Large-format Imax thinks small for biz plan

Large-format Imax thinks small for biz plan

”Fantasia 2000” generated $50 million in domestic box office for Disney, but didn’t yield a profit.

Somewhere back in prehistoric time, about 1970 I believe, Terry Southern published his minor classic “Blue Movie.” The through line went something like this: Grubby film producer schemes to create big-budget, big-star porno movie.

Here’s the beauty part — only one print would be made, able to be seen in only one theater, located in the mountain fastness of Liechtenstein, at super premium ticket prices. The producer/distributor/exhibitor would reap wealth beyond the dreams of human avarice while tourism to Vaduz would explode.

Until very recently I had assumed that this brilliant method of reaching filmdom’s holy grail — complete control of the chain of distribution — was the fanciful product of one of Southern’s latenight locoweed sessions, not a carefully constructed business plan.

However, my investigation into Imax Corp. has caused me to suspect that “Blue Movie” may now be a Harvard Business School textbook case.

Imax has emerged as essentially the sole supplier of large-format motion picture cameras, projectors and sound systems. It has built the Imax brand into a near-generic term for the giant screen experience, vanquishing such competitors as Showscan and Iwerks in the process.

The history of the entertainment business, from Thomas Edison to Samuel Arkoff, is replete with would-be monopolists seeking to own every aspect of the production and distribution of a particular showbiz niche. Aside from those keynote addresses to industry confabs extolling the virtues of a competitive marketplace, scratch a mogul and you will discover the heart of a monopolist.

Imax Corp., under the leadership of co-CEOs Brad Wechsler and Rich Gelfond, is clearly not an exception to this rule. Since this duo acquired working control of Toronto-based Imax in 1994, they have achieved a share of market in large format that would make Bill Gates blush, “more than 90% of the industry,” per a recent Prudential Securities bullish report.

Imax designs and manufactures the projection and sound systems for these giant-screen — up to 80 feet high — theaters, licensing its technology and its name, while leasing the equipment on lucrative, bordering on extortion, terms.

What they don’t do anymore is own the theaters, retaining just nine in North America out of nearly 250 worldwide. What they also don’t do, any more often than they have to, is make the movies themselves, preferring to let other brave souls pony up the $6 million to $12 million negative cost per pic.

Now this number may strike a studio head of production as the stuff of dreams. Add that, with rare exception, advertising costs are minimal. Next consider that playoff periods of one year or more are the norm and that the ticket price for a 40-minute film is the same or higher as for a two-hour movie.

Even with a generous fill-and-spill, we’re talking eight-plus showings a day. Those struggling with the economic realities of today’s movie production and distribution world may understandably ask, “Where has this business been all my life?”

The cold shower comes when our would-be Imax filmmaker learns that the box office split with the theater is typically 80/20 — in favor of the venue. These retention rates put the $75 million domestic box office for “Everest” in just two years of release in perspective. Film rentals of about $15 million — and essentially no ancillaries — do not a blockbuster make. As for the modest P&A, it is only the A that is modest. Single Imax prints run $20,000 in 2-D and $40,000 in 3-D for a 40-minute film, although the location typically fronts these costs.

Before you jump to the conclusion that owning and operating an Imax theater must be a great business, let me throw in a few more numbers. The space required for an Imax theater and the cost of equipping it –around $3 million paid to Imax Corp. over a 10-year period — effectively makes nearly every commercial multiplex Imax location unprofitable for the operator. It was these commercial locations, as opposed to the museum and other institutional sites that have always been Imax’s bread and butter, that were heralded as the dawn of a new large-format era several years ago.

The experience of most of the leading exhibition chains that have installed an Imax theater in one of their megaplexes has been discouraging, with just a few Sony locations the prominent exception.

And from the producer/distributor’s standpoint? A number of studios, most notably Sony in the Peter Guber era, have tried their hand at making Imax pics pay, with little success. My informal research has convinced me that the current financial structure of this unique and desirable medium must change if it is to become a business for anyone but Imax, or for that matter for Imax over the long run.

Disney’s “Fantasia/2000” was thought by many to signal the advent of just such salutary changes. Indeed the Mighty Mouse was able to dictate unprecedented terms for the recently completed four-month run of the picture, generating more than $50 million in domestic B.O. But even those better terms and that number, plus more modest foreign ducat sales, hasn’t yielded a profit for Disney — although they may have created a relatively low-cost, high-visibility teaser-trailer campaign for the upcoming 35mm version.

Doesn’t all of this add up to clever strategizing on the part of Imax? Why build a monopoly if not to leave the riskier, less profitable parts of the business to others, while focusing your attention — and your capital — on those sectors where you can extract a monopolist’s profit? Indeed, Imax Corp.’s 1999 P&L sports pre-tax profit margins of 21%. (The figures for 1998 were marred by a $19 million write-down of several of the company’s own films, occasioning the current de-emphasis on inhouse production.) Revenue growth has been steady, if unspectacular, at nearly 20% annually for the past three years.

While the large-format business may be problematic for the producer and the exhibitor, one assumes that the Imax shareholder has reaped a solid reward, thanks to his management cornering the market in this intriguing niche of the business. One would be wrong. Imax’s stock hit 19 in mid-1996, and closed May 30 at 21. During this four-year stretch, the Nasdaq Index has almost precisely tripled.

Is Wall Street missing a good bet? I don’t think so. Perhaps the analysts are bothered by the nearly $5 million in cash compensation paid to Wechsler and Gelfond each over the past three years. Just in case the stock ever does go up, Imax’s co-CEOs are covered, with nearly a million shares apiece under option.

However, Wall Street is not overly concerned with excessive executive compensation these days. The reason for the Street’s lack of interest in the Imax stock lies, more probably, in the company’s flawed business strategy and cloudy long-term outlook. It was King C. Gillette who discovered, as every first-year business school student knows, that giving away the razors and earning a large profit on the razor blades is the best path to riches. But Imax has priced the razors — its cameras and projectors — in a way that severely limits its, or anyone else’s for that matter, ability to sell blades and make money.

As for that cloudy future, its name is — guess what? — digital. Digital large-format technologies under development could lower production, distribution and exhibition costs, while heightening the viewer’s experience.

According to Ben Stassen, CEO of nWave Pictures, a leading producer-distributor of inventive large-format movies, “The future of this industry will be digital, or there won’t be one.” Now Stassen, in common with most large format players, has labored for years in Imax’s shadow, and might be regarded as less than perfectly objective.

Imax, while developing its own digital projection system, will face digital large-format competition without its potent patent protection. In a DVD/home theater world, there should still be a growing market for a format that delivers a uniquely theatrical experience. Whether the audience will care if that experience carries the Imax brand name appears to be an open question.

(Roger Smith, a former Warner Bros. exec, now heads the Gotham consulting firm Roger Smith & Co.)

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