Saving the cineplex

Can an entrepreneur persuade movie houses to go digital before it is too late?


Morristown, N.J. (FSB Magazine) -- Upstairs in one of the dark, dusty projection rooms at Brooklyn's Pavilion Digital Cinema, owner Bud Mayo watches an employee struggle to lift a 50-pound reel of 35-millimeter film out of its giant metal canister. After placing the film on a shelf the size of a tractor wheel, the projectionist will manually splice reels, inserting ads and trailers that will get fed into a bulky projector. The process can take as long as four hours. Mayo shifts his weight. He's impatient, and with good reason. Near the projector sits a sleek network server system it looks like a stack of industrial hard drives - that can do this entire job almost instantly, with a few clicks of the mouse. That server is the heart of Mayo's new digital projection system, and Mayo says it will do more than just save time. It might just save the nation's movie theaters.

Mayo, 65, should be retired by now. But seven years ago the former IBM computer salesman, Wall Street banker, and independent-theater owner pulled himself away from the golf course after watching major movie chains such as United Artists descend into bankruptcy in the mid-1990s. The solution, Mayo felt, was obvious: digital distribution and projection, a nascent technology that Mayo predicted could reduce costs and boost revenues. And so he began his quest, founding Access Integrated Technologies (accessitx.com) in Morristown, N.J., with the goal of dragging movie houses into the Digital Age. "Someone had to be first," he says quietly.

In an era of declining box office sales and competition from home entertainment systems, movie theaters see digital projection as a way to increase revenues. For example, to fill empty seats during a slow movie run, theaters can use digital projection to show live concerts and sporting events, such as the Super Bowl or a performance from the Metropolitan Opera. It's also more effective for showing alternative movie formats. "In digital, 3-D movies are much crisper and don't cause eye fatigue," says Carl Wagner, vice president of film for Rave Motion Pictures in Dallas and an AccessIT customer.

Digital benefits studios also. A digital movie is a 300-gigabyte computer file that studios encrypt and send via satellite. Traditionally, processing and shipping one 35-millimeter film runs around $1,500. The same movie can be transported digitally for about one-fifth the cost, potentially saving studios $3 billion a year. Once the theater downloads the file onto a server, staffers use AccessIT's software to manage the movie on an iPod-like playlist, adding content such as previews by dragging and dropping files. When the system is in place, theater owners can show any digital files they choose, not just movies. They can also attract more customers by adjusting the price of tickets or the offerings onscreen to match consumer demand. "In 2005, Hollywood made about $9 billion, and that's with theaters running at 15% capacity," says Mayo.

Despite the advantages of digital projection, only about 2,000 of the nation's 37,000 theaters have converted. The greatest stumbling block has been price: Going digital used to cost between $75,000 and $100,000 a screen. That's a hefty sum for theater owners to bear, especially when the bulk of the financial benefit goes to the studios.

Before developing any technology, Mayo sat down with studios and proposed that they redirect most of the money they save on film printing and delivery to theaters to help subsidize the cost of new equipment. Today AccessIT holds an 11-year agreement with all seven major studios, which pay the firm about $1,000 for each digital movie. In turn, AccessIT finances the projector rollout for its customers, offering movie houses the entire AccessIT package - satellite dish, software, servers, and projectors - for about $10,000 a screen annually, plus a one-time fee to install the software. "Until AccessIT, there wasn't any program that made it cost-effective for theaters to abandon millions of dollars' worth of film equipment," says John Ellison, president of UltraStar Cinemas in San Diego.

So far, AccessIT is the only company that offers a complete digital system for theater owners. That presents an opportunity for Mayo, but one that won't last long. Technicolor (technicolor.com) is developing a competing product that it hopes to provide to some 5,000 screens by 2010. Concentrating on independent theaters and regional chains, AccessIT converted 1,538 screens last year and is moving at a pace of about 266 theaters a month. The firm has also won over content providers; Walt Disney Studios signed on in 2005 as the first studio to supply films compatible with AccessIT's technology. Twentieth Century Fox and Universal followed. And AccessIT recently won a contract to license its distribution software to IMAX.

But that may not be enough to protect Mayo from the impending competition. Michael Karagosian, digital cinema consultant for the National Association of Theater Owners, says that most owners may wait until the technology is proven before diving in. "AccessIT sells to the early adopter," he says.

AccessIT's competitors argue that the upstart is moving too quickly. Technicolor favors a slow rollout, so it can fix the glitches that come with digital technology. On the rare occasion that a digital projection fails, the screen goes dark, and it can take time to identify and fix the problem. "Film might get a bit out of focus, but it doesn't stop the show," says Joe Berchtold, president of Technicolor Theatrical Services. "But when you have a situation where the screen goes dark with digital, you're gambling with the livelihood of the studios and exhibitors. That doesn't make sense for us." AccessIT customers, Berchtold, and Mayo say that today in about 99 of 100 movie showings systems do not fail.

In any case, Mayo isn't slowing down. "Bud is at the forefront of this movement," says Paul Glantz, owner of Emagine Entertainment in Troy, Mich., and an AccessIT customer. "If another company came to me and said, 'Here's what I've got for you,' it would be hard to convince me that it's a better opportunity."

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.