Imax prepping a massive digital transition

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Imax is going digital.

The giant of the large-screen format is beginning one of the biggest initiatives in its 40-year history: switching from 70mm film to a digital system of projection.

Next month, the company will roll out the first three digital Imax installations with exhibitor AMC Entertainment -- two in Washington and one in Baltimore. Three more will debut in August in Philadelphia. Imax expects to have digital systems deployed at 50 sites by year's end, with the goal of converting its 296 owned or equipped theaters in 40 countries.

Imax believes that the digital offerings will prompt new installations and more studio films for release in Imax theaters.

"In 2006, we averaged about 35 new theater signings a year. In the last seven months, we signed 173 new theaters," Imax co-chairman and co-CEO Rich Gelfond says. "That's because of the launch of the digital product."

New joint-venture agreements include deals with AMC for 100 systems and Regal Cinemas for 31 systems. The deployment has the potential to change the fare offered in the theaters.

Imax built its business on screening such documentaries as "Space Station" and "Bugs" but in recent years has aimed for such tentpoles as the Batman and Harry Potter films. It inked a deal this year with DreamWorks Animation that includes Imax distribution of the upcoming "Madagascar: Escape 2 Africa" as well as the studio's first three 3-D titles, starting with "Monsters vs. Aliens" on March 27, 2009, "How to Train Your Dragon" in November 2009 and "Shrek Goes Fourth" in May 2010.

"Madagascar 2," which opens Nov. 7, is scheduled as the first "wide" digital Imax release, on an expected 35 screens.

Imax said that it has been talking to six studios about film projects for 2009. During this transition period, Imax will release both film and digital.

A challenge for the Imax business model always has been studio distribution costs. A 70mm Imax print can cost from $22,000 per print for a 2-D film to $45,000 per print for a 3-D title. According to Gelfond, with digital projection, studios would -- at least initially -- deliver the content as files on a hard drive at a low cost of about $800 per digital Imax "print."

To create the files, Imax takes the studio content through its DMR process that remasters it for the large format and creates a deliverable -- known as a "Digital Cinema Package" -- in 4K resolution (four times the picture information found in 2K, the typical resolution for digital cinema projection), which is sent to theaters.

The principal components of Imax's digital projection system includes two 2K digital cinema projectors using Texas Instruments' DLP Cinema technology, a specially made server from Doremi and a proprietary image enhancer. The Imax setup is complete with the proper sound system and theater configuration.

"Images from the two projectors overlap, so in a sense, technically speaking, it's 2K resolution," says Brian Bonnick, the company's executive vp technology. "But what this new Imax system does is increase image fidelity. The images are of a higher quality than you would get with a single projector."

Most installations will be joint ventures between Imax, which puts up the production equipment and screen, and the theater owner, who covers the cost to retrofit the moviehouse (about $150,000 per auditorium). Boxoffice is split on a negotiated basis.

In other instances, the theater would purchase the system from Imax, which is about $1.2 million per auditorium plus a minimum royalty to Imax from the exhibitor, which is typically the greater of $50,000 a year or 3% of the total boxoffice.

Typically, the Imax cut from a studio on any given movie at an Imax theater is 12.5% of the boxoffice gross; Imax ticket prices tend to be 20%-30% more than a traditional movie ticket.

Imax's digital initiative has been a long time coming, and investors haven't always been enthusiastic about the expensive strategy.

The company's stock has fluctuated from $30 in 1999 to less than $1 a couple years later after a failed effort to sell itself. It closed Thursday at $7.31, roughly where it was five years ago.

But Wall Street has taken a liking lately, with five analysts calling the stock a "buy" or "strong buy" and no one calling it a "sell."

Eric Wold of Merriman Curhan Ford recently told Imax investors that "introduction of a digital system plus more joint-venture deals could reaccelerate theater growth and profitability."
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