Imax bets its future on Hollywood

By SHIRLEY WON
Friday, January 26, 2007

Richard Gelfond is eager to see Hollywood blockbusters like "Spider-Man 3" and "Harry Potter and the Order of the Phoenix" hit the silver screen later this year.

These so-called franchise movies could spur cinema operators to move faster to install Imax Corp.'s giant screens, says Gelfond, its co-chief executive officer.

"When people believe there are very strong films coming, it's kind of an incentive to sign with Imax, and install quickly so they can be open in time for the next film," he said in a recent interview from the company's executive offices in New York.

Imax is hoping that more cinema operators will embrace its big-screen format as it gears up to pitch its new joint venture strategy, whereby it supplies the equipment for free in exchange for sharing box office revenue. "This is an opportunity to grow faster," Gelfond said. "I would be surprised if we didn't announce our first joint venture in the first quarter."

Imax, which is focusing on bringing Hollywood films to commercial theaters instead of sticking to educational institutions such as science centers and museums, is on the hot seat to grow and boost its battered stock price after failing to find a buyer last year.

Most analysts see potential in joint ventures to expand the Imax theater network because the giant-screen maker is taking on the risk as opposed to its traditional business of leasing or selling its systems.

But some warn there could be more uncertainty about Imax's financial results in the short term if the company begins to book more revenue as it is earned instead of getting a big wad of cash up front.

"There is probably going to be a higher degree of volatility in earnings in the near to medium term," said analyst Michel Kelman of Bala Cynwyd, Pa.-based Susquehanna Financial Group. "They will start building a recurring revenue stream, but that takes time."

Gelfond disagrees that there will more uncertainty with the company's financial results under the new strategy. He said Imax still has a backlog of deals for its traditional installations that stood at 73 at the end of the third quarter. And this month, Imax announced two more deals for three systems under its traditional leasing model.

He sees growth potential in a joint venture strategy following a pilot project that began in 2005 with U.S.-based AMC Entertainment Inc. to convert four existing theaters to the Imax format.

AMC won't comment on the joint ventures, but Gelfond said: "I think AMC is pleased with the way they have performed."

Imax, which has its formal headquarters in Mississauga, Canada, has 286 screens in 40 countries. Imax mostly leases its big-screen technology to cinema operators who pay an upfront fee of about $1.5-million (U.S.) and get almost all of the box office revenue.

Under the joint venture strategy, Imax provides and pays for the equipment, at a cost of about $700,000. Theater operators would then spend about $250,000 to retrofit an auditorium. Both parties share the box office returns under a negotiated formula after they recoup their investments.

While Imax prefers to do joint ventures at existing theaters because they have a box office track record, it will consider them for new movie complexes if the location is right, Gelfond added.

Robert Bucksbaum, owner of box office tracker Exhibitor Relations Co., warned that joint ventures could face a tough sell in the near term despite the appeal of the Imax experience. U.S. cinema owners have already spent a fortune in recent years renovating their theaters with bells and whistles like stadium seating and better sound to compete against home theater systems and pay-per-view, Bucksbaum said. "It used to be that you would put up a box and a few seats and anybody would go to the movies."

But Gelfond said he doesn't anticipate a big problem since Imax is putting up most of the money.

Imax plans to limit its proposed joint ventures to cinemas in North America, Western Europe and Japan. It is targeting deals for 20 theaters this year; 30 in 2008; 40 in 2009; and 50 in 2010.

Signings should accelerate when the company launches digital projection in late 2008, Gelfond added.

Going digital, he said, will mean dramatically lower print costs for studios when they convert their movies into the big-screen format, and should motivate them to increase the number of films they show in Imax theater. It means that 10 Hollywood films could be shown in a year instead of six or seven, Gelfond said.