Like RealD's Stock Price, 3-D Movies Face a Bumpy Ride

There's no question 3-D movie-technology provider RealD (RLD) had the IPO equivalent of a blockbuster opening weekend earlier this month. The stock's volatile performance since then, though, may be more indicative of what theater operators, hoping for a wider income stream, can expect from 3-D technology. RealD licenses its RealD Cinema Systems to movie exhibitors.

The Beverly Hills, Calif.-based RealD, which priced its initial public offering at $16 a share, opened its first day of trading on July 16 at $19.55 and reached an intraday high of $21. Since then, the stock price fell for three-straight days and dropped to as low as $17.26 during the week before rallying late Friday to close last week at $18.73 a share.

3-D Screens Could Increase by 40% This Year

Whether that's a sign of things to come for 3-D theatrical releases remains to be seen. With 3-D screens accounting for about one out of every eight movie screens in the U.S., theater exhibitors are expected to increase that number by as much as 40% to as many as 7,000 between now and the end of the year, according to Patrick Corcoran, spokesman for the trade group National Association of Theatre Owners (yes, it's known as NATO).

Box-office numbers appear to support such an expansion. 3-D has accounted for about 22% of total U.S. movie ticket sales this year, or about double the percentage in 2009, according to Eric Wold, an analyst at Merriman Curhan Ford. That number may rise further as studios release 18 3-D titles during the second half, compared to five during the first half.

Still, just like a 3-D bullet or a car that appears to be popping out of the silver screen, those numbers may be an illusion. Released just before the 2009 holiday season, Fox's Avatar set all-time box-office records both domestically and globally, with $2.7 billion in revenue worldwide and $750 million in the U.S., according to BoxOfficeMojo.com.

And about 80% of Avatar's U.S. box-office was from 3-D, according to NATO's Corcoran.

The Avatar Effect

RealD's IPO "would clearly have been a lot lower had Avatar not debuted or been a flop," says Chris Chinnock, president of display-industry research firm Insight Media. "This ignited a feeding frenzy for 3-D movies in Hollywood that RealD was able to leverage."

Such success has also driven exhibitors to gradually increase their 3-D ticket markup to about $3.50 -- or almost half the average ticket price of $7.95 -- which may present problems when cash-strapped customers are deciding whether to spend the extra money on a less-promising title. Just one in five theatergoers would be willing to pay a $4 premium for a 3-D ticket, according to BTIG analyst Richard Greenfield, who cites his own July poll of almost 2,600 people.

"Any premium that 3-D commands will depend on the perceived value of the movies being offered in 3-D," says Corcoran. "Too many 3-D movies, especially if they are perceived as being of lesser quality, will impact their value to moviegoers."

Offering the 3-D Option

Still, despite the fact that some of the new, visually innovative titles such as Warner Bros.'s Inception are still being released only in 2-D, more theater exhibitors appear to be willing take that chance by making an investment that in some cases may total $30,000 per 3-D-converted screen, in addition to the $75,000 investment required if the screen hasn't already been converted to digital.

For instance, RealD, which allows exhibitors to avoid some of the one-time expenses by instead charging five-year licensing fees in addition to taking a percentage of the box office, tripled its revenue for the year ended March 26 from a year earlier to $150 million. However, it also widened its loss to $40 million from $16.4 million a year earlier because of higher product costs and operating expenses.

RealD expects future revenue to rise faster than costs, and Wold says theater operators may be able to expect the same by offering more moviegoers the 3-D option at a higher price in addition to standard 2-D fare.

"I don't think exhibitors risk alienating consumers with higher 3-D ticket prices," says Wold. "They offer a premium experience for a premium price, and consumers have the option to opt out and choose the less-expensive 2-D version. It's not 3-D or nothing."