Chris McGurk Says Cinedigm’s Future Is In Software And Content

By | March 27, 2011 11:11 pm PST
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Not sure if you noticed, but over the past week Cinedigm’s stock price jumped over 33% from USD $1.50 to USD $2.00. It closed Friday out at USD $1.88. The sudden price increase in Cinedigm’s stock is likely due to a number of factors, rather than a single reason.

It has been a busy year so far for North America’s largest digital cinema deployment entity. In January industry veteran Chris McGurk (formerly with Overture Films and MGM) joined Cinedigm as it’s new chairman and CEO. In February the company announced improved financial results for the third quarter for fiscal 2011, hired back David Gajda as the chairman of their software division and signed Southern Theatres to a d-cinema deployment contract.

Last week AMC, the second largest U.S. theatre chain, selected Cinedigm’s Exhibition Management Solution to handle such head office tasks as film rental and revenue auditing. This was a day after the third annual Gabelli & Company Movie Industry Conference, where Cinedigm was represented by McGurk, whose presentation on maintaining theatrical film windows was reportedly well received.

In the following conversation, which took place on the eve of the first annual CinemaCon convention in Las Vegas, McGurk openly discusses the company’s stock price, digital Cinema, and most importantly, Cinedgim’s future business direction.

Celluloid Junkie: So, as someone who has attended ShoWest in the past as a studio executive, how does it feel to be heading to Las Vegas for CinemaCon as the head of a digital cinema deployment entity?

Chris McGurk: There’s a little bit of a difference but I think it’s kind of great because we’re positioned right in the middle. We’re not on the studio side and we’re not on the exhibition side, but we’re basically a facilitator for what both sides are trying to do and right now that’s a great position to be in. I was just at the Gabelli Conference last week in New York where we presented and listened to everyone talk for six hours. It seems the level of tension that exists between studios and exhibitors right now is higher than it’s ever been, primarily because of windowing. But I think a company like Cinedigm, a digital services provider, a provider of alternative content and software solutions, I think we’re in kind of a unique position to sort of get in the middle of all that and help find some solutions to make things work.

CJ: Could that explain why Cinedgim’s stock has increased so quickly over the past week or so?

CM: Well, we try not to track the stock every day or every week, but we’ve been out there telling the new story of the company and part of that was at the Gabelli conference and part of that was we announced a big software deal with AMC. Besides being the second largest chain in North America it’s also off our platform because AMC is a DCIP deployed circuit and so that was a great piece of news. So, I think that announcement in concert with the fact that we’ve been telling the new story of the company hopefully has begun to resonate and you’ve begun to see that reflected in the stock price over the past couple of weeks.

CJ: So, that’s the big question. What is Cinedigm’s “new story”?

CM: I looked at digital cinema back when we sold MGM back in 2006. It was something I was very serious about trying to get involved with, because even then I thought it was a complete game changer for the industry on a bunch of different levels. For a variety of different reasons I didn’t do that at that point, but probably in hindsight I should have given my three years in the indie film business. But I always viewed digital cinema as a game changer, not just the digital deployment and conversion of screens, but the businesses that you could build off of the digital backbone. Now you fast forward three or four years later and finally the digital revolution has arrived, maybe a few years later than a lot of people had expected. Now you’ve got 17,000 digital screens out there, almost half the screens in North America that are either deployed or under contract to be deployed. So finally you’ve got critical mass out there for the platform.

Now it’s time to realize the promise of digital cinema and build businesses off of that backbone and I think the two real areas that we’ve been saying Cinedigm can really take advantage of the digital platform, and not only really become market leaders in two different growth businesses but actually dominate those businesses, is the software businesses and the alternative content business. That’s the new story of the company that we’ve been telling. Digital deployment remains job number one for us and we’re very hopeful that we’re going to expand our footprint from 7,000 screens to northwards of 12,000 screens very rapidly, but we’ve really identified those two businesses of software and content as two businesses that we’re going to focus our resources on and build off of our position to grow those businesses and be the market leader in both.

CJ: Does a part of the decision to focus on software and content come from the fact that at some point deploying VPF financed d-cinema equipment can’t go on forever? At some point the VPFs will go away and thus no longer need to be managed.

CM: Not for a while, but it is going to go away. The integrators who have basically set up that platform are really in a unique position to leverage their position and the fact that they’re sort of out there and under the hood in theatres means they can really be the companies that facilitate building those businesses off the platform. For instance, on the software side, we’re the leading supplier of what I’d call operational software, theatre management software, at the theatre level and the circuit level already and we’re the leading independent supplier of distribution management software for all the independents and a couple of the major studios. The beauty of it is our software works on anything that’s DCI compliant. That’s why we just did our deal with AMC, even though obviously we aren’t responsible for deploying at AMC. We just think that’s a whole area where we can grow the business and become the standard in that whole arena and we really don’t have any competition at all other than home grown systems.

CJ: But surely there are some competitors out there. Both Arts Alliance and Unique Digital have developed theatre management systems which have had traction in the marketplace. Don’t you see them as competitors?

CM: Not really so much here domestically.

CJ: Does Cinedigm have plans to enter the international market, if not as a deployment entity, then maybe as a solutions and content provider?

CM: Oh yeah, we’ve got several pilot programs overseas. We just did a deal over in India. We hired Dave Gajda back, which is great. Part of his charter is to look for opportunities to expand our software footprint internationally. He’ll look for M&A activity in that whole space to execute our agenda and to use his relationships and his forward thinking development focus to try and build a whole other generation of software that we can apply both to exhibitors, to distributors and also in the market research arena. We think that’s an area we should explore to develop tools to understand audiences better in theatre and help exhibitors and the studios more precisely market against that audience. That’s going to be a big part of our future. I think we’re really strongly positioned there now and you’re going to see a lot of growth in that space and hopefully a string of additional announcements above and beyond the AMC announcement which we just made.

Content obviously is the other arena that I’m particularly interested in. The company has done some really good things in the past, some sporting events like the World Cup and BCS. Some concerts like Dave Matthews and we’ve got a programatic series called KidToons which has been successful for us, but the goal now is to take our position in that space and really amp it up to become the market leader in that whole area and we’re putting together a pretty comprehensive plan to tackle the business and take it to a higher level which we hope to implement in the second half of this year.

The cool thing that we have right now, that I’m really excited about is this Foo Fighters concert. What I love about it is, yes it’s the first live 3D musical experience, but it sort of showcases all the capabilities of our network and what digital cinema can really do. On the one hand we’re releasing an independent film because, A, it’s a documentary, and B, we’re going to have a live concert, and C, it’s going to be in 3D and then D, there’s going to be an interactive component to it as well. All in one on April 5th we’re going to be able to showcase all of these elements that digital cinema brings to the screen.

If there’s been one thing that I think that the whole industry has failed to do regarding digital cinema is really emphasize the most important aspect of it and that is that it really enhances the audience experience in theatre. We talk about cost savings and all the other things that it does, but first and foremost it creates a better experience in theatre for the audience. You get the big screen, you get everything in digital in hi-def, in 3D, you can do interactive, you can do live and you can have all these different expanded choices in content, like concerts. So net-net the real upside of digital cinema always has been the fact that it enhances the audience experience and enables theatres to leapfrog anything that a consumer can do at home. That simple high concept I don’t think we all did a good enough job over the last few years of really telling the world that that’s what digital cinema is all about and that’s what I love about this Foo Fighter concert because it’s all that rolled up into one presentation.

CJ: Do you think there will ever be a time where the “alternative” label will dropped from alternative content and it will simply be content along the lines of feature films?

CM: I absolutely agree with you. I hate that name. Because what does it mean? Is it non-regular content? It’s entertainment that audiences want to see in theatres, just as they want to see wide release films. When you look at the capacity utilization on average for theatres, it’s less than 20% on an annual basis and Monday through Thursday it’s less than 5% on average. So just marginal increases in capacity utilization in theatres could create gigantic businesses. If we could fill up 10% or 15% more of those seats you’re talking about billions of dollars on an annual basis accruing back to different categories of content. I do think that it can be a huge business. Will it be as big as the film business in the next five years? No, but I think it can be a tremendous new revenue stream for content providers and exhibition.

CJ: Do you think the current VPF deals stand in the way of alternative content really taking off?

CM: I’ve got to tell you even with the VPFs I think there’s a way to create a really solid financial model for alternative content that hasn’t been created yet. A lot of what’s been done so far in this whole space has frankly been done on a trial and error basis. I don’t think anyone has rigorously looked at it and said, “Here is the potential size of the business based on available capacity. Here are the categories for other types of content that have the most potential to succeed in this business because there’s an opportunity to premium price, there’s an opportunity to bring in sponsorships, there’s an opportunity to find an audience that really wants to see this content, there’s an opportunity to create an ancillary business.” And I think the other single most important thing that nobody has done right now is forged a true partnership with exhibition that’s given exhibition a chance to participate in the full revenue stream of the content.

Our network proposal, a key part of it, is we’re going to make sure we cut our exhibitor partners in on our piece of the backend on any content that launches on their screens so that for the first time they’ll be participating in downstream income from VOD, and DVD and television and any foreign pre-sales, if there are any. I think for the first time you’ll get an alignment of a business model between a content distributor and exhibition and I think that’s a smarter way to go about releasing content in this day and age. Both the content provider and the exhibitor will have the same interest for the first time and that’s sort of a unique feature of the network proposal that we’re going to be selling at CinemaCon which I think is really going to help us grow this business quickly.

CJ: Cinedigm’s current VPF deals end in September of 2012. Has any thought been given to extending those VPF contracts with the studios?

CM: What I’ve heard from the studios, it’s a pretty hard and fast deadline for us and everybody else. You’ve got to understand that at this point in the rollout for the studios it’s been several years and part of the upside in this whole thing and part of coming up with the VPF concept was they were going to subsidize the rollout and the equipment but at a certain point it was going to stop. They want the clock to start to tick toward a point where they’re able to realize all those savings on their bottom line. From the discussions I’ve had with the studios they are quite serious about that September deadline. That’s part of the reason at CinemaCon the theme at Cinedigm, and you’ll see it when you come to our booth, is “The Time Is Now”. Get it done now. I think that deadline is going to help drive an even greater exceleration in deployment over the next year-and-a-half.

CJ: One criticism of Cinedigm is that the company hasn’t had positive earnings. Will that change in the near future?

CM: Netflix wasn’t cash flow positive for the first ten years of their existence and now what’s their market cap? You know last quarter we were actually cash postive in our non-deployment business and that’s a trend that’s going to continue going forward. We’ve said to investors time and again every thousand screens we deploy drops about $2.5 million in EBITDA to our bottom line. We’re over 7,000 screens now. We feel pretty good and very comfortobalbe about our position right now. I think you’re going to see an excelarting trend in that arena and I think we’re very positive about the next 12 months both in terms of the growth opportunities I’ve talked about and the financial performance we’re going to be able to deliver. I would suggest anyone who has any questions about our balance sheet just watch our results over the next 12 months and I think there’s going to be a lot of good news.

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