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NEW YORK--(BUSINESS WIRE)--May 14, 2002-- Cost of Changeover to Digital
Projection the Key Obstacle - Piracy and Competing Technical Standards Also
Concerns; Will Distributors Step in and Underwrite New Digital Technology?

With the release of Star Wars Episode II, attention again turns to digital
cinema. But moving beyond the hype, digital projection of films faces
several major obstacles. A new report by Booz Allen Hamilton finds that full
acceptance of digital cinema by the film industry is still a long way off,
and in fact may never break through, unless the industry redefines how it
shares revenues and finds inventive ways to finance the cost of the
changeover.

There is no question about the promise digital cinema technology holds. The
most obvious advantage is vast cost savings, as electronic transmission
replaces mass copying and distribution of 35mm celluloid prints, a process
which currently costs the studios over $1 billion each year. Digital
projection also offers better picture and sound quality, easier editing and
new opportunities for theaters to better utilize their screens.

However, the industry has been reluctant to embrace digital cinema
technology. Star Wars Episode II was shot on digital videotape from
beginning to end, but at its U.S. opening only 60 screens out of 5,000 will
display it in its pure, digital form, while the rest will use traditional
film projectors. Fewer than 100 theaters worldwide are equipped with digital
cinema projectors, and only 30 feature films have ever been distributed
digitally.

The main reason for this slow adoption rate is the cost of converting the
nation's 36,000 movie screens to digital projection, which is estimated at
$3 to 5 billion. Mike Katz, Senior Vice President at Booz Allen, estimates
the payoff on that investment could be three to five years. "Given declining
profitability in the theaters and the uncertainty surrounding hard benefits
for theater owners versus the studios, it could be difficult to attract the
necessary capital," Katz said.

John Frelinghuysen, Vice President at Booz Allen, noted other obstacles to
digital technology. "No one's hurrying to change the current system, because
it works just fine. Traditional projection equipment is extremely reliable,
and there is a plentiful supply of used equipment on the market." In
addition, there are concerns about digital piracy and competing technology
standards at both studios and theaters, as well as a fear on both parts of a
loss of control, he said.

The investment needed to implement digital technology could come from
distributors, which include traditional players like Technicolor and new
entrants like Qualcomm and Boeing. These companies may emerge as the logical
sources of capital and brokers of the deals necessary. "The distributors may
be best positioned to break the logjam caused by the economic climate, the
financial structure in place and the conflicting interests among the
stakeholders. They have the broad relationships and the cash flow to act as
catalysts during the transition," said Krishan Bhatia, Booz Allen Senior
Associate.

The report outlines other scenarios that Booz Allen says could lead to a
breakthrough for digital cinema:

-- Studios and theaters redefine the way they currently share revenues to
adapt to the economics and dynamics brought about by digital cinema. The
increased revenues and cost savings need to be split in a way that helps
theaters out of their current slump while providing incremental upside to
studios.
-- Theaters move beyond their current focus on movies to embrace alternate
forms of content and advertising. Currently, only $200 per screen per year
is generated in ad revenue in the U.S., compared to $22,000 per screen in
Europe. Third parties interested in presenting sports, concerts or other
in-theater entertainment could also represent attractive new revenue
sources.

"Ultimately, the next level of investment in the technology may only be
spurred by a dramatically different type of digital cinema event that
captures the public's imagination. Otherwise, expect it to continue to go
the way of solar power, high definition TV and electric cars -- great
inventions that promise a brighter future but are not quite ready for the
mass market," Katz said.

About Booz Allen Hamilton

Booz Allen Hamilton has been at the forefront of management consulting for
businesses and governments for more than 80 years. Booz Allen combines
strategy with technology and insight with action, working with clients to
deliver results today that endure tomorrow. With 11,000 employees on six
continents, the firm generates annual sales of $2 billion. Booz Allen
provides services in strategy, organization, operations, systems, and
technology to the world's leading corporations, government and other public
agencies, emerging growth companies, and institutions.

To learn more about the firm, visit the Booz Allen Web site at [url=http://www.boozallen.com.]www.boozallen.com.[/url] To learn more about the best ideas in business, visit [url=http://www.strategy-business.com,]www.strategy-business.com,[/url] the Web site for strategy+business, a quarterly
journal sponsored by Booz Allen.

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I guess I won't be ordering digital projection equipment anytime soon afterall.

For the folks who do have digital projection already I'm curious to hear how they're financing it. Leasing? Some sort of vendor financing (Boeing, Technicolor Digital, etc.)? How has the concern about rapid obsolescence been addressed?

Thanks.

With 60 digital screens in the USA (probably the world) I'll bet that not one theatre has paid for the system. It's all test stuff for now and if you're lucky enough: big, new, beautiful, correct demographics, close to the suits, etc. you might get one.

Mike,

I sent an e-mail a few weeks ago to Technicolor Digital because I had read about their self-touted program of placing digital systems on 1,000 screens. I explained that I was looking to open a triplex cinema cafe in a community with about 326,000 pop. and asked if they would send me more info about their fiancing program. I DID receive a polite reply that I am simply too small to fool with (at least they answered).

I just received an e-mail back from Boeing Digital as well. They say they are very interested in marketing their projection system to independent exhibitors. They refered me to some PDF files on their website (stuff I've already seen).

Oh, by the way, they say the cash price to install their system (I presume on one screen) is $225,000. The way they used "cash" in their reply to me suggests that there may be other ways to acquire use of the equipment.

Kodak is working to get the cost down to a more reasonable level:
http://www.kodak.com/US/en/motion/digital/kennelP.shtml#p

QUESTION: What will the system cost and when will it become available?

KENNEL: You obviously can't put a price tag on a product that is in development, but most industry financial analysts believe that digital cinema will begin to become attractive somewhere around $75,000 per projector. As for when, it won't happen overnight. The projector and storage hardware that are available today are much more expensive than that.

--- Glenn Kennel, Kodak Digital Cinema Program Manager

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John P. Pytlak, Senior Technical Specialist
Worldwide Technical Services
Entertainment Imaging
Research Labs, Building 69, Room 7525A
Eastman Kodak Company
Rochester, NY 14650-1922
Telephone: 585-477-5325 Cell: 585-781-4036 Fax: 585-722-7243
E-Mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it
Website: http://www.kodak.com/go/motion

I personally am not too excited about digital--and I doubt I will see it mainstream in my life time. Our industry is not real fast on change--look at sound and how many different systems and use---look at cyan soundtracks, wasn't that suppose to be implemented a couple years ago already? I know I will need to change the reader heads, that I installed close to 5000 hours ago, before cyan is the norm. On cyan I jumped the gun--payed $350 more than what they sell for today and still could be using exciter bulbs.

The hype of digital is just hype in my book.

We recently got a Technicolor digital system installed (Barco Projector). I have no idea on the financing or cost, but was surprised that a town of 320,000 was told they were too small! We have a permanent population of 110,000 (which balloons to 200,000 in the winter time), and we went from inquiry to running Star Wars digitally in roughly 4 weeks! The technology is wonderful and I can't wait for it to be the norm!

Big Guy: Is your theatre independent, or part of a large circuit? Perhaps they wanted to test the demographics in a smaller city? Another possibility is that your theatre circuit's management is in a decision-making position within NATO.

---

John P. Pytlak, Senior Technical Specialist
Worldwide Technical Services
Entertainment Imaging
Research Labs, Building 69, Room 7525A
Eastman Kodak Company
Rochester, NY 14650-1922
Telephone: 585-477-5325 Cell: 585-781-4036 Fax: 585-722-7243
E-Mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it
Website: http://www.kodak.com/go/motion

John Pytlak,

Or, perhaps Technicolor Digital didn't want to waste time with me because I'm not really in the exhibition business yet.

We are an independent and don't belong to NATO (yet). I have no idea how we managed to get the system, even one of the guys that helped install it stated he was surprised such a small market got one. At any rate, we are VERY happy with it. Now let's just hope that we can keep a good stream of movies to play on it!

Big Guy --- sounds like you are in Yuma, Arizona?

---

John P. Pytlak, Senior Technical Specialist
Worldwide Technical Services
Entertainment Imaging
Research Labs, Building 69, Room 7525A
Eastman Kodak Company
Rochester, NY 14650-1922
Telephone: 585-477-5325 Cell: 585-781-4036 Fax: 585-722-7243
E-Mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it
Website: http://www.kodak.com/go/motion

Big Guy,

Are you able to tell us anything about the terms for your use of Technicolor Digital's system? Are you paying them "X" cents per ticket sold or some other such arrangement? Of course, I'll understand if you're not free to talk about financials. Regardless, reading an update now and then about your experiences with the system would be appreciated. Thanks.

Big Guy;

I too would be interested in your conversations with the folks. We are in the process of rolling out a total of ten upscale first-run “Cinema Draft Houses” that will be 100% digital capable. Our guy has been discussing the roll out with the main players in the digital market. I’d be interested to see what they gave an independent with one location versus what we are being offered as a ten unit forty screen “all digital circuit”.

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"Building the world's first all digital theatre circuit. Bijou, The Ultimate Cinema Bar & Bistro (tm)"

[This message has been edited by b716astg (edited May 23, 2002).]