Sept. 30 was a huge day for Imax, and that was the morning Jackson Myers chose to sleep in. ‘I was in bed, and suddenly these calls are coming in with people yelling that I have to get a release out.’ Apparently, the Walt Disney Co. was acquiring the giant-screen maker for US$1.5 billion, and Myers, Imax’ s director of corporate communications, knew nothing about it.
It turned out there was nothing to know: the press release was a hoax, and not a very good one. According to SEC allegations, a Wall Street broker looking to jack up the share price had cut and pasted new paragraphs into a Disney release announcing its (real) acquisition of Marvel Entertainment. But the fact that many investors bought it — sending Imax shares up sharply in pre-market trading — attests to a new chapter in the meandering, mishap-filled saga of Canada’ s best-known film company.
Not so long ago, the idea of someone paying that kind of scratch for Imax would have been laughed off the wires. Its eight-storey-high movie screens with immersive visuals and sound were the embodiment of the better-mousetrap fallacy — a great technology that no one could figure out how to mass-market profitably. The company, based jointly in Mississauga, Ont., and New York City, had been disappointing shareholders for decades as one business model after another failed to pan out.
In the past two years, however, a combination of smart strategy and dumb luck have spawned a dramatic turnaround that suggests there may be a real business here after all. Imax’ s revenue jumped 54% in the first three quarters of 2009 as it added theatres at a sizzling pace — two or three a week, as far away as Japan and Australia. After two profitable quarters, the company is on track to reach $150 million in sales in 2009 (up from $106 million a year ago) and notch its first year in the black after three losing ones. Share price? Almost quadrupled this year.
These stats testify to the power of Imax’ s new formula: converting Hollywood blockbusters to its more vivid and immersive format, then screening them in multiplexes fitted out with bigger screens. In essence, Imax has decided to scale itself down to Hollywood’ s size, descending from the lofty heights of offering a truly unique viewing experience to a merely ‘premium’ one. CEO Richard Gelfond explains the strategic revamp this way: ‘In the old days, we told the studios, AC~You have to shoot with Imax cameras,’ and we told exhibitors, AC~You have to build Imax theatres.’ Now, instead of telling them to get in our business, we got in their business.’
The epiphany came at a fortuitous time. Hollywood has been trying to boost its ‘wow’ quotient as it struggles to lure consumers away from their giant plasma TVs running Blu-ray Discs. More movies released in digital 3-D — at higher ticket prices — are growing box-office revenues despite flat attendance. And Imax takes the game a notch higher. Its screens are bigger (though only by one-sixth in some theatres) and its picture and sound more vivid (though it’ s merely digitally remastered film footage). But if you’ re going to leave the house to see a movie like James Cameron’ s upcoming 3-D fantasy Avatar — the apotheosis of the kind of high-tech tentpole flick Hollywood is betting on these days — you might as well get the full effect, even if it costs an extra five bucks.
Or so the industry hopes. Hollywood, of course, has tried other revitalization tactics (remember indie cinema?) that only worked for so long — and so has Imax. Over it’ s 40-year history, the company has teased the market with several bouts of profitability before inevitably slumping back into losses. Its recent success has brought accolades from analysts but also sharper attention from rivals, one of which is now suing Imax in an effort to invalidate its patents. And while the company’ s stock has soared, it’ s still far below its record high, suggesting investors remain skeptical that this latest script will have a happy ending.
The AMC complex on the western outskirts of Mississauga — your standard suburban multiplex surrounded by big-box stores — is a potent reminder of how much smaller and pedestrian the experience of seeing movies on ‘the big screen’ has become over the years. The shopping mall-sized building has 24 auditoriums ranging from two 450-seaters to ones a third that size — not much bigger than an upscale home theatre.
Unbeknownst to the crowds, however, one of the big ‘boxes’ is an Imax demo site — the place where studio heads, film directors and exhibitor reps come to see what their movies would look like when tweaked for the Imax format and shown on a bigger screen. Compared to the massive canopies facing steeply tiered seats in custom-built Imax venues at theme parks and museums, this is underwhelming: The screen is just 15% bigger than a regular one and is shifted forward 16 feet where a few rows of seats have been removed. But Larry O’ Reilly, executive vice-president of theatre development, insists this ‘theatre geometry’ makes all the difference, because by filling more of viewers’ field of vision, the image appears to be double the size.
O’ Reilly, a 15-year veteran of Imax who has ‘ridden the roller coaster’ of the company’ s changing fortunes, has given more than 200 demonstrations here in the past two years, capped with the screening of a trailer reel. Since 2002, the company has been digitally remastering Hollywood movies so they could play in its theatres, boosting contrast and brightness, remixing the soundtrack for its sound system, and cleaning up any imperfections in the footage. ‘A tiny dot on a regular screen looks like a blotch on an Imax screen,’ says O’ Reilly. The result, he says, blows away his visitors. He recalls a few years back showing some Spider-Man footage converted to Imax to director Sam Raimi, in hopes of securing the sequels for the format. ‘As we’ re walking out of the theatre, he’ s saying, AC~In Imax, every frame is a postcard. You can mail it home!’ ( Spider-Man 4 has already been booked for an Imax release in the summer of 2011.)
While the demo may impress the directors, what sells exhibitors is the math. A brand new, full-size Imax theatre costs $5 million to $8 million to build; converting a multiplex auditorium to Imax runs $1.5 million. Slashing that upfront investment has galvanized Imax’ s theatre expansion. The number of Imax theatres showing mainstream movies has jumped more than 75% in just two years. By the end of 2009, the company expects to have 440 theatres worldwide, three-quarters of them showing commercial fare. That’ s dramatic growth, considering Imax eked out fewer than 100 screens in the first 25 years of its existence.
Founded by four Canadian filmmakers and inventors who debuted their large-screen technology at the 1970 Expo in Osaka, Japan, Imax has long been known for wowing families with journeys through underwater worlds and mountain panoramas. Everyone agreed that Imax’ s super high-resolution 70-millimetre film produced stunning results, but the cameras and projection systems, let alone the theatres, were very expensive. What’ s more, there weren’ t enough venues to justify the investment for filmmakers, forcing Imax to fund its own productions. ‘We’ d spend $8 million to $10 million to make a documentary, and there was a 25% chance that we’ d recoup that capital,’ says O’ Reilly. ‘But we did it because we had to sell theatres,’ and you can’ t do that without content.
Enter Gelfond and Brad Wechsler, two Wall Street investment bankers, who bought the money-losing company in 1994 with the goal of reorienting it to screening more commercial movies and expanding its presence beyond institutions. It seemed to work. Within three years, the co-CEOs doubled Imax’ s revenues by leasing its technology to multiplexes that were spreading like a pandemic around North America. The duo appeared set for a quick flip, but the plan didn’ t pan out: the theatre expansion spree ended in a massive slump that put several of the biggest exhibitors in bankruptcy protection. With its clients broke, Imax saw its shares, which had peaked above $30, dwindle to penny-stock status by the fall of 2001. When Gelfond and Wechsler tried to sell the company in 2000, there were no takers. (They tried again in 2006, and again failed.)
Gelfond traces Imax’ s current transformation to 2003, when he began discussions with AMC Entertainment, North America’ s second-largest exhibitor. To overcome AMC’ s concerns about the high cost of installing Imax technology, Gelfond proposed a joint venture in a few test locations, where Imax would provide the projection system and screens, and AMC would cover the cost of auditorium retrofitting and signage. In return, Imax would share in the box-office revenue. Both partners were pleased with the results, but AMC wasn’ t willing to bet on converting more theatres unless Imax went to a digital format. The industry was gearing up for a shift from shipping cumbersome film prints to fast, digital distribution. Imax had a particularly compelling case for going digital, as its prints cost $30,000 to $45,000 per movie per theatre (compared to $1,500 for regular celluloid) making studios reluctant to commit to the format.
Imax had already started work on a digital projection system that would make the distribution costs negligible. By 2008, with the track record of the initial joint ventures and a digital system in place, the company raised about $50 million to finance its share of future theatre conversions. In the spring of 2008, Regal Entertainment Group, the biggest U.S. exhibitor, signed a joint-venture deal covering 31 theatres. A few months later, AMC inked a similar agreement for 100 theatres, promising to double Imax’ s commercial theatre presence in the U.S.
The joint ventures transformed Imax’ s business, but the new model came at a price: from 2006 to last summer, Imax piled up 11 losing quarters, as it plowed money into developing the digital technology while sales slowed because customers held out for the new projection systems. But the pace of the turnaround has picked up recently. In first quarter of this year, 17% of revenues came from the joint ventures and ticket sales. By the second quarter, that revenue represented 47% of the total.
The exhibitors aren’ t complaining, either. Imax and Imax 3-D command higher prices — typically $4 to $5 extra. It’ s not uncommon for Imax 3-D movies to bring in twice the revenues of their 2-D versions. At some chains, overall box office was flat or declined last year, but sales at theatres with Imax screens grew as much as 25%. Plus, Imax draws a new kind of consumer. ‘The purest Imax patron seeks out Imax, and that’ s bringing in an incremental attendance,’ says Frank Rash, a senior vice-president at AMC. ‘Before, they weren’ t attending at all.’
But building a robust theatre network is only half the equation. Imax’ s problem has always been twofold: not enough exhibitor interest because of a lack of movies, and vice versa. To really break out, Imax needed Hollywood’ s support, and now it has got it. In 2006, three major movies came out on Imax. This year, Imax’ s release slate was fully booked with 14 blockbusters, almost all of which opened at No. 1.
Hollywood started to take notice of Imax when The Polar Express in Imax 3-D came out in 2004. It was the first major digital 3-D movie, and the 3-D versions outsold the 2-D showings 14-to-one. When the Matrix movies and the toga slashfest 300 were released as ‘the Imax Experience,’ they brought in a new kind of audience to Imax theatres: young, tech-savvy, mainly male viewers willing to book tickets in advance. But the game-changer was The Dark Knight. Director Christopher Nolan had spent a year becoming an expert in Imax technology before deciding to shoot part of the movie on Imax cameras — footage that drew raves even from amateurs. The noir Batman tale was a massive hit, but the Imax numbers were stunning: $65 million in global ticket sales over its run — 10% of the total from just 1% of the theatres.
‘It used to be us calling up the studios,’ says Gelfond. ‘In the last year, it’ s been the studios calling us.’ Indeed, Imax has become a key part of the mix for Hollywood, says one analyst who requested anonymity. ‘[Imax] are able to pick which movies they want,’ he says. ‘I have not come across a recent situation where a studio said no to Imax. The only reason they would have missed out on a big movie is because it clashed with their existing release schedule.’
This month, Imax’ s drawing power will get its biggest test yet with the release of Avatar, one of the most hyped movies in recent memory. Featuring new 3-D technology, performance-capture techniques and other technical wizardry, the animated tale of a soldier who visits the mythical planet of Pandora is custom-made for premium screens. People flooded theatres for 3-D previews in August, but the response was mixed: Some sneered at James Cameron’ s ‘big blue Smurfs’ while others raved that the movie ‘will absolutely revolutionize the way we look at films.’
Imax has a lot riding on Avatar‘ s success, because the movie is seen as a barometer of 3-D cinema’ s lasting appeal. Imax 3-D is the cream of the premium crop, and the company has said it plans for 3-D movies to comprise half its release slate next year. In fact, Imax has seen a spike in orders in the run-up to the release as theatres rush to maximize their take from the highest-priced screens. If the movie bombs — or even significantly misses the lofty forecasts for its opening weekend — studios and exhibitors may reassess their planned investments in 3D. And just as Imax has benefited from Hollywood’ s belief that its profitability lies in making movies bigger, louder and more immersive, so it will suffer if studios sour on that strategy.
That would be a major blow, because Imax is already facing some built-in limitations. For one, only the big extravaganzas make sense for the format, and Gelfond says 14 movies is about as many as he expects the company to release in a year. The North American expansion also seems bound to slow. ‘Imax is not something that can fit in every theatre,’ says AMC’ s Rash. ‘That starts to diminish it. And we wouldn’ t want more than 12 to 14 Imax movies. We want Imax to pick blockbuster films and make them bigger.’
That makes international expansion critically important. The company estimates it has penetrated only 15% of its potential market overseas (versus 40% on this continent). But the lucrative strategy is tougher to execute abroad, in countries like Italy and France, where the movie theatre business is still fragmented and largely family-owned.
Imax’ s efforts to squeeze its big-screen experience into multiplex boxes have had their share of detractors. Last summer, the Internet buzzed with gripes about Imax ‘whoring out’ its brand to chains and tricking people into paying a premium for what was hardly the immersive thrill its name implied. There was even a boycott movement. But the backlash has died down. O’ Reilly says that when he talked to exhibitor partners, they told him to do nothing. ‘We don’ t have people asking for their money back, and we’ re selling lots of tickets’ ‘ is what he heard. An analyst agrees with that advice — people vote with their wallets. ‘If the experience was disappointing, it should show up in ticket sales and in consumer research.’
What may turn into a bigger issue — or at least a costly distraction — is a brewing war with Cinemark Holdings, the third-biggest U.S. theatre chain. Cinemark is introducing its own big-screen technology — dubbed Extreme Digital Cinema, or XD — into its theatres, with 72-foot-wide screens and comfy leather chairs, at prices slightly lower than those at Imax screens. The company has also filed a lawsuit to invalidate two Imax patents. Imax has fired back with a claim that Cinemark stole its trade secrets when the two partnered on an Imax expansion into Latin America in the 1990s. XD, Imax claims, is ‘a bootleg version of the Imax Experience.’ Gelfond’ s reaction to the Cinemark offensive is blunt: ‘Throughout Imax’ s history, we have seen others try to copy or emulate the Imax experience. None have been successful.’
By far, the biggest question revolves around whether Hollywood and Imax can continue to produce an experience that warrants a premium price. For now, most observers believe the company has found the right track, practically stumbled into it, as the combination of movies going digital and Hollywood going for big extravaganzas created an opportunity Imax almost couldn’ t miss. For the foreseeable future, says Brett Harriss, an analyst with Gabelli & Co., ‘the risk to the company is operational. Their challenge is to execute on the backlogs [of theatre orders] and to make sure they get content to put in those theatres.’
That operational challenge falls largely to Gary Moss, who joined Imax last summer in the newly created position of chief operating officer. He sees his job as ensuring the company remains focused and doesn’ t start chasing ‘tangential growth patterns.’
So perhaps it’ s no surprise that tidings of a Disney purchase would have some credibility — the big mouse has long been rumoured as a possible Imax buyer. After saying over the years it’ d make sense for Imax to be part of a studio and twice unsuccessfully peddling the company, Gelfond now insists he has no interest in selling out. ‘As we went through the ups and downs, Brad and I always had a passionate belief we’ d find a formula that would work,’ he says. ‘I feel this phase is well on its way. The question is what will be the next act.’ Imax is venturing into screening live events, and Gelfond muses about ‘going into the home.’ Can the Imax Experience be shrunk to the size of a family room and still credibly bear the Imax brand? Perhaps that’ s the wrong question. What the Imax brass finally realized is that size doesn’ t matter if you don’ t have the economics right. With shareholders watching warily for another stumble and competitors eager to cut in on its action, Imax has to prove it can finally live up to its promise. Memo to Jackson Myers: No more sleeping in.