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The battle of the movie theater format is on in theaters around the world. But at The Motley Fool, we don't care quite as much which theater experience you prefer (although that is important) but rather which theater will make you money. Let's introduce our contestants.
RealD (NYSE: RLD ) is the new kid on the block, just hitting the stock market in July and has since risen an impressive 53.6% since going public at $16.
IMAX (Nasdaq: IMAX ) is the wily veteran who has been around since 1967 and has just recently begun to hit its stride.
Both companies make 3-D projection equipment, get licensing revenue and make those funky glasses we love to wear at the movies.
The biggest difference between RealD and IMAX is the place they see themselves taking in the market. RealD is expanding as fast as possible to beat out other formats, and IMAX is taking the role of the luxury provider by picking and choosing partners and keeping a sense of exclusivity to its brand.
The business model battle
A good way to judge these two companies is to see how much revenue they generate per theater. The two companies have slightly different business models and report slightly differently, but for the table below I am comparing RealD's license revenue to IMAX's revenue from joint ventures and films. I believe these are the best basis for comparison.
Film Revenue (Q3 2010)
* Theater count is as of the end of the third quarter.
Whoa, now that's a difference if I've ever seen one.
The bread and butter of both companies are a slice of each ticket you purchase at the box office. IMAX can obviously command a higher percentage of that box office than RealD.
Another big difference in financial performance is what they can command for glasses you wear while in the theatre. RealD lost $6.6 million in its product segment largely due to the cost of new 3-D glasses and recycling used ones. IMAX, on the other hand, sells a cleaning machine and doesn't spend enough on glasses to even make it a point of concern in its SEC filings. RealD mentions the word "eyewear" 87 times!
I make a big deal of this because, while RealD gets high margins for licensing revenue, it is essentially subsidizing that revenue with eyewear it sells below cost.
Where are the IMAX theaters?
The theater model that IMAX and RealD use is another major differentiator. RealD is trying to get into as many theaters as possible and will start running into an issue of saturation fairly soon. Its 9,300 screens are already more than theater behemoths Regal Entertainment (NYSE: RGC ) , which operates 6,703 screens, and CineMark, which operates 4,938 screens. IMAX, on the other hand, can pick and choose markets to enter maintaining a premium product.
IMAX has 470 screens, which are split between 348 commercial screens and 122 institutional screens. Backlog, which has been growing rapidly, consists of 257 theater systems as of the end of the quarter. When completed, a worldwide screen count of 727 is far from saturating the market.
IMAX is very profitable with only 470 screens, but RealD posted a loss of $5.1 million with 9,300 screens. Some would argue RealD will become profitable with more scale but I ask how many screens does it need? 15,000? 25,000? 50,000?
Two wins for IMAX.
Beyond the theater
RealD does hold an advantage in the consumer electronics field, where it has recently opened up the RealD format. This is still very much a nascent market, but it does provide an opportunity for growth.
IMAX has a number of ventures including a 3-D television channel with Sony and Discovery. It has also made an investment in Laser Light Engines alongside Harris & Harris (Nasdaq: TINY ) to develop brighter projection bulbs. It also recently announced a new nXos Calibrator for IMAX audio systems. Not exactly stepping on Dolby's (NYSE: DLB ) toes here, but improving its offering to stay ahead of the game.
RealD gets on the board with a win beyond the theater, although with an asterisk because consumer electronics aren't a big component of revenue yet.
Movie studios have played a more neutral game, attempting to offer both RealD and IMAX formats when possible. Dreamworks' (Nasdaq: DWA ) recent release Megamind was available in both formats and so was Disney's (NYSE: DIS ) smash hit Toy Story 3. Upcoming films with high expectations like Tron: Legacy, The Green Hornet, and Mars Needs Moms are also being shown in both formats. I can't really give an advantage to either company based on movie titles.
IMAX has a far superior business model, and I like IMAX's ability to pick and choose blockbuster movies to keep its product premium.
IMAX wins my battle of the theater formats. Maybe that's why it's a Rule Breakers pick? To find out what other stocks the Rule Breakers team has picked click here for a free 30 day trial.
Who do you think has the best theater experience? Leave your thoughts in the comments section below.
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