Go to a flooring store or two and start w carpet. Bring samples home and then next steps are walls/ceiling. When selecting carpet (why on earth would you want to get rid of the red carpet...jk) think about these things: what kind of flow from adjacent spaces / rooms in terms of color? Dark brown tones to work with chair? Textures? Pattern or solid? Plushness - I’d think you’d want something on the plush side vs a thin carpet. If you look at home theatre inspiration shots it may get you started w the floor. Then when you have carpet selected and a decent sized sample to work with repost a photo w that. You’ll get better responses for walls otherwise you are going to get a million different directions here. Good luck!

Are the panels wallpapered now? Look at Houzz photos of movie theatre carpet and see the patterns and colors that make the space feel better. https://www.houzz.com/photos/query/movie-theatre-carpet/nqrwns

This is what we did in a clients media room, perhaps it will give you some ideas.

Consider a dark color to help the theater experience. I don't know about the audio in that room, but colored acoustical panels are recommended to get the best sound experience. The panels are inexpensive compared to all the other equipment that goes into a theater. It looks like high ceiling in that room, so don'f forget about the ceiling and getting some panels on the ceiling to cut down on the echo/sound reflection.