Imagine you were given this kit: a clever business plan that enables your company to participate in 3D box office revenue, interesting technology for bright 3D pictures and a smart screen, patents to convert 3D content, and falling 3D box office that is causing Wall Street analysts to beat up your stock, reducing the target price from $20 to as low as $12.50. Your job, if you choose to accept this assignment, is to increase revenue, and convince the analysts that your company is positioned for growth. Assuming you accept the challenge, what would you do?
The core problem for your company is revenue. Revenue is driven solely by 3D theatrical attendance, because your licensing fees are pulled directly from box office. But this is not an element you have control over, and a weakness of your business plan that makes analysts uneasy. Analysts know that people don’t go to the movies to see your 3D technology: they go to the movies to see a good movie, and you’re not in the movie making business. Nor is anyone interested in your movie-making advice. In truth, you take a piece of box office without carrying any risk in production, distribution, or exhibition, which doesn’t open many doors for you.
But there is one door that hasn’t closed: exhibition. You locked them into long-term licensing contracts for your technology – and they would be less likely to dump you at the end of those contracts if you could improve 3D box office.
The title of the article gives away who I’m talking about: RealD, the largest provider of 3D add-on technology in the US. The analysis given above may be somewhat brutal, but it is just as valid and real. A much edgier analysis could point out that 3D is proving to be least popular in countries where box office is burdened with RealD’s licensing fees. This feeds into the concern of many people in the business: are audiences tired of 3D as a format, or are they tired of paying high ticket premiums to see it? There is growing opinion that it’s the latter. While only $1 of the $4 premium commonly found in the US can be blamed on RealD’s license fee, every dollar counts.
RealD may not be able to improve 3D movies, but it can do a lot to fulfill the audiences’ expectation of receiving a quality 3D experience for the premium paid. RealD Luxe represents RealD’s attempt to do just that. If RealD can successfully build a brand that induces audiences to pay the 3D premium, then it will have a hit. For RealD, a public company that has failed so far to develop revenue in the consumer market – as it originally promised to do – a lot hinges on the success of this program.
It’s for that reason that RealD Luxe should not be taken lightly. It’s significant that RealD chose to introduce Luxe in the Eastern European market, where independent cinema owners rule. Independents do not have the scale needed to build their own valued branded experiences, and a strong 3rd party brand such as Luxe should be very attractive. If successful, RealD will be on the path of “disruptive innovation,” so well described by Harvard’s Clayton Christensen. Such innovation begins in a small, seemingly insignificant way, eventually improving and building in scale to the point where it one day not only competes with established players, but undermines their very business with a superior product. In the US, where RealD is strongest, the largest exhibitors are satisfied with their in-house brands for conveying quality. It would take a tremendous effort to cause US exhibitors to throw out their in-house brands for RealD Luxe. But in Eastern Europe, where exhibition is highly fractured, the barrier to success is quite low, making this the smart region in which to launch, build, and improve the brand.
It’s not enough, however, to simply mimic the old THX approach of a branded cinema experience: a brand with no clothes. RealD may not be able to control the making of a movie, but it can work to introduce a degree of quality control, and possibly enhancement, in the final picture. According to reports, RealD began demonstrating an in-house DMR-like process a year ago, and it now owns the In-Three 3D conversion patents to shore up its enhancement work.
The competition, however, is not the in-house branded experiences promoted by major cinema owners, but IMAX. No one knows better how to defend and promote a branded cinema experience, and it is worthy to note that IMAX was granted US Patent 8411931 in April 2013, broadly defining a method for converting 2D content to 3D that can also be applied to the enhancement of existing 3D content. One might surmise that the format war for a branded 3D experience has only begun.