CASE STUDY: Imax

Back in 1997 the CEO of IMAX, Richard L. Gelfond, was sceptical about building a story with Hollywood movie stars into the big screen format. At that time his answer to the criticism of IMAX® films’ missing story was: ‘It is too expensive and risky for us to put all our eggs in one basket and hire a major movie star.’ However, in 2003 new technological achievements have made it possible to show, for example, Matrix Reloaded on the huge screen format. This is not just the projection of the standard theatrical print on an IMAX screen – the film will undergo the patented IMAX DMR (digital remastering) process, which enhances the quality of the image and soundtrack to the huge IMAX 15/70 format. The same has happened to Apollo 13, featuring Oscar®-winning actor Tom Hanks. So though IMAX have been through financial tough times the company now seems to be looking towards a brighter future. The IMAX Corporation The IMAX Corporation is involved in a wide variety of out-of-home entertainment business activities. It designs and manufactures projection and sound systems for giant-screen theatres based on a patented technology. The IMAX Corporation is the world’s largest producer and distributor of films for giantscreen theatres. The IMAX Corporation, together with its wholly owned subsidiaries, is one of the world’s leading entertainment technology companies whose principal activities are: the design, manufacture, marketing and leasing of proprietary projection and sound systems for Imax theatres principally owned and operated by institutional and commercial customers in more than 36 countries (1 September 2003); the development, production, digital remastering, post-production and distribution of certain films shown in the IMAX theatre network; the operation of certain IMAX theatres located primarily in the United States and Canada; and the provision of other services to the IMAX theatre network including designing and manufacturing IMAX camera equipment for rental to film-makers and providing ongoing maintenance services for the IMAX projection and sound systems. The IMAX theatre network is the most extensive large-format network in the world, with 239 theatres operating in more than 36 countries. Of these, 115 are in institutional locations and 102 in commercial locations. While IMAX’s roots are in the institutional market, it believes that the commercial market is potentially larger. To increase the demand for IMAX theatre systems, it is currently working to position the network as a new window for Hollywood event films. To this end IMAX has both developed a technology that allows standard 35mm movies to be converted to its format and is also working to build strong relationships with Hollywood studios and commercial exhibition companies. IMAX theatre systems combine advanced, highresolution projection systems, sound systems and screens as much as eight storeys high (approximately 80 feet) that extend to the edge of a viewer’s peripheral vision to create the audiovisual experience. As a result audiences feel as if they are a part of the on-screen action in a way that is more intense and exciting than in traditional theatres. In addition, IMAX’s 3D theatre systems combine the same projection and sound systems and up to eight storey screens with 3D images that further increase the audience’s feeling of immersion in the film. IMAX believes that its network of 3D theatres is the largest out-of-home, 3D distribution network in the world. History The IMAX system has its roots in EXPO ’67 in Montreal, Canada, where multi-screen films were the hit at the fair. A small group of Canadian film-makers/ entrepreneurs (Graeme Ferguson, Roman Kroitor and Robert Kerr), who had made some of those popular films, decided to design a new system using a single powerful projector rather than the cumbersome multiple projectors used at that time. The result was the IMAX motion picture projection system, which would revolutionize giant-screen theatre. As the IMAX screen is about ten times the size of a conventional movie screen picture quality has to be very good. The camera required is also much bigger than a conventional movie  camera, but for anyone with film experience it is not hard to learn to use. The much acclaimed Fires of Kuwait was nominated for an Academy Award in the Feature Documentary category in 1993. Since the premiere in 1970 more than 700 million people have enjoyed the IMAX® Experience™. In 1977, IMAX was awarded the sole Oscar® for Scientific and Technical Achievement by the Academy of Motion Picture Arts and Sciences. The award recognized IMAX’s innovation in creating the world’s best film capture and projection system as well as IMAX’s acceptance as part of the entertainment mainstream. IMAX Ridefilm: entry and departure Historically, another part of the corporation was the IMAX® Simulation Ride System, which combined giant-screen technology with aspects of an amusement park ride. One of Ridefilm Corporation’s new state-of-the-art projects became reality in 1993. Back to the Future – The Ride, directed by Douglas Trumbull, premiered in June at Universal Studios, Hollywood. This high-tech attraction was considered by entertainment industry experts to be the paradigm for the film experience of the future. The Ridefilm concept consisted of 18- person projection rooms in which the seats are equipped with seat belts and move with the action on the screen. The film is projected on a 180-degree screen, with digital surround sound. IMAX never succeeded in becoming profitable in the Ridefilm business. One of the reasons for that might be that it never reached the critical mass of about 100 cinemas needed in order to support the three or four Ridefilms that must be made each year to make the business profitable. In the fiscal year 1999 IMAX was forced to write off Ridefilm’s assets, resulting in a charge of US$13.6 million. IMAX’s business today Generally speaking IMAX does not own its theatres, but leases its projection and sound systems and licenses the use of its trademarks. IMAX derives revenue principally from theatre system lease agreements, maintenance agreements, film production agreements and distribution of films. In 2002, IMAX introduced a technology that can convert live-action 35mm films to its 15/70-format at a modest incremental cost, while meeting IMAX’s high standards of image and sound quality. IMAX believes that this proprietary system, known as IMAX DMR (Digital Re-Mastering), has positioned IMAX theatres as a new release window or distribution platform, for Hollywood biggest event films. As of 31 December 2005, IMAX, along with its studio partners, had released 11 IMAX DMR films. In 2005, IMAX released four films converted through the IMAX DMR process contemporaneous with the releases of the films to conventional 35mm theatres, rereleased one IMAX DMR film that had previously been released in 2004, and released one film made specifically for IMAX theatres. In March 2003, IMAX introduced IMAX MPX, a new theatre projection system designed specifically for use by commercial multiplex operators. The IMAX MPX system, which is highly automated, was designed to reduce the capital and operating costs required to run an IMAX theatre while still offering consumers the image and sound quality of the trademarked experience viewers derive from IMAX theatres known as ‘The IMAX Experience’. During 2005, IMAX signed agreements for 31 MPX theatre systems from North American and international commercial theatre exhibitors. Theatre system leases IMAX’s system leases generally have 10–20-year initial terms and are typically renewable by the customer for one or more additional ten-year terms. As part of the lease agreement IMAX advises the customer on theatre design and custom assemblies and supervises the installation of the system; provides training in using the equipment to theatre personnel; and for a separate fee provides ongoing maintenance of the system. Prospective theatre owners are responsible for providing the location, the design and construction of the building, the installation of the system and any other necessary improvements. Under the terms of the typical lease agreement the title to all theatre system equipment (including the projection screen, the projector and the sound system) remains IMAX’s. IMAX has the right to remove the equipment for non-payment or other defaults by the customer. The contracts are generally not cancellable by the customer unless IMAX fails to perform its obligations. The contracts are generally denominated in US dollars, except in Canada and Japan, where contracts are generally denominated in Canadian dollars and Japanese yen, respectively. The typical lease agreement provides for three major sources of revenue: (i) initial rental fees, (ii) ongoing additional rental payments and (iii) ongoing maintenance fees. Rental payments and maintenance fees are generally received over the life of the contract and are usually adjusted annually based on changes in the local consumer price index. The terms of each lease agreement vary according to the system technology provided and the geographic location of the customer. IMAX films IMAX produces films that are financed internally and through third parties. With respect to the latter, IMAX generally receives a film production fee in exchange for producing the films and is appointed the exclusivedistributor of the film. When IMAX produces films it typically hires production talent and specialists on a project-by-project basis, allowing IMAX to retain creative and quality control without the burden of significant ongoing overhead expenses. Typically the ownership rights to films produced for third parties are held by the film sponsors, the film investors and IMAX. IMAX is a significant distributor of 15/70 format films, with distribution rights to more of these films than any competing distributor and generally distributes films that it produces and it has acquired distribution rights to films produced by independent producers. As a distributor, IMAX generally receives a percentage of box office receipts. International marketing IMAX markets its theatre systems through a direct sales force and marketing staff located in offices in Canada, the United States, Europe, China and Japan. In addition, IMAX has agreements with consultants, business brokers and real estate professionals to find potential customers and theatre sites for IMAX on a commission basis. IMAX has experienced an increase in the number of commercial theatre and international signings since 1995. The commercial theatre segment of IMAX’s network is now its largest. As at 31 December 2008, 38.0 per cent of all theatres are outside North America. IMAX’s institutional customers include science and natural history museums, zoos, aquaria and other educational and cultural centres. IMAX also leases its systems to theme parks, tourist destination sites, fairs and expositions. See Table 1 for an outline of IMAX’s operations by area.

For information on revenue breakdown by geographic area see Table 2 (revenue by geographic area is based on the location of the theatre). Table 2 also shows that IMAX has been in a clearly negative financial development during the last three years. During the last three years IMAX has lost US$77.3 million. No one customer represents more than 5 per cent of IMAX’s installed base of theatres. IMAX has no dependence upon a single customer, or a few customers, the loss of any one or more of which would have a material adverse effect on IMAX. As of 31 December 2008 IMAX had 326 employees, excluding hourly employees at company-owned and operated theatres. IMAX enters the Chinese market The first IMAX projection system in a theatre in China was installed in December 2001 and 13 additional IMAX theatre systems are scheduled to be installed in China by 2008. China is now IMAX’s second-largest market (after the United States) and fastest-growing market. However, the geopolitical instability of the region comprising China, Taiwan, North Korea and South Korea could result in some economic risks. There are currently 81 IMAX theatres scheduled to be operating in Asia by 2014, including more than 40 scheduled to be open in China by 2012. For example in September 2009, IMAX Corporation and Guangzhou Jinyi Film & Television Group, Co., Ltd, a leading entertainment developer and exhibitor in China, announced an agreement to open four IMAX theatres in China. The first three installations were scheduled to be completed during the second half of 2011 in the cities of Chongqing, Tianjin and Shenyang. A fourth installation is scheduled for 2012 in a yet-to-be determined ocation. Each IMAX theatre will be part of a newly constructed multiplex, and each will utilize IMAX’s digital projection technology. Established in 2004, Guangzhou Jinyi Film owns 19 multiplexes with 150 screens in Guangzhou, Beijing, Tianjin, Xiamen, Fuzhou, Wuhan, Suzhou, Shenzhen and Chongqing, in addition to other affiliated cinemas. Guangzhou Jinyi Film will show both Hollywood movies and mainstream Chinese films. The four-theatre deal is the second multitheatre announcement between IMAX and a Greater China area exhibition company in three months, following the June agreement between IMAX and Chinese film studio Huayi Bros to release mainstream Chinese films to IMAX theatres in China and other parts of Asia. Competition in the industry The out-of-home entertainment industry is very competitive, and IMAX faces a number of challenges. IMAX competes with other large-format film projection system manufacturers as well as, indirectly, conventional motion picture exhibitors. IMAX competes with a number of manufacturers of large-format film projection systems, most of which utilize smaller film formats, including eight-perforation film frame, 70mm and ten-perforation film frame and 70mm formats, which IMAX believes deliver an image that is inferior to the IMAX experience. As already mentioned, the IMAX theatre network and the number of 15/70 format films to which IMAX has distribution rights are substantially larger than those of its competitors, and IMAX DMR films are available exclusively to the IMAX network. IMAX’s customers generally consider a number of criteria when selecting a largeformat theatre, including quality, reputation, brand name recognition, type of system, features, price and service. IMAX believes that its competitive strengths include the value of the IMAX® brand name, the quality and historic up-time of IMAX cinema systems, the number and quality of 15/70 format films that it distributes, the quality of the sound system in the IMAX theatre, the potential availability of Hollywood event films to IMAX cinemas through IMAX DMR technology and the level of IMAX’s service and maintenance efforts. Nearly all of the best performing large-format theatres in the world are IMAX’s. In addition to existing competitors, IMAX may also face competition in the future from companies in the entertainment industry with new technologies and/or substantially greater capital resources. IMAX faces competition from a number of alternative motion picture distribution channels such as home video, pay-perview, video-on-demand, DVD, and syndicated and broadcast television. IMAX competes for the public’s leisure time and disposable income with other forms of entertainment, including sporting events, concerts, live theatre and restaurants. Furthermore, the out-of-home entertainment industry in general is undergoing significant changes. Primarily due to technological developments and changing consumer tastes, numerous companies are developing, and are expected to continue to develop, new entertainment products for the out-of-home entertainment industry, which may compete directly with IMAX’s products. The motion picture exhibition industry is in the early stages of conversion from film-based to electronicbased media. IMAX is similarly in the early stages of developing a digital projection system that can be utilized in IMAX theatres. In recent years, a number of companies have introduced digital 3D projection technology. According to the National Association of Theater Owners there are approximately 1,700 conventional-sized screens in US multiplexes equipped with digital 3D systems. However IMAX believes that its IMAX brand name and its IMAX

DMR technology, including its patented theatre geometry, differentiate it significantly from other 3D presentations. Until now the IMAX theatres have outperformed the conventional theatres on a per-screen revenue basis. However, the competitive risks could include the need for IMAX to raise additional capital to finance remanufacturing of theatre systems and associated conversion costs, capital that may not be available to IMAX on attractive terms. The commercial success of IMAX’s products is ultimately dependent on consumer preferences. The out-of-home entertainment industry in general continues to go through significant changes, primarily due to technological developments and changing consumer tastes. Numerous companies are developing new entertainment products for the out-of-home entertainment industry and there are no guarantees that some of these new products will not be competitive with, superior to or more cost-effective than IMAX’s products. Newest development At the end of September 2009, IMAX Corporation and Sony Pictures announced that the highly anticipated motion picture Michael Jackson’s THIS IS IT would be released for a special run in select digital IMAX(R) theatres worldwide during the film’s limited two-week engagement in thousands of theatres globally starting on 28 October 2009. THIS IS IT will be digitally remastered by the use of IMAX DMR technology. The crystal-clear images coupled with IMAX’s customized theatre geometry and powerful digital audio create a unique environment that will make audiences feel as if they are in the movie. Chronicling the months from March through to June 2009, the film is produced with the full support of the estate of Michael Jackson and drawn from more than one hundred hours of behindthe-scenes footage, featuring Jackson rehearsing a number of his songs for the show, that never took place because of his death on 25 June 2009.

 
 
 
 

What are the main reasons for the failure of IMAX ride film? 

Can Imax's score competencies be transferred to the marketing of high-volume commercial products? Which types of products could these be ?

What are the possibilities of growing the IMAX business with the new IMAX MPX system combined with their new IMAX DMR technology, which enables Hollywood studios to digitally remaster their films into IMAX's 15/70?

In 2011, a wholly-owned subsidiary, IMAX China, was formed. What are the advantages and disadvantages for IMAX of this entry mode initiative?

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Answer rating: 100% (QA)

Main reasons for the failure of IMAX ride film High cost and complexity Building and maintaining IMAX Ridefilm theaters was expensive requiring specialized equipment and infrastructure This limited th... View the full answer