2016 Summative Assignment Case - Imax

9B09M019
IMAX: LARGER THAN LIFE1
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Copyright © 2009, Richard Ivey School of Business Foundation Version: 2017-05-04
Educational material supplied by The Case Centre
FLASHBACK 2004
Copyright encoded A76HM-JUJ9K-PJMN9I
In Daytona, Florida, John watched a racecar going at more than 100 miles per hour crash into a concrete
Order reference F394058
barrier. John ducked to escape the debris that appeared to be flying straight at him. A few moments later
John was virtually within a racecar, next to the driver, zooming at more than 120 miles per hour around the
racetrack. For the next half an hour, John experienced in three dimensions and on a larger-than-life scale
crashing cars, dizzying turns, efficient pit crews, shining metal, burning rubber, swirling gas fumes and
screaming fans. Finally, as the overhead lights at the theater gradually lit up, the audience sitting around
John started applauding. John had just witnessed a screening of the IMAX movie NASCAR.
NASCAR set a box-office record as an original IMAX 3D film with the highest grossing opening weekend
and the highest per-screen average. At $21,579, NASCAR’s per-screen average was higher than that of the
weekend’s top 10 films.2 Reports of NASCAR’s box-office success would have surely pleased Richard
Gelfond and Bradley Wechsler, the co-CEOs of IMAX Corporation.
INTRODUCTION
Gelfond and Wechsler had bought IMAX along with Wasserstein Perella Partners from the original owners
in 1994 for $80 million. They took it public the same year to raise capital to fund IMAX’s growth. For
investors in IMAX, the years since then had been like a ride on a rollercoaster in the IMAX film Thrill
Ride: exciting peaks when movies achieved commercial and critical acclaim, and scary drops when
analysts questioned whether a niche player such as IMAX would be able to achieve consistent growth or
even survive.
NASCAR’s success at the box office was evidence that the co-CEOs’ efforts to reach a new audience —
distinct from those typically attracted to IMAX’s educational documentaries — might work. Another
movie that was indicative of IMAX’s emerging strategy was The Polar Express. The Polar Express was
the first time a Hollywood movie would be released simultaneously in commercial multiplexes and IMAX
1
This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives
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theaters. NASCAR and The Polar Express were symbolic of the direction in which Gelfond and Wechsler
had pushed the company to achieve faster growth and higher margins. The two-pronged strategy involved
expanding the reach of IMAX by (a) going beyond its cloistered museum environments into multiplexes
and (b) presenting Hollywood films in IMAX format.
Despite the success of NASCAR and The Polar Express, IMAX faced several questions about its future:
 Could IMAX thrive as a niche player that made large format films and systems?
 Would increasing the number of Hollywood movies released in IMAX format save the firm or dilute
the IMAX brand?
 Should Hollywood movies be released simultaneously in regular and large format?

THE BACKGROUND SCORE

Since the first moving images flickered in a dark theater, movies have captivated audiences around the

world. About the time that people were getting familiar with programming their VCRs and learning to
enjoy movies on the small television screen, a small group of people was developing a technology to
project movies on giant screens. The idea for IMAX originated in 1967 when the success of a multi-screen
theater system at the Montreal Expo led filmmakers Graeme Ferguson, Robert Kerr and Roman Kroitor to
create a large format movie system. IMAX was founded as the only company in the world that was
involved in all aspects of large format films. The first IMAX film premiered in 1970 at the Fuji Pavilion in
Osaka, Japan.
IMAX was listed in the NASDAQ exchange in 1994 and achieved a market capitalization of $196 million
in the first year itself.3 As of December 12, 2008, market capitalization was down to $125 million. There
were about 295 theaters showing IMAX movies in 40 countries, with almost 60 per cent of the theaters in
North America.4 Almost 50 per cent of the theaters were located in museums, aquariums, zoos and other
institutions, and about the same percentage had the IMAX 3D technology. The IMAX movie library at the
end of 2007 stood at 226 films; some produced by IMAX, many others produced by independent
filmmakers or studios such as Time Warner. In 2007/2008, some of the well-known films to be released in
IMAX included Harry Potter and the Order of the Phoenix, Shine a Light — a film about the Rolling
Stones by the famous film director Martin Scorcese — and The Spiderwick Chronicles.
THE IMAX STORY
Scope of IMAX
The company’s main sources of revenues were long-term theater system lease and maintenance
agreements, film production and distribution, and theater operations. Given its scope of operations, IMAX
could be considered a part of three different industries: Photographic Equipment and Supplies (SIC code
3861), Motion Picture and Video Tape Production (SIC code 7812), and Motion Picture and Video
Distribution (SIC code 7822). IMAX was a relatively small firm compared to a rival studio such as
Disney/Pixar or a theater chain such as Regal Entertainment.
3
S. N. Chakravarty, “A really big show,” Institutional Investor, 35:10, October 2002, p. 20.
4
Hoover’s, www.Hoovers.com.
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In 2007, it generated $59.12 million (51.04 per cent of total revenue) from IMAX systems sales, $36.57
million (31.57 per cent of total revenue) from films and $16.58 million (14.31 per cent of total revenue)
from theater operations.5 Order trends suggested that newer agreements were for 3D systems. The theater
leases were generally for 10 to 20 years and renewable by the customer. As part of the lease, IMAX
advised customers on theater design, supervised the installation of the system, trained theater staff and
maintained the system.6
Inside IMAX
Hardware: The Film Technology
IMAX films were printed on films that were 10 times larger than the 35 mm films that were used in
traditional multiplexes and were projected on screens that were (on average) eight stories high

(approximately 88 feet) and 120-feet-wide, or in domes that were 81 feet in diameter. See Exhibit 1 for a

comparison of 35 mm and IMAX film sizes.

IMAX theaters were designed so that projected images stretched up to the peripheral vision of the viewer,
thus the viewer was completely immersed in the scene. Each frame of an IMAX film had 15 sprocket
holes to guide it through projectors (compared to four in each frame of a 35 mm film). The films were
projected onto screens by IMAX-designed projectors that had special features — a higher shutter speed,
rolling loop motion and vacuum to hold the film to the lens.7 IMAX projectors used 15,000-watt bulbs,
whereas the regular 35 mm projectors used bulbs between 3,000-4,000 watts. The projectors were cooled
by circulating more than 50,000 cubic feet of air and nine gallons of distilled water per minute. These
features of the IMAX projection system produced images on-screen that were brighter and sharper than
those found in conventional movie theaters.
IMAX had developed the skills, knowledge and capabilities to design and assemble the critical elements
involved in its projector and camera systems, though most of the components were purchased from
vendors with whom it maintained long-term relationships. Strict quality control of components and end
products had ensured an average service time of 99.9 per cent for its equipments installed in theaters.
Company personnel visited each theater for servicing the systems; the projection systems were serviced
every three months and the audio systems were serviced once a year.
In 2007, IMAX spent almost five per cent of its sales revenue on Research and Development, and 50 of its
318 employees were involved in it. The company had spent about $12.6 million in R & D in the past three
years.8 It had also received grants from Ontario Technology Fund for its R & D, and held 46 patents and
had seven patents pending in the United States.9 IMAX had successfully developed 3D cameras and
projection systems to produce realistic 3D images. The audience used polarized or electronic glasses that
split the images for the left and right eye by using liquid crystal shutter lenses that were controlled by an
infrared signal and opened and shut 48 times per second in coordination with the projector to create a 3D
effect. Another example of the firm’s technological capabilities was a lightweight 3D camera that it had
developed to shoot a movie about the International Space Station in space. IMAX worked with MSM
Design, a small firm owned by Marty and Barbara Mueller, and developed a camera that weighed only 90
5
Annual Report, 2007.
6
Annual Reports.
7
Computer-Aided Engineering, 15:8, 1996, pp. 8-9.
8
9
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pounds, compared to the traditional IMAX 3D cameras that weighed 228 pounds.10 IMAX 3D projectors
were also capable of projecting 2D images. The visuals were supported by six-channel digital audio that
typically produced 12,000 watts of realistic, distortion-free sound. The sound systems were developed by
Sonics Associates Inc., a subsidiary in which IMAX had 51 per cent ownership. The company had even
developed a 3D directional sound technology that offered location and depth to the audio. A testament to
IMAX’s technological prowess was the 1997 Oscar Award it received for Scientific and Technical
Achievement.11
Because of its larger size, printing and distributing IMAX films was costlier than 35 mm films. IMAX had
developed digital cameras and projectors that it planned to install in theaters starting in 2008 so that it
could produce and distribute its movies in digital format. While the conversion to digital format required
substantial upfront investment, it was expected that this shift would allow IMAX to lower its operational
costs (of film production and distribution) significantly.

Software: IMAX Films

The motion picture industry produced several types of movies: horror, adventure, comedy, romantic
comedy, family, drama and documentaries. Of these, the documentary segment was considered so
significant that the Motion Picture Association of America (MPAA), in its annual Oscar Award ceremony,
gave out separate awards for these films. While the large format film itself was a unique feature of IMAX,
it had also differentiated itself by its library of films and locations. IMAX films were often educational
and entertaining, and involved documentaries of natural and scientific wonders such as the Grand Canyon,
space stations, etc. An IMAX film, Fires of Kuwait, was nominated for an Academy Award in 1993.
By locating itself in prestigious venues such as the Smithsonian Institution in Washington, Liberty Science
Center in New Jersey, Museum of Science and Industry in Chicago, and Port Vell in Barcelona, Spain, the
firm had created a unique brand image. In an interview with CNN, co-CEO Gelfond noted IMAX’s
advantage: “IMAX is also a brand, so we don’t have to pay the same kind of talent that Hollywood has to
pay, which is really a huge percentage of the costs. Once you take those costs down and you look at just
making the film with the world around you as the talent, you get into much more manageable budget
ranges. A typical two-dimensional film at IMAX is about $5 million; a typical 3D film at IMAX is about
$10 million.”12 Hollywood studios would have to pay a major star (such as Tom Cruise or Eddie Murphy)
more than $10 million for a movie. While top movie stars were celebrities and drew huge compensation,
many others involved in the production, distribution and marketing of a film were neither well-known nor
highly paid. In 2007, according to the Bureau of Labor Statistics (BLS), the median salary for an actor in
the motion picture and video industry was about $17 per hour.13 Some of these talents had formed unions,
such as the Screen Artists Guild, to negotiate higher wages for their labor. The disruption of TV
programming in spring 2008 caused by the brief Writers Guild strike was suggestive of the power such
groups had on studios.
Besides stars, the other major cost of movie-making was the marketing. It was estimated that a studio spent
almost 30-50 per cent of the total cost of production and distribution of a movie on its marketing.
10
“Cam programming helps design 3d IMAX movie camera for NASA,” Computer Aided Engineering, 19:3, March 2000, p.
10.
11
W. C. Symonds, “Now showing in IMAX: Money!; The giant-screen technology will even bag an Oscar,” Business Week,
3520, March 31, 1997, p. 80.
12
D. Michael, “Bigger is better: IMAX knocking competition down to size,” CNN, November 6, 1998,
www.cnn.com/SHOWBIZ/Movies/9811/06/imax/index.html?iref=newssearch, accessed March 23, 2008.
13
www.bls.gov/oes/current/naics4_711500.htm, accessed December 23, 2008.
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According to the Motion Picture Association of America (MPAA), the average cost of making and
marketing a movie rose to more than $106 million in 2007, with marketing budgets averaging $36
million.14 The marketing of the movie was done through several channels, such as TV, the press, theaters,
websites and promotions with retailers. See Exhibit 2 for average spending in each media. For example,
most kids’ movies released by studios, such as Disney and SKG Dreamworks were promoted through tie-
ups with restaurants, such as McDonald’s and Burger King, and also toy manufactures and other retailers.
The Hollywood business model used the awareness created by the presence of stars and substantial
marketing budgets to draw large audiences into theaters in the opening weekend itself.15 To achieve high
ticket sales on opening weekends, large numbers of prints of the movie were distributed. In contrast,
traditionally, IMAX had not marketed its films aggressively. The company did have a sales force and
marketing staff at its offices in Canada, the United States, Europe, Japan and China to market its theater
systems. The movies were sold to theaters separately; as such, there was no national marketing or
advertising.16 Unlike Hollywood movies that had short lifespans in the theater circuit and were then
withdrawn for release on DVD and pay-per-view format, IMAX films were often shown in theaters for

years after their release. In recent years, IMAX films had received some marketing support. For example,

for IMAX movie Everest, producer Greg MacGillivray spent $2 million in marketing and reportedly saw a

20-45 per cent increase in box-office revenues at each theater. Moreover, IMAX’s alliances were helping
in cross-promoting its movies. For example, for its T-Rex: Back to the Cretaceous 3-D movie, it had a
month-long promo on Showtime that was also shown in Imaginarium stores in malls across the United
States.17 The increasing number of Hollywood movies that were released in IMAX format allowed IMAX
to ride on the coat tails of marketing campaigns launched by the studios.

IMAX films were often produced by the firm, or partially or fully financed by other parties. The firm hired
the talent for the film on a project-by-project basis. Most of the post-production work was performed at
David Keighley Production, a wholly-owned subsidiary of IMAX. IMAX (and any investors or sponsors)
shared the ownership rights for a film, while usually IMAX controlled the distribution rights. As a result,
IMAX had the distribution rights to the largest number of large format films. The distributor received a
percentage of the theater box office revenues. IMAX films often remained in distribution for four or five
years. (See Exhibit 3 for box office revenues for IMAX films.)
Generating Growth
IMAX used a two-pronged strategy to maintain its growth. First, it had sought to expand beyond its
institutional environment by opening IMAX theaters within multiplexes or converting existing
multiplexes’ screens to IMAX format. Second, it had launched Hollywood films in IMAX format.
An IMAX Near You
While early IMAX theaters were mostly located in institutional settings such as museums and aquariums,
to reach a wider audience IMAX had engaged in alliances with commercial movie theater owners.18 It
14
M. Marr, “Now playing: Expensive movies; Average cost of a film tops $100 million for first time; Valenti set to leave
MPAA,” The Wall Street Journal, March 24, 2004, p. B. 4, www.mpaa.org/researchStatistics.asp, accessed December 23,
2008.
15
Adam Leipzig, “How to Sell a Movie (or Fail) in Four Hours,” The New York Times, November 13, 2005.
16
D. Oestricher, “IMAX hopes for big run with Matrix,” The Wall Street Journal, June 18, 2003, p. b5c.
17
T. L. Stanley, “IMAX lands showtime, GTE for 1st X-Promo,” Brandweek, July 13, 1998, 39:28, p. 5.
18
L. Gubernick, Hollywood Journal: Hollywood think bigger — your favorites, only taller: Can re-released movies breathe life
into IMAX,” The Wall Street Journal, February 15, 2002, p. W. 5.
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grew rapidly during the late 1990s as theater owners, such as AMC, Cinemark and Regal, went on a
building spree and bought IMAX systems to install in their multiplexes. According to Wechsler, this
strategy backfired when IMAX could not escape the crisis that hit the theater industry in the late 1990s
because of the overbuilding during that decade. As many theater-owners filed for bankruptcy, IMAX had
to engage in belt-tightening of its own because of its receivable problems. Moody’s downgraded IMAX’s
debt of $200 million senior notes from Ba2 to B2 and a $100 million note from B1 to Caa1 because of the
risk of default by customers. In response, IMAX cut $14 million in overhead, laid off 200 employees and
bought back $90 million of its debt.19 Debt remained a critical problem for IMAX (See Exhibits 4, 5 and 6
for IMAX financials).
In recent years, IMAX entered into partnerships with AMC and Regal Cinemas to screen IMAX films in
multiplexes using its MPX technology. MPX technology allowed IMAX and theater-owners to convert
traditional theaters to IMAX format.20 It was estimated that it now cost only $175,000 to retrofit a
multiplex and another $500,000 to install the IMAX system.21 Regal Cinemas had built IMAX theaters in

several markets and waited to see how they performed before adding more.22 In March 2008, it signed

another agreement with IMAX for 38 more theaters, bringing the total number of Regal IMAX theaters to

52 by 2010. Regal theaters would charge $2.50-5.00 more than their regular feature admission for IMAX
films. 23 In December 2007, IMAX signed a deal with AMC to install 100 IMAX digital theaters systems
in 33 markets, thereby substantially increasing its presence in the U.S. market. IMAX had identified 655
multiplexes without an IMAX nearby.24 However, IMAX co-CEO Wechsler had stated that he did not
expect IMAX theaters to be ubiquitous but exclusive, like flying first-class; while co-CEO Gelfond had
suggested that the IMAX experience would be so unique that it could not be replicated at home.
Consistent with this vision, the theater agreement that it recently signed gave AMC territorial exclusivity.25
Unlike past agreements where theaters chains bought the system from IMAX, the newer agreements
required the partner theater chain to make the investment for retrofitting the theater, while IMAX paid for
the system installation in return for revenue-sharing on future ticket sales. Analysts expected that such
agreements (and digital conversion) would lower IMAX’s capital requirements and help it pay off its
debt.26
Go West IMAX!
Another strategic move by IMAX to ensure its growth was the conversion of Hollywood movies into
IMAX format. IMAX had developed a patented digital re-mastering (DMR) technology that allowed it to
convert traditional 35 mm films, such as Harry Potter, Spiderman, Antz and The Simpsons, into the large-
screen format and even develop 3D versions of such movies. The development of this technology was
critical because merely projecting a 35 mm film on the large IMAX screen would have produced a grainy
picture. According to co-CEO Gelfond, the firm invested millions of dollars to sharpen the resolution of
19
Z. Olijnyk, “One giant leap,” Canadian Business, 75:17, September 16, 2002, pp. 46-48.
20
21
Katy Marquardt, “Imax Parlays a Huge Screen and 3-D Tech into an Experience You Can’t Duplicate at Home. Coming
soon to a multiplex near you,” US News and World Report, Feb. 6, 2008,
www.usnews.com/articles/business/2008/02/06/imax-parlays-3-d-tech-into-an-experience-you-cant-duplicate-at-home.html,
accessed December 23, 2008.
22
The Wall Street Journal, 2000.
23
B. Pulley, “The really big screen,” Forbes, 172:13, December 22, 2003, p. 222.; The Wall Street Journal, 2003.
24
25
Katy Marquardt, “Imax Parlays a Huge Screen and 3-D Tech Into an Experience You Can’t Duplicate at Home. Coming
soon to a multiplex near you,” US News and World Report, February 6, 2008,
www.usnews.com/articles/business/2008/02/06/imax-parlays-3-d-tech-into-an-experience-you-cant-duplicate-at-home.html,
accessed December 23, 2008.
26
Ibid.
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the converted pictures and it took more than five years to develop the technology.27 The re-mastering of
Apollo 13 took 16 weeks, while The Matrix Revolutions was re-mastered as it was being produced,
allowing for near-simultaneous theater and IMAX releases. As IMAX had worked out the teething
problems with this technology, the costs of conversion had come down. For each print, it now cost
$22,500 to convert a standard two-dimensional film and $45,000 to convert a 3-D film. It was expected
that moving to a digital format would further lower the conversion costs. If the conversion succeeded at
the box office, more studios might be willing to spend the extra money to convert their standard 35 mm
films to IMAX format.28 This would also attract theater chains to open new IMAX screens. Though
IMAX made only seven per cent of the box office revenue from reformatted films by other studios,
compared to the nearly 30 per cent that it made on its own movies,29 the conversion of Hollywood movies
might allow IMAX to survive, according to co-CEO Gelfond.30 An announcement to launch the Harry
Potter movie on IMAX resulted in an almost 11 per cent surge in its stock price that day. Gelfond noted
that IMAX could continue making educational films that could be screened in theaters during daytime for
families, students and tourists, while its reformatted Hollywood movies could be screened in the evening.

In an interview with Amusement Business, co-CEO Wechsler noted that the IMAX strategy of moving into

the commercial movie business would hopefully expand the core audience.31 “Our research tells us that a

lot of people will pay that extra $3 to $5,” Gelfond said in an interview with USA Today.32
The first full-length Hollywood movie released on IMAX was Fantasia 2000 in January 2000.33 The
classic Beauty and the Beast, which had a 20-week show on 67 IMAX screens in 2002, generated $32
million in revenue.34 The first live action commercial movie to be launched in IMAX format was Apollo
13, which generated an additional $2 million in revenue. Later, Star Wars was released on IMAX
followed by The Matrix Reloaded, which generated $11.7 million. 35 These movies were released in
IMAX after their theatrical release.36
As more Hollywood movies were converted to IMAX format, the studios had to decide whether these
should be released simultaneously in theaters and IMAX format. Could the expansion into IMAX theaters
cannibalize the traditional theatrical revenues? It was found that almost 90 per cent of The Matrix
Reloaded IMAX viewers had seen the movie in theaters earlier. The Polar Express, which was released
simultaneously in IMAX and traditional theaters during the 2004 Christmas season, was a big hit with $45
million in revenues in the IMAX format.37 On December 12, 2008, the movie The Day the Earth Stood
Still was released simultaneously on IMAX and multiplex screens. At $31 million, the movie had the
highest box office gross over a weekend. More than $3.8 million (about 12 per cent) of the total revenue
came from IMAX theaters. Notably, the average revenue per IMAX theater was $30,800, compared to the
27
S. N. Chakravarty, “A really big show,” Institutional Investor, 35:10, October 2002, p. 20.
28
The Wall Street Journal, 2000; Institutional Investor, 2002.
29
D. Lieberman, “IMAX supersizes its plans for future flicks,” US Today, December 16, 2002,
www.usatoday.com/tech/news/techinnovations/2002-12-16-IMAX_x.htm, accessed December 23, 2008.
30
Z. Olijnyk, “One giant leap,” Canadian Business, 75:17, September 16, 2002, pp. 46-48.
31
N. Emmons, “IMAX may turn toward mainstream,” Amusement Business, 112:49, December 4, 2000, p. 1, pp. 20-21.
32
D. Lieberman, “IMAX supersizes its plans for future flicks,” US Today, December 16, 2002,
www.usatoday.com/tech/news/techinnovations/2002-12-16-IMAX_x.htm, accessed December 23, 2008.
33
R. Ricklefs, “IMAX hopes to take cast screen into mainstream — a new ‘fantasia’ tests film strategy of Canadian firm,” The
Wall Street Journal, December 10, 1999, p. 1.
34
35
T. Lowry, “Now playing at IMAX: Hit movies” Business Week, 3807, November 11, 2002, p. 46.; N. Sperling, “IMAX
executives hoping Warner’s ‘The Matrix’ is ‘the one’,” Amusement Business, 115:46, 2003, pp. 24-25.
36
T. King, “Hollywood Journal: When a ‘Sure thing’ Isn’t — Even the $20 million stars can’t guarantee a hit; trying to ignore
‘Pluto’,” The Wall Street Journal, October 11, 2002, p. w11.
37
W. D. Crotty, “IMAX’s screen gets bigger,” The Motley Fool, September 15. 2005,
www.fool.com/investing/general/2005/09/15/imaxs-screen-gets-
bigger.aspx?terms=Imax+screen+gets+bigger&vstest=search_042607_linkdefault, accessed December 23, 2008.
Page 8 9B09M019
national average theater revenues of $8,100.38 Such track records should give more studios the confidence
to release their movies simultaneously in commercial and IMAX theaters.
INDUSTRY DYNAMICS
Motion picture production and distribution was part of the service sector of the economy and included
firms such as Disney/Pixar, MGM, Regal Entertainment, Lions Gate and Carmike. Many of the
production and distribution companies were now part of other, larger, diversified firms. For example,
Columbia Pictures was now part of Sony, Warner Brothers was a subsidiary of Time Warner, Paramount
Studios was part of Viacom and Pixar and Miramax were part of Disney. Over the years, media firms had
sought to vertically integrate their operations by owning not only the production facilities but also
distribution networks.

Film production remained a risky business. Only one in 10 films ever recovered its investment from

domestic theater release; and only six out of 10 movies ever recouped the original investment.

Competition among movies within the same genre was so high that studios scheduled releases carefully to
avoid direct competition. Thus, release dates were announced several years in advance and production was
designed around preferred holiday release dates, such as Thanksgiving, July 4th, Memorial Day weekends
or the first weekend of May.
IMAX films faced competition from other films produced by studios such as Pixar/Disney that were
targeted for families or children. Within the large format film segment, Iwerks was the only rival to
IMAX.39 Iwerks was founded in 1986 and continued to be involved in all aspects of large format films and
simulation rides. It produced films in the 15/70 and 8/70 formats; however, the focus of the firm was more
on ride simulation packages located in theme parks, zoos, museums and other destinations. Iwerks had
received two Academy Awards for Scientific and Technical Achievement. In 2002, Iwerks merged with
SimEx (a firm founded in 1991), which was involved in ride simulation and animation production.
Another firm, Megasystems, which was involved in the development of large format projection systems,
production and consulting in marketing, operations and technical services, had discontinued its projection
system production and was renamed Pollavision. Pollavision was now only involved in consulting (and
maintenance) services for large format film theaters.40
Technology Trends
Potential IMAX viewers could consume many alternative sources of entertainment, such as live plays,
sport events, TV programs, the Internet, etc. See Exhibits 7 and 8 for admissions, prices and time spent on
alternative entertainment sources. Viewers might choose to watch a movie on DVD, pay-per-view or video
on demand rather than at the theater. The development of high-definition DVD recording, big-screen TVs
and cheaper home theater projection and sound systems posed an even bigger threat to box office ticket
sales. See Exhibit 9 for DVD sales trends in the United States. According to one estimate, almost 85 per
cent of a film’s revenue now came from home viewing through various channels such as DVD/VHS, cable
and TV.41 Yet, it had been found that the success of secondary sources such as DVD sales and rentals was a
38
“Imax rises as consumers embrace large screens,” Associated Press, December 16, 2008,
http://biz.yahoo.com/ap/081216/imax_mover.html?.v=1, accessed December 23, 2008.
39
C. Booth, “IMAX gets bigger (by getting smaller),” Time, June 29, 1998, 151:25, pp. 48-49.
40
www.pollavision.com, accessed December 23, 2008.
41
E. J. Epstein, “Hollywood’s death spiral,” Slate, July 25, 2005.
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function of the movie’s box office success.42 According to Jack Valenti, former president of MPAA, 50 per
cent of DVD viewers and almost 38 per cent of VCR movie-users were frequent moviegoers. He said,
“People who love movies are eager to watch them again in different environments.”43
The development of new technologies, such as cheaper high definition camcorders, as well as the
proliferation of new distribution channels, such as cable, satellite and the Internet, had also created
opportunities for new independent firms to enter the industry. One such firm that leveraged its knowledge
of computer technology to develop blockbuster animated films was Pixar. New firms might enter one or
more parts of the film industry value chain — talent management, production, post-production,
distribution, etc. Specialists in post-production processes had emerged who were responsible for editing,
special effects, media transfers, subtitling, etc. However, entry into all aspects of the value chain
simultaneously had been rare. A recent example of such an entry was SKG Dreamworks, a studio that was
started by film industry veterans Spielberg, Katzenberg and Geffen.

Such technological changes had also increased the potential for piracy. According to the Motion Picture

Association of America, the U.S. film industry lost more than $3 billion annually because of piracy.

Section 8, Article 1 of the U.S. Constitution offers Congress the power to offer copyright protection. The
Copyright Act of 1976 that was amended in 1982 offers strong penalties for copyright violations. (See
www.copyright.gov/title17 for recent development in copyright law.) Violations were considered felonies
and were subject to federal criminal charges and civil lawsuits. The Motion Picture Association was
working closely with the U.S. Congress to enforce sentencing guidelines and improve copyright protection
as newer technologies emerged and posed fresher challenges. According to Karen Randall of Vivendi,
whose production The Hulk was released on the Internet by pirates before its theatrical release, the FBI was
very cooperative and aggressive in pursuing the case.44
Other Trends
IMAX had to cease screening its movie Volcanoes of the Deep Sea in some parts of the United States, as
certain religious groups were offended by its position on, and depiction of, evolution.45 Concerns about
violence and sex in movies had generated considerable efforts to organize and lobby political action to
regulate the industry. For example, Tipper Gore and Lynn Cheney (spouses of former vice-presidents Al
Gore and Dick Cheney, respectively) had worked hard to curtail the levels of violence, sex and vulgar
language found in popular media.46
Another trend that might help firms such as IMAX was the increased consumption of educational
entertainment. Ever since Sesame Street succeeded in educating and entertaining kids simultaneously, the
“edutainment” market had grown as parents increasingly sought out play activities for their children that
were educational. This trend had been attributed to increasing belief among parents that in a knowledge
economy, their kids’ success might depend on education. The widespread popularity among parents of the
concept of the “Mozart effect” — a finding that babies that listened to Mozart recordings in the womb or at
early stages after birth had richer cognitive development — was seen as evidence of their desire to produce
42
Bruce Orwall, “A Dud at Theaters Will Be a Dud DVD,” The Wall Street Journal, November 26, 2005, p. A2.
43
J. Valenti, MPAA Press Release, 2002.
44
S. McBride and B. Orwall, “Movie industry steps up drive against pirates,” The Wall Street Journal, January 27, 2004, p.
B1.
45
Cornelia Dean, “A new test for IMAX: The Bible vs. the volcano,” March. 19, 2005.
46
Richard Goldstein, “Scary Move: When Both Parties Team Up to Target Hollywood, Be Afraid. Be Very Afraid!” Village
Voice, October 3, 2000 p.20.
Page 10 9B09M019
smart kids.47 Other trends that were driving this growth could include higher education levels of parents
and overscheduled kids and parents.48 As a result, zoos, museums, software, TV shows and toys were all
redesigning their products to entertain and educate.
According to IMAX, more than 20 per cent of IMAX audiences were school groups. About 70 per cent of
IMAX viewers were between 19 and 65 years of age, and the majority were college- or university-
educated, with an average household income of more than $70,000, and with 33 per cent earning more than
$100,000.49 MPAA offered a more fine-grained analysis of demographic data on movie attendance. It
reported that 12-24 year olds (38 per cent of admissions) had the largest attendance for feature films in
theaters in 2007, followed by the 25- to 39-year-olds group (29 per cent of admissions).50 The 12-24-year-
olds were also frequent moviegoers (at least one movie per month), representing 41 per cent of frequent
moviegoers. IMAX needed to figure out a way to attract this demographic.

U.S. and Global Market

In 2007, 603 movies were released in the United States and collected revenues of $9.6 billion.51 According
to the MPAA, there were 1.4 billion movie theater attendances in the United States in 2007.52 Jack
Valenti, former president of the MPAA, noted that Americans had the highest per capita movie attendance
in the world at 5.3 films a year. By excluding those who did not see at least one movie a year, the per
capita attendance rose to 8.6 films per year.53 Exhibit 10 displays theater revenues, average U.S. ticket
prices, attendance annual growth rate, consumer price index (CPI) and growth of the U.S. economy.
Theater-owners realized that ticket prices could not go up forever, as this might drive away more viewers;
so they tried to generate revenue by screening more commercials before showing the feature film.
According to some experts, release of big budget franchise movies or sequels of popular movies attenuated
the adverse impact of the economy on theater attendance.
Movies were now increasingly becoming a global industry. More than 5000 films were released
worldwide in 2007, with seven billion attendances and annual global box office revenues estimated at
$26.7 billion.54 The Asia-Pacific region had the largest share of the global market. While Hollywood
movies had always enjoyed an international audience, with globalization and the increased movement of
people across national borders, movies from other regions such as Hong Kong and India were also finding
an international audience. For Hollywood movies, a significant part of the revenues now came from
outside the United States. See Exhibit 11 on domestic and foreign sources for the top 10 films in 2007.
THE LARGER ISSUES
At this point in its evolution, IMAX faced two critical questions. Would IMAX lose its differentiation if it
exhibited too many Hollywood movies? Greg MacGillvray, who had made several films in the IMAX
47
Jeffrey Kluger and Alice Park, “The Quest For A Superkid,” Time, April 22, 2001
www.time.com/time/nation/article/0,8599,107265-1,00.html, accessed December 23, 2008.
48
R. White, “That’s Edutainment,” White Hutchinson Leisure & Learning Group, 2003.
49
www.IMAX.com.
50
J. Valenti, MPAA Press Release, 2002.
51
US Entertainment Industry: 2007 MPAA statistics. See also, M. Marr, “Now playing: Expensive movies; Average cost of a
film tops $100 million for first time; Valenti set to leave MPAA,” The Wall Street Journal, March 24, 2004, p. B. 4.
52
James Jaeger, The Movie Industry, www.mecfilms.com/moviepubs/memos/moviein.htm, accessed December 23, 2008.
53
2007 movie attendance study, MPAA.
54
2007 International Theatrical Snapshot, MPAA;www.mpaa.org/International%20Theatrical%20Snapshot.pdf, accessed
March 4, 2009.
Page 11 9B09M019
format, including the highly successful Everest, argued that IMAX ran the risk of losing its brand identity
as it moved into non-educational entertainment films. He said: “There’s also been a slight brand erosion
given that these films have not been really educational experiences, but more entertainment experiences.”
According to MacGillvray, IMAX’s own research showed that the brand’s trustworthiness was rooted in
the fact that IMAX grew up in institutional settings.55
Another question that the present co-CEOs had faced for several years was: Should IMAX be sold to a
larger studio, such as Sony, Disney or Time Warner? That is, was it too small to survive on its own?
Some analysts had speculated that IMAX was ripe for acquisition. Co-CEO Gelfond had once stated,
“Someday it will make sense for IMAX to be part of a studio.”56
The author would like to thank Professors Barbara Bartkus, Alan Eisner, Jim Key, participants at a case writing

workshop organized by the Society for Case Research, and students at Old Dominion University for comments on
earlier versions of the case. Thanks also to Lee-Hsien Pan for his research assistance.

55
P. Waal, “Call in the barbarians,” Canadian Business, 73:17, September 18, 2000, pp. 85-87.
56
P. Waal, “The plot quickens,” Canadian Business, 71:11, June 26-July 10, 1998, pp. 51-57.
Page 12
Source: IMAX, with permission.

Exhibit 1
IMAX FILM SIZE

9B09M019

Page 13 9B09M019
Exhibit 2
AVERAGE MARKETING SPENDING ON VARIOUS MEDIA, 2007
Newspapers 12.9 %
Network TV 16.1 %
Spot TV 13.7 %
Internet 5.3 %
Trailers 4.9 %
Other Media (cable TV, radio, magazines, billboards) 24.5 %
Other Non-media (production/creative services, exhibitor services, promotion & 22.6 %
publicity, market research)
Source: www.mpaa.com.

Exhibit 3
BOX OFFICE REVENUES FOR IMAX MOVIES (IN MILLIONS OF $)
Rank Title Studio Gross-to-date Year

1 Everest MFF $87.18 1998

2 Space Station 3-D IMAX $77.10 2002

3 T-Rex: Back to the Cretaceous IMAX $53.14 1998

4 Fantasia 2000 BV $52.26 2000
5 Mysteries of Egypt IMAX $40.59 1998
6 Deep Sea 3-D WB $37.09 2006
7 Magnificent Desolation IMAX $26.67 2005
8 Beauty and the Beast BV $25.49 2002
9 NASCAR 3D: The IMAX Experience WB $21.58 2004
10 Sea Monsters: A Prehistoric Adventure NGC $20.05 2007
Source: www.boxofficemojo.com. IMAX box office receipts have only recently started being tracked.
Page 14 9B09M019
Exhibit 4
IMAX CORPORATION ANNUAL BALANCE SHEET

(in thousands of dollars)
Period Ending 31-Dec-07 31-Dec-06 31-Dec-05 31-Dec-04

Assets
Current Assets
Cash and Cash Equivalents 16,901 25,123 24,324 28,964
Short-Term Investments - 2,115 8,171 -
Net Receivables 25,505 26,017 89,171 19,899
Inventory 22,050 26,913 28,294 29,001
Other Current Assets 2,187 3,432 3,825 2,279
Total Current Assets 66,643 83,600 153,785 80,143

Long-Term Investments 59,092 65,878 - 59,492
Property Plant and Equipment 23,708 24,639 26,780 28,712

Goodwill 39,027 39,027 39,027 39,027
Intangible Assets 4,419 3,782 6,030 3,931
Accumulated Amortization - - - -
Other Assets 10,928 6,646 9,756 7,532
Deferred Long-Term Asset Charges 4,165 3,719 10,806 12,016

Total Assets 207,982 227,291 246,184 230,853

Liabilities
Current Liabilities
Accounts Payable 74,267 69,720 62,057 62,724
Short/Current Long-Term Debt - - - -
Other Current Liabilities - - - -
Total Current Liabilities 74,267 69,720 62,057 62,724
Long-Term Debt 160,000 160,000 160,000 160,000
Other Liabilities - - - -
Deferred Long-Term Liability
Charges 59,085 55,803 44,397 50,505
Minority Interest - - - -
Negative Goodwill - - - -
Total Liabilities 293,352 285,523 266,454 273,229
Stockholders’ Equity
Common Stock 122,455 122,024 121,674 116,281
Retained Earnings (213,407) (184,375) (144,347) (160,945)
Other Stockholder Equity 5,582 4,119 2,403 2,288
Total Stockholder Equity (85,370) (58,232) (20,270) (42,376)
Source: Annual Reports.

Page 15 9B09M019
Exhibit 5
IMAX CORPORATION ANNUAL INCOME STATEMENT


Total Revenue 115,832 129,452 144,930 135,980
Cost of Revenue 74,673 76,902 73,005 70,062
Gross Profit 41,159 52,550 71,925 65,918
Operating Expenses
Research & Development 5,789 3,615 3,264 3,995
Selling General and Administrative 44,705 42,527 39,503 36,066
Non-recurring 562 1,073 −859 −639
Others 547 1,668 911 719

Total Operating Expenses 51,603 48,883 42,819 40,141
(10,444) 3,667 29,106 25,777

Operating Income or Loss

Income from Continuing
Operations
Total Other Income/Expenses Net (933) 1,036 1,004 265
Earnings Before Interest and Taxes (11,377) 4,703 30,110 26,042
Interest Expense 17,093 16,759 16,773 16,853

Income Before Taxes (28,470) (12,056) 13,337 9,189

Income Tax Expense 472 6,218 934 (255)
Minority Interest 0 0 0 0
Net Income from Continuing Ops (28,942) (18,274) 12,403 9,444
Non-recurring Events
Discontinued Operations 2,002 1,425 1,979 800
Extraordinary Items 0 0 0 0
Effect of Accounting Changes 0 0 0 0
Other Items 0 0 0 0
Net Income (26,940) (16,849) 14,382 10,244

Page 16 9B09M019
Exhibit 6
IMAX CORPORATION CASH FLOW STATEMENT


Net Income (26,940) (16,849) 14,382 10,244
Cash Flows Provided By or Used In
Operating Activities
Depreciation 17,738 16,872 15,867 14,947
Adjustments to Net Income (3,520) 10,349 (8,678) (4,577)
Changes in Accounts Receivables 675 (11,106) (8,324) (6,673)
Changes in Liabilities 4,781 4,399 (11,749) (6,830)
Changes in Inventories (1,603) 57 (383) (283)

Changes in Other Operating Activities 2,648 (9,659) (1,545) 4,583
Total Cash Flow from Operating Activities (6,221) (5,937) 1,786 11,411

Investing Activities
Capital Expenditures (2,150) (1,985) (1,597) (320)
Investments 2,115 6,396 (7,818) 393
Other Cashflows from Investing Activities (702) 2,105 (1,301) (1,435)

Total Cash Flows from Investing Activities (737) 6,516 (10,716) (1,362)

Financing Activities
Dividends Paid – – – –
Sale Purchase of Stock 420 286 3,633 558
Net Borrowings (1,714) – – (29,769)
Other Cash Flows from Financing Activities – – 786 800
Total Cash Flows from Financing Activities (1,294) 286 4,419 (28,411)
Effect of Exchange Rate Changes 30 (66) (129) 44
Change in Cash and Cash Equivalents ($8,222) $799 ($4,640) ($18,318)
Exhibit 7
SUBSTITUTE ACTIVITIES TO MOVIES IN 2007
Activity Attendance Average Ticket Price

(in millions) (in $)
1 Movies 1400 6.88
2 Theme Parks 341 35.30
3 Ice Hockey/NHL 21 44.60
4 Basketball/NBA 22 46.75
5 Football/NFL 17 65.25
6 Baseball/MLB 77 23.50
Source: MPAA, www.mpaa.com.

Page 17 9B09M019
Exhibit 8
MEDIA CONSUMPTION BASED ON HOURS PER PERSON PER YEAR
Filmed Entertainment 2003 2004 2005 2006 2007
Cable & Satellite TV 886 909 980 997 1,010

Broadcast TV 729 711 679 676 676
Consumer Internet 153 164 169 177 181
Home Video (DVD & VHS) 60 67 63 62 64
Box Office 13 13 12 12 13
In-flight Entertainment & Mobile Content 5 8 10 13 18
Subtotal 1,846 1,872 1,913 1,937 1,962

Other Entertainment

Broadcast & Satellite Radio 831 821 805 778 769

Recorded Music 187 196 195 186 171
Newspapers 195 192 188 178 172
Consumer Magazines 122 125 124 121 119
Consumer Books 108 108 107 108 108
Video Games 76 78 73 76 82
Subtotal 1,522 1,520 1,492 1,447 1,421
Exhibit 9
DVD CONSUMPTION IN THE UNITED STATES

(in millions of units)
Rental DVDs Sell-through Total DVDs Avg. Price

DVDs of DVD
2007 171.2 1,084.6 1,255.8 22.11
2006 180.2 1,129.0 1,309.2 22.29
2005 179.0 1,114.5 1,293.6 21.20
2004 149.3 1,063.3 1,212.6 20.32
2003 105.4 768.3 873.6 20.15

Page 18 9B09M019
Exhibit 10
THEATER BOX OFFICE REVENUES, AVERAGE U.S. ATTENDANCE, PRICE AND ECONOMY
Year Revenue Ticket price Attendance GDP CPI

(in billions $) (in $) (in billions) Growth Inflation
(in %) (in %)
1990 5.02 4.22 1.19 1.9 5.4
1991 4.80 4.21 1.14 -0.2 4.2
1992 4.56 4.15 1.10 3.3 3.0
1993 4.89 4.14 1.18 2.7 3.0
1994 5.18 4.08 1.24 4.0 2.6
1995 5.27 4.35 1.21 2.5 2.8
1996 5.81 4.42 1.32 3.7 3.0

1997 6.21 4.59 1.35 4.5 2.3

1998 6.76 4.69 1.44 4.2 1.6

1999 7.31 5.06 1.44 4.5 2.2
2000 7.46 5.39 1.38 3.7 3.4
2001 8.12 5.65 1.44 0.8 2.8
2002 9.27 5.80 1.60 1.6 1.6
2003 9.16 6.03 1.52 2.5 2.3

2004 9.21 6.21 1.48 3.6 2.7

2005 8.83 6.41 1.38 2.9 3.4

2006 9.14 6.55 1.39 2.8 3.2
2007 9.63 6.88 1.40 2.0 2.8
Source: National Association of Theater Owners (NATO), www.natoonline.org; Bureau of Economic Analysis, www.bea.gov;
and Bureau of Labor Statistics, www.bls.gov.
Exhibit 11
DOMESTIC AND OVERSEAS REVENUES FOR 2007

(in millions of dollars)
Rank Title Domestic Overseas World

1 Pirates of the Caribbean: At World’s End 309.4 649.0 958.4
2 Harry Potter and the Order of the Phoenix 292.0 645.0 937.0
3 Spider-Man 3 336.5 548.9 885.4
4 Shrek the Third 321.0 470.4 791.4
5 Transformers 319.1 382.0 701.1
6 Ratatouille 206.4 409.5 615.9
7 I Am Legend 256.4 327.6 584.0
8 Simpsons Movie, The 183.1 342.4 525.5
9 300 210.6 246.0 456.6
10 National Treasure: Book of Secrets 220.0 234.0 454.0
Source: www.worldwideboxoffice.com.

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9B09M019

IMAX: LARGER THAN LIFE1

Usage permitted only within these parameters otherwise contact info@thecasecentre.org

Purchased for use on the Strategy, at Durham University Business School.

Taught by Min Liu, from 8-Oct-2020 to 8-Apr-2021. Order ref F394058.

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Purchased for use on the Strategy, at Durham University Business School.

Taught by Min Liu, from 8-Oct-2020 to 8-Apr-2021. Order ref F394058.

THE IMAX STORY

Hardware: The Film Technology

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Purchased for use on the Strategy, at Durham University Business School.

Taught by Min Liu, from 8-Oct-2020 to 8-Apr-2021. Order ref F394058.

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Taught by Min Liu, from 8-Oct-2020 to 8-Apr-2021. Order ref F394058.

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Purchased for use on the Strategy, at Durham University Business School.

Taught by Min Liu, from 8-Oct-2020 to 8-Apr-2021. Order ref F394058.

to ride on the coat tails of marketing campaigns launched by the studios.

An IMAX Near You

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Purchased for use on the Strategy, at Durham University Business School.

Taught by Min Liu, from 8-Oct-2020 to 8-Apr-2021. Order ref F394058.

Usage permitted only within these parameters otherwise contact info@thecasecentre.org

Purchased for use on the Strategy, at Durham University Business School.

Taught by Min Liu, from 8-Oct-2020 to 8-Apr-2021. Order ref F394058.

Usage permitted only within these parameters otherwise contact info@thecasecentre.org

Purchased for use on the Strategy, at Durham University Business School.

Taught by Min Liu, from 8-Oct-2020 to 8-Apr-2021. Order ref F394058.

Usage permitted only within these parameters otherwise contact info@thecasecentre.org

Purchased for use on the Strategy, at Durham University Business School.

Taught by Min Liu, from 8-Oct-2020 to 8-Apr-2021. Order ref F394058.

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Purchased for use on the Strategy, at Durham University Business School.

THE LARGER ISSUES

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Purchased for use on the Strategy, at Durham University Business School.

Source: IMAX, with permission.

IMAX FILM SIZE

Purchased for use on the Strategy, at Durham University Business School.

AVERAGE MARKETING SPENDING ON VARIOUS MEDIA, 2007

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BOX OFFICE REVENUES FOR IMAX MOVIES (IN MILLIONS OF $)

Rank Title Studio Gross-to-date Year

1 Everest MFF $87.18 1998

2 Space Station 3-D IMAX $77.10 2002

3 T-Rex: Back to the Cretaceous IMAX $53.14 1998

IMAX CORPORATION ANNUAL BALANCE SHEET

Period Ending 31-Dec-07 31-Dec-06 31-Dec-05 31-Dec-04

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Purchased for use on the Strategy, at Durham University Business School.

Deferred Long-Term Asset Charges 4,165 3,719 10,806 12,016

Total Assets 207,982 227,291 246,184 230,853

Source: Annual Reports.

IMAX CORPORATION ANNUAL INCOME STATEMENT

Period Ending 31-Dec-07 31-Dec-06 31-Dec-05 31-Dec-04

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Purchased for use on the Strategy, at Durham University Business School.