As Show East got underway back in October North America’s largest digital cinema integrator, Cinedigm, published a press release that was meant to serve as an industry update on the digital rollout in the territory. According to Cinedigm there were 12,802 digital screens in North America out of approximately 39,000 screens (not counting IMAX screens). That’s an increase of 65 percent.

I wondered where some of the figures Cinedigm was sighting came from and the company’s Co-CEO, Adam M. Mizel, was kind enough to speak with me at the beginning of November. Our conversation took place a week before Cinedigm announced second quarter revenues of USD $18.9 million. This was a 7.8 percent increase over the same quarter from last year, though the company suffered a net loss for the quarter of USD $9.4 million from continuing operations. The net loss for the first six months of Cinedigm’s fiscal year was USD $16.3 million.

Such losses might sound dire; however these figures are a 19.5 percent and 12.2 percent improvement over Cinedigm’s second quarter and first six months from last year and reflect non-cash depreciation charges. A true testament to the uptick in digital cinema rollout activity is the 13.3 percent increase in Cinedigm’s revenue to USD $38.2 million, which has helped make the company cash flow positive.

The same day as their second quarter earnings announcement Cinedigm revealed their Phase 2 financing entity had landed up to USD $86 million in senior credit from Societe Generale and Natixis. An additional USD $23 million in junior capital will come from Macquarie Equipment Finance.

What exactly does all this mean? Well, now Cinedigm has the ability to offer exhibitors non-recourse financing to deploy digital cinema equipment. Because the loans are being offered to Cinedigm as non-recourse, Macquarie will hold onto the title for the equipment. Cinedigm will continue to do what it always has; deploy, manage, bill and monitor digital cinema systems, work with content providers and be responsible for all the administrative work to service the debt.

Cinedigm’s Phase 2 subsidiary will install as many as 2,100 digital cinema systems with this non-recourse financing. While Christie projectors were used in the majority of Phase 1 deployments, Barco and NEC will provide digital projectors for the company’s non-recourse financing facility while Christie, Barco and NEC will support exhibitors who purchase their own systems in the Phase 2 rollout.

With all of this in mind, here is the transcript of my conversation with Mr. Mizel:

Celluloid Junkie: How is Cinedigm measuring the figures in its industry update press release? How did you come up with a figure of 12,802 digital screens in North America?

Adam Mizel: That’s about 13,500 now, as of a week or two ago. Basically we have our own data that is up to date on all digital instillations because our business unit that delivers features and trailers to digital sites on behalf of the studios has to keep a very detailed trusted device list. So we know exactly how many sites are out there, at least those reporting and if you want to get something delivered to you, you’re reporting. The studios track it, we track it, and so we have reliable numbers. We generally do not release this information to the public as a reporting metric but we do provide a view of what is out there based on actual sites Cinedigm has delivered to.

CJ: It’s been pretty widely reported that 3D has been driving digital cinema growth and installations for the past 18 months. Do you think without 3D d-cinema would have taken off? Will there be an increase in 2D screens?

AM: I think 3D has accelerated the adoption curve, but that curve was going to occur. I think 3D was an accelerant.

CJ: Is it true then that 2D screen installations have pretty much stalled?

AM: That’s not true. There are not 13,500 3D screens. What you are seeing right now driving the significant growth in installations in North America are both Cinedigm and DCIP installing and converting complete multiplexes which means that most of those screens are 2D, not 3D. When a multiplex converts, the theatre owner is going to determine how many screens are going to be 3D; usually somewhere between 20 and 40 percent. So most of the screen growth you’re seeing is 2D screens being added.

CJ: So then maybe 2009 was an anomaly for 3D growth due to the financial crisis. Were exhibitors only installing whatever 3D they could afford but now that the economy is getting better they are starting to convert whole multiplexes? That would increase the number of 2D installations.

AM: Right. Basically until 2010 most of the installations that were getting done were exhibitors on their own purchasing a small number of digital systems in order to show 3D movies. With the financing markets now more stable and with both Cinedigm and DCIP having access to financing exhibitors are converting entire multiplexes and benefiting from virtual print fees to support that occurring.

CJ: How has the financial crisis affected Cinedigm this year? Has it gotten any easier to find funding for rollouts?

AM: A simple statement is that 2010 has turned out to be the year for digital cinema and for Cinedigm that 2008 was supposed to be. Effectively I think the industry lost approximately 24 months as the financial crisis really shut down capital market access for digital cinema. That changed this year and is evident in our increasing both exhibitor signings and exhibitor deployments. We are confident Cinedigm will continue to see growth in both signings and deployments in the New Year.

CJ: At certain industry events members of NATO’s Cinema Buying Group often air frustrations that everything isn’t moving faster. Has CBG or its members voiced any concerns to you directly?

AM: We talk to them quite frequently and our message is consistent. Digital cinema is picking up pace and that it’s important for those CBG members to figure out the strategic and financing path they want to take. Because there are slightly less than two years left in the deployment period under various studio agreements for CBG members to access VPF financing, it is important for them to begin their conversion process as soon as possible.

CJ: At one point there was some discussion around getting Cinedigm’s virtual print fees (VPFs) revised to accommodate CBG members. Is that still the plan or has that happened already?

AM: That did occur. There have been a number of amendments to the virtual print fee agreements to accommodate the needs of the CBG members and so those now reflect the changes. There’s no CBG VPF per se, but Cinedigm has further refined how the mechanics work to make sure everyone’s needs are met.

CJ: Can CBG members work with Cinedigm to finance their digital conversion or do they have to bring their own financing?

AM: Every exhibitor that we talk to has a choice of providing their own financing, and being the exhibitor buyer of the equipment, or working with us on a non-recourse financing solution.

CJ: So it’s the same for CBG and non-CBG members?

AM: There is access for all exhibitors who meet the credit criteria, whatever the lender may be. We have those individual conversations with individual exhibitors and figure out what will work best for them from a financing perspective.

CJ: In your industry update you mentioned that Cinedigm has closed deals for 1600 exhibitor buyer screens and 800 Cinedigm financed screens. Are exhibitor backed screens twice the number of financed screens due to the credit crisis and difficulty in finding financing?

AM: Yes, I think you will see growth in both of those numbers. I can’t predict the timing or the order but we are certainly seeing more exhibitor buyers in our historical results percentage than going forward just because the financing markets have been more open for that kind of recourse financing.

CJ: Are exhibitors who purchase equipment on their own turning to Cinedigm to secure a VPF?

AM: Exhibitors are very smart business people and they want to make sure they fully understand their choices and make sure they find the best partner. Cinedigm has a long record of being a terrific partner to the exhibition industry and making sure we consistently deliver the highest quality of service to allow exhibitors to get their circuit converted to digital and help support their operations. I think exhibitors see that and they understand that and we’ve been doing this for five or six years now with a terrific track record.

CJ: Some North American exhibitors have said they feel forced to use Cinedigm if they want a VPF because there are no other integrators in North America (save for DCIP). This has led to speculation that a competitor from abroad might enter the territory. Are you aware of any such plans?

AM: Cinedigm frequently speaks with all of the major participants in the industry, so we have a good sense of most conversations and we feel confident that we offer the best combination of value and service for the exhibitors. We’re pretty comfortable with our current position in the industry.

CJ: Well then, let’s reverse the question. Are there any plans for Cinedigm to go international?

AM: Cinedigm features one of the best infrastructures for administering the deployment of digital cinema. We certainly have conversations with other exhibitors and financing entities globally to discuss ways we can help them with their deployments. We are certainly exploring in those conversations ways in which we can leverage our infrastructure to support other entities as they look at how they get into digital cinema.

CJ: You’ve personally been quoted as saying “digital cinema opens up an entire world of entertainment options for networked digital theatres.” Wouldn’t studios, who pay the bulk of the VPFs, have issue with non-studio content being put onto digital screens?

AM: The bulk of the attendance and revenues generated in movie theatres are on the weekends so the real question and opportunity with digital cinema is to help the exhibition industry and all the different content owners and distributors find attractive, interesting and compelling content for those off-peak periods in cinemas when they are not well attended. The importance is finding the opportunities to leverage that fixed infrastructure in a manner that it doesn’t get leveraged today.

CJ: Is there any opportunity for non-studio distributed content to break into the peak hours?

AM: Sure. And the big studios do the same thing. If you look at “Slumdog Millionaire” that opened on five or seven screens and gradually grew to thousands and ultimately an Academy Award. In that example Fox was doing the very thing you are describing, which is taking a movie and testing it and seeing how it played, how it gained word-of-mouth backing and then it gathered attendance. This supported its growth in distribution on a very cost effective marketing basis. Something like that can be done by others. I think this digital conversion provides creative ways to test the performance of content and content that has legs will further and further expand distribution. If it makes sense it will make money and that’s what will happen. And in some instances it may eventually lead to partnering with one of the bigger studios for distribution. There are just so many avenues that grow out of it that none of us fully know what will happen because we’re experimenting in a new world of content distribution.

CJ: So then independent distributors and filmmakers won’t face any hurdles with VPFs?

AM: There are both virtual print fees and alternate content fees so I think it depends on the type of content, how it’s being booked and played and the economic returns that it generates. Distribution can grow in different ways. I think in fact, in the digital world it opens up many more opportunities because as you said, the cost of producing and distributing canisters of film was fixed and the same no matter how often it played, how many nights a week, how widely, you had a significant fixed cost. In the digital world, even in the VPF and ACF world, you have many more options and creative ways to structure things.

CJ: At some point the period of VPFs will be over; studios will stop issuing them and their terms will conclude. Has Cinedigm begun to think about what it will do in a future without VPFs?

AM: The way we look at our business is right now we are deploying an open source digital cinema platform, that is providing the financing, billing, monitoring and verification. This platform includes all of the work we do around the deployments for exhibitors, including our delivery infrastructure whether it is via satellites, hard drives or broadband delivery as well as the software that makes the network work. The platforms Cinedigm and others are deploying are all interoperable given the DCI standards. In addition to that platform, we are developing different applications to really take advantage of the new capabilities available in digital cinema. That can be alternative content entertainment, other forms of software that allow you to have other ways to manage and operate your studio or circuit, or it can be interactive data and analytical tools. I think in the long run our business is around the different applications that leverage the digital cinema platform. For the next couple of years there will be a lot of work to do for everybody in putting out the platform and in parallel building those applications. That’s what we spend all of our time on and it takes a lot of time and energy to do both.

CJ: It’s no secret that theatre owners aren’t big fans of the exhibitor agreements they have to sign with integrators. However, large parts of these are dictated by VPF agreements. Is there anything that you would want to clarify for exhibitors about Cinedigm’s agreements or about the company itself?

AM: I think exhibitors have a very good sense of our history, our focus, our capabilities and our track record of success.

You’re right though, fundamentally many of the terms and structures in our agreements with exhibitors are dictated by two things, the virtual print fee agreements with the studios and the requirements of the lenders. In that process, Cinedigm is the servicer and our goal is to try to find the balance for all three constituents; the exhibitors, the lenders and the studios. A lot of that is limited by the requirements of the studios and the lenders, but we have and we continue to advocate many issues that we think are important to exhibitors in making this work for them. One of the things that is most important to exhibitors is that the cost of this deployment, outside of their upfront contributions, is being born by the studios. And to be clear, the cost of the equipment, the financing and Cinedigm’s servicing costs are all being paid for out of the virtual print fees that are paid by the studios and not by exhibitors. Our job is to be in the middle to make that work for everybody.

This process is complicated and we acknowledge that. Part of our job is to explain the details in clearer terms. What we are talking about in many instances is relatively complex asset backed securitizations of a long term payment stream from a diversified pool of movie studios. That is not what most people in business deal with at all, much less in exhibition. It’s not what they’ve had to deal with and like I said, part of our job is to try and help translating from very different languages that everyone speaks and making it understandable for all parties.