Investing In The Right Stuff In Digital Cinema
by Michael Karagosian
©2009 MKPE Consulting LLC All rights reserved worldwide
originally published in the 30 January 2009 issue of Digital Cinema Report
If you were an investor, would you put your money into developing digital cinema products? It's a question whose answer probably deserves a book. Trusting that readers have better things to do with their time, I'll keep my thoughts to this article.
It's fair to say that digital cinema has seen a few false starts. Few, if any, who invested in digital cinema products back in 2000 have reached break-even. First, there was the push to 1.3K projectors and MPEG servers. Then, in the wake of releasing the DCI specification in 2005, came the push for installing non-DCI-compliant digital cinema products. Manufacturers have been in a spin since.
What's that you say? Non-compliant digital cinema products? If you weren't aware, the fact is that digital cinema products today are not DCI-compliant. Further, studios do not deliver movies today in a DCI-compliant distribution. Yet every virtual print fee deal made calls for DCI-compliant equipment. Banks, not eager to lend to anyone these days, let alone digital cinema integrators, are becoming wary of the situation. Who's going to pay for the upgrades? Why invest in equipment that doesn't meet the terms of current agreements?
For the manufacturers that did invest significantly in digital cinema, the picture today is not pretty. Most companies had expected to see purchase orders by now. Not only will the purchase orders have to wait, but further investment in R&D is needed. DCI specifications need to be met, and for a number of exhibitors, additional product requirements are necessary. For many manufacturers, the need for further R&D in lieu of significant sales has become the legacy, if not Achilles' heel, of this technology.
How did we get to this point? Fingers can be pointed in all directions. Manufacturers who jumped into this space early wrongly thought they could own the market by pushing non-standardized technology into theatres. Studios mistakenly sent the wrong signals by signing financing deals before the equipment-to-be-purchased actually met their own specification. The early adopters among exhibitors, a type of business that never before had to rely on high technology, simply trusted everyone else.
While digital cinema was declared ready-to-go in 2005, the essential distribution standards, referred to as "packaging," weren't completed until late 2006. The last of the digital cinema packaging standards won't see publication until mid-2009. The last standard now in progress contains the only audio packaging specification in the entire suite of SMPTE digital cinema standards.
In lieu of digital cinema standards in 2005, manufacturers were forced to punt, taking work conceived in the earlier ill-fated effort to push MPEG-2 compression into theatres, and adapting it to the DCI-specified JPEG 2000 compression format. Slowly, manufacturers have since upgraded systems to some of the new standards, and thus come closer to "DCI compliance." But these upgrades have to be made in unison among competitive manufacturers, one step at a time. This becomes a coordination issue, the speed of which must be slow enough to include all manufacturers. Ideally, the industry would have baked its cake before putting it up for sale. Instead, a half-baked cake was pushed out the door, and manufacturers are left to painfully change out the ingredients in the field.
If you think I'm only talking about digital cinema servers, you would be wrong. No projector in the field today meets the DCI specification, either. While some studios were prepared to grandfather these projectors, not all of their brethren were willing to go along. As a result, all 2K projectors will have to receive hardware upgrades as well. The travel and labor costs alone for this will lead to a hefty bill.
The achievement of DCI compliance won't meet market needs, however. DCI compliance will not incorporate important standards that bring exhibitors closer to meeting ADA requirements, for instance. Nor does it require the degree of interoperability that enables an exhibitor to replace one brand of digital cinema server with another and guarantee the functionality of system management software.
Digital cinema has not been managed in a manner that encourages worldwide investment. Even in the US, it's unlikely to achieve deep market penetration until the cost of equipment comes down to that of film systems. So while the manufacturers need to pump more into R&D, they also need to reduce their costs. This is not an easy pair of objectives to meet.
Unfortunately, market forces are not at work today, adding to the difficulty in achieving lower equipment prices. Virtual print fee financing (if you're not familiar with this term, please see http://mkpe.com/faqs/) is a subsidy for equipment purchases. Subsidies tend to circumvent market forces by propping up the status quo. It's not a situation that we're likely to get out of soon, unless something from left field comes along, such as a new low-cost projection technology, or significant private investment in only digital 3-D systems.
So, are you ready to invest? I'm not being a very good cheerleader. Obviously, investment in digital cinema is a complex subject. It probably deserves a book.