Global Economics

Imax's China Deal Boosts Its Asia Expansion


Imax has been winning over Hollywood. Now a partnership with Chinese movie studio Huayi will likely help its expansion efforts across Asia

It took years for Imax (IMAX) to convince Hollywood studios and theater-chain owners that people would pay more than the standard movie-ticket prices to see blockbusters on screens five stories high. Once exclusively used by museums showing nature documentaries, Imax's large-format version has become a big draw for big-budget titles such as Star Trek and Monsters vs. Aliens. Now the company is betting it can sell audiences on more than just Hollywood fare.

On June 16, Imax announced a three-film deal with Huayi Brothers, China's biggest studio, giving Imax its first foreign-language movies. Aftershock, director Feng Xiaogang's disaster drama about a girl who survives a devastating earthquake, is slated for release in July 2010 and will show at 18 Imax theaters in China, as well as at select theaters in other parts of Asia and North America.

Finding a Chinese partner was crucial for Imax's expansion plans in Asia. The alliance with Huayi should also help Imax in China when its films aren't selected among the 20 foreign films that the Chinese government permits domestic theaters to show each year. "There's no guarantee that the 10 to 12 movies we show would make it into China," says Imax CEO Richard Gelfond. In fact, that happened last year with The Dark Knight, the Batman blockbuster starring Christian Bale and Heath Ledger. Now if China says no to an Imax film, theaters will still have locally produced Imax movies.

Not long ago, the Ontario company (based in Mississauga, a city on the outskirts of Toronto) made most of its revenues leasing projectors and technology to theaters. That changed in 2002 when Imax began converting 35mm Hollywood films to its own 70mm format. Back then the biggest hurdle was signing on studios and theater-chain owners. Hollywood studios held out because theater chains weren't on board; theaters were reluctant to pay big sums for new projectors and giant screens until Hollywood offered Imax-format movies.

Winning Over U.S. Theaters

Imax gradually made headway. The turning point came in late 2007 when Imax and AMC Entertainment, a Kansas City (Mo.)-based chain that operates more than 4,600 screens, announced a joint venture for 100 new Imax theaters. The venture was the first large-scale adoption of Imax's new digital projectors. The projectors would prove crucial in lowering the company's film-production costs. Imax also tossed out the old playbook and agreed to pay part of the cost of building new theaters in return for a 10% to 15% cut of box-office sales. And other theaters became convinced that building Imax theaters would boost their attendance figures, not simply cannibalize their theaters showing movies in the standard 35mm format.

Thanks to the switch to digital projectors, Imax now invests a lot less on reformatting films. The company used to spend $4 million, plus $25,000 to $45,000 per print, depending on whether it was 2D or 3D. New technology has reduced reformatting costs to about $1.5 million per movie, and that of creating a digital copy on a hard-disk drive to $1,000. "If we had to pay those print costs, the China partnership wouldn't have been feasible," says Gelfond.

The rollout of digital theaters is proceeding at a rapid clip. As of March, Imax boasted about 200 theaters worldwide that feature Hollywood movies. By the end of the year it expects to add another 40. Imax's biggest market is the U.S., but that market accounted for only a third of the estimated $28 billion in global movie box-office revenues last year. So there's plenty of room for expansion.

By 2012, Imax expects to have 42 theaters in China and plenty more throughout Asia. Imax won't have the same strategy in every country. In developed markets, Imax is forming joint ventures with theater chains, starting off with just a few locations to gauge demand. Last December, Imax opened three theaters with Hoyts Cinemas in Australia, and a fourth is slated for this year. On June 18 it added three theaters run jointly with Japan's Tokyu Recreation, in time for the premiere of Transformers: Revenge of the Fallen. "The idea in Japan is do this small deal, let it run for a while, see what the rate of return on investment is, and see if it makes sense for us to expand the relationship," says Gelfond.

Promising Movie Markets

In emerging markets, Imax is sticking to the traditional practice of leasing projectors. That's because it's harder for the company to rely on independent market researchers in Taiwan, China, India, and other countries that track box-office sales at individual theaters. Of course, those countries also hold the most promise. China's box-office numbers were just $635 million last year—compared with $4.1 billion in the U.S.—but that figure was 30% higher than in 2007, according to New York-based investment bank Morgan Joseph.

India is another market with a lot of potential. Imax already has six theaters there and contracts for four more. In July, it will install its first digital projector in India, at a Mumbai theater run by a unit of the Reliance ADA Group. And if the partnership with China's Huayi Brothers proves profitable, Imax might consider the model for India and its huge Bollywood film industry. "I've started to give it some thought," says Gelfond. "Is there the right partner in India that would commit to enough theaters so it makes economic sense? We're not there yet."

Imax executives are counting on their strategy to work. Since 2005 the company's revenues have dropped 20%, and losses have piled up. Last year, Imax booked a $33 million net loss on an 8% decline in sales to $106 million. Gelfond expects profits this year. Analysts agree. Jeffrey Blaeser, an analyst at Morgan Joseph, predicts Imax could see a profit in the third quarter of this year and end up with a net income of $4 million for the entire year. The company's Nasdaq-listed stock price has jumped 64% this year.

It's not clear whether Imax moviegoers are ready for foreign-language films. The company's picks so far mainly have been family movies and big-budget sci-fi films. And showing only a dozen films a year, as Imax does, has its downside. Some might flop, and movie release delays could throw off theater openings. Imax and Tokyu's theaters in Japan were supposed to open last November with the premiere of the latest Harry Potter movie, but Imax and Tokyu put their plans on hold when the movie's release was delayed. The Imax version of Harry Potter and the Half-Blood Prince is now expected to lag the opening in other theaters by two weeks—meaning Imax won't benefit from opening-weekend buzz. "As long as Imax keeps expanding and choosing the right movies, they should do fine," says Eric Wold, an analyst at San Francisco-based investment bank Merriman Curhan Ford. "But the movie industry is fickle. There's always the risk that consumers suddenly won't want to pay the extra $4 or $5."


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus