IMAX China Is About to List in Hong Kong. How Did It Become the Most Successful Brand in China's Film Market in Five Years?

Thanks to Avatar, thanks to Wanda, thanks to the Chinese market.

In January 2010, Heping Cinema in Shanghai suddenly became unusually busy.

Every day at four or five in the morning, more than 200 people lined up outside, with dozens of scalpers loitering around them. They were willing to queue in the winter cold for one reason: Avatar was showing in the cinema's IMAX auditorium.

Avatar once again reset Chinese moviegoers' sense of how Hollywood could use film technology to create visual spectacle. It also let them feel, for the first time, the full force of an IMAX screen combined with 3D.

At the time, all of China had only 14 IMAX screens, yet together they took in a startling 158 million yuan (US$25 million) for Avatar, 11.4% of the film's mainland box office. From then on, IMAX and its giant screens enjoyed five years of rapid growth in China.

The number of IMAX theaters on the mainland grew from 14 to 234. Last year, 35 films were shown in IMAX format, and the company earned US$78.22 million in Greater China: 27% of its global revenue and more than half of its profit.

Meanwhile, the Canadian technology company has kept expanding its business in China. It formed a strategic partnership with Wanda, the largest theater chain on the mainland, while also winning orders from other major chains such as Jinyi, Xingmei and Bona. It looked for suitable local partners, took investment from a China Media Capital industry fund, and set up a film fund with it so that IMAX could begin developing its own IMAX films. And during this year's Shanghai International Film Festival, it announced that it would step beyond the big screen and enter the home theater market.

All these moves were made in the name of "IMAX China," the IMAX group's Chinese subsidiary. The company, founded in 2011, has just received approval from the Chinese government to go public in Hong Kong this year, raising about US$280 million.

By now, 17 years have passed since IMAX first entered the Chinese market.

From a big toy in science museums to Hollywood's visual weapon

In 1998, 17 years ago, IMAX opened its first office in China.

At first, it aimed at the market for educational and science films. In 2001, IMAX opened its first theater in China, inside what is now the Shanghai Science and Technology Museum.

According to Li Yinjin, deputy director of the museum's science film center, the first film shown in that IMAX theater was Back to the Cretaceous. For more than a decade afterward, educational films, documentaries and scenery films had the theater to themselves. Only in 2013 did the museum relent and let Skyfall become the first commercial blockbuster to play there.

Focusing on educational films had in fact been IMAX's strategy ever since its founding in 1967. "That was mainly because IMAX had no money in the beginning," recalls Richard Gelfond, now IMAX's chief executive. "Showing educational films made it easier for IMAX to get money from government departments and the National Science Foundation to build its own screens and theaters."

"Of course, making educational films was also cheaper. After all, you don't have to pay scenery or animals high fees." IMAX at that time was not very commercial. Gelfond admits that it was more like a non-profit university.

The change came in 1994. Gelfond realized then that IMAX's technology could be used in Hollywood blockbusters and would very likely earn high profits. So Gelfond, who was still working in investment banking, bought IMAX in a deal and began pitching its technology to Hollywood.

A chicken-and-egg problem

But IMAX's first few attempts failed. "We ran into a classic chicken-and-egg problem," Gelfond says.

First, IMAX approached theaters, hoping to persuade them to upgrade their auditoriums to IMAX. But theaters hesitated, because there simply were not many IMAX films to show. Spending several million dollars on an IMAX auditorium that could show only a few IMAX films a year was not a business worth doing.

Realizing that content was the problem, IMAX hurried to Hollywood studios. But the studios were not interested either. There were hardly any IMAX theaters in the world, so even if studios were willing to make IMAX films, there would be nowhere to show them. Not only would they make no money, they would also have to pay for IMAX cameras and film stock.

So theaters complained that IMAX could not supply films, while studios complained that IMAX could not find screens to show them. Any way you looked at it, it was a deadlock.

In fact, the root of the problem was that IMAX technology was simply too expensive. In the late 1990s, one IMAX film print cost as much as 30 prints in a regular format. Distributing an IMAX film cost more than Hollywood could bear.

It was the same for theaters. Upgrading a regular auditorium to IMAX cost about US$5 million, roughly 20 years of box office for an ordinary auditorium. Theaters were unwilling to spend that kind of money.

Gelfond saw the problem clearly, and he began looking for every way to make IMAX something both theaters and Hollywood could afford.

New technology and a new business model make IMAX the studios' darling

To get there, IMAX did two things. The first was to cut the cost of its technology as hard as it could. On the theater side, IMAX improved the process of converting an auditorium, which greatly reduced the cost of upgrades.

On the studio side, IMAX developed an algorithm called DMR in 2001 that could convert almost any film into an IMAX film. Studios no longer had to buy expensive IMAX cameras and film stock to shoot, nor make expensive IMAX prints. In short, making an IMAX film was no longer prohibitively expensive.

Even more important than the technical progress was IMAX's new business model.

In the past, IMAX had worked with studios and theaters by licensing its technology: studios and theaters paid IMAX a large sum for its equipment and technology. Under this arrangement, studios and theaters carried all the risk, so naturally few wanted to do business with IMAX.

So IMAX came up with a rather tempting offer: it would convert a film into IMAX format for the studio free of charge, in return for one-eighth of the film's IMAX box office.

It was the same with theaters. They only had to pay a token US$150,000 renovation fee to have IMAX upgrade their auditoriums. In exchange, of course, they had to give up 20% of their IMAX box office.

Put that way, the benefits may not be obvious, so let's run the numbers. Suppose a ticket for an ordinary film costs 40 yuan; the studio gets about 16 yuan of that and the theater about 21 yuan. An IMAX ticket generally costs 120 yuan. After IMAX's cut, the studio gets about 33 yuan and the theater more than 38 yuan. Everyone is happy.

What really saved IMAX was Avatar

Once it had settled its problems with theaters and studios, IMAX's biggest remaining question was how to get more people to happily pay more for IMAX films.

"Thank you, Avatar," Gelfond says.

Avatar, released at the end of 2009, is still the finest example of Hollywood's visual-effects blockbusters. With Avatar's success, IMAX, which had hitched itself to the film, became fixed in moviegoers' minds as the "standard format for visual-effects blockbusters."

In a way, this reputation came about strangely. On some occasions the director James Cameron said: "There's no need to see the IMAX version. Sometimes the digital 3D version looks good too." On some film review sites, critics who compared the IMAX version with the regular 3D version also concluded that you don't necessarily need to see Avatar in IMAX.

But moviegoers simply loved IMAX. In Avatar's first week in North America, IMAX screens, less than 3% of all screens, took in 12% of the total box office. In China, scalpers sold IMAX tickets for Avatar for 500 or 600 yuan, sometimes more than 1,000.

By the time the film left theaters, IMAX screens had grossed more than US$250 million, double the previous record.

And so IMAX won over moviegoers around the world, and the favor of Hollywood studios.

Hollywood began to take IMAX films more and more seriously: of the 320 IMAX films listed on IMAX's website, 206 were released after Avatar. In other words, more than 60% of all IMAX films came out in the past six-plus years.

This reflects a change across Hollywood. Its creative powers have weakened; screenwriters, directors, producers and actors can no longer draw audiences with good stories. Avatar's sudden arrival made Hollywood realize that visual effects could be a lifeline. And IMAX, which claims to "better show off the appeal of visual-effects blockbusters," rode this trend and soared.

Then IMAX caught, and seized, the best era of Chinese cinema

With a good business model in hand, and a brand built on Avatar's momentum, IMAX has done quite well these past two years, expanding faster in regions around the world. The best-performing of them all is Greater China.

By IMAX's own figures, from 2012 to 2014 the number of IMAX screens in China grew by more than 40% a year, and IMAX films' share of total box office rose year after year.

All this is because these years happen to be the best era of Chinese cinema.

Five years ago, China had only a little over 4,000 screens; now it has more than 24,000. More screens lifted overall box office, and over the past five years China's total box office has roughly quadrupled. Rising box office in turn fueled a great leap forward in theater building.

In this wave, IMAX was still the favorite. For one thing, an IMAX screen earns far more than an ordinary one. According to EntGroup, a single IMAX screen takes in more than five times the average box office.

For another, IMAX is seen as a symbol of a premium theater experience; after all, IMAX tickets cost considerably more and the viewing experience is somewhat better. Many theaters even use IMAX to set themselves apart from rivals, rushing to install IMAX screens in their cinemas.

So China's major theater chains were eager to sign with IMAX and add more IMAX auditoriums. Their biggest patron was Wanda.

In 2007, Wanda, then busy developing commercial real estate, began working with IMAX, and the deep-pocketed developer signed contracts for 10 IMAX theaters in one go. Four years later, Wanda came back to IMAX asking to lease 75 more. By 2013, the partnership had grown to 210 IMAX theaters.

The two companies have indeed worked well together. For IMAX, Wanda, a property developer with deep pockets and plenty of commercial space, was an ideal partner. For Wanda, the high-quality service IMAX provides fits its fairly upscale positioning.

By the end of 2014, Wanda Cinema Line had 105 IMAX screens, more than two-thirds of all IMAX screens in China. It is fair to say that without Wanda, there would be no IMAX as we know it today.

Because Wanda matters so much to IMAX, the milestones section of the prospectus IMAX filed with the Hong Kong stock exchange mentions Wanda three times, thanking it for its support and help in IMAX's development in China.

In China, IMAX doesn't want to be just a company that shows films

Although IMAX seems to be entering its golden age, it also has quite a few hidden worries.

As a company that provides technical support to studios and theaters, IMAX still depends heavily on Hollywood blockbusters for its survival.

Specifically, no blockbuster releases means IMAX's camera equipment goes unsold, IMAX cannot make money converting films to IMAX, and, worse still, the many IMAX auditoriums it has invested in sit empty.

To solve this problem, IMAX has no choice but to go further into film production to guarantee a steady flow of releases. In North America, IMAX has partnerships with many directors, such as Christopher Nolan, who made Interstellar, and Michael Bay, director of the Transformers series.

In China, IMAX has sought out many partners. Its cooperation with Huayi Brothers, for example, began in 2009. Their joint film Aftershock was released a year later and took in 670 million yuan at the box office.

Afterward, the two worked together on Tai Chi Zero, Tai Chi Hero, Back to 1942, CZ12, Journey to the West: Conquering the Demons, Young Detective Dee: Rise of the Sea Dragon and Dragon Blade, among others. Huayi Brothers is now IMAX's largest film partner in China.

At this year's Shanghai International Film Festival, IMAX also struck a deal with China Media Capital to set up a 300-million-yuan film investment fund that will co-invest in 10 Chinese-language films.

At the same time, IMAX is actively building ties with Chinese directors. This summer's two big releases, Monk Comes Down the Mountain and Monster Hunt, came out in IMAX versions mainly because IMAX invited the directors Chen Kaige and Raman Hui to have their films converted by IMAX.

In fact, IMAX has even thought about making films itself. At a forum in early September, Greg Foster, chief executive of IMAX Entertainment, said: "Our goal is to offer the best possible film service 52 weeks a year, which means having an IMAX film in release every week. If making IMAX films ourselves is the best way to do that, we will be glad to make them."

But a crisis may be just around the corner

The content problem may be the easiest of all the difficulties IMAX now faces.

As IMAX took off, more and more companies launched giant-screen brands of their own. In China alone, several compete with IMAX, including Korea's CGV giant screen, China Film's China Giant Screen, Poly's POLYMAX and Shanghai Film Group's Oriental Giant Screen.

To most Chinese viewers, these giant screens are essentially the same. They care only whether the screen is big enough, not which company is behind it.

On top of that, these domestic giant screens are relatively cheap, and their marketing claims that some of their specifications beat IMAX's. How IMAX can win this kind of competition is another question it has to think hard about.

Second, IMAX's expansion in China has ridden on the great leap forward in Chinese theater building. When theater building in China reaches saturation, where will IMAX's further growth come from?

In the end, IMAX's rise in China, and indeed the world, rests on many coincidences: the boom in visual-effects blockbusters led by Avatar, Wanda's emphasis on building theater chains as it moved into commercial real estate, and even the fact that China's film market happened to start expanding rapidly in the very year Avatar came out.

It is precisely because IMAX's rise rests on so many coincidences that we worry: when moviegoers tire of visual-effects blockbusters, when China's theater-building spree ends, and when virtual reality becomes the next generation of entertainment, how will IMAX hold its place in this market?