Case introduction and background
The IMAX corporation has been at the forefront of groundbreaking movie technology since the 1960s. Their expertise in multi-screen, large-format filmmaking that creates an immersive experience has suffered relatively few competitors over the years. Distinctive brand identity has added to IMAX’s market differentiation. Initially, IMAX opened theatres in institutions such as museums and aquariums, and created documentary style films with high educational value. This has given IMAX a strong image as a trusted provider of quality “edutainment” movies suitable for family audiences.
Much of IMAX’s business relies not on the production and screening of their signature movies, but on the sale of their patented equipment. In order to remain leaders in large-format movie technology, IMAX invests heavily in research and development (R&D). Between 2004 and 2007, the company spent over $12.6 million in R&D, in addition to receiving related funding grants from the Ontario government. Recent technological developments include 3D filming technology, 3D directional sound, and digital cameras and projectors. IMAX has traditionally sold their equipment directly to theatres, and provided necessary servicing. Recent agreements with theatre chains require IMAX to pay for system installation. In return, IMAX receives a cut of box-office revenue from screenings of reformatted IMAX films.
Despite its favourable reputation and considerable technological achievements, IMAX has experienced financial difficulties since the late 1990s. During the theatre overbuilding crisis of the 1990s, many commercial theatres screening IMAX format films filed for bankruptcy. Unable to collect receivables from failed theatres, IMAX plunged deeply into debt. Their credit rating suffered and was considerably downgraded. IMAX did take measures to reduce their debt load, but have yet to dig themselves out completely. Additionally, developments of new film technologies presents a threat to IMAX’s reign over the high-definition, large format, immersive style movie market. New high-definition cameras and related technologies have made it easier for new filmmakers to create movies with similarly clear images, while digital projection has made it cheaper and easier for theatres to screen films with a similarly immersive feel.
In order to remain competitive, reduce their debt load, and expand their audience, IMAX has begun reformatting and screening Hollywood blockbuster movies. These reformatted films have generated considerable box office revenues, especially when the movies are released simultaneously in IMAX theatres and mainstream theatres. Although there is some concern over brand erosion due to the company’s involvement with mainstream movies, the experiment appears to be a success. The reformatted IMAX screenings consistently bring in much higher revenue than the mainstream screenings, with customers willing to pay an extra $3 to $5 to see popular movies in the IMAX format. The company, however, continues to show losses in their financial statements, their costs far outstripping revenues despite the popularity of the reformatted Hollywood films.
Questions have arisen whether IMAX may continue as an independent studio or whether it should be sold to a major studio. This question stems from several issues, such as IMAX’s declining market capitalization, their debt and credit problems, and the threats presented by emerging technologies. These issues are part of a bigger picture, namely that IMAX no longer enjoys their former market supremacy over high definition, large-scale, immersive movie making. Ultimately, IMAX faces the following problem: there now exists too many substitutes for the creation and viewing of the formerly unique ‘experience’ IMAX offered, which makes it difficult for IMAX to sufficiently differentiate themselves from competitive mainstream...
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