Entertainment
Making Money Off 3-D
10.08.09, 7:40 PM ETLOS ANGELES -
On Aug. 21, thousands of fans crammed into Imax theaters around the country to watch an ad. The event was "Avatar Day," sponsored by 20th Century Fox. Director James Cameron unveiled 16 minutes of his forthcoming 3-D sci-fi movie Avatar. Theaters were filled to capacity--in fact, hundreds of people were unable to get the free tickets.
When you can cause that kind of commotion just by showing a long trailer, it's worth taking notice. Avatar is the most anticipated movie of the year by a long stretch. Fans are watching to see if Cameron, the man behind Aliens, Terminator and Titanic, can once again deliver the goods when Avatar hits theaters Dec. 18. Hollywood is watching to see if moviegoers will turn a live-action 3-D movie into a Transformers-size hit. Since 3-D movies command on average an extra $3 per ticket, if the same number of people were to see Avatar in 3-D as saw Transformers: Revenge of the Fallen, that would mean an extra $168 million at the box office.
According to Piper Jaffray analyst James Marsh, there's a way for investors to profit from all this hype. If Avatar is a bona fide hit, studios will start pumping out many more 3-D films. However, there are only around 2,700 3-D screens out there right now. That's not enough for a wide release, which usually requires at least 3,000 screens.
That bottleneck could be about to clear. JPMorgan Chase is raising roughly $750 million in debt and equity to fund the installation of more digital projectors at an average cost of $100,000 per screen. The money will be repaid by a flow of "virtual print fees" from the studios. It costs around $1,500 to send a celluloid print to a theater today. Sending a film digitally costs only a few hundred dollars (and will eventually cost almost nothing). So the studios have agreed to pay $1,000 per shipped digital film to pay back investors.
Marsh projects that the JPMorgan deal will help boost the number of digital screens (3-D movies are only shown digitally) to 3,750 by the end of the year and 8,000 by the end of 2010.
The companies poised to gain the most from the massive roll out are theater chains.
"Theaters have historically been seen as a low-risk growth business," says Marsh. "Kind of boring. But with 3-D and digital, there's the start of a growth trend."
Carmike Cinemas has embarked on the most aggressive digital expansion of any of the theater chains. The Georgia-based company, which has a market cap of $127 million, operates theaters in small towns like Manhattan, Kan., and Conway, Ark.--not exactly the kinds of places one would expect to go to for a state-of-the-art theater experience. But a full 93% of Carmike's 2,285 screens are digital, and 500 are equipped for 3-D.
At $10.04 per share at Thursday's close, the company's stock is near its 52-week high and above Marsh's target of $9. But if Hollywood starts making more 3-D films, Carmike could see a big jump in revenue. Marsh believes that 3-D could add $10 million to incremental cash flow by 2010.
Carmike is also well positioned to use its digital screens for what theater owners are calling "alternative content": sports, operas and concerts. In January, the company showed the FedEx BCS National Football Championship game between the University of Florida and the University of Oklahoma in 30 theaters in 3-D. Even though the game was on TV, it still sold out in the theaters at $20 per ticket.
Regal Entertainment Group is the largest cinema chain, with 6,778 screens and a $1.9 billion market cap. So far Regal has moved into digital less aggressively than Carmike. The company has only 300 theaters equipped for 3-D, compared to Carmike's 500. But with a stock priced at $12.13, Regal is trading well under Marsh's target price of $19. Regal has the most to gain from the JPMorgan deal, which will give billionaire owner Philip Anschutz the ability to quickly upgrade lots of theaters without taking on a lot of debt.
Another company that could benefit from the 3-D revolution is Imax. The Canadian maker of huge screens ($542 million market cap) has found a way to bring Imax to the masses by partnering with theater chains like Regal to convert multiplex screens into the Imax format. The screens are smaller than the massive, standalone Imax theaters that are often found next to museums. But they are always the biggest screen in the theater and often show movies in 3-D.
The company has been on an expansion tear, growing from 183 of these smaller screens last year to 273 today. That's helped boost Imax's revenue 67% for the first half of the year to $74 million. At a share price of $9.75, Imax is near its 52-week high of $10.14. Marsh doesn't have a rating on the company, but he says Imax is an important part of the trend to make movies a special, outside the home experience.
"The fear for exhibitors early on was that home entertainment would become a substitute for going to the movies," says Marsh. "But whether it's Imax or 3-D, you can't easily replicate that at home. It makes it more of an event."
