By Rich Phillips, CTO

    How necessity brought cinema into the digital age

    Cinema was the last medium to go digital. Long after most of us moved our record collections to gather dust in the attic, threw out our VHS cassettes in favour of shiny optical digital disks, and rejected the mystery and anticipation of the photochemical process for the instant gratification of digital photography, cinema theatres across the world continued to showcase the latest Hollywood blockbusters, increasingly produced using complex digital effects, through the 100 year old medium of 35mm film. 

    There were good reasons for this late transition. Hollywood were understandably concerned about the potential threat to the control of their content. Those with music divisions had witnessed first-hand what could happen when easily replicable digital files combined with the social reach and unregulated scale of the internet. 

    They saw the massive opportunity for reduction in distribution cost by avoiding all of the material and process costs associated with 35mm print duplication and distribution. They also realised that standards would be required to avoid chaos and that none of the existing digital television standards were close to matching the quality possible with a good film print. New standards would need to be developed, complete with anti-piracy mechanisms far more secure than anything that existed at that time outside of the military or the financial sector. 

    None of this was going to be cheap to develop or build, and all theatres across the globe would have to replace their existing film projection equipment for the advantages to be fully realised. Previously cinemas had purchased and owned their own projection equipment. Film equipment wasn’t cheap either, costing maybe upwards of $25,000 for a new film projector, but the technology was well understood and could last 20-30 years with minimal maintenance. The digital equivalent, however, cost more like $100,000 per screen and seemed unlikely to last anything near as long. 

    The sound and picture quality achievable with film could be excellent, and cinema’s customers were not complaining that they needed to watch films digitally (indeed many believed they were doing so already). In short, exhibitors did not see a particularly compelling business case for spending millions of dollars to help distributors reduce their distribution costs. 

    The rise of Virtual Print Fees

    These were the economic conditions in which the Virtual Print Fee model emerged. It provided a mechanism for distributors, who stood to benefit most, to bear the majority of the investment required to make the transition from film to digital exhibition. The model was simple enough in principle. A third party “integrator” would draw up contracts with major content distributors that would oblige the distributor to pay the integrator a fee every time they sent a digital file to a contracted exhibitor, which would represent a part of the saving they had made by not having to strike an expensive 35mm print for that cinema. In return, the integrator would agree to finance the new digital equipment, and would use the VPF payments to pay off the capital. Over time the finance would be re-paid, the exhibitor would own their digital equipment, and the distributor, no longer having to pay VPF fees, would be able to enjoy the benefits of vastly reduced content distribution costs. The integrator would take an administration fee along the way for their trouble. 

    Simple in principle, but fiendishly complex in detail. The contracts gave the distributors the leverage they needed to enforce quality and security standards, by insisting on “DCI compliance” – essentially meeting Hollywood’s technical requirements. The integrators were responsible for making sure only DCI equipment could be deployed, and that any updates required during the course of the contract were correctly applied. Exhibitors were also typically required to take on support and maintenance contracts through the integrators to guarantee continued compliance and reliability. Another key principle was that everybody who used the equipment would have to contribute. Apart from key Hollywood distributors that also meant every smaller distributor and every provider of “alternative content”. This wasn’t such great news for the smaller independents, who may have previously managed with a handful of prints being moved around between cinemas over an extended time. 

    In the era of film, it was typical for a particular film to open on a particular screen, and then play exclusively on that screen for the rest of the week, until it was either extended, moved down to a smaller screen, or dropped altogether depending on demand. This practice was partly driven by the mechanics of 35mm film – it could be a lot of physical work moving made up prints around between screens. In theory, use of digital projection enables much more flexible programming practices, but in practice, the VPF contracts, and the complexity within them around what fees were payable under what circumstances, has extended this practice into the digital age, and the full potential for flexible scheduling is yet to be realised. 

    One palpable advantage of the move to digital for exhibitors has been their ability to increase efficiency through the use of Theatre Management Software (TMS) to automate content, scheduling and playout operations.

    One palpable advantage of the move to digital for exhibitors has been their ability to increase efficiency through the use of Theatre Management Software (TMS) to automate content, scheduling and playout operations. This has typically allowed them to reduce the number of dedicated technical personnel in a cinema, and make considerable cost savings as a result. TMS software was often provided by the integrator as part of the “recoupable expenses” – the costs for which it is allowable to recoup capital investment through VPF collection. This software was provided by either the VPF integrator or sometimes digital playout equipment manufacturer. 

    Many VPF contracts impose a restriction on the exhibitor to prevent them from swapping out this software for an alternative whilst within the VPF contract term. This is understandable – the integrator needs to measure equipment usage accurately to meet their distributor contractual obligations, and the TMS software can be used to collect and submit that. However, it also brings disadvantages – what if the provider of the TMS software does not invest or innovate sufficiently? What if it does not work with digital playout equipment from other manufacturers, limiting exhibitor choice as their estates expand? 

    In most cases, exhibitors transitioned their whole estate from film to digital over a short time period, choosing equipment from one or two manufacturers and not needing to think too hard about TMS software compatibility as long as it worked with the equipment they were deploying. But things change – new sites are built and the choices may be different, or sites may be acquired from exhibitors using different equipment. Meanwhile, and predictably, the transition to digital has also led to an explosion of related technologies such as motion seat systems, spatial audio formats and multi-screen experiences. Frustrating if you cannot integrate all of that equipment with the software platform that you are lumbered with. 

    The first VPF contracts were, typically, for a period of 10 years, and are now starting to come to an end. The next few years will see another major transition as exhibitors take on full ownership and responsibility for their equipment. Despite some wishful thinking, the distributor subsidies which catalysed the conversion will not happen again. In the post-VPF world, exhibitors will be responsible for purchasing, maintaining and replacing their own equipment. But they will also be freed from some of the restrictions imposed by their VPF arrangements. Their business relationship with distributors, large and small, will no longer be complicated by VPF terms. They will become free to take direct control of their own support and maintenance operations. And they will have free choice of hardware and software from the best providers in the market. DCI compliance is still likely to be important – although no longer enforceable through VPF contracts, critical mass and content access restrictions will encourage exhibitors to invest in compliant equipment. 

    Most importantly, the choice of theatre management software will now be driven by the market  - exhibitors able to choose providers with the best and most flexible products rather than being forced to take the integrator’s or equipment manufacturer’s standard offering. Choosing software which allows them to run hardware from all the different equipment manufacturers consistently will strengthen their negotiations for equipment replacement and provide improved consistency and further improved efficiency. Competition between the best TMS providers will drive innovation and deeper integration bringing further potential such as fully automated and centralised operations, intelligent content management, dynamic scheduling, dynamic ticket pricing and ultimately improved revenue and profitability.

     End of VPF represents the end of the first chapter of the story of the future of cinema. It has helped to transform the industry and make it fit for survival in the 21st century. It has laid down the foundations for decades more of innovation and change, driven this time not by studio accountants, but by exhibitors free to make their own decisions to invest in what matters most to their customers - whether that is increased choice of content, a more immersive experience, or more affordable ticket prices driven by improved efficiency.

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