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IMAX (NYSE: IMAX ) made headlines last week with a massive 75-theater deal in China that sent the stock screaming higher to end the week. But this isn't just any deal for IMAX. This was a joint venture in the world's most-populated market and has the scale to pay off big time. To understand why the market was so excited, let's take a peek into why Motley Fool Rule Breakers pick IMAX has a winning business model.
The start of a business model
The core of IMAX is the company's relationship with studios and directors. When a studio comes to IMAX wanting to release in its theaters, IMAX has to weigh the fixed cost it will incur with the variable payout if the film is successful.
In a normal deal, IMAX converts the film to IMAX format at a cost of roughly $1.0 million to $1.5 million. In exchange for converting the film, IMAX takes a percentage of the IMAX box office (usually 10%-15%).
This is the same concept RealD (NYSE: RLD ) operates on and puts IMAX's and RealD's incentives in line with studios'. That's why both RealD and IMAX are looking for blockbusters like Avatar and trying to avoid duds like this weekend's Sucker Punch.
The real beauty of this model for IMAX is that it has a fixed cost, and the payback, which is variable, grows as the theater network grows and more blockbusters hit IMAX screens.
Sales and joint ventures
IMAX isn't just about studios. It also has a relationship with the theaters playing IMAX films. If a theater chooses to buy IMAX equipment, IMAX makes a profit on the deal. For example, today IMAX announced eight additional sales-type installations at Cinema Park theaters in Russia, on top of 10 theaters that were previously announced. In recent years, IMAX has been pushing joint ventures with operators that prove beneficial to both sides.
In a joint venture deal, IMAX fronts the cost of installing the theater system for a percentage of the box office and concession revenue. The advantage for operators like Regal Entertainment (NYSE: RGC ) and Cinemark (NYSE: CNK ) is they don't have to pay for capital equipment while gaining the incremental revenue from IMAX.
One of the reasons the deal in China was such a big deal is because it was a joint venture for a whopping 75 theaters. So IMAX will take a piece of the box office from both the studio and the theater in all 75 theaters. It's the gift that keeps on giving.
Growth engines for the future
We've covered the core of IMAX's business model, but IMAX doesn't end there. Beyond the theater, IMAX has partnered with Sony (NYSE: SNE ) and Discovery Communications (Nasdaq: DISCK ) on a 3-D television channel. The channel has started slowly, but I like that IMAX is an early mover in the space.
There's also the Laser Light Engines investment IMAX has made with high-tech venture firm Harris & Harris (Nasdaq: TINY ) to make 3-D theaters brighter.
Neither of these deals are big contributors to earnings yet, but IMAX will stay one step ahead of the competition as it adds similar technology-driven deals in the future.
Foolish bottom line
Understanding how a business makes money is core to how Fools should be building their investment theses. If you don't know how a company makes money, how could you possibly know if it is going to make money for you?
IMAX has been making investors lots of money lately because of an outstanding business model and growing international momentum. I expect that to continue as these international theaters ramp up and movie patrons worldwide begin to enjoy the IMAX experience.