My local historic movie theater closed its doors for good last week, a victim of the coming industry conversion to an all-digital format. With the average cost of converting to digital projection costing around $125,000, my theater -- which charged just $5.50 for ticket -- couldn't afford the upgrade of its four screens.
Although IHS Screen Digest Cinema Intelligence Service says just over half of the screens worldwide had made the switch to digital, studios plan to stop shipping movies in the 35 mm format by the end of next year with a complete global conversion by 2015 . News Corp's (NASDAQ:FOX) Twentieth Century Fox studio became the first to officially announce it will distribute all of its movies digitally here in the U.S. within the next year or so .
With the cost of an average 35 mm film running around $1,500 to print and distribute compared to just $150 for a digital copy, there's little need to understand more than basic economics why the change is happening .
Past is not prologue
As television made the mandatory conversion from analog to digital signals, it coincided with the proliferation of flat-screen televisions that heralded a boom in sales. Corning (NYSE:GLW) sold a gazillion glass panels in the process and Dolby Labs (NYSE:DLB), whose digital sound technology was embedded in the conversion standards and in the set-top boxes required for viewing, rocketed to new fame and its stock to new heights.
There's a new opportunity now as the movie industry converts to an all-digital format, but the winners from the last revolution aren't going to be the same this time around.
I can't hear you
Despite selling digital cinema products and 3-D digital equipment, Dolby is not likely to be a contender. Because digital cinema is based on open standards, it doesn't include Dolby's proprietary audio technologies. So it needs to rely on systems sales, but they've been lagging. With the digital cinema transition more than halfway complete and rival system makers such as Sony (NYSE:SNE) having more market share than Dolby, it finds itself at a competitive disadvantage. It's a trend and an opportunity that's slipping from its grasp. Product revenue fell 21% in 2012 and will probably dwindle away further as the transition continues to mature, but its new Atmos technology may help it recover some lost ground.
IMAX (NYSE:IMAX) will undoubtedly benefit as its films and theaters are already optimized for the digital revolution. It saw the future back in 2008 and transitioned to a digital format using Texas Instruments' (NYSE:TI) digital light projection technology . Since TI owns most of the important patents behind DLP, it should see further gains with the DLP technology licensed by relative newcomer NEC, Barco (the biggest name domestically), and Christie (the digital leader in Europe). Over 30 manufacturers use TI's DLP to power their projectors, and it owns half the world's market share in front projection technology . Competing technology comes from Sony, whose 4K offers even higher resolutions.
One ring to rule them all
The movie Avatar may have been the catalyst that set the wheels in motion, with its groundbreaking 3-D effects causing theaters to upgrade to be able to show off the new technology. Now with the release of the movie The Hobbit, which was filmed at 48 frames per second versus the conventional 24 fps -- the first movie ever to be filmed so -- theater owners are going to be under pressure to upgrade their theaters again. And James Cameron is reportedly going to shoot an Avatar sequel at 60 fps.
While the faster film rates can make for a smoother 3-D motion, many of those who previewed The Hobbit claimed it gave them motion sickness, like having ridden on a roller coaster. Like the use of 3-D technology itself, it may come down to the fact that only certain movies are worth filmed in the higher frame rate .
With movie theater chains such as AMC, Cinemark (NYSE:CNK), and Regal Entertainment (NYSE:RGC) making the move to convert their theaters to digital -- and pushing their ticket prices higher -- studios will need to be more selective. Piranha 3-DD and My Bloody Valentine 3-D ought to teach studios that just because you can use a technology doesn't mean you should. The lower cost of digital distribution, however, likely means we'll actually see more of this dreck than less.
Investors will also have to learn they can't look back at history to see who will rule the day ahead, but will have to find a new crop of winners to choose from.
Rich Duprey owns shares of Dolby Laboratories. The Motley Fool owns shares of Corning and Imax and is short Sony (ADR) and has the following options: long JAN 2013 $22.00 calls on Sony (ADR). Motley Fool newsletter services recommend Dolby Laboratories, Corning, and Imax. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.