Digital 3-D in Exhibition
by Michael Karagosian
©2008 MKPE Consulting LLC All rights reserved worldwide
originally published in the 30 November 2008 issue of Digital Cinema Report
Overview
3-D and the motion picture industry have a long history together. 3-D movies have sprinkled themselves across the landscape of time, but failed to establish a sustainable genre. With the introduction of digital 3-D projection, however, the game has been renewed. Overcoming its reputation as a gimmick, 3-D digital projection has become the single-most value-add feature that digital projection has to offer. This important new technology, though, must be carefully nurtured if it is to succeed long-term in the theatre.
The challenge of digital cinema
When digital cinema technology was first introduced to the public in 1999, it was said to be a technology in search of a killer application. The challenge for digital cinema is that it is expensive and comparatively short-lived when compared to film projection equipment. Film equipment, being mechanical in nature, can last 30 years or longer with regular maintenance. Digital equipment, on the other hand, can incur a cost of ownership that's some 300% to 400% higher than that for film systems.
Of course, there are some benefits to the audience digital projection. The technology insures consistent quality over time. There are no film scratches to deal with. No splices in the sound track. Assuming no degradation in the lamp, a digital movie on day 20 will look as pristine as it did on day 1. But these aren't benefits that can be easily monetized. In fact, audience testing demonstrates that differences in quality between digital and film presentations are hard to detect. Untrained audiences tend to focus on the improvement in sound, due to the uncompressed nature of digital cinema audio, and are less cognizant of an improvement in picture.
Exhibitors stand to gain with digital projection due to the ability to show "alternative" digital content with quality projectors. These new types of content include certain music events and operas. However, audiences buy tickets for this new entertainment even when shown on much lower cost and lower quality LCD projectors, again making it difficult to monetize the benefit of using digital cinema projectors.
So who benefits? The well-known economic motivator for digital projection is the lower cost of digital fulfillment over that for film. It is the distributor that benefits through these cost savings. The dilemma is that this is an unbalanced equation. The exhibitor does not participate in the gains that are realized in the supply chain, but instead is burdened with the increased cost of digital system ownership. Until the cost of digital projection equipment is substantially reduced, this will remain the quintessential problem underlying the introduction of digital cinema.
The 3-D value proposition
Into this scenario enters digital 3-D projection. I first became aware of the sequential stereoscopic capability of digital projectors around 2003. While the capability was impressive, it was difficult to imagine that this would become a "killer app." It was hard to depict an enthusiastic creative community over this new format.
But I was wrong about not having a supportive creative community. In late 2004, Peter Jackson began to press the company In-Three to stage a public 3-D presentation at the 2005 ShoWest trade show. For me, hearing this from an Oscar-winning director was a good start. Did anyone else in the creative community feel as enthusiastic over 3-D? Fortunately, the answer to that was yes. Rick McCallum of Lucasfilm was next to throw his support behind the event, and by the time ShoWest took place, Jim Cameron, George Lucas, Robert Zemeckis, Robert Rodriguez, and Randal Kleiser were present to publicly proclaim their desire to produce 3-D movies. The ShoWest 2005 event was the tipping point. Soon after, Disney issued a Request for Proposal for converting upcoming release Chicken Little, and the rest is history.
Impressively, creative support for 3-D digital cinema has only grown with time. 2009 will witness the largest number of 3-D releases in a single year. And 2010 promises to beat 2009. Jeffrey Katzenberg, animation king turned 3-D cheerleader, has on several occasions publicly stated his belief that all movies will eventually be projected in 3-D.
For exhibitors, the box office generated by 3-D movies speaks for itself, exceeding that of 2-D versions by a factor of 2x to 3x. Part of this bump in box office is due to the willingness of 3-D audiences to pay a ticket premium. The other part is due to the desire of audiences to see the movie in the new 3-D format over 2-D. When seeking the value proposition of 3-D for exhibitors, two questions come to mind: will the bump in box office continue as more theatres adopt digital 3-D technology, and will the additional revenues pay for the digital 3-D equipment?
The answer to the first question has to do with one's belief about audience behavior. To date, there is no evidence that 3-D movies attract new movie-going audience. The box office multiple of 2x to 3x is pulled from a digital 3-D theatre footprint of less than 1000 screens. General consensus is that the increased audience for 3-D presentations is "stolen" from the audience that otherwise would have gone to a local 2-D theatre. As the 3-D theatre footprint grows, the bump in attendance at 3-D theatres will flatten.
The second question has a more involved answer. If the prior answer to the first question is correct, then the additional box office revenue should be modeled as entirely due to ticket premium. This means that the ticket premium alone needs to pay for the digital projection system plus the 3-D add-on technology. The variables are the number of 3-D movies booked, the ticket premium, number of seats in the auditorium, cost of the digital projection system plus maintenance, and the cost of the 3-D add-on system. In truth, the large number of variables that exist makes almost any result possible. One can claim that a system can be paid off in one year, or ten.
An example is instructive. If one assumes that 3-D movies are played every week of the year in a 300 seat house, that the average box office is equivalent to 3 full shows a week, that the ticket premium is $2 with a 50% split to the distributor, the 3-D add-on system costs $25,000 a year, and the digital projection system costs $70,000, then the entire system can be paid for in a little over 3 years. That's a lot of assumptions, which deserve further examination. Still, one can see the potential value-add of digital 3-D in an environment where a large number of digital 3-D releases are due. It's no wonder that the operators of many mid-sized circuits have opted to buy their digital 3-D systems outright, while showing little interest in installing digital 2-D systems.
Challenges to the assumptions
As said, the assumptions in the the value model for 3-D exhibition deserve further examination. Primary among these is the continued production of 3-D movies. In this, I point to the wide set of industries where 3-D visualization has proven itself valuable. This includes the automotive, architectural, medical, and the military markets. As the computational power of the personal computer grows, the ability to render drawings and data sets in 3-D increases. Everyone benefits from the increase in available tools and knowledge for creating and viewing 3-D images. Unlike the past, motion picture 3-D today is less a stand-alone innovation and more an off-shoot of the overall trend for 3-D visualization.
This is the core differentiation between 3-D of today and 3-D of the past. In every instance, 3-D of the past was an innovative effort strictly centered on motion pictures. But unlike the past, 3-D of today builds upon a body of knowledge whose application extends well beyond motion pictures. This has lowered the risk threshold for digital cinema production, with the result that we now see an increase in investment in 3-D motion pictures. Coupled with the creative interest described earlier, the present trend could lead to 3-D as a permanent option in entertainment.
But continued investment in 3-D production also relies on ROI. Given that the majority of motion picture revenue is through direct-to-consumer sales, there is strong demand for introducing 3-D to the home. Thus, there is much development today geared towards the consumer market. Bringing 3-D to the home, however, is not as easy as bringing 3-D to theatres. In digital cinema, the 3-D distribution platform is a convenient extension of the 2-D platform, and all distributions are compatible (or should be) with all 3-D viewing systems. But in the home environment, no such platform exists where a simple extension leads to compatibility with the various playout and viewing systems. For the consumer, this means that the wrong selection of playout and viewing technology, at least in today's market, could prevent a 3-D distribution from being viewable. These are challenges that must be overcome for 3D-in-the-home to be successful.
When considering the home market, other factors also come into play. While 3D-in-the-home is a necessary step to anchor the market for content, the timing of its launch could have a significant impact on investment in the theatre. This point cannot be overstated. Faced with a growing and more capable home entertainment market, exhibitors today are particularly interested in digital 3-D precisely because it is not available in the home. Time must be given for the theatre market to take root and mature before exhibitors are ready to face competition from 3-D home entertainment. While movie makers understand where their long term revenue comes from, few are willing to make 3-D content strictly for home consumption. A healthy 3-D first-release cinema market is important.
Another risk to the value-add model is the cost of the 3-D add-on technology in the theatre. Where passive polarized glasses are used, the cost of glasses tends to be absorbed today by the distributor. This unique condition may not last forever, and in the future, such costs could be passed directly to the exhibitor. Where more expensive spectrum-filtered and shutter-type glasses are used, the long term costs remain difficult to model. Manufacturers of such glasses like to quote longetivity based on the survival rate of washings, but attrition and user-induced damage will likely be the primary factors that affect cost of ownership. More field experience is needed to build believable cost models for these types of glasses.
Longer term, the cost of the digital cinema system itself is at risk. Studios today accept 3D-to-the-eye light levels that are around 4 ft-L. But brighter images are desired, and 3-D light levels of 7 ft-L or thereabout, are now discussed for the future. Naturally, exhibitors tend to install digital 3-D projection in the largest theatres possible using a single digital projector. High 3-D light levels are inherently difficult to achieve, with most 3-D add-on technologies having an efficiency factor in the 10-12% range. Thus, projectors tend to use the highest wattage lamp possible when showing 3-D movies, a parameter that is limited by the projector's design. If studios change their mind and decide to only allow their movies to be shown only on screens having higher light levels, then either the size of the auditorium must be reduced (for a smaller screen), or a second projector must be added. Either way, the economic impact to the exhibitor would be very significant, and would have to be considered in the value-add equation.
It's not necessarily a wrap
It's clear that the elements exist for the sustenance of 3-D as a vital motion picture release format. 3-D technology is now in use in many industries, expanding the knowledge base and lowering the risk of investment. The creative community has demonstrated support for the format. The ROI for 3-D will grow once the format is successfully introduced to the home. And the economics behind the exhibition of digital 3-D motion pictures, compared to that of digital 2-D motion pictures, looks promising. But while the stars line up today for bringing 3-D movies to the theatre, the underlying conditions that makes this possible cannot be taken for granted. These conditions must be understood and nurtured. 3-D could be here to stay, but only if we focus on making it so.