Entertainment

Imax's Widescreen Profit Performance


Lots of companies have rebounded from the recession, but few have regained form as quickly as the larger-than-life theater company Imax (IMAX). Box-office sales for films shown on its mega-screens more than tripled over the past two years, to $587 million in 2010. (Imax pockets as much as a third of each ticket's cost.) Shares have risen tenfold since late November 2008. By the end of this year, Imax projects it will have about 600 screens, up from 266 in 2005. That could mean more prosperous times ahead, since Imax says its screens generate nearly five times the revenue of those at a traditional cinema.

There's also the cool factor: Imax's giant curved screens, once best known for showing feel-good nature films at museums, have become among the hottest dates in Hollywood: Top directors such as James Cameron and J.J. Abrams fight to open their special-effects-laden hits at Imax venues to crank up the wow factor. "The benefits to the studio, I'm sure, involve higher ticket prices and having another kind of aspect to publicize. But the real benefit is that it's immersive and massive," says Abrams, who is producing the next installment of Viacom's (VIA.B) Mission: Impossible franchise for an Imax release.

Despite such accolades and the current popularity of Imax's widescreen fare, executives say the company almost failed before plotting a difficult digital rebirth. "We came very close to the financial brink" a decade ago, recalls Chief Executive Officer Richard Gelfond. "We discussed bankruptcy and a recapitalization. For an extended period of time we managed for cash, not growth, and beyond that we had to change the company—just about everything."

Crippled by debt, high costs, and clunky analog technology, Imax twice tried to find a buyer, most recently in 2006. Yet potential suitors doubted the company's ability to move beyond traditional low-return mainstays such as Whales: An Unforgettable Journey, and Imax failed to drum up interest.

The repeated failures turned out, in hindsight, to have been a lucky break, since they forced Gelfond to undertake a transformation that fundamentally altered nearly every aspect of Imaxs business model. One key issue: how to convert Hollywood's 35mm films to Imax's 70mm format. Gelfond says Imax, unable to find anyone with technology to blow up the movies without distortion, had to invent its own process. Imax now has 105 patents, with 72 more pending.

"They are really a pretty simple story of a company with a concept that was 15 years too early," says Michael Pachter, a Wedbush Securities analyst. "They started to build out their theaters before they had the right content ready, the Hollywood movies. Now they have...become the Louis Vuitton of theaters."

A financial restructuring was another critical advance. In 2008 the company penned a deal with theater operators that required far less capital up front from Imax and produced revenues quickly, followed the next year by $131 million in equity offerings. The fresh capital plus short-term borrowings were used to retire all long-term debt.

Tech advances also have helped. Imax's old large-format film reels, which cost up to $40,000 per copy and weighed hundreds of pounds, have been replaced with hard drives that cost a few hundred dollars and offer better-quality digital video. And the cost of building large-format theaters or retrofitting multiplexes with Imax systems has fallen from about $7 million to a few hundred thousand dollars, thanks to lower construction costs and less expensive gear.

Moviemakers say Imax can help lift a film above the weekend multiplex clutter. "What creates the buzz for a movie is when somebody walks out of an Imax theater Tweeting and Facebooking, saying, 'You should see what I just saw,'" says Jon Landau, James Cameron's producing partner on Avatar and a coming sequel. "That's what we're going for."

Imax's first clear sign of mainstream success was with The Matrix Reloaded in 2003, the first time Imax showed a movie simultaneously with regular theaters. "I was looking to do something out of the box; to make our film special," says Dan Fellman, head of domestic distribution at Time Warner's (TWX) Warner Bros. Entertainment, the studio behind the movie. "Whether or not I broke even wasn't the question." The movie grossed $742 million, up from $464 million for the original The Matrix. Although the Imax box-office take was just $14 million, it was enough to prove the format's credibility to Hollywood. It's a different story today: Imax showings generated $242 million of Avatar's $2.78 billion worldwide box office and almost one-quarter of the ticket sales for Tron: Legacy on just 2 percent of the screens showing the film, according to Imax.

The trick now, Gelfond says, is to leverage the Imax brand without diluting it. The company is forming 3net, a cable channel with Sony (SNE) and Discovery Communications (DISCA), and has built a prototype portable Imax theater that could show movies or even live events such as rock concerts at temporary locations. Says Greg Foster, Imax's chairman of filmed entertainment: "If we can provide a piece of our DNA that creates a better experience, then it might make sense to try something new."

The bottom line: Widescreen theater operator Imax, once barely afloat, is riding the current wave of popularity for 3D and special-effects films.

Sterngold is a reporter for Bloomberg News.
White is a reporter for Bloomberg News in Los Angeles.

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