Last year was a tough one for shareholders of IMAX Corporation (NYSE:IMAX). Though the company continued to execute operationally, it was caught up in an industrywide pummeling of movie theater stocks. Infighting between Hollywood studios and theater operators, combined with a weaker blockbuster film slate, weighed on box office sales. The summer slump gave nervous investors more reasons to worry and there was a wholesale exodus from the space.
Now its main rival in China is gunning for IMAX: It believes it can become the biggest theater operator in the country by 2019 -- and it's backed by the Chinese government.
From the frying pan...
Last year was already a difficult one for the movie theater industry. The reason? Early in 2017, there was talk from Hollywood studios about revising the rules surrounding premium video on demand (PVOD). Currently, most major movie studios restrict a movie for 90 days from the date it's released in theaters. Thereafter, the film is made available for pay-per-view via cable and satellite operators and digital sales to consumers. Last spring, six of the seven biggest studios were in discussions to shorten that 90-day window to as little as 17 days. The companies were offering exhibitors a cut of the $50 cost for the PVOD viewings. If this came to pass, theaters would have a much shorter window in which to recoup the cost of the film and book their profits.
Studios, meanwhile, had been looking to make up for revenue lost due to falling DVD and Blu-ray sales. Ongoing shifts in consumer behavior are also taking their toll, as younger viewers are increasingly turning to streaming from the likes of Netflix, Inc. and short-form video from Alphabet Inc.'s YouTube for their entertainment needs.
Combine that with a weak slate of summer blockbusters and you can see why the industry was in turmoil.
Into the fire
China is IMAX's largest market outside the U.S. The company owns a majority stake in IMAX China, controlling about 68% of the shares. Late last year, IMAX's principal competitor in the market -- state-backed China Film Digital Giant Screen Company, or CGS -- announced that it had "a government mandate to become the largest premium large format brand" in the country. CGS was confident that it could achieve that target by 2019. Chairman Lin Minjie said, "Our top priority is expansion, not profitability."
As of June 2017, CGS had 288 screens in China, compared to 430 for IMAX. By allowing theater operators to retain a larger share of ticket revenue and charging a flat fee for installation, the company believes it can better compete with IMAX. Many theater owners share a percentage of ticket revenue with IMAX under joint revenue-sharing arrangements.
Putting out the fire or fanning the flames?
IMAX made moves to improve its position last year. The company revealed plans to reorganize its movie slate, cut 14% of its workforce, and reduce costs by $20 million annually. IMAX also announced a new share-repurchase plan to buy back $200 million in shares by mid-2020. This could result in a 15% reduction in its share count. The company is also working with theater partners to add premium seating at a number of IMAX locations.
IMAX continues to be the leader in premium-large-format screens worldwide. The company reported revenue that grew 14% year over year to $99 million in its 2017 third quarter. IMAX also produced record global box office revenue of $219 million, up 17% over the prior-year quarter -- all at a time when overall industry ticket sales fell 14%.
China Giant Screen will have to prove that it can live up to its directive. Moviegoers care more about the experience than about a government mandate, and IMAX has proved it can deliver the goods.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Alphabet (A shares), IMAX, and Netflix. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), IMAX, and Netflix. The Motley Fool has a disclosure policy.