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Imax Bric Expansion


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Contents Introduction to the case and Issue Identification 1 Main Issue 1 Subsidiary Issues 1 Environment Analysis 1 SWOT: Internal & External Analysis 1 PESTE Analysis 2 Porter’s 5 Analysis 3 CAGE Framework 4 Strategic Alternatives 4 Alternative 1 4 Alternative 2 5 Alternative 3 5 Option Evaluation 5 Final Recommendation 6 Implementation 7 Customer Archetype 7 Marketing Mix 7 Financial Analysis 7 Implementation timetable 9 Conclusion 9 References 12 Appendix 14 Appendix 1: Option Evaluation 14 Appendix 2: Customer Archetype 14 Appendix 3: Theatre Statistics and Growth Rate 15 Appendix 4: Application of Growth Rate to Total Number or Theatres 15 Appendix 5: Number of IMAX Screens added per a year and % of Total Screens 15 Appendix 6: Total Revenues and Revenues Generated by Hollywood Films 2014-2017 16

Introduction to the case and Issue Identification
Main Issue
As of 2013 IMAX had taken in a total of $288 in revenue. For the first time since its inception roughly 40 years ago, international revenues overtook North American revenues with total revenues for 2013 from countries outside Canada and the US of $151 million. Additionally, while international revenues rose by 10 percent over the previous year, revenues for North America dropped by 6.5 percent. Further, theatres that were once a source of revenue for IMAX have begun retrofitting their own theatres with Premium Large Format (PLF) screens. The main issue for IMAX is that the product lifecycle for large format screens has reached maturity in North America. This phase is characterized by a sales volume peak, decreasing market share, and profits starting to decrease (product life cycle stages, 2016).
Subsidiary Issues
In addition to the IMAXs main product entering the maturity phase of the product cycle in North America and there are additional circumstances that further exacerbate the main issue. The cost to convert a theatre to PLF is roughly $150,000 per a theatre, which is significantly less compared to the millions of dollars it originally cost. Due to this decrease in cost and the availability of off-the-shelf PLF technology a number of competitors have entered the market and begun eroding IMAXs market share. The matter is further compounded with studios and exhibitors in North America realizing that they could make millions more by cutting IMAX out of the picture. Further, North American audiences have opted to watch movies at on home on their entertainment systems or on mobile devices instead of going to a theatre. Globally there are many new markets that IMAX can and has begun to penetrate. IMAX currently has plans to add an additional 1,600 screens globally and has one-fourth or 400 allocated for the BRIC nations of Brazil, Russia, India, and China. Now it needs to determine to which of these countries it will add screens to and how to mitigate the country-specific risks.
Environment Analysis
SWOT: Internal & External Analysis Strengths * IMAX has been a trailblazer in the technology for their industry. This has led to them possessing 99 patents related to digital and film based projection, sound system designs and imaging technologies. As a results the name IMAX is synonymous with large-format, high quality cinematic experiences. * Since 2010 IMAX has remained debt free and cash positive. | Weaknesses * IMAX revenue-sharing agreements have an initial term of 10 to 13 years and are non-cancellable. This is a large time commitment and may deter potential client interested in trying out IMAX. * Ticket prices are considered the most expensive for the entire film industry. | Opportunities * International sales have been high with moviegoers in China, Russia, India and Latin America. * In emerging market the popularity of IMAX is strong and the price is quite inelastic with some IMAX tickets costing four times as much as a regular ticket in India and one theatre in Russia charging $80 per a ticket and still doing well. | Threats * Chain-operated theatres large-screen formats were opening at a rapid pace, outnumbering IMAX screens, with 3 PLF screens for every IMAX screen in North America. With some theatres not adding any IMAX contracts, others placing their PLF screens near IMAX theatres and some offering both IMAX and PLF in the same theatre. * Studios and exhibitors realize that they stand to gain millions of dollars by cutting IMAX out of the picture. |

PESTE Analysis Political | * IMAX has 99 patents in the United States. IMAX would be impacted by US patent laws. * China and Russia have both spoken in favor of steps to protect the local film industry in their respective countries by placing minimal quotas for Russian and Chinese films. | Economical | * From 2003 to 2013 the combined GDP growth of BRIC nations had exceeded the combined growth of G7 nations. * North America continues a five-year trend of flat box office receipts in comparison to double-digit growth in Latin America and Asia Pacific. | Social | * More consumers in domestic markets have opted to watch movies on home entertainment systems and mobile devices. * The growing middle class in BRIC nations have a willingness and financial ability to spend. | Technological | * Studios have started delivering more films in a digital format making it easier to build auditoriums with sound and lighting architecture for large-format viewing. * Mobile devices such as tablets and smart phones have made it easier to view movies, television and other media almost anywhere. | Environmental | * The digital format of films creates less waste than the traditional celluloid format. * Watching movies on devices such as tablets is a low power option, compared to watching a film on an IMAX screen. |

Porter’s 5 Analysis Supplier Power-Low | * IMAX owns 99 patents related to its film based projection, sound system design and engineering and imaging technologies. * IMAX has been able to lower the cost of converting films to the IMAX format to $20,000 to $50,000 per a film and the cost of converting theatres to IMAX theatres to roughly $150,000 per a theatre. | Buyer Power-Medium | * There are millions of ticket buyers that visit IMAX theatres yearly and therefore no single powerful buyer exists to drive down the ticket price for large format screens. Price * There a millions of ticket buyers, but only thousands of movie theatres. Theatres that were at one time buyers of IMAXs products and services now have an option to build their own PLF screens and take more of the profit for themselves. | Competitive Rivalry-Medium | * For every 2 IMAX screens there are 3 PLF screens from competitors in North America. * While PLF screens from competitors outnumber IMAX screens they do not provide the high-quality experience offered by IMAX theatres. | Threat of Substitution-Medium | * The only direct substitute for an IMAX screen is a PLF screen. These are the only two options for a customer that wants the experience of a large screen format and set-up offered in sound design and high definition picture. * For a customer that wants to watch a movie there are a number of indirect substitutes available such as a regular movie theatre, home entertainment system, and mobile devices. | Threat of New Entry-Medium | * There are over 72 PLF brands in North America, but only a few of them could be considered a real threat. * The cost to convert a theatre to the IMAX format is roughly $150,000 per a theatre and about $350,000 to build a new IMAX auditorium. The cost while reduced from the millions it cost previously is still quite significant. |

CAGE Framework Cultural Distance | Administrative Distance | Geographic Distance | Economic Distance | Attributes Creating Distance | * In Brazil and Russia business is conducted in their native tongues of Portuguese and Russian. * India and Chinas primary religions are Hinduism and Taoism and Confucianism. | * Brazil, and China have protectionist policies in place related to the film industry and Russia is considering similar policies restricting the number of Hollywood films. * Russia and China operate under non-democratic political systems. | * Population wise India and China populations are significantly larger than the US at 1.27 and 1.37 billion. * A large amount of China and India’s population still lives in rural areas. | * Nearly half of India’s population is poor (600 million) and only 17% of households are classified as middle class or higher. * Russia and Brazil economies rely heavily on commoditized goods. Russia’s economy relies heavily on oil & gas which is a highly volatile market. |

Strategic Alternatives
Alternative 1 With the 400 theatres allocated for the BRIC economies expand mainly into China, with limited amounts of theatres opened in Russia, India and Brazil. The amount allocated to each market should be based upon current middle class size and future estimated growth, overall market size, and the population’s adoption of technology and Hollywood films. Further, establish more joint ventures and partnerships with local film production companies to convert popular local films to the IMAX format. | Pros + | Cons - | * China’s middle class already numbers in the hundreds of millions, with an enormous appetite for affordable luxuries. Russia also has a large percentage of the population that is classified as middle class. * Creating partnerships with local film production companies to convert films into the IMAX format is a way to mitigate the protectionist policies of China and Russia. | * China already has protectionist policies in place that limit foreign movies imports to 34% a year and may reduce this number even further. Russia is already considering protectionist policies. * A large number of individuals in India are used to viewing films for an admission price of $2-$3. |

Alternative 2 IMAX increase their focus and efforts on developing a premium home entertainment systems to offer an at home experience that is as similar as possible to the experience offered in theatres already. | Pros + | Cons - | * IMAX would be able to take advantage of the trend in North America of consumers opting to watch more films at home or on mobile devices. * IMAX would be able to develop a new revenue stream and recapture profits lost to the trend of consumers viewing films at home and on mobile devices. | * This does not take advantage of IMAXs existing patents or its competitive advantage, which is its capability to offer a high quality theatre experience at a reasonable price point. * It will take a great deal of time and money to develop and market the home entertainment system. |

Alternative 3 IMAX expands into each of the BRIC countries evenly. Allocating 100 theatres to Brazil, 100 to Russia, 100 to India and 100 to China. Additionally, continue to develop partnerships and joint ventures with local theatres and film studios. | Pros + | Cons - | * By fostering relationships with local exhibitors and studios IMAX will increase the likelihood of doing business in these countries. * This option simplifies the decision allowing IMAX to focus more time on developing these markets. | * This option does not take into consideration the unique risks and opportunities in each market. * China and Brazil already have protectionist policies in place and Russia is considering creating similar policies. These would reduce the amount films that IMAX could release in these countries and cut into profits. |

Option Evaluation
Each of the alternatives has been evaluated on a scale of 1 to 5 based upon an estimation of four criteria; risk, cost, time and profit, with 1 being low and 5 being high. The evaluation is as follows:
Risk-Option one carries the least risk compared to the other alternatives. The allocation of theatres based upon current middle class size and future estimated growth, overall market size, and the population’s adoption of technology and Hollywood films in addition to working with local theatres and studios to convert local films to IMAX mitigates the risk of protectionist policies and the risk of poor market selection. R&D is riskier because it’s a venture into a market that IMAX is not as familiar with and not as well known for and alternative three does not take into account any of the unique risks of each market.
Cost-For alternatives one and three the cost is the same at about $350,000 per a theatre. Developing a new home theatre that would incorporate aspects of IMAX theatres would be quite costly, in addition to the cost of testing, marketing and developing supply lines to bring the home theatre to market.
Time-Alternatives one and three each would take about the same amount of time to implement as IMAX already has agreement established with each country and already has the existing technology and infrastructure in place. All that’s needed to be done is select the theatres and set up the IMAX theatres. While there is work already begun on developing a premium home theatre system for IMAX there still would likely be a large amount of time to develop, test and bring to market the home theatre system.
Profit-Alternatives two has the potential for large profits if successful, but because IMAX does not have previous experience in this market these profits are not guaranteed Profits for alternative three would be reduced due to the lack of discernment in selecting markets for the greatest optimization of revenues, and the risk of protectionist policies reducing the number of IMAX films that could be imported to countries such as China and Russia. Alternative one would be most profitable due to careful selection of markets and partnerships with local studios to convert films to the IMAX format ensuring that IMAX would still be able to have films showing in countries despite increased protectionist policies.

Final Recommendation
The alternative that IMAX should implement is alternative one, expand into China, Russia and India with a higher number of theatres allocated for China and develop further partnerships with exhibitors and studios to convert local films into the IMAX format. This option takes advantage of emerging markets that are in still in the growth stage of the product cycle with price being relatively inelastic in Russia and China. Further, this option takes advantage of a growing middle class that will number in the hundreds of millions that are willing to pay for affordable luxuries such as IMAX films. This solution compliments IMAXs competitive advantage which is offering a high quality movie going experience that creates a more immersive environment for movie goers at a reasonable price. Further, it leverages their core competency for innovation which includes 99 patents and an additional 36 patents pending approval.
The generic strategy recommended for IMAX would be one of differentiation. IMAX is known for offering a theatre experience unlike any other, even with other PLF screens being offered in theatres, IMAX still offers the highest quality experience. If IMAX were to dilute the quality of their theatres to lower the cost and compete with PLF screens, exhibitors would lose all incentives for to choose IMAX over other PLF screens and profits would likely plummet. IMAX should continue to focus on offering a high quality experience to consumers in both foreign and domestic markets because they will be able to continue to justify the price they charge for their products and consumers will continue to choose IMAX over other PLF screens for a better movie going experience.
Customer Archetype
IMAXs customers fit a large age demographic with films appealing to children such as the Polar Express and films meant for an older audience such as The Dark Knight. According to the industry 65% of films goers are aged 18-59 and this should be the main focus of IMAXs efforts. IMAX consumers also appreciate technology, have an appetite for affordable luxuries, are middle class or higher, enjoy large Hollywood blockbusters and a high quality movie going experience.
Marketing Mix
Price-the average price per a ticket for an IMAX movie domestically is $13 to $15, with the average price for a regular movie ranging from $8 to $10. The pricing for an IMAX film appears to be based upon a combination of prestige and product line pricing, to indicate the exclusiveness and quality of the product and to differentiate between regular and 3D IMAX films.
Product-IMAX offers two forms of their product to consumers. The first is a regular IMAX film and the other is a 3D IMAX film. The first meets the needs of the customer who wants to experience the large picture quality and sound for a summer blockbuster film, and the second for the consumer that wants that extra level of immersion in film that 3D provides in addition to a regular IMAX films attributes.
Place-IMAX films are offered at multiplex theatres that can offer to consumers both films in regular format and also in the IMAX format. Multiplexes are located in large urban centers to ensure access to a large number of movie goers. IMAX films are played in theatres across the globe and in this case will increase the number of screens in China, Russia, India and Brazil.
Promotion-IMAX screens will be promoted through a combination of offering free tickets to opening for new films in IMAX format to generate word of mouth, and advertisements placed before regular films in theatres.

Financial Analysis
A growth rate of was applied to each country based upon the number of screens added from 2012 and then extrapolated for each year until 2017. While the number of screens for China seems quite high, it is based upon a growth rate of 10 per day as outlined in the case. To calculate the number of screens to add to each market in total based upon the 400 allocated for BRIC countries total box office generated by each country was multiplied by the percentage generated by Hollywood films. From this the amount of total Hollywood box office generated by each country was found totaling $3.86 billion for the BRIC nations. Next each BRIC countries contribution to Hollywood revenues was divided into the total and a percentage of contribution was found for each country. This was multiplied against the total 400 allocated for BRIC countries and resulted in 187 IMAX theatres allocated for China, 120 for Russia, 16 for India and 77 for Brazil. Because each theatre costs $350,000, the installation of all 400 will be spread out over 4 years. See table 1, for information related to these calculations.
Table 1 | Calculation of Theatre Allocation to BRIC Countries | | Total Box office Rev. in $ billions | % of total box office | % from Hollywood | From Hollywood in $ in billions | Box office from Hollywood % | total # of IMAX theatres allocated over 4 years | Allocated per a year | China | $3.60 | 49% | 50% | $1.80 | 47% | 187 | 47 | Russia | 1.40 | 19% | 83% | 1.16 | 30% | 120 | 30 | India | 1.50 | 20% | 10% | 0.15 | 4% | 16 | 4 | Brazil | 0.90 | 12% | 83% | 0.75 | 19% | 77 | 19 | Total | $7.40 | 100% | | $3.86 | | 400 | 100 |

To determine the amount of revenue that would be generated by adding the additional screens to each of the BRIC countries the total amount of IMAX screens for each year from 2014 to 2017 was divided into the total number of screens for each country.
Total revenues for and revenues from Hollywood films for foreign markets were calculated by applying the rate at which box office revenues grew for each BRIC country in 2013 and then applying the percentage from Hollywood films found in table 1.
Using the 32.5% rate that IMAX captured from each revenue sharing agreement, a cost of $350,000 per a screen, in addition to applying the percentage of revenue captured from Hollywood from 2013 and an additional capture 2% of foreign box office revenues by partnering with local studios the following pro-forma, partial Income statement in table 2 was generated for IMAX from 2014-2017.

IMAX Corporation
Pro-Forma Partial Income Statement
For the Year Ending December 31, 2017
IMAX Corporation
Pro-Forma Partial Income Statement
For the Year Ending December 31, 2017
Table 3

| 2014 | 2015 | 2016 | 2017 | Rev. China | $41,263.65 | $49,734.18 | $60,111.12 | $73,033.85 | Rev. Russia | 10,283.00 | 20,764.75 | 27,199.43 | 34,453.56 | Rev. India | 10,822.50 | 13,814.14 | 15,232.67 | 16,789.48 | Rev. Brazil | 6,669.00 | 13,004.63 | 16,890.68 | 21,422.23 | Total Rev. BRICs | 69,038.15 | 97,317.70 | 119,433.90 | 145,699.11 | | | | | | COGS China | 16,450.00 | 16,450.00 | 16,450.00 | 16,450.00 | COGS Russia | 10,500.00 | 10,500.00 | 10,500.00 | 10,500.00 | COGS India | 1,400.00 | 1,400.00 | 1,400.00 | 1,400.00 | COGS Brazil | 6,650.00 | 6,650.00 | 6,650.00 | 6,650.00 | Total COGs BRICs | 35,000.00 | 35,000.00 | 35,000.00 | 35,000.00 | | | | | | Gross profit | $34,038.15 | $62,317.70 | $84,433.90 | $110,699.11 |

Implementation timetable | 2014 | 2015 | 2016 | 2017 | | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | Add theatres in BRIC countries | | | | | | | | | | | | | | | | | Increase partnerships with local studios of BRIC countries | | | | | | | | | | | | | | | | |
The main issue that IMAX faced was entering the mature phase of the product cycle, with subsidiary issues such as the large amount of PLF screens in domestic markets, the risk of studios and exhibitors cutting IMAX out of the picture completely, changes in North American view habits, and determining where to add 400 new IMAX theatres in BRIC countries. By allocating theatres based upon revenue growth rates for each market and taping into foreign revenues generated by BRIC countries IMAX is able to access a market largely untouched by PLF screens that outnumber IMAX in North America. Further, IMAX will be able to access markets that still find their products novel and are willing to pay to experience it. Allocating theatres based upon revenue growth and the percentage of theatres that IMAX will represent of the total has helped determine how many IMAX theatres to allocate to each BRIC country and also an idea of the revenue generated. Lastly, by working to develop relationships with foreign movie studios, IMAX is able to gain access to even further revenue and protect itself from loss of profits due to the protectionist policies of certain countries.

Product Life Cycle Stages. (2016). Retrieved April 18, 2016, from

Appendix 1: Option Evaluation

Appendix 2: Customer Archetype

Appendix 3: Theatre Statistics and Growth Rate | Total Screens 2012 | Screens added 2013 | Total Screens 2013 | % growth 2013 vs 2012 | # of Imax Screens | IMAX % of total screens | China | 8,350 | 3,650 | 12,000 | 44% | 221 | 1.8% | Russia | 3,023 | 177 | 3,200 | 6% | 8 | 0.3% | India | 1,050 | 150 | 1,200 | 14% | 39 | 3.3% | Brazil | 2,550 | 100 | 2,650 | 4% | 11 | 0.4% |
Appendix 4: Application of Growth Rate to Total Number or Theatres | # of Screens 2014 | # of Screens 2015 | # of Screens 2016 | # of Screens 2017 | China | 17246 | 24784 | 35618 | 51187 | Russia | 3387 | 3586 | 3796 | 4018 | India | 1371 | 1567 | 1791 | 2047 | Brazil | 2754 | 2862 | 2974 | 3091 |
Appendix 5: Number of IMAX Screens added per a year and % of Total Screens | IMAX screens 2014 | IMAX screens 2015 | IMAX screens 2016 | IMAX screens 2017 | IMAX % of total screens 2014 | IMAX % of total screens 2015 | IMAX % of total screens 2016 | IMAX % of total screens 2017 | China | 268 | 315 | 362 | 409 | 1.6% | 1.3% | 1.0% | 0.8% | Russia | 38 | 68 | 98 | 128 | 1.1% | 1.9% | 2.6% | 3.2% | India | 43 | 47 | 51 | 55 | 3.1% | 3.0% | 2.8% | 2.7% | Brazil | 30 | 49 | 68 | 87 | 1.1% | 1.7% | 2.3% | 2.8% |
Appendix 6: Total Revenues and Revenues Generated by Hollywood Films 2014-2017

[ 1 ]. See Appendix 1 for Option Evaluation graph
[ 2 ]. See Appendix 2 for Customer Archetype
[ 3 ]. See Appendix 3 for Theatre Statistics and Growth Rate
[ 4 ]. See Appendix 4 for Application of Growth Rate to Total Number of Theatres
[ 5 ]. See Appendix 5 for Number of IMAX Screens added per a year and % of Total Screens
[ 6 ]. See Appendix 6 for Total Revenues and Revenues Generated by Hollywood Films 2014-2017

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