3-D Technology Firm RealD has Starring Role at Movie Theaters

As Hollywood rushes headlong into 3-D filmmaking, few companies have as much to gain -- or lose -- as RealD of Beverly Hills. The privately owned technology company with 75 employees has emerged from obscurity to become the leading provider of 3-D systems for movie theaters, outflanking established players such as Dolby Laboratories Inc. RealD's products -- which include an adapter that attaches to the lenses of digital projectors and lightweight glasses -- account for 90% of the U.S. market.

Underscoring its dominance, RealD just signed an agreement with theater chain AMC Entertainment Inc. to install its 3-D technology for as many as 1,500 screens. Terms weren't disclosed. The deal, which will be formally announced today, follows similar agreements with theater operators Cinemark USA Inc. and Regal Entertainment Group.

"We've been impressed with the system," said Frank Rash, AMC's senior vice president of strategic development and marketing. "People are very comfortable with the experience."

RealD founders Michael Lewis and Joshua Green

The contracts come as theater operators seek to lure people away from the big screen high-definition TV at home and back into theater seats. Hollywood studios, concerned about younger audiences who increasingly are turning their attention to video games, the Internet and text messaging rather than going to movies at the mall multiplex, also are banking on the new format.

Over the next three years, about 40 films are scheduled to appear in 3-D, including James Cameron's long-awaited sci-fi adventure Avatar, which Fox will release in December. Walt Disney Studios has 17 3-D movies in the pipeline. And DreamWorks Animation SKG is releasing all of its new features in 3-D, starting with Friday's opening of Monsters vs. Aliens, whose performance will be closely watched as a bellwether for the new format.

The studios have been encouraged by the 3-D versions of movies such as Coraline and My Bloody Valentine. And if the upcoming releases live up to the hype, that could be a boon to RealD, which makes money by licensing its system to theaters, which typically pay an upfront fee of $5,000 to $10,000 and a royalty of about 50 cents per ticket.

Nonetheless, the company's $100-million investment in 3-D technology is a gamble. The credit crunch has slowed the conversion of theaters to digital projection systems, which are required for 3-D screenings. Currently, only about 2,000 of 40,000 screens in North America are 3-D ready.

And although domestic box-office attendance is up about 6% this year despite a severe recession, some analysts question whether penny-pinching moviegoers will be willing to shell out the extra $3 to $5 per ticket to watch a movie in 3-D.

"Is the value proposition sufficient that consumers are going to feel like it's warranted?" said Michael Pachter, a media analyst at Wedbush Morgan Securities. "My guess is no."

For years, theater owners and studios squared off over which would pay for the switch to digital projectors, which cost about $70,000 per screen.

That dispute was resolved last fall, when a consortium of exhibitors and studios agreed on a plan to finance the conversion of nearly 20,000 theater screens and enlisted JPMorgan Chase & Co. to help with the financing. Then the credit markets froze, making it hard to bankroll the conversions.

"It's clearly slowed the rollout," said Regal Chief Executive Mike Campbell, whose company has RealD's systems on only 240 of 6,800 screens. "We would love to have more 3-D screens on the market, but it's beyond our control."

Campbell sees the financing problem as temporary, as does DreamWorks Chief Executive Jeffrey Katzenberg, a zealous advocate of 3-D. Katzenberg has had to temper his expectations. He initially predicted that Monsters vs. Aliens, which cost about $175 million to produce, would open on 5,000 3-D screens. Instead, the film will open on less than half that number.

The slower pace of the 3-D rollout hasn't stalled RealD's business, Chief Executive Michael Lewis said. RealD won't disclose its finances, but Lewis said revenue nearly doubled in 2008 and that the company was on track this year to post an operating profit. "The best creative minds are using this as a new type of filmmaking," Lewis said. "This is a fundamental shift."

That was the hope when he and President Joshua Greer launched the company in 2003 with the goal of using digital technology to improve the 3-D experience. Since its heyday in the early 1950s, the technology has been plagued by poor image quality that made viewing uncomfortable. Many filmmakers regarded 3-D as little more than a marketing gimmick.

A former investment banker, Lewis met Greer when the two worked on the now-defunct digital media lab established by talent firm Creative Artists Agency. Both had worked on 3-D films and believed in the medium's potential.

"We just became obsessed and convinced with the idea that we needed to bring this experience not just to a few hundred theaters, but everywhere," said Greer, who worked on James Cameron's 3-D documentaries Ghost of the Abyss and Aliens of the Deep.

They spent 18 months researching ways to improve the quality of 3-D images. They licensed technology from StereoGraphics, a California firm that created 3-D products for clients including NASA, and later bought the company.

Traditional 3-D systems relied on two projectors, one for each eye. Instead, RealD developed a liquid crystal adapter that attaches to a single digital projector, synchronizing left and right eye images 144 times a second. It also developed lightweight plastic glasses, as opposed to the flimsy cardboard variety.

In 2004, Lewis and Greer raised $16 million from investors and later secured $50 million from Shamrock Holdings, Roy Disney's investment arm, and $20 million more from an investment group headed by Pequot Capital. Once they developed the system, they toured the country, pitching it to studio executives and skeptical exhibitors.

"I don't think there's anybody," Katzenberg said, "who has done more or worked harder to develop the exhibition side of this new platform."

By Richard Verrier, Los Angeles Times