Imax thinks not-so-big

Smaller screens may mean bigger profits—if viewers don’t revolt

IMAX thinks not-so-bigFor decades, Imax Corp., the little company with the big screens, was a Hollywood outsider. Even as crowds were awed by documentaries about four-storey starfish, movies with stars of the Homo sapiens variety were scarce. But behind the scenes the Imax script has recently undergone a remarkable rewrite. The Mississauga, Ont., company is opening new theatres at lightning speed, while studios are clamouring to bring their biggest films to the Imax screen. This month Imax turned its first quarterly profit in three years, thanks to blockbusters like Monsters vs. Aliens, Transformers and Star Trek. “Three years ago we were knocking on doors in Hollywood saying, ‘Will you please put your big-budget movie on our screen?’ but now the studios are knocking on our door,” says Larry O’Reilly, head of theatre development. The dramatic revival has sent Imax shares up threefold since November, making it one of the hottest stocks on the Toronto Stock Exchange.

But this is Imax, which means it’s always too early to predict a happy ending. So, from the company that brought you shareholder lawsuits, regulatory probes and a string of botched deals, comes the latest plot twist: Imax wants moviegoers to forget almost everything they think they know about Imax. In its bid for Hollywood stardom and sustainable profits, the company and its theatre-chain partners have taken the Imax brand to the editing room. Gone is the steep seating traditionally found in Imax cinemas; many new Imaxes are just retrofitted multiplexes with the first few rows removed. The huge (and hugely expensive) Imax film projectors are giving way to the digital variety. And as for those ginormous screens, in some new theatres they’re just 25 per cent larger than the plain ones next door. Where the company once marketed itself under the slogan “Think Big,” the focus now is on Imax as a cut above conventional cinemas. In essence, Imax is transitioning from offering a seven-storey novelty experience that can be so overwhelming that some find it distracting, to more of a premium viewing experience—at a premium price—in the same way that Dolby is synonymous with superior sound. “We’re selling way more movie tickets to Imax theatres than ever before so we believe we’re actually building the brand,” says O’Reilly.

It’s a high-stakes rebranding effort with the potential for huge gains, but it could just as easily damage the company’s reputation with audiences if it’s not done right, say experts. Some warn that may already be happening. “When you ask people what they think of Imax, they say that means a giant screen,” says James Hyder, editor and publisher of LF Examiner, a magazine that analyzes the large-format theatre industry. “They’re not being straightforward with people about their product, and eventually people are going to figure that out.”

Putting an established brand under the knife, especially one like Imax that’s typically forged at a young age on school trips, is always risky, and the consequences were plain to see in May. Aziz Ansari, a Los Angeles comedian, paid an extra five dollars to see Star Trek at a recently opened Imax theatre in Burbank, Calif. Later that day he blogged about his experience: “IMAX is whoring out their brand name and trying to trick people.” Ansari’s call for a boycott of Imax spread like wildfire across other blogs and news sites. One disgruntled viewer created an online map to distinguish what he called LIEMAX theatres—those with smaller screens—from the real thing. In online comments, countless people chastised the company for not coming clean to prospective theatregoers about the smaller screens, and CEO Richard Gelfond briefly became the corporate villain de jour. It would be easy to dismiss much of the vitriol as yet another anonymity-fuelled cyber pile-on, except that even Roger Ebert, the movie critic, and Frank Marshall, who produced the Indiana Jones movies, have also blasted the company. “Don’t spend your money for this,” Marshall wrote on his Twitter page in June.

The latest uproar comes just as Imax seemed to have found its Hollywood groove. In 1967 Imax pioneered movie technology with its 70 mm film (traditional movies used 35 mm film) and big screens, building its first permanent theatre at Toronto’s Ontario Place. But as the company rolled out theatres in other public spaces, it longed for mainstream success. So in 1994 two New York investment bankers, Gelfond and Brad Wechsler, bought the company, took it public, and soon began to talk up Imax’s prospects. In 1999 Gelfond predicted that within a decade Imax would have 500 theatres around the world.

As recently as 2007, with fewer than 300 theatres, it looked like Imax had no hope of reaching that goal. Nor had film directors come to embrace Imax in any big way. What’s more, Imax had suffered numerous self-inflicted wounds. The company failed to sell itself on two occasions, at one point plunging into penny stock territory. (This week the shares hit $10.40.) Securities regulators were sniffing around, and Imax was twice forced to restate its earnings. The company still faces class action lawsuits from those debacles. With its credibility shot, the analysts at big Bay Street and Wall Street brokerages who once touted the Imax story tuned out.

Yet, while all that was going on, Imax was quietly remaking itself. It developed a technique to digitally remaster movies shot with regular cameras into the Imax format. It also spent millions developing digital projection technology, which it unveiled last year. The move slashed costs dramatically. A feature-length film print that might have cost $60,000 per cinema before could now be crammed onto a hard drive for no more than $300.

At the same time the company overhauled its business model. Rather than just sell its projectors, Imax began signing joint venture agreements with major cinema chains like AMC and Regal Cinemas. Imax supplies the projectors, while the chains pay to retrofit the theatres. In return, Imax gets 45 per cent of the related box office and concession sales. As a result, Imax’s network of theatres is exploding. This year the company expects to have 319 commercial theatres in 42 countries (in addition to 121 institutional theatres in museums and the like)—up 78 per cent in just two years. It took Imax 25 years to open its first 100 theatres, yet that’s how many are expected to debut this year alone.

Hollywood has taken notice. By the end of this year Imax will have shown 13 major studio releases, including The Dark Knight, which grossed US$65 million in Imax theatres. Still to come are heavyweights such as a 3-D retelling of A Christmas Carol, staring Jim Carrey, and James Cameron’s 3-D feature Avatar. The strategy is paying off in spades. In the second quarter revenue nearly doubled to US$40.9 million, earning the company US$2.5 million in profit compared to a US$12-million loss last year. “Imax is the premium product in the industry so they can cherry-pick the best movies,” says Brett Harriss, an analyst at Gabelli & Company in New York.

But this begs the question: is the Imax brand being watered down in the pursuit of short-term profits? Some, like Hyder, think so. He compares Imax’s strategy to Coca Cola’s ill-fated shift to New Coke, when the beverage giant altered its tried-and-true formula after conducting extensive consumer research. Three months later customer backlash forced it to scrap the new drink and bring back the original as Coke Classic. To avoid a repeat in the theatre world, Hyder says the company should brand the smaller theatres as Imax Digital or Imax Multiplex.

Yet, for all the online histrionics spawned by Ansari’s blog post, the fallout hasn’t reached the box office. The small-screen scandal got lots of press, says Harriss, but “people are still lining up outside the door on these big movies to see them in Imax.” That could be because they have never seen an Imax movie in all its seven-storey glory. But as the company is desperate to point out, even its stripped-down theatres outshine regular cinemas. The screens may be smaller, but under the company’s patented theatre layout, they give the effect of being larger than they really are. Imax uses dual projectors, instead of just one, to throw a brighter picture on the screen. And its theatres are outfitted with Imax’s powerful audio system, built right into the screen.

Still, O’Reilly says the company has taken note of the criticism and is working with theatre operators to “educate” moviegoers about what they’re getting in return for their Imax ticket. Because even as Imax tries to reposition itself from the company known for its giant screens to one offering an overall premium movie experience, it knows its future hangs in the balance. “The most valuable asset we have as a company is the value of the brand,” says O’Reilly. Lose that, and Imax could be back for a repeat engagement as a corporate box-office bomb.

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