Film Echo
The Digital Promise
Arts Alliance Media CEO Howard Kiedaisch on the digital rollout in Europe. The business model will provide financing via a virtual print fee.
After the British company Arts Alliance Media (AAM) agreed a business model for digital cinema deployment in Europe with the Hollywood studios Twentieth Century Fox and Universal Pictures, negotiations are now taking place with cinema chains and further studios and distributors.
When do you expect the business model to be introduced for digital cinema in Europe?
Now that we have reached an agreement with the studios, we can enter into serious discussions with the cinema operators. The question is which offer do the cinema operators want. We need a contribution from the cinemas in order for this model to work. We need to talk to each individual chain to find out what their needs are and how they picture a commercial solution.
When do you expect to conclude the first deals with cinema operators in Germany?
That is difficult to say as we are negotiating with cinema operators throughout all of Europe. The contract that we closed with the studios covers the digital deployment for up to 7,000 screens. After that we will negotiate for further screens. We are working on a first come first served basis and will deliver first to those cinemas that want to make the conversion. There will be no standard fixed price as different factors apply to each cinema operator and in each country. For this reason, the model will have to be adjusted each time to reflect whether an operator takes more of a risk or prefers a customised fixed price. There are different ways to structure a calculation which leads to the same financial result in the end.
Does the business model offer different options and possibilities within which the cinema operators can choose?
Yes, when the studio’s contribution is set and we know the cost of the equipment, there is a remaining balance that the cinema operator has to cover. That is why we ask the cinema operators which model they prefer and can then tailor it exactly to their needs.
How high is the cinema operator’s risk?
That depends on the number of virtual print fees that are ultimately received. These have an effect on the whole model and thus also on the extent of the cinema operator’s commitment. Julian Levin from Fox suggested on a panel on digital cinema that the studios bear 70% of the costs and the cinema operators 30%. But that is more a mathematic formula. We have to see how that will work in practice and AAM can take that risk on for the cinema operator.
Will Arts Alliance Media collect the money for the virtual print fees itself or will that be carried out by a national institution in each country?
We will provide this service as it is a part of our offer. As we have already converted 260 screens to digital in the UK, we know how the equipment has to be assembled and can guarantee the financing for it. We therefore process everything with regard to the purchase and payment of the equipment but also for the collection of the virtual print fees and the repayment of loans. We also take care of personnel training and the installation and maintenance of the equipment. To speed up the deployment of digital cinema, we are going to work with local companies in the individual markets that have exact knowledge of the respective market and the local cinema operators.
Will the virtual print fee always be the same for all distributors or negotiated on a case by case basis?
We negotiate with the studios on a case by case basis because each studio wants to take different aspects into account. With this approach, it is inevitable that not everybody gets the same slice of the cake because not every distributor automatically wants the same thing but has various motives and issues that we have to address.
What does the price of the virtual print fee depend on? Does it make a difference whether a distributor shows a film in a large multiplex cinema or a small arts cinema?
It’s the same price as a rule as the virtual print fee is not based on box office sales but is charged per screen as a basic fee for the delivery of the digital print. The price is primarily made up of the difference in costs incurred for celluloid copies as opposed to digital copies. The cost of a celluloid print is around USD 1,000, USD 1,200 and for a digital print USD 200 so that on average around USD 800 to 1,000 are saved. The studios, however, point out that additional costs are incurred for the creation of the digital master, the digital material for distribution in different territories and the overhead costs needed to manage two different parallel systems.
Does the saved difference flow into a central pot at Arts Alliance Media?
We will set up a central pot and conclude contracts with the cinemas which will pay sum X and with the studios which will pay sum Y. We therefore bear the whole risk if the model does not work. The cinema operators do not have to worry about how many virtual print fees we receive or if we are paid the money in full. As we offer this full service the cinema operators can concentrate on their core business. They do not have to take care of purchasing equipment, negotiations with the bank or with the studios. Arts Alliance Media takes this on and ensures that the proper equipment is selected correctly and that it works.
How will the delivery of the digital content be guaranteed?
We provide the cinemas with a contractual guarantee that the studios will deliver their content digitally. That is a question that concerns many cinema operators because they are worried that they will not get enough content. And the digital equipment is worth nothing without content. The cinema operators can concentrate on interesting programme offers like sport, operas or a larger variety of films which digital technology makes possible.
Is the newly gained flexibility with digital cinema more important that the cost saving?
If we look at the total of all box office takings and the fact that cinemas are relatively empty 75% of the time, there is a great deal of additional capacity that can be utilised as long as we find ways to generate the audiences. That is the great advantage for the cinema operators. For the studios, the advantage lies primarily in the cost-saving on the copies. That is easier to quantify than the advantages that a more flexible programme with different offers like screenings for senior citizens, a Playstation 3 competition for teenagers on a Saturday morning or an opera screening in the evening provides. It is up to the cinema operators and marketing experts to develop good ideas to use the equipment accordingly.
The other focus at the studios is on using the most recent 3D technology which requires digital equipment. Each studio currently has a 3D film in production. From 2009 DreamWorks Animation will only be backing the production of 3D films and James Cameron is filming „Avatar“ which will only be available to see in 3D. Hopefully there will be enough digitally equipped cinemas for this film when it is released.
Does the flexibility gained by the digitalisation of cinemas also work with regard to security and piracy if the studios have to issue digital keys for each screen? Can a screen be changed on the spur of the moment if something doesn’t work?
Our contract states that we will not interfere with the existing relationship between the cinema operator and the distributor. The deciding factor is always the contract which the studios/the content owner/the distributor have concluded with the cinemas. Most studios plan to give the cinemas security keys for all screens so that the cinema has the flexibility to show a film on all its screens if necessary. That is part of the digital promise. There is no reason for a studio to refuse a multiplex permission to show its film on all screens in its complex.
We have closed a deal in Great Britain with Odeon that operates a multiplex with nine screens. On the opening weekend, “Spider Man 3” was shown on all nine screens which was only decided at the last minute due to the increased demand when all the seats were sold out. This shows the flexibility that digital cinema provides and how it increases revenues. Due to the increased demand for “Spider Man 3” all nine screens in the Odeon were full on Saturday night at 11 pm.
Do the distributors have to pay a virtual print fee for the use of digital copies for each booking?
In most cases the distributor or studio will not have to pay again if the film is moved from a larger screen to a smaller one.
The manner in which the model works means that the fee is paid only for the initial showing on a screen. The distributors are thus not in a worse position than before.
Some distributors, however, are afraid that they will have to pay more than in the past. Up until now with the use of celluloid copies, they owned a copy that they could use as often as they liked. With digital copies, a physical copy is no longer available and in addition, the hard disk is sent back.
There are certain mechanisms in our agreement which I cannot explain in more detail. However the distributors are compensated for this. We have designed the model in such a way that each party can use it in its own way and not only save but also have an incentive to use the equipment. The worst thing for us would be if in the end fewer copies were used as it is our goal to bring more content to screens.
If the virtual print fee is only due for the initial showing of the booking, from which point on can copies be used without having to pay a fee?
That is very complicated. The manner in which this model works ensures that smaller distributors who have copies that are used over a long period of time also have as many incentives as studios that use mass copies.
Is there a break even point at which distributors will no longer have to pay virtual print fees?
The model is structured in such a way that no one has to pay anything as soon as the cost of the equipment is recouped.
Who guarantees that the break even point does not keep on being delayed because further investment and upgrades, service and support are needed?
Our contracts guarantee that we will make no further financial demands once the costs are covered.
How is that stipulated in the contract? Is a date named in the contract that for example the equipment has to be paid for in ten years?
It should take less than ten years as long as the repayment is made quickly. Our agreements stipulate that no payments are due once the costs have been covered. From this point on the system works in the usual way in that prints are sent and used. We carry out each upgrade and adjustment to the equipment as that is part of our service agreement.
Up until now, only the distributors and cinemas have negotiated with each other and discussed rental fees which will continue to be the case in the future. With digital cinema and the installation of the equipment however, Arts Alliance Media enters the game as a third player. Will AAM be paid commission for this?
Our expenses are already calculated into the virtual print fee and the cinemas’ contributions. The costs for the equipment, the financing of the equipment and our profit margin are part of the recoupment plan.
How is AAM financed? Do you get support from the major studios?
We are privately financed and have had an investment fund and been in operation for four years. We get no support from the studios however as a digital film distribution company, we are specialised in digital cinema and digital content for the home entertainment business. We supply content and technologies to web sites and brands that sell consumers content via the internet. We have various sales partners for this purpose, e.g. the British publisher Emap who owns the film magazine “Empire” where we offer consumers a service to download films. We also provide the “Movies Now” website owned by Tiscali with technology and content. We have concluded contracts with Universal, Warner, Sony and Fox in Great Britain to provide content to be downloaded via the television set top box. Overall we have over 1,600 films on offer in Great Britain.
Our business purpose is targeted towards delivering digital content to both consumers in the home and in the cinema. Our good relationship with the studios is very helpful in both cases. We profit from the synergies which we have through our relationships and through digital asset management when we are talking with technicians, operating managers, studios and independents.
When do you expect to conclude a deal with Buena Vista and Paramount on the virtual print fee for Europe?
I hope that we will be able to announce deals with one or two further studios before the end of this summer. But that takes time. My first meeting with Fox took place in November 2005 and we signed the contract in May of this year. We have already been negotiating with the other studios for a long time.
How will you deal with the independent distributors? Will they be treated in exactly the same way as the major studios or do other conditions apply to them?
Other conditions will probably apply to the independent distributors which will be set by them as well as by us as they have completely different needs to the studios. We want them on board because we need their content, as we do not want to just offer Hollywood films. It is important for the cinema operators to be able to have a large variety of content at their disposal. Now that we have agreed deals with the studios, which represent the most conservative group, we are able to make deals more quickly with the independent distributors.
Will the independent distributors pay a lower virtual print fee than the major studios?
The studios wouldn’t allow that but I can offer them a deal that will make them happy. A virtual print fee that works for the studios should be all the more acceptable to the independent distributors.
The studios have concluded large contracts by which they receive considerably cheaper print costs. The independent distributors should even be able to benefit more from the VPF deal as their costs will undoubtedly be higher than the studios.
Birgit Heidsiek