The Film Industry's Real Trouble Is Just Beginning — IMAX's Bad Numbers Are Only the Tip of the Iceberg

The "technology + giant screen + IP" formula may have gone about as far as it can. Time to think of something else.

IMAX's layoffs may matter to the film industry far more than most people realize.

Just days ago, the Canadian film-technology company announced job cuts. Counting its North American headquarters and its joint venture in China, 100 people will go, about 14% of the company's total workforce.

Bad results were the immediate trigger. In the first quarter of this year, IMAX's revenue fell from $92 million a year earlier to $68 million, and net profit dropped from $14 million into the red. Its joint venture in China saw core net profit for the same period fall to $1.7 million, a drop of nearly 90%.

Swings like this are not unusual for film companies. The business turns on too much chance: one flop can sink a whole quarter's results. Even a studio like Paramount saw revenue fall by $300 million in the quarter with no Transformers movie.

The same rule applies to IMAX, since part of its revenue comes from splitting the box office of IMAX releases. "First, you have to remember that last year's first quarter was a record," IMAX CEO Richard Gelfond argued. He stressed that no film this year has come close to Star Wars: The Force Awakens, which took $2 billion worldwide.

But that is not the company's whole business. Selling equipment to theaters matters just as much: it accounts for 77% of total revenue at IMAX China and 33% at IMAX. This is where revenue is falling fastest — theater system sales and leasing, which IMAX reports separately, dropped from $18 million to $6.94 million.

In theory, selling theater equipment should not be a cyclical business. As long as the outlook for the film market stays good, more theaters will pay for IMAX projection systems. In that sense, IMAX's trouble is really the whole industry's trouble, and it will not be fixed soon — otherwise the company's share price would not have fallen to a four-year low.

The clearest sign of it is the box office.

North American box office grew 2.2% in 2016, but ticket prices rose 2.6% over the same period. Adjust for that, and the year's 1.315 billion admissions were below the 1995 level. In the same year, China's total box office of 45.7 billion yuan grew less than 4% over the year before. Strip out the lift from the Spring Festival slate and the year was flat, with five months actually down.

People have not cut the time they spend on entertainment. Video sites keep adding users fast: Netflix's subscriber count passed cable TV for the first time; Tencent Group COO Sun Zhonghuai predicted that any video site with fewer than 30 million paying subscribers would be weeded out. According to a Newzoo report, the global games market will likewise grow from just under $100 billion in 2016 to $120 billion.

It is film alone that people have lost their appetite for. When every other kind of entertainment is taking more of their time and money, a film industry standing still is really moving backward.

Sequel blockbusters deserve much of the blame. "Pirates of the Caribbean? That's the fifth one already. Transformers? Also the fifth one," said Chris Aronson, head of North American distribution at 20th Century Fox. "Some movies just aren't good enough."

When the dashing, defiant Captain Jack Sparrow first appeared on a big screen, Pirates of the Caribbean took more than $300 million in North America. But Pirates of the Caribbean 5, which opened a month ago, set a franchise low on its first day there, and its final total will not break any records either.

The Mummy, which opened right after it, made only $31 million in its first weekend — with Tom Cruise on board, and as a reboot of the beloved 1999 Mummy series. Against the film's $125 million budget, that number is dismal. Universal's plan to launch its Dark Universe looks dark indeed.

The films that opened the 2017 summer season all failed, which more or less guarantees that Hollywood will repeat the failure it lived through last summer. In the words of Robert Moore, then vice chairman of Paramount: "a tough summer."

There is some irony in this: a decade ago, sequel blockbusters were seen as Hollywood's savior. Back then the visual-effects business was coming of age, and effects blockbusters pulled in large audiences on the novelty of their spectacle. Effects films with budgets above $100 million became the market's mainstream.

Bigger budgets meant bigger risk. To lower the odds of failure, Hollywood turned to sequels that already had a fan base, or to stories adapted from classic novels and films. That thinking later became the concept Chinese film people talk about as IP. Building projects around sequels became Hollywood's basic way of working.

IMAX is a company that model produced. What set it apart from the many film projection systems was the brand it built as the format that "shows off the appeal of effects blockbusters better," as IMAX wrote while promoting The Mummy: "Only in front of an IMAX screen will you recall the terror you once felt at being crushed by sandstorms and mummies."

Over the past few years, effects blockbusters advanced in triumph. The top North American earners shifted from Rain Man, Home Alone and Forrest Gump to Harry Potter, The Avengers and Jurassic World, and IMAX rose with them: annual revenue climbed from $130 million in 2006 to $370 million in 2016.

Turn it around, and once people stop caring about sandstorms and mummies, the ground IMAX stands on gives way. Get Out, currently the seventh-biggest film of 2017 in North America, builds its psychological dread out of race; it needs no giant IMAX screen and no 3D to show what it has.

That is why IMAX's falling results are a big deal for Hollywood. They are an alarm bell: the effects-sequel blockbuster model Hollywood has leaned on for so long is becoming hard to sustain.

That model changed all of Hollywood. The studios all went off to make blockbusters, the film business no longer had room for filmmakers with ideas of their own, and those people moved to television.

David Fincher made House of Cards for Netflix; David Lynch brought back Twin Peaks for a third season 26 years on; the Coen brothers and Steven Soderbergh, both Palme d'Or winners, have television projects in preparation. The Weinstein Company, which once released Django Unchained, said recently that it would put more money into television documentaries.

Losing those filmmakers means that if Hollywood really wants to get out of the effects-sequel business, it will take a long time. Before all this, though, China was the market Hollywood had pinned its hopes on.

Transformers: Age of Extinction and Furious 7, which broke China's box-office record for imported films in 2014 and 2015 back to back, were an enormous encouragement. The second one especially: it took $353 million in North America and $391 million in China.

All of that came to nothing in 2016. To prop the market up, China's film regulator even opened up the quota for revenue-sharing imports: the 34 such films a year previously agreed became 38. In June and again in November, Hollywood revenue-sharing releases were scheduled in clusters. None of it worked as well as people had imagined.

And as in North America, more players were trying to cut the same cake. China released 364 domestic films in 2016, more than 60 up on 2015, yet domestic box office fell from 27.1 billion yuan to 26.6 billion; 90 imported films opened in 2016, two-thirds more than in 2015, but box office from imports rose less than 20%; the number of screens in China passed 41,000, up nearly a third, which means revenue per screen fell by nearly a third too.

The slump carried into 2017. Box office on the Chinese mainland totaled 14.343 billion yuan in the first quarter, very close to the 14.49 billion of a year earlier. But strip out the online ticketing fees that officials began counting as box office at the start of the year, and the quarter's real figure was only 13.5 billion yuan, down 6.7% year on year. It was the first negative first quarter in five years.

IMAX China's results suffered too. Its box-office revenue fell 5% in 2016, which pulled film-business revenue down from $28.5 million to $26.8 million, even though the number of IMAX films released that year rose from 41 to 46.

The challenges ahead will only get more tangled. First, Chinese and American audiences are starting to want different things. The three biggest films of the year so far in North America — Beauty and the Beast, Guardians of the Galaxy Vol. 2 and Logan — have all been unremarkable in China. Meanwhile xXx: Return of Xander Cage and Resident Evil: The Final Chapter, which did poorly in North America, each took more than 1 billion yuan there.

All of those films had IMAX versions, which also shows that most films cannot serve the Chinese and American markets at once. If the trend holds, IMAX will have to convert more films to its format or give up on one market or the other. Either way, the margin on IMAX films falls.

Second, take Guardians of the Galaxy Vol. 2 and The Fate of the Furious. The first draws its audience mainly from tier-one cities, which produce 25% of its box office, while tier-three and tier-four cities together account for less than 30%. The second does its heaviest business in tier-three and tier-four cities, which contribute more than 35% of its total.

Conventional theaters do not have to worry much about this, because they have plenty of films to show. If The Fate of the Furious is popular, they add showings; if nobody turns up for Guardians of the Galaxy Vol. 2, they swap in a few domestic films. IMAX theaters cannot. Only a few dozen IMAX films open each year, so if Guardians of the Galaxy Vol. 2 does ordinary business in tier-three and tier-four cities, the theaters have to grit their teeth and keep showing it.

Even among effects blockbusters, some are crude and direct, filled end to end with fighting, while others carry more cultural weight and ask the audience to take them in slowly. Different films need different marketing and different scheduling, and today's IMAX theaters do not have that room to maneuver.

The worst of it may be that Chinese audiences' appetite for effects blockbusters seems to be fading as well, as if carrying on North American audiences' distaste for them.

Captain America: Civil War was billed as "Avengers 2.5," yet it still took about 200 million yuan less than the real Avengers: Age of Ultron. In the same Star Wars franchise, this year's Rogue One, with Jiang Wen and Donnie Yen added to the cast, made only about half of what The Force Awakens did.

Each pair opened in China at a similar time of year and belongs to the same IP, so the comparison says something. It cannot stand for the trend across all of Chinese cinema, but it is a dangerous signal all the same, a warning of trouble that may be on the way.

This market already has plenty of precedent. In 2013, Vicki Zhao's So Young took 720 million yuan and set off a wave of youth films. In the end the youth film collapsed completely as a genre in China and became something everyone held in contempt.

What separates IMAX from the Hollywood effects-sequel model behind it is that IMAX has the world's most deeply built film industry to fall back on, so it will not rot through in two or three short years the way youth films did. What they have in common is that neither treated the making of films as the core of the business. Both bet instead on simple formulas — sequels and remakes, youth and abortion — as dependable ways to make money.

The result is that the audiences lured into theaters grew tired of an industry repeating itself over and over, and turned in the end to other kinds of entertainment, in China as much as in North America.

If the people making movies have not worked this out yet, then the film industry's real trouble is only beginning.

The cover image and the images in this article come from Douban Movie and Wikimedia Commons.