Market Insight

Europa Cinemas Conference: Digital Cinema Workshop summary

December 03, 2013  | Subscribers Only

David Hancock David Hancock Director – Research and Analysis, Cinema & Home Entertainment
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The digitization of European cinemas continues apace; IHS data shows that 29,000 are digitised and there are 7,000 left to do mainly in Italy, Spain, Greece, Russia, and the Baltic States. Globally, 84.1 per cent of the world's cinema screens are digitized, and attention is turning to new areas for development, such as electronic distribution, and new forms of content (alternative content). Some initial thought is also being given to financing digital equipment in the future, and the panels in the morning workshop of the 18th Europa Cinemas Conference in Athens in November 2013 considered all these areas. The morning was moderated by David Hancock, IHS E&M, Director, Film and Cinema.


The real theme of the morning was change: changing technology, changing business models, changing operational practices, which have been brought about by digital. From an almost technology-free zone, cinemas have become a meeting ground for business and consumer technologies, and while the key to cinema's future is always the films being made, the cinema environment and selling points can be developed and modernized for the new digital media landscape.


Session 1: Models, VPFS and Financing
Domenico Dinoia
(Exhibitor, Cinema Massimo Troisi - Vice President of FICE, Italy)
Ron Sterk (Managing Director, Dutch Exhibitors Association - Cinema Digitaal, The Netherlands)
Serge Plasch (Managing Director and CEO, dcinex, Belgium)
Michael Stejskal (Exhibitor, Votiv Kino - Distributor, Filmladen, Austria)
Alex Stolz (Head of Distribution, British Film Institute, UK)
Christian Bräuer (Managing Director, Yorck-Kino GmbH - President of AG Kino-Gilde, Germany)

In January 2012, the UK Department for Culture, Media and Sport issued a report which contained the following quote:

"The VPF, if unchecked, will have a continuing and detrimental impact on independent distributors and smaller exhibition venues".

This quote was the starting point for the discussion about where the financing model of the VPF is around Europe, what problems have been thrown up, what solutions have been found and what can still be done for the countries or exhibitors that are lagging behind. WE heard from Ron about the progress in the Netherlands, where he led an industry-wide digitization programme called Cinemadigitaal. The initiative was helped by EUR5m from the government, which was about 15 per cent of the money needed, and may have helped bring down the VPF to an affordable level. The banks will be repaid by 2016, earlier than planned for. There has been little change to the market although there are more film releases, including smaller films, but they are staying on screen for a shorter length of time. The lower cost of Hard Drives (HDD) means that there can be a wider original release and less need to circulate from screen around the country over time. In Austria, Michael explained that the early digitisation of a dominant leading exhibitor left the rest of the market with a problem around 150 screens). The model proposed by the integrator did not fit the independent release model so the distributors (local and US) developed the Free VPF system, which takes EUR1 from each admission up to a maximum of EUR500. There is a contribution of EUR5,000 from government for each cinema. Like the Netherlands, more films are being screened but for a shorter overall period of time. In Italy, Domenico explained that the country has been lagging behind due to the lack of an industry-wide agreement on a VPF and no government intervention. Some larger circuits had digitised with integrators but the distributors came together to agree a VPF level and structure and the market can now move ahead. He expected 80% of cinemas to be digitised by March 2014. The VPF level is EUR480, and the investment assumed is EUR55K per installation. In Germany, Dr Christian explained how Germany has progressed since we last heard from him three years ago. The art house section of the market, of which he is a leading member, developed a model called the VPF Hub, which sits alongside the Integrator VPF model and public funding. This system works for 700 screens in the country and brings together 60 distributors. Several of the members have already paid off their equipment in only two years. Last year, we also heard from Nico Simon about a model he had structured in Luxembourg, where a number of art house screens in the country came together to operate as a single 'multiplex' in a standard VPF model.

Tying that together is the common themes of local action when the Integrator model didn't work for them, collaboration between industry sectors, engagement by the public sector (financial and organisational) and maybe also a fear of the alternative. If there was no action, then the only model proposed to them may not work. That is a powerful motivator. It came out a few times that a model was developed because the traditional VPF model did not correspond to the reality of release patterns in their country, therefore it was necessary to build a local system from the bottom upwards, taking into account the domestic market reality.

The UK is struggling with a different situation, even though very nearly all cinemas are converted. The presence of four integrators in the market means that the process of moving films from screen to screen ends up in distributors paying several VPFs and it is proving expensive and actually harming independent distributors. For some months now the BFI, represented on the panel by Alex, has been trying to find a way through this, and while there is no lack of desire to solve it, the different systems in place make that complex. The UK market has been digitised with no public money (apart from the early innovation of the DSN in 2005) and by integrators using the VPF model. A possible solution is the Widest Point of Release (WPR) where the VPF is paid on this measure after a film's run in cinemas. Serge had the chance to conclude the session, and on a positive note. He explained that the price of equipment has been coming down significantly in the past year or two, especially with the low-cost small screen projectors. In addition, in nearly all cases, the payback period has been quicker than forecast, as the estimates for turn rates were conservative. The VPF started out around EUR650 in the early days. This means that a cheaper VPF can be proposed over a shorter period for cinemas that have not yet digitised. Serge mentioned a possible figure of EUR350 for a 5 year payback which he is negotiating with distributors and studios which he could offer to Eastern Europe, Baltic States, Greece, Spain etc. He also explained how he went to the studios with a similar proposal for a group of 100 Bulgarian screens. Turkey was seen as the most active market currently.

Session 2: Electronic Distribution

Jean Mizrahi (CEO, Ymagis and Smartjog Ymagis Logistics, France)
Nico Simon (CEO, Utopia S.A, Luxembourg)
Eric Vicente (Exhibitor, Les Écrans de Paris - Distributor, Sophie Dulac Distribution, France)
Laurent Dutoit (Exhibitor, SA Cinéma Scala - Distributor, Agora Films, Switzerland)

Much attention is being focused now on the second phase of digitisation of cinemas, that of delivering content to cinemas electronically. IHS data shows that one third of all European cinemas are equipped for electronic reception of movies. There are many different schemes being developed in Europe but the USA is advanced in this, with DCDC now up and running to 17,000 screens as a starting point. It is a satellite-based system operated by Deluxe/Echostar. Jean explained the different options in this field: Hard Drives, Broadband, and Satellite and went through a detailed explanation of the advantages and disadvantages of each. Broadly speaking, each method suits different release types although there is some crossover. He said that satellite suits releases of 100+ sites and that landline bandwidth is variable so both e-delivery methods have downsides.

Jean also proposed the European DCP, which he will start using within Ymagis/Smartjog, which is a core DCP which can be sent earlier as European films tend to be ready early, and an OV file can be sent to the cinema at a different time, containing the sub-title or dubbing file.

The two independent distributors, Laurent and Eric, explained how they preferred to use hard drives for their releases as these can be 'bicycled' around cinemas bringing down the actual unit cost of HDDs to cinemas. The electronic delivery methods on offer were too expensive for them, especially with a VPF on top of that.

Eric also brought up the subject of KDMs, which still seem to be problematic for the industry. He explained how it takes one day out of every week for the person in charge of logistics within his company. From January, he said that his company would no longer be using KDMs at all.

Nico described how HDDs are a nightmare for art house cinemas as the cinema staff spends too much time running round trying to locate the DCPs, which could be in one of many sites. He went so far as to say that the continuing use of HDDs for physical delivery will hurt European films and exhibitors want electronic delivery.

Session 3: Alternative Content

Marc Allenby (Head of Commercial Development, Picturehouse Cinemas, UK)
Ivo Andrle (Exhibitor, Kino Aero - Distributor, Aerofilms, Czech Republic)
Barry Rebo (Managing Partner, Emerging Pictures, USA)

David described how in the UK this year, Alternative Content will be worth 1.8 per cent of box office, with a predicted gross revenue of £20m according to Rentrak. However, one of the most remarkable conclusions of this session was the lack of consistency in what we call it. The audience in the first session was asked whether they preferred Alternative Content or Event Cinema. Of the 150 people in the room, only three people preferred Event Cinema. Barry explained how he called it additional content, but he also described the reaction of a client of his, who said 'let's call it what it is, supplementary income'. The different views of naming it does show a different understanding of what it is. Barry said that it includes art house and specialty film, as they are an alternative to the Hollywood model. Marc said that Picturehouse Cinemas did not include films in their 'ScreenArts' brand. Traditionally, the high arts are the core of Alternative Content provision (IHS data shows that one third of all events in European countries that we profiled were opera). Barry said that the US had opera overload. Content is not so much the issue, as there is plenty of content, but the quality of that content is not always high and not diverse. That seems to be changing, and David pointed out the British Museum Pompeii show and the success of Dr Who in cinemas the same weekend of the conference. From the floor, Peter Buckingham (SampoMedia) provided the useful information that Dr Who took £1.8m in cinemas in UK over a single screening, with a £4,000 screen average.

You don't have to be an enthusiast of AC to understand its importance to an exhibitor, according to Ivo, who distributes and screens a significant amount in Czech Republic. Ticket prices can be up to five times higher than a cinema ticket. Marketing is a challenge, as the budgets are necessarily limited although pre-sales help to know how much money there is. However, Picturehouse invests much in the overall approach to Alternative Content (it will constitute 20 per cent of its revenues this year) and will not base the marketing on a specific amount of money for an event but a part of a wider approach to making the audience aware of this content as well as marketing specific events. Barry finished by saying that a key to it all is managing expectations: that of the content providers, the distributors, the cinemas and the audiences. The revenues made may not always be high, the technical delivery may have issues but for a new revenue stream, there will be a development of the business model and delivery over time.

Session 4: Equipment and financing the next generation of digital cinema

Serge Plasch (Managing Director and CEO, dcinex, Belgium)
Jean Mizrahi (CEO, Ymagis and Smartjog Ymagis Logistics, France)
Tim Sinnaeve (Market Director, Digital Cinema Barco, Belgium)

There were two strands to this session. The first was the multiplication of equipment being offered to cinemas, such as internal management systems, new sound systems, high frame rates, 3D, even 4D. The second strand is how we finance the next generation of digital cinema projection equipment, when the replacement cycle begins. Serge and Jean agreed that there would be no second VPF offered to the market by US studios. They are both people who have negotiated VPFs with the studios. The mechanism was designed for a one-time only conversion therefore equipment of the future will need to be financed in a different way. Serge said that there would be no VPF after 2018 and at that time the industry would revert to the 35mm model. Tim explained how they were looking at new business models and new revenue streams for cinemas that would add revenue to the existing cinema revenue breakdown, such as a Business to Business platform, advertising, education as well as expanding its role as a targeted entertainment platform. He pointed out that cinemas are utilised only 20 per cent of the time, very low compared to other industries and funding the next phase would be achieved by improving this figure.

Serge agreed that new equipment would need the possibility of revenue generation or cost savings but that financing should not be a problem. Jean pointed out that banks have a few years experience with cinema now, due to digitising, and while the VPF helped lessen the risk, cinema has proved a stable medium and the business model is understood by financiers. Jean said that the cost of e-distribution is coming down rapidly and that will make a different world in a few years time. The VPF may go, but there is a possibility of other models, such as a 'landing fee'.

Tim said that new projector equipment would be cheaper by the time of replacement, making investment easier. Laser illuminated projection would be more expensive, but the prospective costs savings in lamps would make a business case for finance a viable one. The future of financing equipment will clearly be in the exhibitors' hands, and it is not too soon to think about how that will be done, whether by lower costs, new revenues or a new approach to capital expenditure.

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