Cinedigm Digital Cinema Corp. no doubt gets top billing for its role in the digital cinema revolution.
The company’s main business is coordinating with studios, theaters and tech companies to finance and oversee the conversion of movie theaters from 35 millimeter film to digital projection.
But what happens to the company’s business once practically every 35 mm theater has gone digital?
It’s not that far down the road. More than half of U.S. screens are already digital and analysts expect the remaining ones to be converted by next year. While international markets have been slightly slower to make the switch, they are expected to catch up in a few years.
So Chief Executive Chris McGurk has been planning ahead. He’s stepping up the company’s efforts in independent film distribution with the goal of making the company into a competitor with mini-studios. Last month, Cinedigm signed a deal with New York digital distributor NewVideo to jointly acquire and distribute films.
“Now that we have this partnership, it gives us a much better economic model,” said McGurk, who works out of the company’s Woodland Hills executive offices, though the company is formally based in Morristown, N.J.
Cinedigm and NewVideo will evenly split the costs of acquiring finished films, and the profits that come from the films’ theatrical and home video releases.
Cinedigm will market and distribute the movies to theaters, while NewVideo, which supplies content to digital outlets Netflix and Apple Inc.’s iTunes, will distribute to those platforms and others, including cable TV video on demand and physical discs.
Cinedigm had already been involved in film distribution, through deals with other distributors like ARC Entertainment.
The two released the Sarah Palin documentary “Undefeated” in theaters last year. Cinedigm also distributes alternative content to theaters, such as a 3-D Foo Fighters concert and the 2010 FIFA World Cup final. Still, distribution has been a relatively small part of the business.
For the fiscal second quarter ended Sept. 30, all but $3 million of the company’s $16.7 million of operating income came from theater conversions, which are paid by residual fees from Hollywood studios and servicing charges from theaters. The remaining $3 million came from theatrical distribution and other business lines.
The pace of conversions is picking up this year, but the studios are expected to stop subsidizing theaters’ conversion costs in September. Starting next year, studios are expected to begin only sending digital versions of their movies to U.S. theaters, all but ensuring that the holdout venues will have made the switch.
Eric Wold, an analyst at B. Riley & Co. in San Francisco, expects as the company remakes itself, Cinedigm will rely on residual fees it will recoup for about 10 years after conversions take place.
“The digital upgrade cycle is going to end sometime around 2013. They’re clearly looking beyond that,” said Wold, who initiated coverage of the company in October with a “buy” rating.
One other analyst who follows the company is neutral on company shares, which are up 28 percent since the start of the year and closed at $1.77 on Feb. 1 in trading on the Nasdaq.
McGurk took over as chief executive in January 2011 after executive turns at Anchor Bay Entertainment and Overture Films, and has fast been remaking Cinedigm.
The company has been losing money on a net income basis, but that is due to the interest payments it records for a loan taken out to finance earlier conversions. Analysts say the loan, which was reduced to $140 million as of Oct. 31, should be paid off in three years. On an operating basis, the company recorded a profit of $30 million for the first half of this fiscal year.
Last year, McGurk made a big move and unloaded two of the company’s lower-performing units.
In July, the company sold a network of satellites, used to digitally send films to theaters, to Technicolor SA of Paris, for an estimated $5 million. Then in September, the company sold its in-theater advertising business to Screenvision in New York for a similar sum.
Proceeds from the two sales and a $7 million private stock offering in July helped that company amass what McGurk called a war chest for content acquisitions. The company had $18 million of cash on hand as of Sept. 30.
He announced the partnership with NewVideo at the recent Sundance Film Festival in Park City, Utah, and told the Business Journal that he’s focusing on acquiring the kinds of independent films with commercial prospects that have come to be associated with Weinstein Co., the distributor of 2010’s best picture Oscar winner “The King’s Speech.”
Like other independent distributors, McGurk is planning to experiment with new release patterns, including making films available on cable VOD the same day they hit theaters. Magnolia Pictures tried it last year with the hit art house flick “Melancholia,” starring Kirsten Dunst, though big studios still fight to preserve a traditional theatrical window of a few months.
“(Studios) are mired in the traditional window system,” McGurk said.
To appease exhibitors that think movies with simultaneous home video releases erode box office revenue, Cinedigm’s model includes the unusual additive of giving an undisclosed cut of home video revenue back to the theaters.
Wold said it’s a unique model that very well could work.
“That should help get placement in the theaters,” he said.
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