Analysis: Theater owners see new dimension in margins from 3D

By Manasi Phadke and Sudipto Ganguly

BANGALORE (BestGrowthStock) – U.S. movie exhibitors are likely to see strong margins in the next couple of years as they pocket a large chunk of the premium film buffs are willing to pay for 3D special effects.

The success of James Cameron’s blockbuster “Avatar” has spawned a slew of releases such as “Alice in Wonderland,” “How To Train Your Dragon” and “Toy Story 3” and proves that after a few false starts the 3D phenomenon is here to stay.

As studios like Dreamworks Animations (DWA.O: ), Warner Bros (TWX.N: ) and Walt Disney Co (DIS.N: ) jump on to the 3D bandwagon, cinema exhibitors are poised to make the most from this trend.

National theater chains like Regal Entertainment Group (RGC.N: ), Cinemark Holdings Inc (CNK.N: ), Carmike Cinemas Inc (CKEC.O: ), Canada’s IMAX Corp (IMX.TO: ) and privately held AMC Entertainment Inc (MHIAE.UL: ) are tipped to gain from the robust line-up of 3D movies.

(For a graphic on the growing share of 3D movies in total box office collections, click http://link.reuters.com/byq78m)

“It’s easy to dismiss this as a fad because there have been attempts in the past and none of them have sustained themselves, but this time, it is seems like it’s a much more serious effort,” Barrington Research analyst James Goss said.

“The technology is more sophisticated than some of the other times in the past.”

Typically, theater owners see margins from 3D films of about 30 percent, compared with margins from 2D films of about 20 percent, Gabelli & Co analyst Brett Harriss said.

Theater owners charge a premium of about $3 to $5 on tickets for 3D films. After making payments to the studios and other parties involved, they pocket about 25 percent to 50 percent of the premium as their profit.

“If the consumer demand continues to be this robust, margins from 3D for theater exhibitors will be higher in 2011 and 2012,” Merriman Curhan Ford analyst Eric Wold said.

BOOST IN 3D SCREENS

In 2009, revenue from 3D grew about four-fold to $1.14 billion, forming about 11 percent of the total North American box office revenue of $10.59 billion, according to Motion Picture Association of America.

Gabelli & Co analyst Brett Harriss expects revenue from 3D films to constitute about 15 percent of the box office in 2010, and subsequently increase to 20 percent to 30 percent by 2011-2012.

There were 4,384 3D-enabled screens in the United States at the end of May 2010, Patrick Corcoran, spokesman for the National Association of Theater Owners, said.

“We are adding about nearly 300 screens a month. So we could be up around 7,000-7,500 by the end of the year,” Corcoran said.

The rising number of 3D screens is not likely to crimp the premium on ticket prices or fuel competition among theater exhibitors, as they typically serve different markets.

While Regal Entertainment and AMC cater to the big cities and suburbs, Cinemark and Carmike largely tend to mid-sized cities and towns.

According to industry experts, it costs around $75,000 to $100,000 to upgrade movie screens to 3D and get a digital projector. However, theater owners bear only a tiny share of this amount — about $4,000 to $8,000 — and most of the funding is taken care of by the Digital Cinema Implementation Partners (DCIP).

The DCIP, formed by Regal, Cinemark and AMC Entertainment in 2007, has a pool of $660 million to help transition of nearly 14,000 movie theater screens across North America to digital technology. Studios also heavily contribute to DCIP funds.

The theater exhibitors pay only the amount required to lease the digital projector.

With studios roping in top directors and stars, viewers await a feast of 3D movies in the second half of the year such as Disney’s “Step Up 3D” and “Tron Legacy,” Dimension Films’ “Piranha 3D” and Warner Bros’ “Harry Potter and the Deathly Hallows.”

With such a line-up, 22-year-old Cristie Rivera Miranda, from Madison, Wisconsin, doesn’t mind paying a higher price to watch a film in 3D.

“I like 3D films that are closer to reality rather than the animated ones. The reality aspect drives me into theatres to watch a 3D flick,” she said in an email.

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(Reporting by Sudipto Ganguly and Manasi Phadke in Bangalore; Editing by Saumyadeb Chakrabarty and Maju Samuel)

Analysis: Theater owners see new dimension in margins from 3D