Movie theaters forced to make expensive upgrades to projectors

Daily Record Business Writer//September 27, 2012

Movie theaters forced to make expensive upgrades to projectors

By Alissa Gulin

//Daily Record Business Writer

//September 27, 2012

Cinematic entertainment has come a long way from the black-and-white talkies that fostered the growth of one of the world’s largest leisure industries. The movie business can be lucrative, but it often throws major curveballs at theater owners — especially small, independent ones.

Projectionist Dominic Wagner works on a film in the projection room at the Charles Theater. Soon, the theater will be outfitted with digital equipment.

Even after years of technological advancements, traditional filmmaking isn’t as efficient as digital production. And these newer methods are far cheaper for studios, but the savings are meaningless unless their films make it into theaters.

For that to happen, theater owners must ditch the projectors that show reels of celluloid films and retrofit their cinemas with digital projectors, hard drives and servers.

And to get financial assistance from an industry-backed program to help offset the $60,000 to $80,000 per screen expense, theater owners must agree to show major studios’ releases. The last day to enroll in the program is Sunday.

Though all cinema operators must grapple with the expense and logistics of converting, it can be riskier business for owners of small theaters, who have less wiggle room on their balance sheets than do large companies.

But despite the risk, several owners of small theaters in Maryland said they’re looking forward to updating their facilities.

“Profit margins-wise, we’ve actually plugged the numbers, and we feel like this would be a pretty profitable investment for us,” said Rich Daughtridge, who co-owns Leitersburg Cinemas, a small Hagerstown theater.

That investment is necessary to stay competitive, Daughtridge and others said, but it’s a massive undertaking and an enormous expense.

Other small theater owners aren’t as optimistic about the impending digital conversion, but they can’t escape a costly decision: switch their projectors or shut their doors.

Under the program, production studios pay a certain amount each time a theater owner books one of the studio’s films.

There are four companies offering slightly different versions of the program. They act as intermediaries that collect the payments — known as virtual print fees — from the studios, and then distribute the money to theater owners.

Although the VPF program isn’t perfect, several theater owners said it brings digital conversion within reach. Adding the new equipment is crucial, they said, because the digital format will eventually eclipse standard film. Without digital projectors, they won’t be able to play most new movies.

It’s go digital, several said, or go home.

Out of necessity

James ‘Buzz’ Cusack and high daughter, Kathleen Lyon, will be converting both the Charles Theater and the Senator Theatre to digital.

James “Buzz” Cusack owns Baltimore’s Charles Theater with his daughter, Kathleen Lyon, and this week was approved as the new owner of the city’s iconic Senator Theatre. He said he’s installing digital equipment in both cinemas, but only out of necessity.

“If we’re going to stay in the movie business, I guess we have to,” he said. “If you want to play first-run movies, I don’t know if you’re going to have any options if you don’t convert.”

The VPF program is structured to spread the studios’ savings throughout the rest of the industry over several years — up to 10, depending on the contract. The more major studio films theater owners book, the more VPF money they will receive and the sooner they will be able to recoup their investments.

Because payments won’t add up as quickly for small exhibitors with only a few screens, several said they will take out loans to finance the project. They said they’ll focus on maintaining high ticket sales to bolster their cash flow in the short term, but they anticipate plenty of anxiety.

“It’s like any other business venture — you’re going to take risk,” Daughtridge said. “You have to perform with your attendance so you are valuable with the film companies. Taking out a massive loan is a risky thing, but I think if you take a snapshot of seven, 10 years out, your loan is being subsidized by these VPF payments.”

Though the VPF program is designed as long-term returns on the initial investment, Cusack said his primary concern is that the equipment will become outdated before that period is up.

“A lot of people are concerned about the obsolescence of it, that you’ll go ahead and buy it, and it could be obsolete in two, three years,” Cusack said. “Installing new equipment is a much more difficult proposition if you have to keep replacing it.”

Several theater owners said they’ve already heard about new capabilities of projectors that could be available in a few years. Manufacturers have assured them that digital projectors have long lifespans and will remain compatible with new models, but Cusack said he’s not convinced.

“Every couple years, there’s new telephones, new computers, new everything,” he said. “So there will probably be new movie projectors. They’ll always be compatible — until they’re not.”

Minimum of $300K

For Cusack to convert the five screens inside the Charles to digital equipment, installation alone will set him back a minimum of $300,000.

Then there’s maintenance, which falls solely on the theater owner under VPF contracts. Maintaining digital equipment costs several thousand dollars more than film projector upkeep, according to The National Association of Theater Owners.

“The big difference between this digital conversion and the equipment that everyone has had forever is that the 35mm is a very old technology, but it runs well and it just costs a couple hundred dollars a year to maintain — it’s like a ’52 Chevrolet,” Cusack said. “It’s very mechanical. It runs great and needs only minor repairs.”

Additionally, VPF programs aren’t designed to cover 100 percent of the conversion cost.

“It definitely cuts into your bottom line, but getting the fees back helps to pay your monthly loan,” Daughtridge said.

“What’s left over after the VPFs is basically what you have to eat, and if you spread that over a longer period, it does cut into your margins a bit, but I think if you’re at least somewhat successful, it shouldn’t be a deal-breaker for you.”

But conversion carries an overall higher price tag for locally owned theaters that cater to small audiences, book fewer films or focus on a specific style of movie. Depending on the VPF contract terms, it could be more difficult to secure the titles owners want.

The Charles, for instance, screens mostly alternative art films, but in order to receive the VPF payments, Cusack must book a certain number of the movies released by the big Hollywood studios.

Cusack said he’s worried studios will exert too much control over his film lineup.

“Other exhibitors probably don’t show as much alternative content,” he said. “They show the mainstream movies that are participating in the [VPF chain], and at the Charles I’m not sure if all the distributors we deal with participate in the program.”

Going digital at the Senator is more critical, Cusack said, because that theater screens mainstream movies that will eventually only be produced digitally.

Daughtridge said he understands the mutual incentive between studios and exhibitors to make the conversion and acknowledges that because his theater already screens the highest-grossing movies, it won’t be as difficult for him to accrue payments.

At the drive-in

Owners of small, outdoor theaters face additional hurdles unique to their environments. Digital equipment requires a cool temperature and must be kept extremely clean, presenting a problem for exhibitors like D. Edward Vogel, who owns Maryland’s last operational drive-in, Bengies Drive-in Theatre in Middle River.

Vogel’s projection room overlooks a sprawling field that’s no stranger to dust. He said he might have to completely renovate the concrete-block building that houses his projection room, including installing a powerful air conditioner.

“A projector ain’t cheap, and it ain’t cheap for a reason,” Vogel said. “It’s a complicated piece of machinery. You are producing an image coming off of a hard drive and using intricate parts. You have to keep everything clean or it will diminish the image and jeopardize the health of the machine.”

Because he wants to keep his film projectors, he might build a separate room for the digital equipment. If Vogel makes the transition, he estimated his total expenses as high as $150,000.

He said the investment might not make financial sense for his business, primarily because spillover exterior lighting from a nearby Royal Farms convenience store has called into question the viability of an outdoor theater in that location. He knows the window is passing to take advantage of the VPF program, he said, but he’s essentially immobile until the lawsuit is resolved. This week, Vogel appealed a judge’s decision to set aside a jury award of $838,000 in the case.

Some theater owners said they’re looking forward to the enhanced experience of digital projections. Daughtridge, for instance, said he’s excited to upgrade the Leitersburg Cinemas.

Manufacturers say digital technology creates clearer pictures and a more enjoyable experience.

“You can pack brighter images, in greater detail, into digital pixels than what film delivers,” said Tim Wood, the VPF program manager for Christie Digital Systems USA Inc., one of the companies offering a VPF program. “Plus, the media is much more compact — a hard drive vs. huge reels of film — and it lasts forever, whereas film scratches, burns, degrades, etc.”

Christie sells digital projections and requires theater owners to use Christie products if they sign up for the company’s VPF contract.

Like high-definition TV

Non-digital theaters might have difficulty satisfying consumers who prefer the enhanced digital experience, Daughtridge said. Just as viewers have grown accustomed to high-definition television, they might eventually come to expect the digital experience.

“I think, for us, our stuff is such dated equipment that we think the experience of our theater will be enhanced,” Daughtridge said. “So we’ll hopefully sell more tickets.”

Cusack, on the other hand, said he did not anticipate selling more tickets, because all his competitors will eventually make the transition.

Bengies’ Vogel, who says 35mm film provides a superior image, doesn’t take his theater lightly. He lives and breathes what he calls one of the last remaining icons of “roadside America.”

A digitized drive-in would be easier to operate, he said, but it wouldn’t be the same.

“I love the sound of the projectors,” he said. “I love the smell of the old film. I love switching the projectors at exactly the right time so the audience sees a seamless transition. It’s an art.”


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