Digital cinema will enhance the moviegoing experience by providing our patrons with consistent, high-quality images that won’t degrade over time. Digital cinema will also give exhibitors greater programming flexibility to meet diverse consumer demand. Equally important, digital cinema will ensure that the theatrical experience cannot be replicated in the home.
Digital cinema has come a long way since the first experimental public screenings in 1999. Beginning in 2000, NATO’s leading committees undertook the technical and business planning necessary to ensure an appropriate transition. We issued several statements to frame the development of technical standards and business models. In November 2004, NATO’s board of directors adopted a unanimous resolution describing our fundamental objectives. Now that nearly all of those objectives have been achieved, or are on the road to fruition, the revolution is beginning.
The need for smaller,
independent theatre operators to come together through mechanisms that aggregate their negotiating power has become more imperative.
In the resolution, NATO members called for uniform technical standards to promote interoperability and compatibility, and to foster competition. NATO worked with our partners at the studios to support the efforts of their Digital Cinema Initiatives, and we are pleased with the final specifications that DCI released in 2005. By the time you read this, NATO’s Technology Committee will have released some supplementary specifications that complement DCI’s work. NATO will also continue to participate in the essential work of the Society of Motion Picture and Television Engineers as that body adopts formal standards.
The resolution also declared exhibitors’ interest in high-quality equipment to enhance the theatrical experience. With the projector and server technology currently on the market, or coming very soon to the market, we believe that digital cinema quality exceeds that of film and anything available in home entertainment systems.
Regarding the business models, the NATO resolution called for a financing plan where the studios pay for the costs of the transition. Today, various third party integrators have proposed financing and installation plans to exhibitors that are backed by agreements with the studios. Under these plans, the third parties raise the capital to buy and install equipment in cinemas. Over time, the studios will then pay “virtual print fees” to the third parties for the use of the equipment. Several exhibitors have already announced that they have reached agreements with the various third parties under these models.
The resolution also demanded that financing plans be open to participation by all exhibitors regardless of size or geographic location. All of the third parties currently offering plans have stated their commitment to this principle. I am concerned, nonetheless, that smaller exhibition companies should seek mechanisms to aggregate their power to obtain economies of scale for use in negotiating digital cinema equipment and service deals. One such mechanism is the Cinema Buying Group LLC, currently operating under the leadership of managing director J. Wayne Anderson.
Regarding a roll-out sequence, the NATO resolution embraced the need for testing of complete digital cinema systems, based on specifications and standards, in a beta market for a reasonable time. Today, at least two of the third-party financing and installation organizations have announced plans for beta markets with exhibitor partners. We strongly support this essential beta testing to ensure that equipment systems do not fail and that the specifications and standards can be met.
At this juncture, then, nearly all of our goals as set forth in the resolution have been accomplished, or appear highly likely to be accomplished. There is one significant exception. The resolution suggested that the roll-out sequence of digital cinema should ensure competitive fairness between all exhibitors and distributors willing to participate, with a region-to-region or market-by-market roll-out to be considered. Given the studios’ strong resistance to the notion of one uniform roll-out plan, and their adamant preference to work with multiple third-party financing and integration entities, a region-to-region or market-by-market uniform roll-out sequence now appears unlikely. Given this reality, the need for smaller, independent theatre operators to come together through mechanisms that aggregate their negotiating power has become more imperative. In my many conversations with our smaller members, however, I am confident that such an effort will succeed.
NATO will continue to advocate the goals of the resolution as the transition goes forward. To a significant degree, though, the work of the exhibition industry through its association is coming to a successful end. It is now incumbent on our individual members to engage and negotiate their particular plans for digital cinema, as they deem appropriate.