Digital Cinema Business
Frequently Asked Questions (FAQs)

What is a VPF?

The Virtual Print Fee (VPF) is a financing mechanism for funding the first purchase of digital cinema equipment. It is based on payment by a content-supplier of a fee per booking. The goal of the VPF is to achieve a neutral P&L for studios, such that the expense for delivering a digital print (including financing fee) is no greater than the cost of delivering a film print.

Payment of the VPF will terminate once the equipment debt is fully retired. Conditions for a VPF may include factors other than a booking, including the use of DCI compliant equipment (see Digital Cinema Technology FAQs, and access to security logs. Such factors may vary from studio to studio.

What is meant when an entity announces the signing of VPF agreements?

Several entities (such as AccessIT, DCIP, Arts Alliance Media, XDC, and others) have announced the signing of VPF agreements with a number of major film studios. The VPF agreement is made between a 3rd party integrator and a studio. The agreement simply says that the studio agrees to pay a certain fee per booking if certain conditions are met. It does not mean that the 3rd party integrator has the financial backing needed to roll out digital cinema, nor does it mean that exhibitors have signed up to the plan. With the exception of DCIP, who has approximately 14,500 participating screens guaranteed by its owners, relatively few theatre owners at this time have signed up to the several VPF financing deals now available.

Do I need to sign up with a 3rd party integrator to gain access to VPF financing?

As VPF financing deals may differ, studios consistently demonstrate an unwillingness to offer VPF financing directly to an exhibitor. Instead, VPF agreements are signed with 3rd party integrators, whose role is to then offer competitive equipment financing to exhibitors. Not all 3rd party integrators are independent, however. Digital Cinema Implementation Partners (DCIP) is a joint-venture of AMC, Cinemark, and Regal, formed expressly to serve as a 3rd party integrator to these exhibitors.

What are the challenges associated with financing digital cinema?

The relationship between parties is complex, making these deals difficult to understand and increasing the apparent risk. This is shown in the diagram below:

The strength of the VPF is that it rests on the delivery of movies by multiple studios, which limits risk. Even if one studio were to cut back on the production of movies, the demand would likely be filled by other studios, resulting in a safe cash flow. However, the equipment required for the delivery of movies must meet the DCI specification, a requirement that no equipment actually complies with today. Consequently, the acceptance of equipment by studios is based on criteria that is somewhat arbitrary and not formally defined. Further, the equipment must be upgraded to meet DCI specifications when such upgrades are available. Depending on how the deal is constructed, the cost to upgrade this equipment is borne by either the exhibitor, the manufacturer, or the 3rd party integrator. Thus, the financial condition of the party that must bear this expense comes into play, adding an element of risk that would not exist if equipment met specification today. It is unlikely that digital cinema equipment will fully meet the DCI specification until the 2010 timeframe.

Why can't a studio simply credit our film rental?

The typical answer to this question is that VPF agreements are lengthy documents, and occupy significant legal resources to negotiate. Studios wish to limit their cost of negotiation. Since the number of exhibitors worldwide far exceeds the number of 3rd party integrators, studios limit their negotiations to 3rd party integrators.

Why is 3-D a driver for digital cinema, and what are the economics?

Digital cinema projectors are capable of projecting stereoscopic 3-D images with a level of quality and reliability not possible with film equipment or in the home (at least, not in the home without significant upgrade of equipment). Audiences have demonstrated a willingness to pay a ticket premium of 20-30% to view 3-D movies, and movie directors have demonstrated a strong appetitite for the creation of 3-D product, resulting in an expected release schedule of one 3-D movie per month throughout 2009 and 2010. Up until the introduction of digital 3-D, digital cinema introduced no new opportunity to increase box office revenue on weekend nights. This makes digital 3-D the primary value-add feature of digital cinema.

The economics of digital 3-D are affected by more than box office, however. The systems that studios are willing to finance through the virtual print fee are strictly 2-D. To project 3-D images requires add-on technology from companies such as RealD, Dolby, XpanD, or Master Image. This add-on technology comes at significant cost to the exhibitor, and must be calculated for in any evaluation of return-on-investment. The differences in the various add-on technologies is discussed further in our Digital Cinema Technology FAQs page.

Should I wait and buy used digital cinema equipment?

There are a few facts that allow one to safely predict that there will not be a significant used equipment market in digital cinema:

• Unlike film projection equipment, digital projection equipment has an estimated 10 year lifetime. If you buy a projector that is 5 years old, then you have 5 years of life left. Lifetime is limited by parts availability and the obsolescence factors associated with high technology. While a part for an old film projector can be customed machined in the worst case, no such fall-back is possible with sophisticated digital equipment. Semiconductor technology changes quickly, and the investment required to re-engineer the circuit boards of old products with new parts is better put to work in developing entirely new products. If you've ever tried to repair a 10-year-old personal computer, then you understand the problem.
• The capex required to replace older equipment with new equipment is simply too high for conducting an early replacement cycle. If exhibitors are struggling today to raise capex for 1st time digital equipment expenditures, it's hard to imagine that they'll go through the process again in 5 years. Consider that for DCIP screens, this would amount to $1B of capex every 5 years.

Any realistic strategy for purchasing equipment must take into account the limited lifetime it has and the re-investment in capex required every 10 years. Waiting to convert is not a bad strategy. Equipment prices, particularly those for smaller screens, are bound to improve, as is the digital supply chain itself. But if you are waiting for used equipment, you should consider the points above.

Is compliance with the DCI specification sufficient to receive a digital movie?

Technically, the answer is "yes." But the interpretation of the DCI specification varies widely among studios. Some studios have a conservative interpretation and will withhold content if you don't comply with every nuance, which can include motorized control of lenses and installation of a 5.1 sound system. Some studios are more pragmatic, and focus their concerns on basic quality level, security, and a common distribution format.