The uncertain future of third party digital cinema funding in Europe

...or How I Stopped Worrying and Learned to Love State-Led Digital Cinema Funding Initiatives.

Having attended a number of national and international conferences and events around Europe there are growing signs that third party middle men are increasingly likely to be sidelined in Europe's digital cinema transition. I realize that this is a pretty strong statement, so here is the evidence that I have come across in as much detail as I can and am allowed to give.

Norway - I keep banging on about this one, I know, but given that they are still the likeliest candidate for being first in switching over all of their cinemas to digital they are well worth watching. With the government having pledged to support 50 per cent of the cost of the conversion, with 15 per cent coming from cinemas, 35 per cent from distributors and no cinema left behind, there is no room in this funding equation for any 3rd party financiers. The funding vehicle will instead be set up by FILM&KINO and in order to qualify, cinemas cannot dip into any other pot of money, be it from Arts Alliance, XDC or anyone else. This goes for municipally owned as much as for private cinemas. So far, so obvious, but what about the rest of the Europe that does not have such a unique cinema structure and big pot of money to spend on them?

Germany - A few weeks ago I attended and spoke on the 'Kino mit Zukunft' (Cinema with future') panel arranged with the FFA. What was interesting was the difference between what was said in public on the panel, which was detailed and interesting, and what people were prepared to tell me off-stage and off the record. Germany has far reaching plans for how to help the cinemas go digital and they are looking to apply the 'Norwegian model' but in reverse. I'm afraid that I can't go into more detail than that at this time, but I hope more will be revealed elsewhere soon.

This is very advanced thinking and the key is that the money is raised through the cinemas with upfront loans to pay for the cap-ex, but it would not involve third party financing. This was largely echoed at the IBC conference where at the D-Cinema Conference Day a presentation was given by Chris Koppelmeier (you can download it other IBC presentation for free as MP3 files here) left no room for third party funders in his overview of the German situation, even if it did not give the most up-to-date status of the plans. Having previously championed the 'Solidarity' model for conversion, it is perhaps no surprise that Germany should follow Norway's lead in planning for a conversion that would by state and exhibitor led, rather than by third parties and financial markets.

Remember too that German is still stinging from the media stock market crash that coincided with the bursting of the dot.com bubble that dragged down a lot of cinema and production companies only a few years ago. They have thus little wish to leave the digital transition to the vagaries of the market.

France - Another interesting presentation at the same IBC session was given by Lionel Bertinet from the CNC. Although he did not go into the level of financial detail and analysis that hid German colleague did, his message was all that more starker. On a slide titles 'The Answers and the role of the government' it stated that "A collective approach is needed." But this was followed by the even stronger statement "There will not be an answer from a third party financier." The means would be an adaptation of CNC public fund, if I understood him correctly. He did concede that pure public financing was not the answer either, but the tone had been set.
I tried to ask him and his German colleague what if any role, in that case, they saw for third party operators, such as those on the panel with him at IBC. The question effectively got swept under the carpet, but when I spoke to him afterwards he conceded that there wouldn't be no role, i.e. there would be some role, for the Arts Alliances, AccessITs and XDCs of this world. But the feeling was that they would not be driving the digitization of Europe. [What that 'other role' will be and the implications that has for third party companies I will get into a later companion post to this one].

UK - It is no small irony that when David Hancock gives his very good presentations of the digital cinema numbers around the world he qualifies the UK's lead by pointing out that it is a 'distorted' market because of public funding underpinning most of the deployments, which are the UK Film Council's Digital Screen Network. Unlike France, the UK is not known for state intervention, particularly when it comes to the film and cinema industry, which it sees as an 'industry' rather than as 'culture'. There was a feeling that now that the DSN is fully deployed and operating very weel, the UKFC had got the snowball rolling and could expect the industry to step in and finish what Pete Buckingham and Steve Perring had started. But that does not appear to be the case.

At the recent meeting of the UK Digital Cinema Group (now taken over by the DCMS from was the DTI) Pete Buckingham spoke ardently and passionately about the need for a digital switch over (DSO), whereby cinemas are migrated to digital much like terrestrial television is being switched to digital in the UK, rather than what he called digital deal making (DDM), whereby this third part operator does a deal with those cinemas and some distributors. Market failures would thus be remedied by a softly-softly public approach and assistance. This is in line with previous ideas that had been floated about the UKFC or a related entity facilitating the switch, much like the the Cinema Buying Group is preparing to do in the UK.

Third parties were already in danger of losing out in the UK because major cinema chains like Odeon-UCI, Vue and others are negotiating directly with distributors about a bilateral VPF deal that would not involve third parties. Given that most UK exhibitor operators are owned by banks or VC it should come as no surprise that they are not keen on other banks or VC getting in on the action.

But let's turn the situation around and look at it from the perspective of the third party companies themselves. Arts Alliance Media are currently top of the class, having announced Europe's first VPF deal at this year's Cinema Expo. But looks closer and talk to industry insiders and this claim-to-fame starts looking distinctly thin. It was set to be announced as far back as ShoWest and being pushed into announcing it with just two Hollywood studios and no exhibitor takers does not look like a position of strength. Remember that Christie/AIX had commitment from three studios within the space of one month and provisional deals with the others before the end of 2005 (yes, it really was two long years ago). I'm sure that AAM will get more distributors on board and sign up cinemas too, but unless they have a Carmike moment, their deal will not impress anyone for long. More importantly, they will have to explain how their 7,000 screen deal holds up on a country-by-country basis when territories start to fall of the road map as government initiatives are unveiled.

What then of AccessIT? Having said on stage several times that they would start international deployment before the end of 2006, they appear now to have changed plans and are focusing on the next 10,000 screens in the North American market instead. Internationally they are selling their software and possibly looking for partnerships, but are not out there signing VPF deals. This is a smart move, in my view. The international market is risky and costly, whereas they have a head start in the US and do well to consolidate this position before DCIP get rolling.

XDC meanwhile have the advantage of already being in Europe. In fact, in lots of European territories. And therein lies part of the problem. The company does not have any one territory where it is particularly strong. It's home market Belgium is out, as Technicolor snatched Kinepolis way from them (more on that later) and while they are big in German speaking territories such as Germany, Switzerland and Austria, this territory is so large that even big numbers do not add up to enough. If you discount Luxembourg XDC lacks critical mass in any given territory and is even getting dragged down somewhat by the e-cinema legacy of Sweden's Folkets Hus 1.3K deployment. XDC has a lot of funding and good will from their investors, so I would not write them off, but they too need some variant of VPF deal to prove that the digital cinema know-how that they have built up can be put to good use. (My sources also tell me that they are having 'issues' with the MPEG/JPEG hybrid server, so I'm sure a lot of focus goes into that at the moment).

Technicolor. More than a year has passed since Technicolor announced it's deal with Kinepolis to convert all of the Belgian exhibitors screens to digital. So far, no VPF deal has been announced and the deployment has been limited to 30-odd Dolby servers. Technicolor also appears to have lost the appetite to announce deals with any other exhibitors until it can sort out Kinepolis. Proud though they might have been to have got Kinepolis on board, I'm sure the Technicolor people recognise now that announcing an exhibitor deal prior to having a VPF deal is putting the carriage before the horse, Unless they want to fund the equipment and installation out of their own pocket, that it. So not only has Technicolor's Kinepolis deal stalled but at IBC word reached me that Denise Hsu, VP Business Development at Technicolor and in charge of the international digital cinema deployment plan has left the company (though if she really has left, then she appears not to have updated her LinkedIn page yet). One of her Technicolor colleagues working with her is said to have left as well. To have the key person responsible for international deployment (see my blog post about her speech at IBC last year) quit before it's even got underway means that she has either got an incredible job offer elsewhere, so good that it is worth giving up being in charge of the single greatest transformation of Technicolor's history, or that she lost faith in the task. Similarly to AccessIT, I'm guessing that Technicolor is focusing on the North American market but they cannot announce that they are walking away or have given up on the Kinepolis deal.

It thus seems that while none of the above companies are drowning, they appear to do little more than treading water in Europe at the moment. In my next post I will look more closely at the role they could still play in the deployment of digital cinema, but why this still spells bad news for them, as well as looking at who will really profit from state-led European digital cinema conversion plans.