Imax at the climax

12 December, 2009

Sept. 30 was a huge day for Imax, and that was the morning Jackson Myers chose to sleep in. “I was in bed, and suddenly these calls are coming in with people yelling that I have to get a release out.” Apparently, the Walt Disney Co. was acquiring the giant-screen maker for US$1.5 billion, and Myers, Imax’ s director of corporate communications, knew nothing about it.

It turned out there was nothing to know: the press release was a hoax, and not a very good one. According to SEC allegations, a Wall Street broker looking to jack up the share price had cut and pasted new paragraphs into a Disney release announcing its (real) acquisition of Marvel Entertainment. But the fact that many investors bought it — sending Imax shares up sharply in pre-market trading — attests to a new chapter in the meandering, mishap-filled saga of Canada’ s best-known film company.

Not so long ago, the idea of someone paying that kind of scratch for Imax would have been laughed off the wires. Its eight-storey-high movie screens with immersive visuals and sound were the embodiment of the better-mousetrap fallacy — a great technology that no one could figure out how to mass-market profitably. The company, based jointly in Mississauga, Ont., and New York City, had been disappointing shareholders for decades as one business model after another failed to pan out.

In the past two years, however, a combination of smart strategy and dumb luck have spawned a dramatic turnaround that suggests there may be a real business here after all. Imax’ s revenue jumped 54% in the first three quarters of 2009 as it added theatres at a sizzling pace — two or three a week, as far away as Japan and Australia. After two profitable quarters, the company is on track to reach $150 million in sales in 2009 (up from $106 million a year ago) and notch its first year in the black after three losing ones. Share price? Almost quadrupled this year.

These stats testify to the power of Imax’ s new formula: converting Hollywood blockbusters to its more vivid and immersive format, then screening them in multiplexes fitted out with bigger screens. In essence, Imax has decided to scale itself down to Hollywood’ s size, descending from the lofty heights of offering a truly unique viewing experience to a merely “premium” one. CEO Richard Gelfond explains the strategic revamp this way: “In the old days, we told the studios, â??You have to shoot with Imax cameras,’ and we told exhibitors, â??You have to build Imax theatres.’ Now, instead of telling them to get in our business, we got in their business.”

The epiphany came at a fortuitous time. Hollywood has been trying to boost its “wow” quotient as it struggles to lure consumers away from their giant plasma TVs running Blu-ray Discs. More movies released in digital 3-D — at higher ticket prices — are growing box-office revenues despite flat attendance. And Imax takes the game a notch higher. Its screens are bigger (though only by one-sixth in some theatres) and its picture and sound more vivid (though it’ s merely digitally remastered film footage). But if you’ re going to leave the house to see a movie like James Cameron’ s upcoming 3-D fantasy Avatar — the apotheosis of the kind of high-tech tentpole flick Hollywood is betting on these days — you might as well get the full effect, even if it costs an extra five bucks.

Or so the industry hopes. Hollywood, of course, has tried other revitalization tactics (remember indie cinema?) that only worked for so long — and so has Imax. Over it’ s 40-year history, the company has teased the market with several bouts of profitability before inevitably slumping back into losses. Its recent success has brought accolades from analysts but also sharper attention from rivals, one of which is now suing Imax in an effort to invalidate its patents. And while the company’ s stock has soared, it’ s still far below its record high, suggesting investors remain skeptical that this latest script will have a happy ending.

The AMC complex on the western outskirts of Mississauga — your standard suburban multiplex surrounded by big-box stores — is a potent reminder of how much smaller and pedestrian the experience of seeing movies on “the big screen” has become over the years. The shopping mall-sized building has 24 auditoriums ranging from two 450-seaters to ones a third that size — not much bigger than an upscale home theatre.

Unbeknownst to the crowds, however, one of the big “boxes” is an Imax demo site — the place where studio heads, film directors and exhibitor reps come to see what their movies would look like when tweaked for the Imax format and shown on a bigger screen. Compared to the massive canopies facing steeply tiered seats in custom-built Imax venues at theme parks and museums, this is underwhelming: The screen is just 15% bigger than a regular one and is shifted forward 16 feet where a few rows of seats have been removed. But Larry O’ Reilly, executive vice-president of theatre development, insists this “theatre geometry” makes all the difference, because by filling more of viewers’ field of vision, the image appears to be double the size.

O’ Reilly, a 15-year veteran of Imax who has “ridden the roller coaster” of the company’ s changing fortunes, has given more than 200 demonstrations here in the past two years, capped with the screening of a trailer reel. Since 2002, the company has been digitally remastering Hollywood movies so they could play in its theatres, boosting contrast and brightness, remixing the soundtrack for its sound system, and cleaning up any imperfections in the footage. “A tiny dot on a regular screen looks like a blotch on an Imax screen,” says O’ Reilly. The result, he says, blows away his visitors. He recalls a few years back showing some Spider-Man footage converted to Imax to director Sam Raimi, in hopes of securing the sequels for the format. “As we’ re walking out of the theatre, he’ s saying, â??In Imax, every frame is a postcard. You can mail it home!” (Spider-Man 4 has already been booked for an Imax release in the summer of 2011.)

While the demo may impress the directors, what sells exhibitors is the math. A brand new, full-size Imax theatre costs $5 million to $8 million to build; converting a multiplex auditorium to Imax runs $1.5 million. Slashing that upfront investment has galvanized Imax’ s theatre expansion. The number of Imax theatres showing mainstream movies has jumped more than 75% in just two years. By the end of 2009, the company expects to have 440 theatres worldwide, three-quarters of them showing commercial fare. That’ s dramatic growth, considering Imax eked out fewer than 100 screens in the first 25 years of its existence.

Founded by four Canadian filmmakers and inventors who debuted their large-screen technology at the 1970 Expo in Osaka, Japan, Imax has long been known for wowing families with journeys through underwater worlds and mountain panoramas. Everyone agreed that Imax’ s super high-resolution 70-millimetre film produced stunning results, but the cameras and projection systems, let alone the theatres, were very expensive. What’ s more, there weren’ t enough venues to justify the investment for filmmakers, forcing Imax to fund its own productions. “We’ d spend $8 million to $10 million to make a documentary, and there was a 25% chance that we’ d recoup that capital,” says O’ Reilly. “But we did it because we had to sell theatres,” and you can’ t do that without content.

Enter Gelfond and Brad Wechsler, two Wall Street investment bankers, who bought the money-losing company in 1994 with the goal of reorienting it to screening more commercial movies and expanding its presence beyond institutions. It seemed to work. Within three years, the co-CEOs doubled Imax’ s revenues by leasing its technology to multiplexes that were spreading like a pandemic around North America. The duo appeared set for a quick flip, but the plan didn’ t pan out: the theatre expansion spree ended in a massive slump that put several of the biggest exhibitors in bankruptcy protection. With its clients broke, Imax saw its shares, which had peaked above $30, dwindle to penny-stock status by the fall of 2001. When Gelfond and Wechsler tried to sell the company in 2000, there were no takers. (They tried again in 2006, and again failed.)

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