Growing the Number of 3-D Screens

by Michael Karagosian
©2009 MKPE Consulting LLC All rights reserved worldwide
originally published in the 15 March 2009 issue of Digital Cinema Report

With Disney's Jonas Brothers and Dreamworks Animation's Monsters vs Aliens now in theatres, combined with a full slate of 3-D releases throughout this year and next, the drive has been on to install 3-D systems in theatres. To play 3-D movies, however, digital projectors are required, and with the capital markets frozen, the adoption of digital cinema has not been moving at a snappy pace. With major circuits Regal, AMC, and Cinemark waiting to close on financing for a major rollout of digital cinema, smaller circuits see this as a once-in-lifetime opportunity to jump ahead of their larger brethren and collect the benefits of 3-D.

The advantage of operating a 3-D theatre has proven to be significant. Lionsgate's My Bloody Valentine 3-D garnered 3-D box office that was six times that of the 2-D screenings. Obviously, movie goers prefer to see their horror in 3-D. While not all 3-D movies generate such high 3-D multiples, multiples of two to three times 2-D box office are frequently reported.

Working the numbers, there is an argument for simply buying a 3-D digital projector and paying for it through the additional revenues gained at the box office. But there are other financing opportunities for digital cinema systems which should be considered, using a mechanism called the virtual print fee. In this scheme, a deployment entity buys the equipment, and studios pay a fee -- a virtual print fee -- per booking to assist the deployment entity in recouping its investment. Exhibitors have full use of the equipment, with ownership transferred to them once the equipment is paid off. Raising capital for such financing has been challenging lately, resulting in a slowdown of the digital cinema rollout. While larger circuits seek big money to finance the conversion of all screens to digital, smaller circuits look upon this as an opportunity to install 3-D digital screens to capitalize on the flood of 3-D movies.

Owning a digital projector, however, is not sufficient to present 3-D movies. While the distribution of 3-D content is more-or-less uniform, the exhibitor must also buy a 3-D add-on technology to accompany the digital projector. Such offerings come from Dolby Laboratories, Master Image, RealD, and XpanD. The choice of add-on technology is entirely in the hands of the exhibitor. The various methods available offer a tradeoff between cost of glasses, type of screen required, portability among different projectors, and ownership vs leasing, all of which must be weighed when making a choice.

Seizing the opportunity to bring digital 3-D to smaller exhibitors, Paramount now offers a "direct" virtual print fee that it will pay for a single 3-D screen. "Direct" means that the virtual print fee will be paid to the exhibitor as the deployment entity, and that a 3rd party deployment entity is not required. Paramount not only looks upon this as an opportunity to expand the 3-D footprint for the upcoming Dreamworks release Monsters vs Aliens, but also a way to seed the conversion of all screens owned by the exhibitor to digital. The agreement includes a provision to allow the exhibitor to sign up with a formal deployment entity capable of managing installations, maintenance, and operational details such as security keys across a large number of screens.

As with any deal, Paramount's offer has pros and cons, causing its share of controversy. For small exhibitors, Paramount's offer would seem ideal. It gives them wide choice in the equipment they buy, and doesn't interfere in their relationships with equipment dealers and maintenance organizations. But small quantity purchases may not produce the best pricing. More importantly, the Paramount offer must be matched by similar offers from other studios to be useful. Unless all studios pay a VPF when showing their movies on the equipment, then Paramount itself is not required to pay a VPF. The exhibitor could end up paying for the equipment themselves.

Other controversy exists. Third-party deployment entities, particularly those overseas, are not thrilled with Paramount's offer. Hollywood content may comprise a major percentage of the market in Europe, but regional content makes for a strong minority. For this reason, deployment entities in Europe and elsewhere in the world must also sign virtual print fee agreements with regional distributors. The lack of consistency among the various deployment agreements that exist has added to the complexity of this task. Paramount's "direct" VPF agreement, a public document, offers a lower VPF payment for 2-D screens than for 3-D, which has added another wrinkle to such negotiations.

While several financial paths are available for acquiring 3-D projectors, the incentive to do so is growing. Dreamsworks is asking exhibitors to charge a $5 ticket premium for the 3-D version of Monsters vs Aliens. If successful, the ticket premium is likely to become the norm for all future 3-D releases. With the ability to attract movie-goers and collect a higher ticket price, we should expect to see more 3-D theatres in the near future.