NEWS INFORMATION

UltraStar Cinemas Breaks Ground on the Apple Valley 14 Cinemas

Digitally Projected Films a Hit
at Vista's UltraStar Cinemas

By Jessica Long - San Diego Business Journal 5-29-2006

As the movie industry's most lucrative season gets under way, San Diego theater owners eager for that competitive edge are increasingly turning to a new form of attraction - digital projection designed to wow audiences with clearer, more vibrant screen images unlike anything ever produced by traditional film reels.

Leading the pack of theater owners moving toward total digital projection is UltraStar Cinemas. The Vista-based chain operated 13 theaters throughout Southern California, Including seven in San Diego County.

UltraStar is the first and largest theater chain in the country to be 100 percent equipped with digital cinema capabilities. And with roughly 40% of the chain's annual revenues being made between Memorial Day and Labor Day weekends, the summer block buster season is an extremely important time for the company, which usually employs about 300 people, but during the summer season, peaks at about 400.

"We're expecting a good summer season this year and a lot of that has to do with the types of films being released now because they lend themselves to digital so well." said John Ellison, Senior Vice President and chief operating officer of UltraStar. "I think the big issue is getting people in so they can experience it, once they do that, it'll sell itself."

While UltraStar is the only chain to be 100 percent digitally equipped, it is not the only chain in San Diego looking at digital technology as the wave of the future for the movie theater business.

National CineMedia, LLC is a joint media venture launched in December by the nation's three largest theater chains, including Missouri-based AMC Entertainment, Inc and the Tennessee-based Regal Entertainment Group. Combined, the two theater companies run roughly a dozen theaters in San Diego County under the names AMC, Edwards, Regal, Signature and United Artists theaters.

Through National CineMedia, which is based in Colorado, the larger theater chains have begun switching to a shared digital content network. Although similar in picture quality but not as sophisticated as the Texas Instruments DLP Cinema technology used at UltraStar, most of the larger chains' systems are a work in progress and officials at National CineMedia aren't taking any chances.

Kurt Hall, the president and chief executive officer of National CineMedia, was quoted last month saying "There's still a lot of work to be done on the technology, both in making it secure (from piracy) for the content owners and in making sure that the systems work and can be operated efficiently by the theater circuits."

One of the biggest piracy concerns when using digital projection is tied to how the movie studios would ultimately like to deliver their content - by satellite link rather than tangible deliveries.

UltraStar's Ellison concedes that there's much work to be done to fully safeguard the content from would-be-thieves, but blocking features, such as embedding watermarks on the pictures themselves so only authorized personnel can remove them, are being developed. He sees no reason to delay using the most advanced technology possible.

In contrast, Hall has said that National CineMedia and its member theater chains will delay full-scale adoption until at least 2007.

Going Digital

While Major studio releases such as "Mission Impossible III," "The Da Vinci Code" and "X-Men: The Last Stand" all come in digital formats, others such as "Flight 93" do not.

About 90 percent of all movies being released are available to theater owners in a digital format because the film industry is also in the midst of adapting the new technology, Ellison said. To accommodate non-digital releases, each UltraStar theater screen is equipped with both a film projector and digital.

"The changeover is just happening right now." Ellison said. "It'll probably take another five to 10 years to full evolve."

UltraStar invested close to $200,000 for each of the chain's 102 screens to upgrade to digital, but "much" of the cost was absorbed by the film industry itself, Ellison said, noting that movie studios save on the storage and delivery costs, and generally can turn out a better product when they utilize digital reels.

"Film is very good, especially when it's new on the screen, but over time, just because of exposure to the equipment, dust, scratches and whatever else, it's not as good as it could be," Ellison said. "With the digital, the quality is as good on day one as it is in week 10."

From January to April, digital projection had a measurable effect on UltraStar's bottom line.

According to Ellison, since greatly increasing the amount of digital screenings in its various theater locations, Ultrastar has seen a 30 percent increase in business compared with the same time last year.

The upswing in business is keeping with a national growth trend in the movie industry; despite it struggles in recent years.

A Promising Market

While UltraStar sales may be up 30 percent, nationally, the theater business also grew, though not by as high a margin. According to industry reports, nationally, business grew by 5 percent when comparing revenues from January to April to the same time last year.

In addition to digital screenings, an increase in the number of new releases over 2005, as well as other promotional tactics such as special combo pricing deals and family days, have all been credited by trade media reports for helping with the industry's recent growth.

According to the National Association of Theatre Owners, total U.S. box office gross sales in 2005 were $8.99 billion, down from $9.53 billion in 2004. The Washing D.C.-based trade organization also reports that the $8.99 billion in 2005, last year's box office gross was the lowest it's been since 2001, when a gross of only $8.41 billion was reported.

But this year's early industry successes coupled with other market data, indicate that history is not expected to repeat itself this year.

Study findings released May 4 by a Canadian-based market research firm, Brandimensions suggest that the 2006 summer movie season will be stronger than last year's. Brandimensions analyzed more than a million Internet sites, sources and blogs pertaining to the film industry to gauge the public's perception of upcoming new releases.

According to the data, the sheer number of online discussions about 2006 releases was double the amount of online discussions held last year about 2005 releases. The Brandimensions report also suggest that discussions held this year as opposed to last were generally more optimistic about the quality of films being released in 2006.

While traditionally the summer blockbuster season runs from Memorial Day weekend to Labor Day weekend, the industry has in recent years begun to accept the first week of May as a key start to the season.