3-D add-on technology provider RealD announced its pursuit of an IPO this month. The wonderful thing about IPO filings is that everyone gets to see what’s under the covers. RealD let out a few surprises.
Not a surprise, the company has gained substantial market share. The screen counts according to RealD as of 25 December, 2009:
- Real D: 4286
- Dolby: 1960
- XpanD: 1560
- MasterImage: 500
- IMAX: 150
- other: 150
What RealD did to get its market share is more interesting. It’s widely known that RealD funded the purchase of digital projectors for 3-D installations through two partnerships in Digital Link and Digital Link II. And it’s widely known that RealD negotiated three 1500-screen deals with each of Regal, AMC, and Cinemark. Disclosed in the IPO filing is that RealD gave away just under 2.5M stock options, with an exercise price of $0.01 and valued on RealD’s books at just under $29.7M, to “motion picture exhibitors.” Guess who. The options vest upon the achievement of screen installation targets.
Cast in a different light, RealD has turned the tables on the exhibitor-distributor relationship. With RealD, it’s the studios who pay (for the glasses), and the exhibitors who get financial benefits (the stock options). When Fox attempted to stop paying for glasses in 2009, the push-back from exhibitors was that the cost of glasses plus the cost of 3-D add-on technology was more than the 50% share of ticket premium they kept. Now that it’s public that they will be stakeholders in RealD, it’s only a matter of time before a studio announces its intent to stop paying for RealD glasses. Your author’s bet is that an announcement will go out end of year when Fox has two 3-D releases, if another studio do it first.
RealD states that its revenue generator is Z-screenTM licensing and sales of glasses. Although it offers several licensing options to exhibitors, its principal licensing revenue is collected at the box office on a per-admission basis. The IPO filing touches on opportunities in the consumer market, and clearly this is where its future should lie. Not articulated in the IPO filing is that RealD has a consumer market opportunity for two reasons: 1) consumers will want cheap eyewear (else how else can you invite friends over to see your 3-D TV?), and 2) a common set of glasses among different television display manufacturers is needed. Without a common type of 3-D glasses that works across several platforms, it will become difficult and frustrating for the consumer to buy replacement glasses. RealD can satisfy both needs.
How well RealD’s IPO is accepted by the market remains to be seen. Certainly, this is the year for 3-D buzz. But it doesn’t take a degree in accounting to see that this company is losing money faster than a bathtub dumps water down a drain. It takes a lot of faith in management to buy this company.