This article is about the digital distribution of large-screen public THEATRICAL programming, and has little to do with streaming motion picture issues/38/images over the Internet. The author discusses current business practices relating to film distribution and shows how those practices are likely to change with the introduction of high-resolution digital media suitable for use in theatres. The central issue is how digital technologies may alter the equations of power in the movie industry to allow more players into the game of making and exhibiting profitable motion pictures.

What Is Distribution?

For our purposes, distribution is defined simply as the means by which something is moved from producer to consumer. Motion pictures are forms of information embedded within issues/38/images and sound. The process of distributing information of any kind is inextricably tied to the medium that carries it, and the costs associated with that medium. For example, if you’re moving written words, one medium for moving them is the printed page. Everything associated with the cost of producing and transporting printed pages impacts upon the price of distributing written words. The current medium for theatrically exhibited motion pictures is film. The new theatrical medium is computer-readable files, imprinted with billions of digitized electronic ‘words,’ known as bytes.

What A Difference A Medium Makes

The most important difference between film and digital media is the relative cost of storing and moving information. Other significant differences include their comparative: 1] physical weight; 2] ease of duplication; 3] durability over time and repeated use; 4] transportability; and 5] the fidelity of sound and issues/38/images they record. For a long time, manageable digital formats suffered from inferior sound and image quality when projected onto large screens, but recent advances in computer processing, storage and projection technologies have overcome this limitation to their use in theatres.

Just in terms of the equipment needed, digital production is estimated to be about 1/17 the cost of comparable quality film production. Unlike film, digital formats require very little physical storage space, are easily duplicated, are durable over time and do not degrade with repeated use. So, if the issues/38/images projected from them are acceptable to audiences, what’s keeping digital technology from being rapidly embraced throughout the motion picture industry?

Two things: 1] the cost of converting theatres to the new equipment they’ll need; and 2] the question of control. Assuming that the first problem can be solved in a way acceptable to exhibitors, and it can, the second issue presents itself as the real barrier to the emergence of this magnificently flexible new medium. Who will control the use of this new medium? Will it be used to amplify and extend the authority of the established players in the film industry, or will it open the doors of opportunity to new players? Let’s take a look at some of the issues that need to be reconciled and then consider if there will be a new game that you as a filmmaker or exhibitor can more easily enter, or just a variation on the old one with slightly modified rules.

In one respect, the film industry is just like most other industries. It has three primary components; 1] production (manufacturing); 2] marketing/distribution; and 3] exhibition (retail). The creative manufacturers’ guilds of producers, directors, writers and actors form a combined membership of about 74,000 members. The retailers operate about 34,000 screens in the U.S. and Canada. Between the manufacturers and the retailers stand the domestic distributors. There are effectively eight of them, known as the ‘majors,’ if you include DreamWorks. Collectively, the majors control some 92 percent of the gross revenue earned on domestically released films. As things stand now, if your film is not distributed by one of the majors, your chances of finding a large audience in the U.S. or Canada are extremely limited.

Ideally a distributor promotes and enables the transfer of motion pictures from filmmaker to consumer with the least amount of interference. When a distributor impedes the process of delivering programming to the market or collects an unfair, disproportionate share of the proceeds for doing so, the filmmaker and/or exhibitor of that material generally lose money. Yet, as currently practiced, this is precisely what film distribution often does. Distribution’s ability to control both the delivery and marketing of movies gives them the means to create a tollbooth on the highway to market that moviemakers must travel. When properly implemented, the combined forces of digitally enabled distribution and exhibition will remove that tollbooth, widen the avenues of commerce, and increase the flow of program traffic.

The Sources, Uses and Consequences of Control

The source of distribution’s control in moviemaking is the acetate film stock itself; the distribution medium. The costs associated with making, storing and shipping on this medium result in huge budgets developed around its use. If the medium becomes less expensive, more flexible, universally inclusive, and fluidly transportable, you change the rules—which is what the digital format is doing.

Exhibition as Production’s Partner

Distributors accept a fiduciary responsibility to maximize the return on the product they distribute for the benefit of the producers they represent. Exhibitors operate the facilities where the theatrical return on that product either materializes, or not. Exhibitors’ ability to establish a profitable run at their theatres is directly related to the potential return producers may thus enjoy. In fact, if not in practice, producers have a direct interest in the success of exhibitors. Barring extreme costs in production, distribution, or marketing which overburdens a motion picture’s return potential, exhibition’s ability to deliver a successful performance should directly benefit the producer. But the masking of costs associated with certain distribution practices make it difficult to see, much less realize, the benefits and interests that these two parties share. Digital distribution and box-office direct accounting, coupled with effective low-cost digital marketing, will reduce the smoke and mirrors and make clear the rewards accruing from a direct and cooperative relationship between producers and exhibitors. What are the impediments to establishing such a relationship?

When read from the exhibition side of the distribution tollbooth, a licensing contract takes into consideration the length of run being promised (four weeks being the usual minimum), the weekly rental terms, theatre admission policies, the number of auditorium seats and the licensed auditorium’s ‘house allowance.’ Each of these presents a potential roadblock to a film being booked if the theatre is not willing or able to play by the distributor’s policies. So each of these represents a means to control, direct or limit the return a producer might otherwise enjoy.

Particularly in smaller markets, the four-week minimum often makes it impractical to run a picture at all, even though it might produce significant revenue if played over a shorter period. Combine those incremental losses over hundreds or even thousands of such exclusions, and very real money is being forfeited. The problem stems from the cost of a film print. The four-week minimum is merely distribution’s way of assuring a return on the investment needed to make and ship a print. At the same time, marketing expenses are not being leveraged to their maximum, as would be the case if all interested theatres in a market could license a picture simultaneously while it was being advertised.

By dramatically reducing the cost of a ‘print,’ digital distribution eliminates the need for four-week minimums, and opens markets of all sizes to a much more diverse range of programming. If a theatre determines it can make money on a single show, a digital format costs so little that it now makes sense to license it. The ability for theatres to recover control over their show schedules will open new markets across the world, and reopen some older ones. Research done by Lightyear Digital Theatre, Ltd. shows that in the U.S. alone, over 9,000 shuttered towns will be able to reopen a viable theatre using digital systems.

Use Digital Media to Sell Your Picture
& Get Paid On Time

Rental costs are either firm (fixed) or settled (negotiated), but either way they start from the perceived value of the program. In half the states in the U.S. (the ‘blind-bid’ states), an exhibitor (buyer) often has to guess about the potential prospects a feature may hold because trade screenings are not required. Even in anti-blind bid states, the need to drive great distances to the nearest screening makes it difficult for many exhibitors to know what they’re licensing, further limiting their ability to properly sell whatever they do buy. The guesswork needs to be eliminated so that theatre operators become more directly involved in the placement and promotion of the programs they choose to exhibit. Marketing directly to the theatre owners and then helping them use such things as the Internet to develop a successful local ad campaign are in every producer’s best interest. Digital technologies now exist to make both tasks manageable and affordable.

Digital distribution is inexpensive enough for screenings to be given to buyers wherever they might be. DVDs, though of lower resolution than generally desirable for public presentation, will be used as screeners and projected on buyers’ own screens. DVDs can be date and time-stamped to allow for a single ‘trade’ screening at a specified time, thus preventing unlicensed use while expanding the number of potential buyers involved. Giving the exhibitor the ability to personally assess the value of a program before buying should eliminate the common practice of ‘settling’ rental terms after a picture has played. The licensing of pictures on ‘firm’ terms can result in nearly immediate rental payments. Some ATM-like systems are already designed into box-office accounting software and can be used to enable rapid reporting and payment of fixed rentals. Owners of digital theatres who make their own buying decisions based on firm term rentals should have no problem paying for their product on a weekly basis. ATM-equipped box-office software can make this easy and automatic.

The Exhibitor Gets Involved in Marketing

Films are rented on the basis of a minimum percentage of gross, or a 90/10 rental figure which is calculated using a theatre’s assigned ‘house allowance.’ The rental formula that produces the highest rental to the distributor is the one that applies, regardless of the negative impact this may have upon the exhibitor. This billing method is detrimental to single screen operations and explains much of why so many have shut down. It’s an absurd and damaging contractual item that guarantees the distributor an absolute minimum percentage, or up to 90 percent of anything over an ‘allowed’ amount. The effect is to punish exhibitors for virtually any meaningful contribution to the promotion of a picture. This is because the 90/10 formula sets a ceiling on earnings above which the exhibitor keeps only 10 cents of every dollar. Hence, an ad campaign costing $400 would necessitate earning an extra $4,000 just to pay for itself! This built-in disincentive costs the film’s producer by limiting local market advertising to whatever the distributor is willing or able to pay for—often nothing whatsoever, after the first-run market campaign. The 90/10 formula limits or eliminates local marketing. It needs to go. Its elimination will open the door for important contributions from exhibition, more targeted local advertising, and higher grosses.

Exhibitors will have an enormously expanded range of program choices and they will be able to ‘customize’ selections to fit their audience, but successful use of such flexibility will require them to learn how to effectively market the materials selected. Of all the new skills that digital distribution will require, the need for exhibitors to create and execute effective local promotions is the most critical and least recognized. Mastery in this area is the most vital challenge confronting the industry as it steps into the digital future, and the scariest for operators and studios whose achievements have been based on national ad campaigns and centralized controls.

The Patron Comes Home Again

Since the introduction of the multiplex, studio distributors have encouraged the construction of ever larger complexes by giving ‘preferred customer’ clearances to them. Clearances come with a tacit agreement that the distributor will give the preferred customer the right of first refusal on their releases in exchange for the exhibitor’s agreement to play as much of the distributor’s product as possible (ideally all of it). This has created a rather inflexible sellers’ market, which too often excludes smaller and sometimes more market-sensitive, locally owned theatres from obtaining desirable licenses. This model works well for the mass marketing of film in the same way Wal-Mart serves the mass consumer trade. It’s one of the tolls exacted by distribution and it doesn’t necessarily serve the film producer.

By diversifying and increasing the product supply, digital technologies will create an avenue for theatres to choose product on a more competitive basis. Promotions will shift from a focus on mass-marketing to targeted local campaigns that encourage development of a one-to-one relationship between theatre and patron. Theatre patrons will begin to take a personal interest in the programming that their local theatre offers, and will assume a proprietary interest in those that are more responsive to local tastes. Customer service factors, such as presentation quality, patron care, facility cleanliness and comfort, and even the price of concessions will enter into the equation as patrons are given the choice of competing venues. Patronage will expand in response to changes in programming, advertising and theatre operations. Not only will more patrons come to theatrical presentations, but they will come more often as well.

program Diversity, Expanded Production Choice

Increased diversity and expansion of product are the watchwords of the digital theatre and the bases of its inevitable replacement of film-based competitors. If you have any doubt that digital formats will expand the supply of programming, consider this: There are approximately 220 MPAA releases annually. There are at least 180 channels of digitally encoded programs streaming into home satellite systems, 24 hours a day, 365 days a year. If only one-half of one percent of that current satellite programming could be presented for sale theatrically, theatres would currently have 7,884 one-hour choices, or 3,942 two-hour choices. That’s almost 18 times the number of programs they can now choose from in film—without adding anything new to the digital mix! Channels like Showtime, Discovery, A&E, Independent Film, History and ESPN, to name but a few, all produce programming which is enhanced by large-screen presentations, and which could potentially be offered theatrically using digital projection equipment.

Over the past century, film distribution has evolved into a highly controlled and protected sellers’ market. This market is rich in theatrical outlets that are often desperately in need of product and willing to take virtually anything provided, particularly if it comes with a little television advertising. The last thing distributors seem interested in is having exhibitors exert any degree of discrimination over the product being played in their theatres. This holds so long as they control either the volume of production or number of prints being distributed. Expand production and open the distribution channels, as digital technologies soon will, and the dynamics change immediately in direct proportion to that expansion and the market’s willingness to respond to it.

The digital market will bring more integration and cooperation between producers, distributors and exhibitors. The success of one has always implied the success of the others, but digital technologies now stand a far better chance of making that implication a fact in reality. Organizations that develop cooperative business relationships designed to maximize the low cost of digital media will benefit sooner, and to a much greater degree, than those interested in proprietary exclusion over digital implementations. MM

Greg Melick is the VP of Programming for Lightyear Digital Theaters, LTD. He is a teacher, writer and former theater owner from Maine.