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Monday March 22, 3:12 AM
Digital Theaters Pay Off for Regal
By Bob Tourtellotte

LOS ANGELES (Reuters) - For nearly a decade, American movie theater owners have been talking about the money-making potential of new digital theater, but the only hard numbers they saw were about costs, not profits.

Now, Regal Entertainment Group , the No. 1 movie theater chain in the United States, says it has changed that with its own digital content network.

When the movie industry gathers in Las Vegas this week for ShoWest, its major annual trade show, Regal unit Regal Cinemedia will point to its experience as proof that the long-held digital dreams of theater owners are coming true.

"In the beginning when Cinemedia was conceptual in nature, a lot of people nodded their heads and said, 'That is a good idea.' There was a healthy amount of skepticism," Regal Co-Chief Executive Mike Campbell told Reuters. "But I think that has gone 180 degrees the other way."

Regal's digital content network is built around low-cost projectors that cost tens of thousands of dollars compared with the advanced digital equipment at the heart of "digital cinema," which can cost up to $150,000 per screen.

But backers of digital cinema -- screening movies using a projector with a computer hard drive or DVD player that is linked to a central network server -- support the idea for the same basic reasons regardless of the projector technology.

For theater owners, digital cinema holds the promise of new advertising revenues from national companies seeking mass audiences. Satellite or cable-linked networks can also pipe content from distant locations into a local theater, using screens during non-peak hours.

Theater owners, for example, can beam a music concert in Los Angeles to audiences in Poughkeepsie, New York. Companies can use the technology to connect branch offices to national sales meetings, and religious groups in various cities can worship together, via satellite.


Regal Cinemedia's digital network is now in 394 Regal theaters operating over 4,700 screens. In 2003, it added about $74 million to Regal's coffers. Advertising revenue alone was up 236 percent over 2002.

While Cinemedia's annual revenue represents only a scant 3 percent of Regal Entertainment's total sales, Cinemedia is growing rapidly. Moreover, Cinemedia's contribution to cash flow, or earnings before interest, taxes, depreciation and amortization margin, is more than 50 percent versus a companywide target of about 20 percent, according to Campbell's colleague, Co-Chief Executive Kurt Hall, who runs Cinemedia.

"While we will always be a small part of overall revenue, the effect on cash flow is significant," Hall said.

Michael Savner, financial analyst with Banc of America Securities, likens that revenue to icing on top of a cake. "To the extent they can extract further value, I think Cinemedia is a good opportunity," Savner said.

Hall said in recent months, Regal is seeing more national, brand-name companies budget for in-theater ads as they recognize its potential.

Because the digital theaters are linked by satellite, advertisers can beam a single ad to the network of theaters much like a TV ad would be broadcast.

Moreover, audiences for any one movie can be targeted -- that is, moviegoers watching "Spider-Man" are distinguishable from those for "The Passion of the Christ" -- making them important to advertisers looking to reach specific consumer groups.


Although advertising in theaters is common in Europe, the idea has been contentious in the United States where audiences have been loathe to sit through ads.

In response, Regal has designed a 20-minute ad segment called "The 2wenty" that takes place before the movie's advertised curtain time and is filled with long-form ads meant to entertain as much as inform.

"Regal understood that the pre-show -- for it to be really something the audience appreciated -- could not be a hard-sell advertising vehicle," said Marc Shmuger, co-chairman of Universal Pictures.

Regal programmed satellite broadcasts of five concerts in 2003 from old rock bands like The Grateful Dead to newer sensations like Coldplay, and has plans for more this year.

Educational groups have also made use of its network, and some 60 churches use it to link up to Sunday morning services.