The Theater Battle: RealD vs. IMAX

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.

Company

Theaters

Film Revenue (Q3 2010)

Revenue/Theatre

IMAX 470 $27.5 Million $58,568
RealD 9,300 $23.8 Million $2,555

* 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.

Advantage: IMAX.

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.

The movies
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.

The verdict
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.

Get Your Popcorn:

Fool contributor Travis Hoium prefers the IMAX experience and is long shares of IMAX. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Walt Disney is a Motley Fool Inside Value selection. IMAX is a Motley Fool Rule Breakers pick. Walt Disney, Dolby Laboratories, and DreamWorks Animation SKG are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 11, 2010, at 8:32 PM, xetn wrote:

    IMAX is also making a huge push in China.

  • Report this Comment On November 12, 2010, at 3:32 AM, kahakun wrote:

    Well, look. This is not about business models; this is about IMAX Vs.RealD(All the rest of the theaters, Regal Entertainment, CineMark, etc.) Now it's obvious that the competition will not end for RealD because because of IMAX's better business models if that what you want to call it!. All of these other theaters still need to make money, stay competitive and give people more reasons to go to theaters. 3D is here to stay and is the future standard of viewing things. It's like betting against the 4G... it does not make sense. They are becoming mainstream. It's the same for the TV's, plus there is so much more than SONY and Discovery channel...

    Also film studios need to make more money and the 3D is going to be getting much more improved content soon. Star Wars 3D anyone? Well how about also 9300 opening theaters versus say 470. Well I'm thinking that the studios will make money @...

    Also here are all the 3D films for 2010

    Alice in Wonderland

    CHUTTI CHATTAN

    BREATHE (3D)

    Cats & Dogs: The Revenge of Kitty Galore

    Clash of the Titans

    Despicable Me

    How to Train Your Dragon

    Hubble 3D

    The Last Airbender

    Piranha 3D

    Sea Rex 3D: Journey to a Prehistoric World

    Shrek Forever After

    Step Up 3D

    Toy Story 3

    Une Nuit Au Cirque

    Also for the system USE TO PRODUCE these films are all different, one is used from IMAX and another one from RealD but that;s asides the point. I believe that RLD is a great stock to own...

  • Report this Comment On November 12, 2010, at 3:36 AM, kahakun wrote:

    Also RealD does not need more theaters, IMAX revenue numbers on 3D films is not ture, these numbers are not only for 3D films.

    RealD and the theaters need and will get quality 3D films SOON.

  • Report this Comment On November 12, 2010, at 10:26 AM, gudsoox wrote:

    listen to their earnings call from last week, it was revealed that they currently offset their licensing revenue with the exhibitor options that they've been paying out to the exhibitors for meeting installation targets. Gross licensing revenue is $35.3M before the $11.5 M options, for the $23.7M net licensing revenue. Supposedly, these installation "bonuses" will end middle of next year.

  • Report this Comment On November 12, 2010, at 1:26 PM, brs975 wrote:

    qudsux in on point...and now add lcensing for 3D eye glassware, exibitors upgrading their theatre experience with larger charis, stereo systems, etc...what exactily is the IMAX advantage? Not sure how a smaller footprint prividing a lesser 3D experience [screen cuts off on the left/ right side, ghost images, etc...] How is a smaller footprint with diminishing percieved advantages a good story?

  • Report this Comment On November 15, 2010, at 1:03 AM, kahakun wrote:

    quantity has it's own quality (Lenin)... more that merrier baby!!!

  • Report this Comment On November 15, 2010, at 6:26 PM, brs975 wrote:

    "IMAX is also making a huge push in China."...4 new IMAX screens in China will not cover 1B+ people Adding the recent 2 screens in the UK and we are still in single digits.

  • Report this Comment On November 15, 2010, at 7:18 PM, pompilia wrote:

    IMAX is one of the few stocks I'm willing to "buy and hold." I say that partly out of a cynical view that the public is increasingly hard-pressed these days to find ways of entertaining itself. All of the widgets and apps as well as the home-screen theaters soon loose their charm, and eventually people realize that their other primary source of entertainment--dining out--is expensive and not as satisfying as genuine entertainment. So what are we left with? Theme parks and Vegas, and how accessible, affordable, and practical are they for couples and families? Vegas used to support itself through gambling, with the entertainment and food largely an inexpensive bonus (ah, for the days of the Rat Pack). That's all changed. Now Vegas pays for itself through high-priced "entertainment"--Celine, carnivals, tiger acts--all going at triple-figure prices. So I see a huge gap, or void, beginning to offer immense opportunities to investors, especially in a culture that doesn't view symphony concerts, community theater, or reading novels--or even attending jazz clubs--as their style of amusement. Nothing fills that void any better than IMAX--it's within reach financially, it's truly unique, it attracts people of all ages (and is more virtual than any other virtual reality out there--so much so that I've seen people in an IMAX theater become ill from the vertigo they'd experienced in high places provided by IMAX technology). IMAX has to be careful not to get ahead of itself, to take it slow and steady, to expect a number of obstacles (their theaters are labor-intensive, expensive to build, and gobble football fields worth of real estate). There's still time to get in at a nascent stage in this medium's development. The American public is tiring of miniaturization, of just eating and getting fat, of being too broke to travel long distances--all of which will redound to the benefit of IMAX and its shareholders. And once the "travelogue-type" filmic content wears out its welcome, IMAX can begin flexing real muscle in its adventurous programming. The potential is substantial if not inexhaustible.

  • Report this Comment On November 16, 2010, at 7:25 AM, gudsoox wrote:

    IMAX's screens generate revenue for 2D and 3D content, while RealD's screens only generate revenue for 3D content.

    So the question becomes what percentage of movies in the future will be in 3D versus 2D. If you think the majority will be in 2D, then IMAX has the advantage of generating revenue always. If you think the majority will be in 3D, then RealD has the advantage of a large footprint to capture most of that.

    BTW, RealD just announced 500 screens in China with just one exhibitor. Even more footprint.

    As for the premium for the "IMAX experience", there's apparently a small but growing grumbling about the "LIeMAX" experience (google for it). It's mostly the enthusiasts that notices and cares. The question is whether the general public will start to care as well. If they do, IMAX won't be able to charge much of a 3D premium beyond RealD's.

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