Hollywood Finds Headaches in Its Big Bet on 3-D

http://www.nytimes.com/2009/01/12/business/media/12film.html?_r=2

 

January 12, 2009

By BROOKS BARNES

LOS ANGELES — The imminent full-bore return to 3-D filmmaking, upon which the movie industry is placing many of its hopes, is in danger of becoming Hollywood’s latest flub.

Some of the mightiest forces in film — Jeffrey Katzenberg, James Cameron, John Lasseter — think the multiplex masses will soon demand that all movies be shown in newly available digital 3-D. Mr. Katzenberg, in particular, has pushed the format, trotting the globe to herald the technology as a transformative moment for cinema akin to the introduction of sound.

 

His bandwagon has plenty of passengers, at least in Hollywood. The Walt Disney Company alone has 15 three-dimensional movies in its pipeline. Twentieth Century Fox is betting an estimated $200 million on “Avatar,” a 3-D space adventure directed by Mr. Cameron and set for December release, his first nondocumentary film since 1997’s “Titanic,” still the biggest moneymaker in movie history, without counting inflation. All told, the movie factory has over 30 3-D pictures on the way.

 

But analysts are starting to warn that all of that product could find itself sitting on a loading dock with no place to go. Studios, thrilled by 3-D’s dual promises of higher profits and artistic advancement, have aggressively embraced the technology without waiting for movie theaters to get on board. And without those expensive upgrades to projection equipment at the multiplex, mass market 3-D releases are not tenable.

 

“It’s starting to look like there will be a lot of disappointed producers unable to realize the upside of these 3-D investments,” said Harold L. Vogel, a media analyst and the author of “Entertainment Industry Economics.” Filming in 3-D adds about $15 million to production costs, he said, but can send profit soaring because of premium ticket pricing.

 

Only about 1,300 of North America’s 40,000 or so movie screens support digital 3-D. (Imax adds 250.) Overseas, where films now generate up to 70 percent of their theatrical revenue, only a few hundred theaters can support the technology. It costs about $100,000 for each full upgrade.

Studios require about 3,000 screens in North America for most new releases. Popcorn movies like “Avatar” or “Monsters vs. Aliens,” a 3-D entry from DreamWorks Animation, typically open on more than 4,000 screens.

 

“The crunch has everybody scrambling,” said Chuck Viane, president for domestic distribution for Walt Disney Studios. “We had expected many more screens to be available by now, no doubt about it.”

 

Upgrades have lagged primarily because of industry infighting over who will shoulder the cost. Studios expected theaters to take the lead because digital equipment would allow them to raise prices — tickets to the new crop of 3-D movies run as high as $25 each — and lure consumers away from their big-screen living room TVs. Exhibitors, hurt by soaring real estate costs, wanted studios to pay for similar reasons.

Movie chains and four of the six major studios agreed in September on a plan to convert upward of 15,000 theaters using $1 billion in debt financing arranged through JPMorgan Chase. But the squabbling took too long: The financing plan came together just as the credit markets froze.

Studios and exhibitors say the upgrade plan is not in jeopardy.

 

“This is a long-term commitment and a long-term strategy,” Mr. Katzenberg, the chief of DreamWorks, said recently.

Meanwhile, the Digital Cinema Implementation Partners, a consortium of exhibitors and studios, is pursuing alternative financing to allow the plan to proceed in steps. “Rather than just being patient, we are aggressively exploring all options,” said Rich Manzione, the group’s vice president for strategic planning.

 

Other participants seem less optimistic. Will the credit markets thaw in the first quarter, as Mr. Katzenberg predicts? “Your guess is as good as mine,” said Mike Campbell, the chief executive of the Regal Entertainment Group, which owns the nation’s largest movie theater chain.

Meanwhile, the shortage of 3-D theaters is upsetting profit projections at various studios, with three-dimensional movies probably leaving millions of dollars on the table. When DreamWorks Animation releases “Monsters vs. Aliens” on March 27, it will have to settle for half the number of 3-D screens it wanted. While acknowledging the shortage, Mr. Katzenberg recently told analysts there were enough theaters available to “recover our upfront investment and make a profit.”

 

To get an idea of how much money is at stake, DreamWorks Animation recently estimated that one of its hit titles, released entirely in 3-D, would earn an additional $80 million in profit.

 

The shortage is sending mixed messages to moviegoers, many of whom are already skeptical of the claims about 3-D. Because of a shortage of outlets last summer, Warner Brothers had to scramble to change the marketing for “Journey to the Center of the Earth 3D” — dropping “3D” from the title — and offer a two-dimensional release in tandem. Lionsgate will have just 900 3-D theaters available for “My Bloody Valentine 3D” on Jan. 16, forcing the studio to show a standard version on about 1,600 screens.

 

The delay is also threatening to undercut one of the primary benefits for theaters — the ability to deliver an experience that consumers cannot replicate at home. But the home entertainment market is rapidly catching up, with companies developing 3-D options for the home.

RealD, a California company that is the lead provider of 3-D technology for theaters, last week demonstrated a similar product for televisions at the Consumer Electronics Show in Las Vegas.

 

Michael Lewis, the chief executive of RealD, said in an interview that he expected Americans to own 10 million 3-D-capable television sets within five years.

People who remember 3-D from the 1950s roll their eyes at Hollywood’s renewed fascination with the medium. They associate 3-D with cheesy films (“Creature From the Black Lagoon”), stiff cardboard glasses and jerky, stomach-turning camera movements.

This time, movie executives insist that everything has changed. Digital projectors deliver the images with perfect precision — eliminating headaches and nausea — while plastic glasses have replaced the cardboard.

Most important, say filmmakers, new equipment allows movies to be built in 3-D from the ground up, providing a more immersive and realistic viewing experience and not one based just on visual gimmicks.