The Digital Transition & What It Means for Indies

With more and more studios moving away from 35mm prints, can art house cinema survive in a digital world?

This article was originally published on the Tribeca Future of Film web site, and was reprinted at Thompson on Film, among other sites. However, I decided to post it here as well, to make it easier to find and for archival purposes.

That sound you’ve been hearing over the last month that resembles the  opening strains of the soundtrack from Jaws is a collective moan from  true independent distributors and the mission-driven exhibitors who play  their films. The catalyst for this distress was a letter from Fox  Searchlight, which is now widely referred to as “the Searchlight  letter.”

The letter simply stated that in 18 months, Searchlight would no longer be making 35mm prints of their releases, and so, if a theater is to continue to play Searchlight’s product, it will have to upgrade to a specific type of digital projection system.

The Searchlight letter may have been the final warning bell, but everyone in the film distribution and exhibition business has known this was coming for a while. NATO (no, not that NATO; the National Association of Theater Owners) has been on record predicting that this would be the last year of 35mm prints for at least the last several years.

So why are indies suddenly in such despair?

It appears that the real implications of this technological change are just beginning to dawn on them. And the issues are both simpler and more challenging than they seem on the surface. The key is that the change is more political than technological.

Let me take a step back and explain.

Over the last decade, the major studios—under the guise of piracy prevention and image quality (both highly admirable goals)—came up with a “standard” for digital cinema that is called the DCI standard (Digital Cinema Initiative). Projectors had to be a minimum of 2K resolution, the file format was standardized as JPEG2000, and a key system (called a KDM) was put into place that required all screenings to be authenticated specifically to the server and projector that was authorized to show it.

These requirements created systems that were (and are) very expensive. Fully outfitting a single screen with the necessary equipment can cost a minimum of $70,000, and potentially much more for larger auditoriums. If 3D capability is desired, the price goes even higher.

In order to convert as many screens as possible, as quickly as possible, a deal was cooked up to have the studios help subsidize the cost of the equipment. They all agreed to pay what is called a VPF (Virtual Print Fee) for each film that they play on a DCI compliant screen.

You’ll excuse me while I laugh out loud about this particular bit of terminology. The use of the “print” metaphor in this context strikes me as so hilarious, I sometimes wonder if it was originally intended to be a joke. You’ll find out below why it is indeed no joke.

Companies such as GDC, Cinedigm (formerly AccessIT), Christie (which also manufactures projectors) and others, became middlemen, providing financing for the equipment and collecting the VPFs from the distributors to apply against the financing costs. Each of these “integrators,” as they are called, has a slightly different deal to offer. Most of these details are not public because the parties are all subject to Non-Disclosure Agreements. However, the major points that they seem to have in common are as follows:

•    All the screens in a complex must be converted.
•    All films that are available digitally must be projected that way
•    All films shown digitally are subject to the VPFs, meaning even a local student film festival is theoretically subject to the same fees as a major studio release (an extreme example that probably could be worked around)

The VPFs are structured in a few tiers. The most relevant is that first-run movies, released during a film’s primary release period (I’m simplifying this a bit), are subject to an $800 fee. Second-run films (do these exist anymore?) are subject to a lower fee, which is calculated weekly until it hits the $800 cap.

Then there are fees called “Alternative Content Access Fees,” which are per-show and depend on day and time. The deal with the studios is that if they agree to pay these fees, then EVERYONE who uses the equipment must be subject to the same fees.

The VPFs are structured to emulate the ways in which major studios release their films. Wide releases from the studios in the 35mm era required prints that cost between $1500-$2500 apiece plus shipping. They typically lasted on screen only a few weeks on average, and then would be relegated to the dustbin. So for a studio, the $800 per engagement VPF actually represents a cost savings.

Why is this a disaster for indies?

The typical release pattern for a smaller independent film in the 35mm era was different. Films would open in a small number of cities, and the prints would be slowly moved around the country until they wore out, or the release was over. One of the key economic decisions in the release of such a film was the number of prints to make.

Releases could be modestly successful with as few as 2 or 3 prints. If the film started to catch on, a few more prints would be made until demand was satiated. In the meantime, costs were kept as efficient as possible. There is NOTHING in the VPF structure to emulate that release pattern—virtual or not.

So why not create a different structure?

The integrators are so fearful of losing the studio VPF income stream, they are loath to reopen those negotiations. The studios have signed off on the current model and have no motivation (short of an antitrust suit) to change it.

Ironically, it was the indies who were among the first to embrace the promise of digital projection. By delivering DVDs, and later using systems such as ours at Emerging Pictures (blatant plug), they were able to get films out more broadly and more quickly without the expense of prints.

However, these systems were (and are) not DCI compliant, so Searchlight and Focus (both major studio subsidiaries) are not permitted to project though these systems. This was fine so long as both of those companies were still making 35mm prints, as a non-DCI system could exist side-by-side with a 35mm projector.

So now you know why the Searchlight letter was such a bombshell.

With no more prints, if a theater wants to play films from one of the studio divisions, they have to go DCI. Theaters that play indie films are faced with a big financial decision depending on what mix of product they have traditionally played.

Art theaters that can’t play Focus or Searchlight films any way, have no reason to go DCI. Many theaters are too close to an AMC or Regal theater, and lose the more commercial art product to them.

I had a conversation recently with one such theater, and pointed out that the only mini-major film they had played in recent years was Shame, which they only got because its NC-17 rating prevented it from being shown at the local multiplex. Worse yet, the film didn’t do any business.

Is this privilege worth a $70,000 expenditure?

They’d be better off with a top notch non-DCI system, which would get them access to all the true-indie product. They could always upgrade a few years down the road as equipment prices inevitably plummet. Besides, there’s no guarantee that the DCI spec won’t change.

Then there are those art theaters that do play Searchlight and Focus films, and in fact depend on that product. In these cases, they should think hard about buying an entry-level DCI system (perhaps a used system) and financing it WITHOUT a VPF deal. Going without a VPF deal is a painful option for such theaters since, as John Toner of the Ambler Theater in Pennsylvania put it at the recent Art House Convergence, one hates to leave money on the table.

But perhaps the upside will be that even Searchlight and Focus might eventually decide that they’d rather play at DCI equipped screens where they are NOT required to pay a VPF.  If they do sign a VPF deal, they are basically cutting out any chance of playing smaller films that frequently would not make enough money to cover the VPF. The distributors of those films will have to start looking elsewhere to play their films.

While some in the indie world have promoted the idea of a boycott, I fear that such an action could hurt the very institutions that are our potential allies.

Rather, I feel we need to promote the following actions as a community:

•   We need to educate exhibitors about the advantages of forgoing a VPF deal. The price of that deal is their freedom to program what they want. It’s just not worth it.

•    In areas where an art house does sign a VPF deal, the independent distributors should find and consistently support an alternative venue. And when I say consistently, I mean even when a film crosses over to larger audiences, these alternative venues deserve to reap the benefits of those successful films, rather than losing those films to the big chains.

•    The independent distributors should get together and decide on an alternative specification to DCI, and agree on a business model to support it. Being non-DCI should not mean compromising the quality of the presentation. Right now, the hodgepodge of systems in the field is not providing customers with a consistent experience.

•   The systems need to be reliable and easy to use. Given how unreliable the DCI system has proven to be (I’ve already experienced three press screenings at three different film festivals that were cancelled because of defective KDMs), a more reliable non-DCI system would be a big selling point.

•   We have to learn to use the advantages of digital projection to improve the diversity of programming, indoctrinating new constituencies to appreciate the theatrical experience.

Finally, anyone up for joining in an antitrust case?

If you wish to see all the comments at the original blog you can find them here.