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WisBusiness: Theater owners face real-life drama as 3-D roll-out coincides with economic crisis

By Kay Nolan
For WisBusiness.com

Perhaps someone will one day make a movie about it: How theater owners, from mom-and-pop operations to big cinema chains, were caught up in an exciting, yet hair-raising adventure when groundbreaking technology swept their industry during the worst recession in decades. In Wisconsin, theater owners say digital film and the 3-D phenomenon has them scrambling to install new equipment -- investing hundreds of thousands of dollars – in hopes of a happy ending.

Those in the throes say the transformation has not been without drama. Movie theater owners have been campaigning for big Hollywood film studios – for whom digital technology slashes costs -- to help theaters pay for expensive upgrades. In the meantime, theaters have run up against financing roadblocks, waiting lists to purchase 3-D projectors and screens, and royalties demanded by manufacturers that lease the equipment. With competing studios rushing to release 3-D films faster than cinemas can install screens, theaters are forced to forgo some titles or end a film’s run sooner than they’d like.

Brian Henry, who owns Fox Bay Cinema Grill in the Milwaukee suburb of Whitefish Bay, plunged ahead to install 3-D capability a year ago, obtaining a private bank loan without waiting for a group financing program being put together by the National Association of Theater Owners. Henry, whose renovated 1950s theater offers dinner during movie showings, predicted that family-oriented 3-D films like “Monsters vs Aliens” and “Avatar” would appeal to his clientele. “And I was right,” he said. “We were the first independent theater in Wisconsin to have it.”

But with the country in economic turmoil and banks tightening up on lending, other theater owners have had to be creative to find the money to upgrade.

Jim and Mary Rusch, who, along with their son and daughter-in-law Jeremy and Kimberly Rusch, purchased the longtime family-owned Portage Theatres in central Wisconsin two years ago, were able to combine a revolving loan from Columbia County with a bank loan to pay for 3-D upgrades to one of their building’s seven screens. They also applied the flood assistance funds they got after torrential rains in the summer of 2008 cut off access to businesses in downtown Portage. But in order to keep up with the flood of 3-D movie releases, the Rusches are trying to borrow more money to upgrade a second screen.

“Banks are worse this year than last year,” said Jeremy Rusch. “We’ve submitted a business plan, but we’re still waiting to hear on the loan.” He finds the delay frustrating because it’s now clear that one 3-D screen isn’t enough. Ticket sales for his theater’s first 3-D offering, “Avatar,” were still going strong after 11 weeks when the theater had to drop it to pick up a new 3-D movie, “Alice in Wonderland.”

“I believe that ‘Avatar’ would have played at least another three weeks, if we didn’t have to pick up another 3-D movie,” said Mary Rusch. Shortly after, when Paramount’s “How to Train Your Dragon” was released in 3-D about the same time as Warner Bros.’ “Clash of the Titans,” the Rusches had to make a choice. They turned down “Dragon” and opted for “Clash.” To their dismay, Paramount balked at sending them a regular, 35mm copy of “Dragon” to show on another screen. Eventually, they say, the studio relented.

Rise of 3-D leads to distribution 'bottleneck'

“Currently, there aren’t enough screens to support the wide releases, which is why we’ve had a sort of a bottleneck over these last couple weeks,” said Patrick Corcoran, spokesman for the National Association of Theater Owners. This year’s rapid roll-out of 3-D movies is causing “difficult traffic management for studios and theaters alike,” he said.

Theater owners like the Rusches need the ticket sales. The new technology has already cost them more than $135,000 for a 3-D projector, curved screen and 400 pairs of 3-D glasses at $27.50 a pair. Because they opted for reusable glasses instead of disposable ones, a special washing machine was needed. To allay customers’ fears of germs, the Rusches spent $5,000 for a new water heater that would ensure a hot enough water temperature. Operating costs with 3-D are higher, too. Jeremy Rusch says digital projector bulbs are pricey at about $1,000 each, and they burn out more quickly than standard ones.

Nationwide, Corcoran says it costs theaters an average of $75,000 for each new digital projector and another $25,000 for each new 3-D-capable silver screen. He says theaters will easily recoup the costs by charging higher ticket prices for 3-D movies. “It can probably pay off pretty quickly, perhaps within the run of a single film, if it runs long enough,” said Corcoran, adding that so far, 3-D screenings are earning two or three times the amount of revenue, per screen, as that earned by the same movie shown in 2-D.

But part of the box office receipts must be returned to Hollywood studios. For the first week or two of a film’s run, a majority of ticket revenue can go back to the studios. After that, theaters start to collect more profit. The good news is that digital movies don't deteriorate after weeks of use like the old reels can, said Mary Rusch. “When you play something on film, by the end of the run, like 11 weeks, it can be scratched and the sound quality can be not quite as good, but with a digital print, the color, sound and everything is just the way it is the first time you played it,” she said.

In addition to film rental fees, one major manufacturer of 3-D technology, RealD, charges theaters royalties for each film shown on its equipment.

Planning, credit crunch slow 3-D rollout

The theater industry association acknowledges the 3-D roll-out for movie-goers has been slowed by behind-the-curtain negotiations. Members spent years putting together a sound business plan before adopting 3-D technology, he said. Theater owners wanted assurance the new equipment’s technology could be upgraded in the future, and that regular movies could continue to be shown on 3-D-outfitted screens.

“Part of what the process has been over the last decade is to ensure there’s a path for sustaining this, so with this big expense, they’re not going to have to do it all over again,” said Corcoran.

In addition, theater owners like Henry and the Rusches know that digital technology saves studios a lot of money because they no longer have to produce actual reels containing 35 mm film, pay to ship the reels to theaters, and provide special storage and disposal of old reels, which, due to their chemical content, may not be put in landfills. Because theaters faced steep costs to convert to digital, they wanted the studios to use some of that savings to help so-called “exhibitors.”

“Basically, what’s been holding the conversion to digital back has been sort of a long process of first, getting the technology right, and secondly, getting the business model right,” said Corcoran. “Initially, the way the digital cinema was perceived was that most of the benefit would go to the studios, so there was a lot of negotiation trying to work out ways so that the studios would contribute to this change-over to digital.”

An agreement was reached for studios to pay theaters “virtual print fees,” based on a percentage of what studios would have paid to ship out standard film prints. The fees are collected and distributed by a third party integrator, typically a company that installs or leases digital equipment in local theaters.

But even though the virtual print fee system has been put together, it’s being implemented one theater or theater group at a time, and not everyone has a contract in hand yet. Henry is hoping to be paid retroactively for the digital movies he’s shown at Fox Bay Cinema Grill during the past year, once he finalizes his fee contract.

The theater owners' group has been working for some time on getting group financing deals for member theaters to upgrade to 3-D, but “just when things were about ready to go, the credit crisis hit, so there was no money to fund this roll-out,” said Corcoran.

That’s easing up. A consortium of the three largest theater circuits (Regal, Cinemark and AMC) called the Digital Cinema Implementation Partnership just secured about $60 million to start the roll-out for those three circuits, he said. Soon, there should be funding for another program called the Cinema Buying Group, run by NATO, which allows independent theaters to pool their collective screen counts in order to negotiate better deals.

3-D screens continue to spread

Theaters nationwide seem sold on the benefits of adding at least one 3-D screen.

“We’ve been seeing installations running at between 100 to 150 a month for the past year, and we expect that to continue,” said Corcoran. “There are about 4,000 3-D screens in the U.S. and Canada, right now, and by the end of the year, we can probably see maybe 7,000 total. What no one knows right now, however, is how many 3-D screens is the right amount for the industry or for a company and I really don’t think anybody really knows how many 3-D movies in the marketplace can be supported.”

Meanwhile, Jeremy Rusch says theaters are facing backlogs in 3-D equipment orders. “I was lucky enough to get on the waiting list in January, and we’ll be lucky to get it by May.”

Marcus Theatres, a division of Marcus Corp. that owns or manages 668 screens at 54 locations in Wisconsin and six other Midwestern states, installed its first 3-D screen in 2007. Recently, Marcus announced plans to install an additional 19 RealD 3-D systems at new and existing locations, bringing digital 3-D to 53 screens at 43, or nearly 80 percent, of its theater locations. Marcus would not divulge any figures on costs to install the equipment, but the theater division recently credited the success of “Avatar” and other 3-D films for its record third quarter, with a 12 percent increase in revenues and a 21 percent increase in operating income.

As a small, independent operator in a middle- to upper-class suburb, Henry is sure 3-D will enhance his business, despite the recession. The cost of a movie ticket, adjusted for inflation, is still more reasonable than sporting events, concerts and other family outings, he says. And movies have always provided an escape during hard times.

He feels sorry for independent theaters in rural areas who are up against big chain cinemas. “Luckily, I have a 10-year relationship with my bank,” said Henry. “It’s going to be tough on many independents. A lot of them aren’t going to have the wherewithal to get financing.”

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