Did you catch the Oscars over the weekend? Some of those top picture nominees came packing some bear market titles. Crash? Brokeback? Capitulation? What's that? It wasn't capitulation, but rather Capote?
Oh. Sorry about that. Seems I wasn't the only one barely paying attention to the Academy Awards that night. The star-studded ceremony mustered the lowest ratings for the film industry's award show in three years. Some argue that the nominations were out of touch. I checked BoxOfficeMojo.com, and not one of the country's 25 highest-grossing movies of 2005 made the Best Picture category's shortlist.
It's more than that, though. The number of movie theater tickets that have been sold in this country has declined for three straight years. The blame is everywhere. It's also misspent. I highlighted the multiplex shortcomings last year. Theater operators pointed the finger at the popularity of LCD and plasma televisions creating high-definition viewing experiences at the home. I don't buy it. It's funny how most pro sports aren't having that kind of problem when folks can see the games even crisper from their home theater setups.
Then you have last year's springtime debacles by DreamWorks Animation (NYSE: DWA ) and Pixar (Nasdaq: PIXR ) . The two largest computer animation studios -- companies that should be basking in huge DVD sales if the filmgoers were staying home -- each received more unsold copies of their latest releases back from embarrassed retailers than they had expected.
The landscape is changing. The film industry just doesn't know it yet.
Digital music, revisited
When prerecorded music sales peaked five years ago, there was a great deal of silly finger-pointing then, too. Fans blamed the quality of the music. The labels blamed file-swapping youths. Retailers pointed both ways, until it joined back those two digits to spell out Chapter 11. In the end, the music wasn't bad and piracy wasn't the silver bullet. It was just that digital distribution had expanded the music listening experience.
You're seeing that now. Just as a grand old cinema house became a twin theater before splitting into smaller multiplex screens, the breadth of the filmgoer consumption is widening.
They call the trend narrowcasting, because consumers are more selective now that they are able to tap into just the eye candy that they like. What do I call it? I call it an investing opportunity. When I see an industry in flux, my Rule Breaker senses start to tingle. This is another industry worth disrupting, and some lucky companies are going to reward the forward-thinking investors that find them.
Big profits from the big screen
The investing opportunities in this fractured space are there for the taking. On the multiplex front, it's hard not to like IMAX (Nasdaq: IMAX ) and Access Integrated Technologies (AMEX: AIX ) .
IMAX is a name that you probably know. The operator of larger-than-life screens and state-of-the-art sound systems has bucked the trend of waning audiences. Last year, IMAX-equipped theaters saw a 35% spike in ticket sales for these digitally remastered releases. Sure, there was a 21% uptick in the number of IMAX screens, but that's part of the growth story right there, too. More and more global entertainment hubs are turning to IMAX to make movies matter again. Because IMAX is teaming up with Hollywood to release likely blockbusters concurrently with their multiplex releases, paying a few bucks more to make a night out at the movies an awe-inspiring experience is worth it.
Then we have AIX. Most theaters are still run the old-fashioned way. Studios duplicate film reels and ship them out to the theater owners. It costs the moviemakers about $1,000 for every screen showing their film. It was never an attractive proposition, even before the patron defections. AIX specializes in digital projectors. Studios don't need to ship out costly copies of the film. Instead, they simply beam the movie over to the local theater.
It doesn't just make economical sense. It also gives the studio and theater operator a great deal of flexibility. Studios can beam over new versions with things like bonus footage, new endings, and bloopers to keep audiences coming back. Digital distribution also opens up the potential for live concert and sporting event broadcasts. AIX isn't the only company in this promising field. Thomson's Technicolor Digital Cinema subsidiary is making major inroads here. AIX just happens to be the pure play.
Big profits from the little screen
It's not all about the film house celluloid. Many companies are already starting to benefit from the popularity of narrowcasting at the digital level. When Apple Computer (Nasdaq: AAPL ) rolled out its video-enabled iPods last year, it fed into the growing popularity of streaming viral videos and short video clips online. Apple simply made it portable.
Companies like Google (Nasdaq: GOOG ) have joined Apple in selling premium videos on the Web. You also have the ad-supported distribution models favored by sites like YouTube.com and News Corp.'s recent rollout of MySpace Film.
There's also Amazon.com (Nasdaq: AMZN ) to reckon with. The company may be ramping up slowly toward digital distribution, but as it does, it's going to be felt all over. The leading e-tailer has already embraced the filmmaking community by helping showcase online short film festivals in the past.
Yes, digital distribution seems to be favoring shorter fare over the three-hour epics. It's why companies like Pixar and DreamWorks, which specialize in animated wonders that span no more than 90 minutes, may be the earlier beneficiaries. Pixar was one of the first content providers on Apple's video store, and it doesn't hurt to have Steve Jobs on your side.
Yes, the movie industry is a great place for fertile stock ideas. IMAX was recommended to readers of the Motley Fool Rule Breakers growth stock newsletter service last year. You also have Amazon, DreamWorks, and Pixar as popular Stock Advisor recommendations. When two Motley Fool newsletters converge into a particular space -- the way both newsletters keyed in on China two years ago -- it's worth your while to check it out.
Sit back. Grab some popcorn. Enjoy the feature presentation.
Longtime Fool contributor Rick Munarriz still loves to go to the movies, although DVD rentals will do just fine in some cases. He does not own shares in any of the companies mentioned in this story. TheFool has a disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.