IMAX Can Use Virtual Reality To Maximize Its Image As An Entertainment Technology Company

| About: IMAX Corporation (IMAX)

Summary

Despite its renowned IMAX image, IMAX, the company, has yet to make its well-received theater business produce better financial results, as theaters are not where movies make the most money.

Pushing further with movie-related technologies is the way for IMAX to extract more dollars from each seat, which the company has done with the IMAX 3D Experience.

Virtual reality provides IMAX another opportunity to maximize its image as an entertainment technology company and a real way to grow revenue, given the changing entertainment consumption habits.

IMAX Corp. (NYSE:IMAX), one of the most notable entertainment technology companies, is known globally for its namesake theater system networks, equipped to provide superior movie image and sound quality in large screens and high resolutions, which the company dubs as The IMAX Experience.

IMAX also is involved in film production, mostly converting Hollywood films to its IMAX format for exhibition in IMAX theaters, in addition to releasing its own original production of certain documentary films.

IMAX is a dominant leader in providing the highest-quality and most immersive motion picture viewing experience in theaters. However, box office gross has not been the primary source of revenue for movie studios when accounting for licensing fees from TV, streaming and merchandising, plus any DVD and blu-ray sales.

In 2015, total U.S. box office grosses were just $11 billion, a relatively small portion of the total movie-related sales. As a result, despite the impressive theater showing IMAX is able to put on, the company gets its cut from a rather limited revenue source.

IMAX has a market capitalization of less than $2 billion as of Oct. 17, 2016, making it still a small-cap company after almost half century in business since 1967. It reported revenue of $374 million for 2015, with a five-year average sales growth rate of 8.5% based on data as of June 30, 2016.

The company already is operating the IMAX theater systems in 67 countries as of Dec. 31, 2015. Significant growth potential may come only from the company-identified, worldwide IMAX zones with key markets limited to Great China, Japan, Latin America and Europe.

Besides adding more seats to drive up revenue, extracting more dollars per seat is another way to grow sales for IMAX. Exhibitors operating IMAX theaters typically charge a premium for IMAX-format films over films exhibited in conventional theaters, and later the 3D technology has allowed movies shot in or converted to 3D post production to command even higher ticket prices.

Now any movie labeled as an IMAX 3D Experience may gross more in box office for theaters, studios and thus, earn incremental sales for IMAX. In fact, 3D glasses for viewing 3D images are featured in about 94% of the company's network of theaters, which use either a film-based projection system or a digital one with a Xenon or laser projector, are in different sizes, large or small, and have screens of either flat or dome-shaped.

While future movie technologies may go from 3D to 3D plus the time dimension someday, it's nothing fictional to have today's 3D motions ushered into the emerging virtual reality, or VR, which after all is the simulation of a three-dimensional environment, only more realistic and immersive.

For IMAX, the application of virtual reality in its theater business is actually the direction the company is taking for the future. It has been reported that IMAX is in the process of retrofitting its theaters with VR stations by installing VR headsets at some of its multiplexes.

The VR market in general is still developing and testing the functions and merits of different VR headset models from a few VR first movers, including the Google Cardboard, Samsung Gear VR, Oculus Rift, HTC Vive and Sony PlayStation VR.

However, getting VR headsets into IMAX's theaters is the least problem for the company, which has chosen Acer to supply its VR headsets. The real issue is with the VR content, or the lack of it, as is already proven on the individual consumer side of the market.

The adoption of VR headsets could more easily become mainstream with the support of a rich selection of VR apps. Meanwhile VR app developers may not fully commit themselves unless a mass VR headset market already exists.

Given such a market dilemma at this early stage of VR application, IMAX should not expect a flow of VR content coming its way and may have to try to produce some VR content itself. The company's current VR rollout seems to be relying on limited VR content out of some movie footages as full-length feature VR movies are still a long shot at this time.

IMAX is not a movie studio, but the company does have certain production capability in documentary film making. In 2016, IMAX released two original documentary films, A Beautiful Planet about earth as seen from space and Voyage of Time on the origins of the universe, produced in association with other movie production companies.

Documentary films, shorter and more descriptive of a subject matter, may fit better with the intended VR experience such as interacting with the virtual environment as if it's the reality and the audiences are in the middle of it. It would be harder for the viewer to mingle with scenes in a feature film that tells a dramatic story about any imaginable fictional characters.

An IMAX VR Experience with original short documentary films, especially those about natural wonders, could maximize and solidify IMAX's image as the best theatrical distribution platform to make audiences feel as if they are a part of the on-screen action. When more people are coming back to theaters, it also directly benefits IMAX financially.

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