The Old Movie Game

Hardly anyone alive today can remember a time when going to the movies didn’t exist. But the movie business isn’t quite the rage that it used to be in its heyday, when major cities seemed to have theaters on every other street corner. As technology has moved on, and entertainment has become increasingly (and more quickly and conveniently) available from other sources, movie houses are far less prolific than they used to be. Indeed, with most titles becoming readily available just months after hitting the theaters, it would appear that cinematic releases have simply become promotional vehicles for the more lucrative profits to be derived from DVD and Internet download sales. But people still go to the movies, drawing a devoted crowd that wants to see the latest and greatest that Hollywood has to offer. 

A New Twist On An Old Idea

3-D technology has been around in one form or another since before photography itself. Several attempts have been made over the years to transfer the experience to moving pictures with varying degrees of success, sometimes intermixed with headache-inducing results. The science and the methods involved have come a long way since the red and blue glasses used when 3-D first enjoyed a wave of popularity in the 1950’s. A lot of this has been made possible by the advent and advances of the digital age, which allow images to be manipulated and enhanced in ways that heretofore were impossible. Indeed, the technology now exists to “retrofit” three dimensional effects onto movies that were not created with the format in mind. For example, the original 1977 Star Wars movie is due for a 3-D release this year.

Fad or Fixture?

Now that the technology has caught up to moviemaker imaginations, many things are possible that could never be realistically rendered before. In particular, the success of Avatar opened up the floodgates, so to speak, as it quickly became one of the top films of all time. As a result, a record 34 3-D releases were on tap for 2011, up 54% from last year.

To be sure, there is the novelty aspect to consider. Will audiences want to see every move in this format? Probably not. But special showcase fare that highlights and makes full use of the medium’s potential will likely draw the largest audiences. That is to say, the latest whiz-bang special effects sci-fi thriller may be a natural, while a tea-room drama or romantic comedy may not be as tempting for the masses to shell out the extra bucks.

Celluloid Fading To Black

But there are other benefits as well. The digital medium also enables theaters to broadcast live events, such as concerts, major sports match-ups, Broadway productions, and other special fare, which also garner premium prices.

There are also cost savings all around, in terms of production, distribution, and exhibition. All those heavy film reels don’t have to be manufactured and shipped all around the world. Also, the digital format won’t fade, wear out, or break in the middle of a key scene, inciting an angry mob of theatergoers to strongly protest.

Another side benefit to 3-D movies is that they are not easily bootlegged. That is, someone cannot simply sneak a camera into a theater and then sell cheap copies on the street. As such, those that want the full experience have to physically go to the cineplex and pay extra, or buy a somewhat pricey home-theater setup and hope that the feature is eventually made available for home viewing in the 3-D format.

The Cinemark Proposition

Cinemark (CNK) is one of the leading operators in the motion picture exhibition business, boasting the third largest circuit in the U.S., with 292 theaters and over 3,800 screens. Moreover, it ranks either first or second in terms of box office revenues in 25 out of its top 30 domestic markets served. It also has 139 theaters in 13 countries across Latin America, representing 1,125 screens.

It is currently in the midst of converting all of its screens to digital projection, which is a prerequisite to exhibiting 3-D movies. At the end of 2010, it had 1,564 digital auditoriums worldwide. Once the rollout is completed, about 45% of its screens will be 3-D compatible. The profit potential for this initiative is considerable. Cinemark gets about a 50% ($3.00) premium per patron for these releases, with the average three-dimensional movie taking in three to six times more per screen than its 2-D equivalent.

There are other reasons the movie business, and Cinemark in particular, should be an investment consideration. First off, relative to other forms of entertainment, such as live concerts, plays, or professional sports, the capital outlay for a family outing is relatively small. This is one reason why the business tends to hold up comparatively well in downturns, as it did during the recent recession. 

Cinemark, in addition to its digital initiative, has also been expanding its theater circuit, both domestically and in its South American markets. Indeed, growth in the latter, particularly in Brazil, has been even stronger than on the home front, owing to the rapidly developing economies in the region. In all, Cinemark added 138 screens worldwide last year, with commitments to build 196 more by the end of 2013.

It has also been expanding its own XD Extreme Digital theatre experience (again, with higher ticket prices) that features floor to ceiling screens, stadium seating, and premium sound systems. It plans to add another 35 to 40 XD auditoriums this year, on top of the 47 it had at the end of 2010. 

To be sure, 3-D may never become the industry standard, and much of the company’s profit potential will still be tied to Hollywood’s ability to supply popular offerings. But, overall, Cinemark’s initiatives are laying the foundation for earnings growth for years to come. In addition to the price appreciation potential and defensive nature of the industry, the stock’s appeal is enhanced by a relatively high yield.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.