Steve McQueen seems a little het up. The Oscar-winning film-maker is contemplating the shifting sands of the movie industry – specifically, the relentless drip-feed of new digital film formats. “All this technology, it’s changing every five minutes,” he says, “because someone’s making some money out of it.”

He talks about old-fashioned reel-to-reel film, a medium he has used since he picked up a Super 8 camera as a student at Goldsmiths in London (his first movie was of his bus ride home) and that he now appears to regard as a kind of muse. “There’s something romantic about film,” he says. “Some sort of magic – it’s almost like it breathes. Film feels much more . . . I don’t know. Maybe ‘human’?”

You hear this kind of reverie quite often in Hollywood these days. We may live in an age of bits and bytes but six out of the nine Best Picture nominees at the Oscars this year were mainly or entirely shot on film – not digital – cameras. Tinseltown’s creative classes are a nostalgic bunch and for more than a century their world was ruled by celluloid, the medium in which movies were shot, edited and distributed to theatres. Many will tell you that there are aspects of traditional film that a digital file just can’t re-create.

Yet, like all things human, the 35mm reel is slowly shuffling off this mortal coil. This year, Paramount Pictures became the first big studio to announce that it would no longer release 35mm prints of movies in the US. In the future, the company may make infrequent exceptions (to pacify its most powerful directors) but Anchorman 2: the Legend Continues was, in effect, the final Paramount film to be shipped to cinemas on, well, film.

That the studio didn’t let this be known until after the fact seems to suggest that it didn’t want to be the first of its peer group to break with Hollywood’s analogue past. But nine out of ten US movie screens have now made the switch from 35mm film to digital. Technicolor has shut down its final film lab; Fujifilm no longer makes film for motion pictures; Kodak, the last remaining producer, declared itself bankrupt in 2012 and recently entered discussions with studios in a last-ditch attempt to ensure some kind of infrastructure to support it. And in December 2013, The Wolf of Wall Street became the first major movie to be delivered to theatres in digital formats only – an event all the more striking given the prominence of Martin Scorsese, who directed it, as a custodian of film history.

The shift to digital distribution promises to save the industry billions of dollars but it comes at a price. Many art-house theatres cannot afford to buy digital projectors, which typically cost between $60,000 and $150,000 each. In Hollywood’s own backyard, many of the indie cinemas that survive rely on rich benefactors. Take the New Beverly Cinema in Los Angeles, which was rescued by Quentin Tarantino in 2007. It’s a stylishly down-at-heel joint that prides itself on unearthing hard-to-find spools of 35mm film. At the time of writing, it is showing the 1988 Jean-Claude Van Damme classic Bloodsport. Phone it up and the cinema will tell you it has procured “a very nice-looking 35mm print”.

The voice on the end of the line carries the verve of an excited oenophile describing a particularly tasty Petrus. Yet even this citadel of analogue resistance has been breached. Tarantino once said that the day the New Beverly betrayed 35mm film, he would burn the place down. He must have reconsidered: his theatre now has a digital projector, too.

Whether the average audience member can tell the difference between movies made using analogue film and those made with digital technologies is debatable. The gap between the two has closed as digital has become more adept at mimicking the detail and feel of film. Yet the switch matters. It is changing the way movies are made and exhibited. And long from now, it promises to dictate what works survive.

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This backdrop helps explain why a group of reactionaries is battling to preserve 35mm. It includes McQueen, who is not anti-digital but would hate to see film go the way of the silent movie. Christopher Nolan is another intransigent. In 2011, just before Christmas, he invited a coterie of prominent film-makers – Michael Bay, Bryan Singer, Jon Favreau, Eli Roth, Duncan Jones and Stephen Daldry among them – to what they thought would be a preview showing of the first few scenes of the Batman movie The Dark Knight Rises.

They had settled into their seats when their host made an unexpected confession. “I have an ulterior motive for bringing you here,” Nolan said.

His focus wasn’t on the distribution and exhibition side of the industry (the stuff that happens in theatres) but on the image-capture side (the stuff that happens on set). The Dark Knight Rises had been shot on film cameras, he explained. This was his medium of choice but he feared that it would be denied to him in the future. He wanted his fellow directors to use their leverage to protect their 35mm cameras from extinction. LA Weekly, which first reported this meeting, injected the underlying story with Spielberg­ian levels of drama.

“There is a war raging in Hollywood: a war between formats,” it claimed. “In one corner, standing with Nolan, are defenders of 35mm film. Elegant in its economy, for more than 100 years film has been the dominant medium with which movies are shot, edited and viewed. In the other corner are backers of digital technology – a cheaper, faster, democratising medium.”

The stage was set for a conflict that is now entering its final round.

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Many directors are ambivalent about the way digital technologies are trying to mimic the aesthetic qualities of film. “Why try to mimic it when you’ve already got it?” asks Steve McQueen. The same answer lies behind most of Hollywood’s riddles: money.

The industry’s finances are notoriously opaque. Last year, however, Tinseltown put in a solid turn at the US box office, taking a record $11bn, which was split roughly 50-50 between the studios and the theatre operators (which rely on high-margin fast-food and soft-drink sales to boost profits). Meanwhile, the home entertainment market brought in revenues of $18bn, having begun to stabilise after years of falling DVD sales. This was largely thanks to a 50 per cent surge in downloads of digital HD formats, which surpassed $1bn for the first time.

The other current bright spot for the studios is the battle for market share between streaming services including Netflix and Amazon Prime and their television-based rivals such as HBO. This has vastly increased the cost of so-called output deals (in which the studios sell the rights to show their back catalogues). The digital economy, it seems, is finally showing Hollywood some love: over the next three years, Netflix alone is expected to pay some $5bn for access to movies. All in all, then, Hollywood is not doing too badly, but the industry is still aching to cut costs – and this is where digital excels.

Digital formats began to displace film in earnest more than a decade ago and the charge was led by George Lucas. In 2002, Star Wars: Episode II – Attack of the Clones became the first major movie to be shot entirely on digital video, even though, back then, it had to be transferred on to 35mm film for most cinemas to show it. The producers of Attack of the Clones estimate that they spent $16,000 on 220 hours of digital tape. If they had used the same amount of film, it would have cost them $1.8m.

Yet the real opportunity to axe costs digitally comes long after the final scene is shot. To produce and ship a 35mm print to an American cinema costs about $1,500. Multiply that by, say, 5,000 prints for a big movie and it comes to $7.5m. Digital formats can do the same job for 90 per cent less.

Overlaid on this is the growing importance of global box-office receipts. Digital distribution makes it feasible to launch a movie simultaneously on tens of thousands of screens across the planet, from Cartagena to Kolkata – and, while you’re at it, on platforms such as iTunes and on aeroplanes.

Moreover, no matter how carefully it is handled, every time a 35mm film print is run through a projector, it will degrade, collecting blemishes – scratches, tears, worn edges – that affect the viewing quality. Titanic reportedly played for so long in theatres that some prints fell apart in the projectors. In this sense, film is indeed mortal, perishable, fragile – human. This analogy would make digital “immortal”. You show a digital copy of a film once or a thousand times and the quality remains undiminished while the studios’ bottom lines grow.

In 2010, the former Universal Pictures chairman Tom Pollock declared that digital distribution was the studios’ “holy grail”. Others foresaw a new golden age of independent movie-making. The director Mike Figgis, Oscar-nominated for Leaving Las Vegas in 1995, relayed his digital dreams at the 2004 Venice Film Festival. Asked if the future was digital, he said: “I f***ing well hope so, because if the economics of production are not in the hands of the artist, I’m not interested in cinema any more.”

In 2004, the Economist went as far as to predict that the cost savings afforded by digital technologies would end the era of the Hollywood megaflop. Unfortunately, things haven’t worked out quite like that. Instead, the summer of 2013 was labelled “the dud zone” for its misfiring blockbusters. White House Down, After Earth and Jack the Giant Slayer – which collectively cost almost half a billion dollars to produce and more to market – fizzled. The Lone Ranger, which cost as much as $375m to make and publicise, is thought to have cost Disney an estimated $150m write-down.

The digital revolution has been part of an economic evolution in which Hollywood’s megabudgets have swollen as the studios chase foreign audiences with bombastic blockbusters. Independent film-makers still need rich patrons and the number of films made by Hollywood has fallen considerably – by 40 per cent between 2006 and 2013, according to one count. All that said, the most significant effects of the death of film might not be felt for decades, perhaps even centuries – until the cinema buffs of the future try to arrange screenings of today’s classics.

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Every time you make a jump in format, there are films that don’t make it. Most American silent movies have been lost and half of those made between the early years of sound and 1950 have perished. There are no known copies of the 1930 operetta Song of the Flame, the first colour production to include a widescreen sequence. We have only an incomplete version of the first sound film to win an Oscar for Best Picture, The Broadway Melody. And only about five minutes remain of The Way of All Flesh, a silent crime drama that premiered in 1927 and that won a Best Actor Oscar for Emil Jannings.

You might think that the “immortal” qualities of digital cinema would help safeguard against similar losses in the future – but experts warn of exactly the opposite. Jan-Christopher Horak is the director of the UCLA Film and Television Archive in Los Angeles, one of the largest repositories of movies and television programmes on the planet. “The problem, in a nutshell, is that there is no such thing as a digital preservation medium,” he explains. “There is no physical carrier on which you can put digital information that will last anywhere near as long as the analogue alternative.”

In short, hard drives aren’t built to last. Tests suggest that polyester and chemical film will endure “400 to 500 years minimum” if stored at proper temperatures and humidity, Horak tells me. “We can take a preservation-quality negative, put it in a vault and, as long as we’re paying the electricity bill, that film will be in good shape long after all of us are gone.”

By contrast, when it comes to digital, archivists are faced with two problems. The first is the perishability of the physical equipment. The second is that every 18 months or so, a new file format comes along to displace its predecessors and, as a result of this constant upgrade cycle, archivists face a kind of Sisyphean dilemma.

Horak tells me that his archive restored a copy of The Red Shoes (1948) by Powell and Pressburger just five years ago. An original Technicolor black-and-white negative was borrowed from the British Film Institute. Much effort was taken to clean it of mould. New copies were made – both on analogue and on a digital format known as LTO3. However, since that work was completed, LTO3 has been displaced by LTO4, which was then superseded by LTO5. “We’re about to go to LTO6,” Horak says. He takes a deep breath: “These tapes are not backward-compatible. So if we miss the changeover between formats we can no longer transfer the information.”

Each leap in format costs between $10,000 and $20,000 per film, he says. He has roughly 350,000 films and television shows in his archive – a potential outlay of $3.5bn just for one leap between file types.

Moreover, digital scanning technologies have advanced hugely over the past five years, capturing far greater levels of detail from analogue negatives. At some point the Red Shoes project is likely to be repeated from scratch. That will be no small undertaking: digitising one analogue negative costs up to $50,000.

Digital formats can also become corrupted. Toy Story 2 was nearly lost when someone accidentally ran a computer command that began rapidly deleting the master copy of the film. This explains why the big studios still make analogue back-ups for their archives – even for films that were shot digitally and will never be shown to the public using a 35mm projector.

It’s the older and niche titles that will disappear from public view first and in the greatest numbers. “There are a lot of films that are owned by copyright owners who are not willing to make the investment to transfer to digital,” says Horak. “Unless they do, these films will not be in circulation.”

Close shave: Toy Story 2 was nearly lost when many of its digital files were accidentally deleted

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This isn’t to say that digital doesn’t have its champions. In Side by Side, a documentary about the rise of the technology made by the director Christopher Kenneally and Keanu Reeves, all of the interviewees, with the exception of Nolan, say that digital projection is better than the 35mm equivalent.

It seems doubtful whet a layperson can tell the difference between the tones and textures rendered by the latest digital cameras and a 35mm camera. The smeary visuals of early digital cameras are a thing of the past. But industry insiders will add that the tools used on a set have an effect beyond the immediate aesthetic of the final movie.

Many directors, for instance, prefer digital cameras because of the deftness they allow. Danny Boyle’s director of photography, Anthony Dod Mantle, won a Best Cinematography Oscar for Slumdog Millionaire – the first digital motion picture to receive that honour. He declined to take heavy 35mm film cameras into the labyrinthine Mumbai slums, opting for lightweight digital equipment instead.

Meanwhile, portions of Marvel’s The Avengers (2012), which cost an estimated $220m to make, were filmed on a Canon EOS 7D – an SLR camera that will fit in the palm of your hand and costs £900 to buy. It allowed the capture of “powerfully immersive and kaleidoscopic views of action scenes”, explained the cinematographer for the film, Seamus McGarvey. Shooting digitally also allows film-makers to review their work instantly and shots that don’t work can be reshot quickly – potentially slashing principal photography costs.

However, photographers have a phrase – “spray and pray” – for the hyperactivity that “cheap” digital technologies inspire. Some argue that digital cameras can breed indiscipline on a film set. Why aim for one perfect take, when a flurry of ten or 20 won’t cost much more? By contrast, the whirr of a film camera in action is the sound of money burning.

Working with film imposes a rigour, traditionalists argue. As one Hollywood post-production expert tells me, “Changing your mind every five seconds doesn’t necessarily get you better results.”

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Turning on a sixpence is necessary to survive the digital revolution. No other company knows this better than Technicolor, a century-old French company whose history is the stuff of Hollywood legend. Its new LA headquarters – a six-storey, gleaming monolith – stand on Hollywood hallowed ground: the site of the historic Sunset Gower Studios lot, carved out from orange groves by the movie mogul Harry Cohn to become the home of Columbia Pictures. This was where Hollywood began. Today, it looks a lot like a slice of Silicon Valley.

There is valet parking for guests and in the foyer you’ll find an Oscar awarded in 1939 to Technicolor for its three-strip colour process, which was used to shoot The Wizard of Oz and Gone With the Wind. A placard lists the films Technicolor has been involved in over the past year, 23 Oscar contenders among them. The vibe is old Hollywood – but the heartbeat of this place is now digital. Technicolor closed its last film lab earlier this year. Employees reminisce about the giant vats of chemicals they once worked alongside. They miss the smell, they say.

The company has invested more than $200m in digital post-production and visual effects facilities, including nine digital scanners that cost more than $1m each and are part of Technicolor’s “digital intermediate” process. It allows film to be colour-corrected and edited on digital equipment, instead of in an old-fashioned film lab. The process is cheaper and faster and the head of the digital productions division, Tim Sarnoff, is a vivacious, enthusiastic realist.

“You have to be very pragmatic in this business – move with the times and provide what your clients need,” he says. “There isn’t much room for emotion.” And yet, like just about everybody at the Technicolor site, Sarnoff seems to be rather in love with film. “There’s a quality to film that is organic,” he tells me. “The texture of film is perfectly random. It’s hard to get that same randomness in a digital form. It’s too perfect.”

Digital might, in some instances, be more reliable but a director loses the serendipitous magic of film, Sarnoff argues. Moreover, not everything about it is cheaper. Post-production work can be much more expensive. Creative choices are often delayed because, with digital, they can be. You wonder whether this ability to rehash has added to Hollywood’s megaflop problem. Might it explain the less coherent action turkeys to have emerged in recent years?

“One would think that digital is simpler,” Sarnoff says. “But our lives have become far more complicated.”

The film projectionists of decades past had a busy and potentially perilous job. Their booths typically housed two projectors and every 20 minutes, when a reel finished, the projectionist would switch from one projector to the other. Every few hours, the carbon arc light rods that burned blindingly bright inside the projectors to illuminate the screen would have to be replaced. Film projectors, unlike their digital cousins, evolved to become durable, eminently fixable pieces of kit. Yet early nitrate films were highly flammable, capable of spontaneously combusting. They would burn even under water, providing their own oxygen supply.

All of that has been replaced, for the time being at least, by something called DCP, or Digital Cinema Package. It involves a hard drive, roughly the size of a paperback, which is couriered to the theatre, where it is unpacked from its protective foam-lined case and slotted into a server that feeds a digital projector. For multiplexes showing new movies, the road map to DCP has been straightforward: the studios have been prepared to subsidise the switch, because it cuts their cost base so much.

It’s much trickier for art-house cinemas, which have mostly relied on loans of old prints owned by the studios. Some studios have indicated that they will no longer part with those prints. Yet many art-house theatres can’t afford to switch to digital and even if they could, it is doubtful that many of the niche archive titles that they want to show will ever find their way on to DCP.

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The Electric Dusk drive-in in downtown Los Angeles has hit upon a solution of sorts: it shows films on DVD. It’s a kind of guerrilla operation – a pop-up drive-in in an abandoned marketplace, flanked by scenes of urban decay and boasting a giant inflatable screen. It opens for business once a fortnight or so. It specialises in 1980s and 1990s nostalgia; the night we visit, Tim Burton’s Edward Scissorhands (1990) is showing. It’s a rare chance to experience an American rite that is quickly becoming a thing of the past.

In the mid-1950s, there were as many as 4,000 drive-ins in the US. Now, there are just a few hundred. The invention of the multiplex, videotapes, DVDs, cable television and the internet all played a part in the drive-in’s downfall. The end of 35mm film promises to deliver the coup de grâce.

It seems a shame. The Electric Dusk audience is a laid-back crowd. You’ll find people sitting on folding chairs next to their vehicles, happy to talk through the movie.

The relaxed attitude is probably just as well: cinema purists hate to watch DVDs. The resolution is crummy, they say – textures get lost, the blacks aren’t black. And how can you charge people for a format that they can watch at home? Yet in the future, lovers of classic movies may well have to make do with such ad hoc solutions.

As for Steve McQueen, he’ll concede that the average audience member probably wouldn’t be able to pick a movie shot on digital from one captured on 35mm, but that is not the point – the difference is important to the people making it. The whirr of the 35mm film camera is “like the strings on a puppet”, he says. “It’s not for the audience to see.” Great movies derive their life from almost imperceptible details. And though the processes may be hidden, somehow they are felt.

Helen Alexander is a researcher and writer based in Los Angeles. Rhys Blakely is LA correspondent for the Times