N.H.'s small movie theaters face costly conundrum: go digital or risk going under

As film distribution goes digital, small New Hampshire movie theaters and drive-ins are faced with the expensive decision of whether to upgrade their projection systems

For Bob Scharmett, who has owned the Milford Drive-In Theater for 44 years, the choice to convert his two outdoor movie screens to digital projection wasn't much of a choice at all. It was convert or die.

"In the very near future, you'll either be in digital or you won't be in business," said Scharmett.

Scharmett said his is one of only about 20 drive-ins nationwide that has converted to digital projection from 35mm film prints, which has been the industry mainstay for more than a century.After last summer, when the drive-in theater on Elm Street in Milford wasn't able to obtain celluloid prints of all the movies it wanted to screen, "we knew we had to make the switch," said Scharmett, whose theater charges $20 a car for a double feature. "It wasn't something we wanted to do because it was very expensive."

It's also the only one of the four remaining drive-ins in New Hampshire that has made the switch.

Nationally, however, it joins a growing number of movie theaters that have made the transition. Already about two-thirds of theaters in the United States have converted from film to digital projection, including most of the major theaters in New Hampshire.

But many of the state's smaller theaters have yet to make the transition, and are left with a costly conundrum: As the movie industry rapidly phases out film in favor of digital distribution, can New Hampshire's few remaining independent theaters that rely on the antiquated technology survive?

That's the question on the minds of small theater owners not just in the state but across the country, many of whom are biding their time while they decide whether they can afford the costly conversion and stay alive.

"They're going to make it a lot harder for the small theaters to survive and you're going to see a lot of small theaters disappear, and it's sad," said Mitchell Shakour, owner of the Northfield Drive-In, which has been showing movies at its location on the New Hampshire-Massachusetts border since 1948.

Rapid conversion

For some exhibitors, the price tag — which can be anywhere from $50,000 to $100,000 per screen, depending on its size and whether 3D is added — will likely be insurmountable.

The National Association of Theatre Owners, or NATO, an organization that represents theater owners, recently estimated that anywhere from 10 to 20 percent of theaters probably won't survive the age of digital conversion.

"You're in or you're dead," summed up Mike Hurley, a city councilor and former mayor of Belfast, Maine, who runs bigscreenbiz.com, an industry website for theater owners.

Hurley also owns two historic theaters in Maine, one of which — the 100-year-old Colonial Theatre in Belfast — he just upgraded to digital at a cost of about $60,000 per each of its three screens.

Like many small theater owners, he's still weighing whether to make the switch at his other theater, a first-run cinema in a small town that hugs the Canadian border.

"Movie theaters in small towns have a much greater importance than they do in big cities," he said. "They are really one of the first places kids are allowed to go to by themselves, they are a place where communities come together outside of church or school, and it's a place that makes you feel like you're connected to the whole world."

What has been most daunting about the industry conversion is how rapidly it's happening, said Hurley. While the conversion has been slowly under way for a decade, it hit the tipping point suddenly in the past couple of years, spurred in large part by exhibitors recognizing the extra profit margins available in 3D films.

According to a study released late last year by IHS Screen Digest, more than 99 percent of theaters used film projectors in 2004, and 85 percent in 2009. But by the end of this year, only about a third will still use film, and the study predicted that by 2015, only 17 percent of theaters will use celluloid prints, relegating it to "niche" status.

And, unlike in the past, when these smaller theaters could opt to purchase used projectors at a lower cost, there really isn't any used digital equipment on the market yet, said Hurley.

Studio savings

While it's clear in which direction the industry is hurtling, uncertainty remains because exhibitors don't have a firm date of when they'll no longer be able to obtain film prints of new movies. Some have predicted it could be as early as next year.

"There have been a few dates floating out there — 2012, another said 2014," said Shelly Hudson, who is the executive director of Red River Theatres, a two-screen nonprofit theater in downtown Concord that screens indie films.

Twentieth Century Fox, for example, sent a letter to exhibitors at the end of 2011 informing them that it would eliminate 35mm print distribution sometime in 2012 or 2013.

"As a letter from our friends at Fox confirms, no one should rely on the distribution of film prints much longer," John Fithian, CEO of NATO, reportedly told attendees at CinemaCon 2012, adding that "most other distributors share that belief."

While it's a cost burden on the theaters, going digital represents a huge cost savings for movie studios. Manufacturing a single 35mm film print costs at least $1,000, and usually more. Once that cost is eliminated, studios stand to save millions on each release.

To pass along this savings and help theaters offset the cost of digital conversion, the studios offered up what is called a Virtual Print Fee, a subsidy administered through a third party that contributes toward the cost of the new digital equipment.

For his $180,000 conversion, Hurley negotiated a VPF deal, the terms of which he cannot disclose. But "this underwriting is going to go away sometime in the next year," he said. "If you don't have one, you're not going to get one."

Plus, he added, many small-town theaters don't qualify for the VPF financing anyway, since they don't show enough first-run films to compensate for the expense of the digital equipment.

"Let's say I'm not opening a movie or can't because I have other movies — if I play that a month from now, I get no virtual print fee," said Hurley. "So when you're dealing with small-town theaters that historically have two or three screens, what are they playing? They're playing catch-up most of the time."

Even if they can obtain a VPF, some really small theaters still may not be able to shoulder the remaining cost of conversion, he said.

Shakour of the Northfield Drive-In said his one-screen theater will "probably opt to continue, but we're keeping our ears open," adding that he wants to wait and see how other drive-ins that have converted to digital fare.

"I'm just thinking about it," said Shakour, who has run the drive-in, which is half in Winchester, N.H. and half in Northfield, Mass., since 1968. "I want to wait and see from their experience which way to go."

His family has been in the drive-in business since purchasing the now-closed Keene Drive-In in 1953.

"The whole reason I stay in it now, I've done it my whole life."

For Hurley, there are certainly benefits in digital projection, not the least of which is a picture that looks as good on its 150th screening as its first.

"I actually am looking forward to it," he said. "The prints don't get scratched. It stays in focus. Technically speaking, it is an improvement."

Scharmett, of the Milford Drive-in, said that the sound is better and the digital picture crisper since the upgrade.

While there are benefits, the smaller theaters in New Hampshire that have decided to switch seem to have made the decision less with enthusiasm for the new medium than an acceptance that they have little other choice.

"For us, there's no added benefit, except we'll be able to show the films we would still be showing," said Hudson of Red River, which opened on South Main Street in Concord in 2007.

Both of its screens will have to be retrofitted for digital, which she said could cost as much as $150,000.

"We're being proactive. We want to make the conversion as soon as we can," said Hudson, adding that it will require the nonprofit to kick up its fundraising efforts by reaching out to its members and the local community for help.

Crowdfunding solution?

Reaching out for community help is really the best shot these small theaters have in staying alive, said Hurley.

"You cannot expect these small-town theaters to bear this cost by themselves," he said. "If they want to keep movies in their town they'll have to come up with a creative solution."

That was what happened with the Ioka Theater in Exeter, which was built in 1915 but closed in 2008.

Shortly after it closed, a grassroots group of community members rallied to restore the theater, which was eventually bought at auction in late 2011 by local philanthropist Alan Lewis.

He tasked the Exeter Theater Company, the nonprofit formed to save the theater in the wake of its closure, with restoring the Ioka and to recruit 1,000 members by the end of March. It met its goal and surpassed it, now with more than 1,400 members on board.

Its restoration plans call for the Ioka to be a premier art house, to house two stages, a bar, function room and two movie screens — both of which will be digital.

Carol Walker Aten, project manager of the Exeter Theater Company, said "it didn't make sense" not to install digital equipment, "given the timing of the restoration is right on the cusp where everybody has to go to digital whether they like it or not. Because the theater hasn't been showing films since 2008, there isn't any particular reason to go back in time and be a museum piece."

The theater has also found a lot of support from local businesses, said Aten, pointing to an economic impact study that found the theater will contribute $2 million annually to the local economy.

"People go 'Hey, why should we give a damn? Bookstores were challenged, they went out of business," said Hurley. "Well that's a good question, but to me, I believe a movie theater is critical to the base of economic development for big and small towns."

For that reason, he is thinking of crowdfunding the conversion of his second theater, heartened by the stories he has heard of small towns and communities coming together to support their local theaters.

"I'm not going to count anybody out until they're not only out but gone and gone for good. Often what will happen, a theater will close, but the town will freak out and revive it somehow. I think we'll have to see how it goes."