Sony, Disney, Warner Said Set To Roll Out Era Of Digital Cinema

The long-awaited rollout of digital cinema could begin this summer. Major Hollywood studios are said to be close to reaching an agreement on a financing plan that would find them footing a multibillion-dollar bill

An agreement would mark the end of a contentious 10-year battle between film studios and theater owners, and would usher in the biggest change in movies since talkies replaced silents.

In the long run, digital cinema likely would save Hollywood studios billions of dollars, primarily in lower distribution costs. It would also help fill the coffers of theater owners by giving them higher-quality movies and the ability to show live events, such as movie concerts, or content new to movie theater venues, such as corporate shareholder meetings.

People in the industry say the Walt Disney (NYSE:DIS – News), Sony (NYSE:SNE – News) and Warner Bros. (NYSE:TWX – News) studios are working on a plan to raise up to $3 billion for theater owners to use to buy new digital projectors and related gear.

The studios all declined to comment. They’ve said before that they expect to help finance the rollout. And theater owners have insisted they won’t pay much, claiming movie studios will reap most of the cost savings when the industry goes digital.

Motion pictures have been filmed and delivered on celluloid and displayed on 35mm projectors from the beginning. Those films have to be shipped. Digital films can be sent via broadband cable or satellite to as many venues as studios want.

There’s also a side benefit. Typically, U.S. movies open first in the U.S. and later overseas, because of the cost and time needed to prepare and ship film copies. That’s one incentive for pirating films. But digital cinema would mean fewer areas would get access to movies late, ending one motivation for pirated flicks.

The move to digital cinema has been arduous due to a myriad of complex issues. Almost all of them have now been resolved.

36,000 Movie Screens

The main issue is who pays for the digital projectors and related gear, such as storage servers and control panels. The total cost is estimated at nearly $3 billion, or about $80,000 per screen. There are some 36,000 movie screens in North America.

Hollywood and theater owners are “very close” to a financing plan, said Loren Nielsen, principal of Entertainment Technology Consultants. “There are no technical limitations any longer and the cost of projectors has come down to where the business models begin to work. It’s just a matter of getting the right parties together to make the pieces fit.”

Easier said than done. The National Association of Theater Owners has angrily fought the studios on this issue.

Digital Cinema Initiatives, an independent group formed by the seven major Hollywood studios to shepherd the digital transition, this month submitted its fifth and final tech standards draft to movie and theater associations. DCI Chairman Walt Ordway expects to receive final comments on the draft within weeks, after which the technical standards will be set.

The document will assure industry compatibility. Two years ago, the industry grappled with four competing formats and unresolved issues related to ownership and digital security. Now, there will be agreement that still will let theater owners pick and choose from a variety of product makers.

“If all goes right, we’ll have the final specifications by April,” said Ordway.

Another big part of agreement being hammered out is a guarantee the studios will produce enough films in digital format. Theater owners want assurances they will have enough content to keep the projectors running week after week.

According to people in the industry, the agreement on the table would work this way: Each time theater owners play a digital movie, participating studios will make a payment toward a loan used to buy the digital projectors, somewhere between $500 and $1,000 per digital print. It’s estimated Hollywood studios will save about $900 on the cost of reproduction, distribution and delivery of each digital movie, so in the short term the money they pitch in to repay the loan is about what they save by making the switch to digital. The savings would come long term.

“Digital cinema offers the industry the opportunity to both revitalize the movie business and save a significant amount of money,” said Bud Mayo, chief executive of Access Integrated Technologies (AMEX:AIX – News). Its software manages the distribution of film prints for four of the seven major studios and 24 independent distributors. It hopes to sell some of technology wares involved in the conversion to digital cinema.

Texas Instruments, Sony Subplot

“We view ourselves as an enabler for all parties in this transition,” said Mayo.

Only Disney, Sony and Warner are leading the way because many of the seven major studios wanted to avoid any talk of collusion or antitrust in hammering out this deal. But the other four major studios are expected to join the effort.

A number of suppliers stand poised to benefit from the conversion, though two stand out. Texas Instruments (NYSE:TXN – News) and Sony are in a heated technology battle over digital projectors. TI has been developing its technology for more than 10 years. It’s digital light processing. DLP technology is widely used in high-definition TV sets and industrial projectors.

Sony entered just last June. It uses a microchip technology that’s also contained in its high-end projections systems for the home.

“If we can navigate the financing structure, than this will be a true hockey stick deployment,” said Doug Darrow, business manager of DLP technology at Texas Instruments. “But it has to happen with flawless perfection.”

Tom Mykietyn, general manager for the display division at Sony Electronics, said he expects the industry will begin a test and gradual rollout in the second half of this year.

“But,” he said, “everything needs to be well-thought-out before the rollout begins.”

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