The Future of Films
And the small company that's quietly building it.
It’s been hard for film companies since the pandemic. Theatrical revenues are down ~30% from pre-pandemic levels. Streaming is growing, and has changed consumer behaviour forever. The franchise-strategy that had worked so well for film studios is fading, with the new Marvel, DC and The Fast and the Furious films reporting disappointing numbers. In such a market, it’s hard for any company in the theatrical business to have high hopes from the future. Yet there is one small company that has been buying its own shares at record pace, shouting in its earnings calls that it is highly undervalued, and touting itself as the future of cinema. Its brand has such fantastic recall that it’s become synonymous with the industry itself - like Google, Xerox and Jacuzzi. It has slowly and quietly carved a monopoly position that is proving very hard to displace. It has beaten street expectations for four quarters straight, and almost all brokerages have given its stock a strong ‘BUY’. 1
The company is IMAX.
So, what does IMAX know that the broader market doesn’t?
To answer the question, let’s look at the global theatrical market of the last 10 years, and the share of IMAX theatres in it.
While the overall market has remained flat in the best years, and declined in the worst years, the revenue share of IMAX theatres has steadily grown. This points to a recent trend in how audiences watch films. While they watch most films on a laptop screen lying in their beds, but when they go out, they want an experience that is the polar opposite of the easy, lazy, low-fidelity bed-watching, one that’s larger than life, loud and overwhelming. If you are dressing up, beating the traffic to reach the theatre on time, and spending heavily, the theatrical experience better be worth it. And audiences don’t mind spending a little extra, if the experience can somehow become even bigger, louder and better. Film, then, becomes an event. People, now, watch films in their beds, and events on the biggest screens possible. This is the market IMAX plays in. It has a monopoly in the business of ‘film-as-an-event’.
A quick 60-second rundown of what IMAX actually does2: IMAX manufactures proprietary projectors, sound systems and cameras, all focused on achieving a high-resolution, large and immersive movie experience. It licenses its projectors and sound systems to movie theatres, typically for an upfront fee, and/or a share of their revenue. Films don’t need to be necessarily filmed with IMAX cameras to be played in IMAX theatres. Such films are converted to the IMAX format through a patented process called DMR, or Digital Media Remastering. Movie studios pay for DMR through a ~12.5% share of the revenue from ticket receipts in IMAX theatres. The films that are shot with IMAX cameras do not require DMR. Recently, IMAX has worked with other camera companies like Arri, Panavision and SONY, to manufacture IMAX-grade cameras for them. The number of films using these cameras has exploded in the last 5 years. Avatar, Avengers, Mission Impossible, Oppenheimer, Dune, and about 30 other films were shot on IMAX (or IMAX certified) cameras since 2019. Christopher Nolan, IMAX’s biggest fanboy has gone a step further and shot his last 4 films almost entirely on IMAX film cameras (not digital), of which exist only 8 in the world. These cameras are so bulky, noisy and expensive that unless the filmmaker has a mad man’s obsession with the image quality, it is impractical to shoot with them.
This business model has worked well for IMAX. It has aligned itself to an experience that is so differentiated from everything else, that customers as well as film companies are willing to pay a premium for it. While the broader market has struggled to regain the pre-pandemic revenue, IMAX has already reached there, and is slated to grow further. Total number of IMAX screens around the world is expected to double, from around 1700 currently to 3300 in the next few years.
Another way to understand IMAX’s success is to view it through the lens of Peter Thiel’s ideas of monopolies, as outlined in his book ‘Zero to One’. First, from its inception, IMAX has strived to capture a big part of a small market instead of a small part of a big market. Its focus has always been on delivering the biggest and the best theatrical experience. It stuck to its vision, even as the market evolved - pivoting to digital from film, from documentaries to mainstream movies, while supporting filmmakers and creatives to create for the IMAX experience. And there’s no competition. IMAX’s moats are almost impossible to break - a vertically integrated technology nexus of cameras, post-production and exhibition that has been perfected over decades, a high-loyalty network of studios and filmmakers, and finally, a brand that has become synonymous to the idea of ‘grandness’ in films. It has also benefitted from very smart communication. Remember how Peter Thiel noted that monopolies never say out loud that they are monopolies? IMAX does exactly that. It is a silent monopoly. The median consumer doesn’t even know that IMAX is a company, let alone a monopoly. Most people think it is a generalised format.
Now if you are a cinephile like me, and your biggest concern is not the big IMAX films, but the near disappearance of small films, do not worry. Our future looks brighter than what the last decade has shown us. I will cover this in detail in my next piece. But I will leave you with one thought appetizer. Our dislike of the big films is rooted in recency bias. The recent spate of big films, almost exclusively reliant on Superhero universes, have been unimaginative and stale. But reverse the clock further and you will find that many of the films that we celebrate for pushing the craft forward were the big films of their times. Citizen Kane, Ben Hur, 2001: A Space Odyssey, Godfather, Goodfellas were all big-budget films for their times. The craft of cinema moves forward not necessarily with the success of many small films, but when small filmmakers are given budgets and the creative freedom to make big films. And that’s what great filmmakers want. They make small films not out of choice but out of compulsion.
The exploding number of IMAX screens will amount to nothing, till there is a steady supply of great stories made for the big screen. The recent box-office successes of Oppenheimer and Dune, and failures of the Marvel and the DC movies show that big films are starting to escape the self-imposed franchise constraints. There will be more original, big films from smaller and newer filmmakers in the near future, and the world will be better for it. Since IMAX has a near monopoly, the future of big-filmmaking will depend to a large extend on IMAX’s future. So for better or for worse, IMAX is going to be there, as long as we value the feeling of being in a cold, dark room with hundreds of strangers, getting lost in another world that helps us understand our own a little better.
Not investment advice. Make your own mistakes.