Little Hobbits seem to have a big impact—not only in the mythology of Middle Earth but in the real world where the release of the much-anticipated film The Hobbit is expected to bring major changes to the movie theater business potentially requiring new investments in digital projection technology in order to support the film’s higher frame rates. The frame rate issue is just one of several challenges for the global movie theater business presented by the ascendance of digital cinema technology according to an IHS Screen Digest Cinema Intelligence Service report. Digital cinema is rapidly replacing 35mm and made up the majority format on global screens for the first time last year. The number of digital cinema screens in 2011 reached 63 825 equivalent to 51.5 percent of global screens. Growth was hefty with last year’s overall numbers up 82 percent from 35 070 screens in 2010. The rate of digital expansion last year ranged from 92 percent in the Asia-Pacific territory to approximately 66 percent in the Middle East-Africa market as shown in the figure below. “As a result of the shift to digital cinema many changes are rapidly sweeping across the industry presenting new challenges and opportunities in the exhibition and distribution of movies ” said David Hancock senior principal analyst for cinema at IHS. “With digital cinema leading the market the full effects of this disruptive technology now are being felt across the board by film exhibitors distributors and a range of affiliated industries. The most pressing technology issue is higher frame rates—now a matter of concern due to the December 2012 release of The Hobbit by director Peter Jackson.” Cinemas will require an upgrade to the projector to be able to play the film—which was shot at 48 frames per second instead of the conventional 24 frames. About 50 000 screens equipped with Series 2 and Sony projectors potentially will be able to show the movie but time and money will still be required for the upgrade. Another leading director James Cameron is in the process of producing follow-ups to Avatar at the even higher rate of 60 frames per second. A second looming technology issue is laser illumination which will move ahead initially through the retrofitting of existing lamp houses and then move onto laser-illuminated projectors in the longer term. The established digital cinema projection companies and a private company Laser Light Engines is driving interest in this area which could significantly reduce the projector’s cost of ownership as well as providing the extra light sometimes needed for good quality 3D presentation. Cinema sound is also back on the agenda shifting from channel-based sound systems such as 5.1 and 7.1 into so-called immersive sound—effectively object-based soundtracks that can be mixed more flexibly. Dolby Barco Immsound Iosono and Illusonic 3D are the five major actors in this market and the key as to which entities win out will be determined by the partnerships that are formed by the players as well as by acceptance of the new system by content mixers and original creators. On the business side the major improvements in the past year included full conversion to digital cinema for the larger exhibitors along with a spread of the funding group mechanism to help otherwise struggling exhibitors achieve conversion. For the latter groups are in place or in advanced negotiations in the United Kingdom the Netherlands Australia the Philippines Brazil and Denmark—on top of the larger exhibitor groupings also working for this purpose in the United States Canada Japan Australia and South Korea. Along with the shift in film format the increasing use of digital cinema equipment has resulted in plunging demand for 35mm prints. At its peak film distribution used approximately 13 billion feet of film a year—equivalent to a trip to the moon and back five times. That amount began to decline sharply in 2010 and the industry this year will use closer to 4 or 5 billion feet for distribution purposes. Also contributing to declining demand for 35mm prints is the rising cost of silver a key material for film processing. The price of silver has climbed from a stable $5 an ounce for almost two decades to around $25 an ounce in 2012 even hitting a high of $50 at one point. Such developments involving the change in film format are having an impact across the entire value chain including film distributors; film stock suppliers such as Kodak Fuji and Agfa; and film processing entities such as Deluxe Technicolor and other film labs. Already mainstream use of 35mm is projected to cease in the United States and other major markets by the end of next year with global cutoff likely to happen by the end of 2015. For many players in the digital cinema space the focus at present is turning to the second phase of digital cinema conversion: distribution. The industry assumption for the medium to long term is based on satellite delivery of content but competition may emerge from terrestrial networks especially as the cost of higher-speed broadband networks decreases over time.