In Reel Time

2010.48 Thoughts on the media industry

Last weekend I was asked twice about what will happen with the media industry long term. I get asked this question often (or the variant…what are your thoughts on the media industry).

The question is so big and broad I always inhale and think for a minute before saying a word (it’s like being asked if there is a God or how we’ll fix social security).

So the short answer is that I don’t know.

But the long answer revolves around the best way to figure out any evolving industry. Start with what you know. Evolution is an iterative process and the end result isn’t pre-determined; rather it takes shape as each individual step or change is implemented (and chosen by a related party). Good ideas often repeat.

So, what I do know (including some clichés that we all know):

1. Story telling goes back before written history; it won’t disappear. It isn’t disappearing.

2. Quality content can’t be free; otherwise artists can’t afford to create much of it (and, to date, newer content has more value than does older content, in general).

3. People are social creatures; blockbusters and the mass market will continue to exist as people want to have common discussion topics.

4. Technology will continue to disrupt media. It always has (the printing press…).

5. A friend’s point: technology is actually adding less value over the past ten years than it did in the years leading up to 2000 (think the PC or Internet over arguably the biggest tech breakthrough of the past ten years – the iPad).

6. Artists need to be more multidimensional. As radio killed the video star and talkies cratered the career of the silent greats the distribution platforms have gotten more demanding and diverse. Lady Gaga is a performer; not a singer.

7. But, I don’t believe that all content should reach its audience over all platforms all of the time. If your audience isn’t watching television don’t spend (money and employee time) to get on television. Note the original argument only works well if you take mainstream media onto the newer avenues of portable devices or the Web and not vice versa (no Farmville movie planned in my knowledge).

8. Digital content is much harder to monetize; no one has perfected the model but I’ve met with some companies that are successfully monetizing (and not just pennies). Look at online gaming!

9. Anecdotal evidence only but the tech world seems to be hiring more out of the studios or other mainstream media companies than vice versa (except in tech systems and support areas).

10. People really do like fragmented distribution. It’s fun and convenient.

11. My kids love games. Kids love games. Women, who make up a lot of the monetizable online traffic right now increasingly, love games.

12. The MacBook Air is great. I like the iPad less (no flash). My Blackberry and Kindle are dear to my heart. Books and Kindles can co-exist.

13. The studio model will continue to be under attack from many Silicon Valley types. The core question is whether it will adapt quickly enough to survive by migrating to a – highly different – form (“protected and feudal microcosm that was only able to stay artificially alive as long as it did because the artists were a part of this small community and helped protect it longer than was wise” was what I heard today from a friend).

14. Iteration broken by big break throughs is the pattern.

15. The old definitions no longer apply: “technology” and “media” are imprecise.

16. Cisco has a tough job. After hours on the line with tech support making my home network “work” I can attest that seamless home networks are not a plug and play concept yet.

17. Some people are open to new ideas and others will resist disruptive change and related solutions (one of my promised clichés). Our brains aren’t wired to accept or process ideas that are vastly different than what we’ve accepted to be true in the past. Having been windows based for so long I’ve had a harder time working my daughter’s Mac than she has (at 9). I keep looking for an X in the right hand upper corner.

18. I haven’t been as excited by so many companies in ten years or more.

Are we in the early stages of this change? No; most industries continue to evolve but the media industry gets more press (it’s more fun!). And the related innovations have accelerated (with the music industry leading the charge).

Coming from the tech world I’ve lived the fast pace of such cycles; and the Internet has clearly injected that speed into media, which had been protected from certain competitive forces by its strong dominant niche position. Consumers have more choice now and the ramifications have been felt throughout all forms of media and created new ones. Some won’t survive. This resolution is far from pre-determined and I’m enjoying meeting with and advising companies that are at the cutting edge of such changes or creatively meeting them head on.

So, in conclusion, what are my thoughts on the media industry? The business model is shifting from protected windows to a more tech style model of proactively focusing on the customer/audience. But, actually, there is no true conclusion for this blog posting. Rather, the debate will continue.

2010.40 Stress in Hollywood and recent media services developments

As you know, Megan and I are focused on the media services sector: the software, system, application, service and equipment rental companies that support the content ecosystem.  We often refer to this universe of companies as “first derivative plays” on the media/content business.

Megan’s post Thursday on Technicolor’s divestiture of its Grass Valley Broadcast business to Francisco Partners covered an important transaction in the broadcast equipment business.  I want to go further and connect a few recent data points:

• Data point number one, April.  Eastman Kodak sells its post-production service business Laser-Pacific to an affiliate of H.I.G. Capital portfolio company Telecorps.  Telecorps had previously acquired Wexler Video, Coffey Sound, PostWorks New York, Orbit Digital and Hulu Post since 2007.  Terms were not disclosed, but word on the street is that Kodak received modest consideration for Laser after having acquired the business for over $30 million in 2004 (FULL DISCLOSURE: Hadley Partners owns an immaterial interest in Telecorps).
• Data point number two, July.  Technicolor sells its Grass Valley Broadcast business to Francisco Partners.  As recounted in Megan’s post, GV lost 52 million Euros in the broadcast business last year, and Technicolor is selling GV to Francisco for no cash consideration – just a note and an earn-out.  In fact, Technicolor is contributing 20 million Euros to the company at closing.
• Data point number three, July.  As covered in the Wall Street Journal Thursday (subscription required), Eastman Kodak’s movie film business is shrinking faster than previously expected due both to less film production generally and the transition of theatrical exhibitors from film to digital distribution.  Kodak’s “entertainment imaging” revenue fell 18% in the June quarter vs. the prior-year period.
• Data point number four, ongoing.  We have heard from several sources that Ascent Media is soliciting bids for all or part of the Company.

I could go on, but you get the point.  Technicolor, Grass Valley, Eastman Kodak, Ascent Media – these companies are all leading vendors into the film/TV entertainment industry.  There is dramatic stress throughout this food chain.  The stress is due partly to financial factors (movie making is one of the last great capital-intensive businesses, and you might have noticed that the cost of capital has risen in the last three years).  It is also indicative of the fundamental shift from analog to digital throughout the video workflow cycle (from capture to display).  The gale-force winds of Moore’s Law will dramatically improve price/performance for customers in this sector as it goes digital, but it is not at all clear that volume will rise enough to support the business models of many vendors.

I’ll end with an advertisement for HPi.  If you an owner, investor, executive, entrepreneur or director in the media services industry, you need to understand the very powerful forces that are squeezing many of the leaders.  And you need a financial advisor who understands these currents and has significant transactional experience navigating in all business environments.  Call us if it is time to talk.

2010.37 Imax to partner with Laser Light Engines

IMAX, which specializes in immersive motion picture technologies, recently signed a deal with Laser Light Engines for development of high brightness technology systems exclusively for IMAX digital theatre systems.

Under the terms of the agreement, IMAX will make an equity investment (of undisclosed amount) in Laser Light Engines; who in turn will develop a custom version of its laser light technology for exclusive use in IMAX digital projection systems. Laser Light Engines will also develop custom features to help enhance the IMAX experience. Additionally, LLE’s technology won’t be available to the general market for two years, and to other large format theatre systems for three years.
Laser Light Engines designs, develops and manufactures OEM laser-driven light engines that provide high brightness, long lifetimes, energy efficiency and color control capabilities.
One particular challenge of theatrical 3D is that the viewer’s 3D glasses filter out a significant percentage of the available luminescence as they “trick” the mind’s eye into seeing a 3D image. That means that a brightness that is adequate for 2D viewing is insufficient for 3D exhibition, and many viewers consider 3D movies to be too “dark.” This challenge is the backdrop for IMAX’s interest in LLE.

IMAX screens typically go from floor to ceiling, and extend to the edge of viewers’ peripheral vision, which creates an immersive experience. Their sound system is of exceptionally high quality. The company’s 3D theatres even further increase the viewers’ feeling of immersion. Most IMAX theatres feature a steeply inclined floor which allows each audience member a clear view of the screen.

The deal is subject to due diligence.

IMAX has had a busy year thus far in 2010 – quickly signing up deals to open new theatres around the globe. Most recently, on July 15 they announced an agreement with Lumiere Pavilions, one of the fastest growing private movie exhibition chains in China, to open three new theatres, one a year starting in 2010. This deal brings the total number of IMAX theatres scheduled for operating in China by 2012 to 57. The total number of IMAX signings announced this year is 95, as compared to 35 systems during 2009. And the mix of openings signed spanned the globe with sites to include Japan, the Philippines, Thailand, Singapore, Russia, the Ukraine, Croatia, France, the Netherlands and the UK. They have also expanded an earlier agreement with AMC by adding 15 to 25 more theaters to the original 104 agreed upon.

Inception, which opened on a record 197 IMAX screens over the past weekend, was also the top grossing picture, taking in $60.4 million.

The company will announce earnings on July 29.

2010.36 RealD IPO prices at $16, stock closes Friday at $19.50

Following up on our two prior posts on this subject (April 20 and June 30), we now report on the consummation of RealD’s IPO.  Highlights as follows:

• Offering size increased from 10.75 million to 12.5 million shares.  All the incremental shares come from shareholders, so the company sold 6 million shares as previously planned and shareholders sold 6.5 million shares.
• Share price increased.  On June 30, RealD had gone on the road with an estimated price range of $13 – 15 per share.  The IPO priced at $16.  This cannot be considered a shocker, given that the NASDAQ had traded up over 6% month-to-date through Thursday’s close.
• Total offering generated gross proceeds of $200 million, and the company received net proceeds of $82.6 million.  That ought to finance a few more deployments…
• Timing is everything.  Not only did RealD likely benefit from the good performance of the equity market in July, but they priced their offering just before a 261 point decline in the Dow on Friday.
• Strong aftermarket performance.  After pricing at $16 Thursday night, the stock traded as high as $21 in early trading Friday morning before closing at $19.50 per share (up 21.9%).  Aftermarket performance for IPO’s in 2010 has not been generally strong, so this definitely counts as a successful start to RealD’s tenure as a public company.
• Valuation update.  At the mid-point of the June 30 range ($14/share), RealD’s implied valuation was $725 million.  At the actual pricing of $16, the valuation was $828 million.  At the Friday closing price of $19.50, the valuation is a cool $1 billion.
• “Greenshoe” from the shareholders, not the company.  As is typical for an equity offering, the underwriters have received a 30-day option to buy another 15% of the deal – in this case, 1.875 million shares – at the same price per share.  In this offering, the additional shares would come from existing shareholders, not the company.  With the stock price well above $16, it currently looks like a safe bet that the greenshoe will be exercised.
• 3D validated by the public market as a significant growth opportunity, and RealD established as the leading pure-play company in the space.

On behalf of Hadley Partners, congratulations to the founders, management, employees and investors in RealD!  We look forward to continuing to follow the company as friends, bloggers and investment bankers.  One of my friends and former co-workers at BT Alex Brown, Andy Howard, has represented Shamrock Capital on the board of RealD since Shamrock’s investment in the company, so my particular congratulations to Andy.

Have a great weekend, everybody!

2010.32 RealD gets closer to its IPO

On June 28, RealD filed an amendment to its S-1 registration statement in preparation for its IPO.  This amendment has the kinds of details – the shares to be sold, valuation range, selling shareholders – that suggest the company is ready to take this offering on the road.  I would expect this roadshow to begin asap.

This registration statement amends the company’s filing on April 9, 2010.  Please refer to our previous post on that filing.

Highlights of the amendment are as follows:

• Expected offering size and valuation.  The company is proposing to sell 6 million new shares at a price range of $13-15 per share.  At $14 per share, the offering generates $84 million in gross proceeds ($75 million net).  This is a lot less than some people’s estimates of $200 million based on the April filing, but it certainly does the job.
• At $14 per share, the implied pre-money valuation for the company is $725 million.  That valuation includes the impact of warrants and options granted to employees, key exhibitors and others.
• In addition to the 6 million shares to be sold by the Company, existing shareholders are looking to sell 4.75 million shares.  Most existing shareholders are selling a portion of their holdings – Michael Lewis and Josh Greer (the founders), Shamrock, Pequot and others.
• The company’s March quarter was huge.  RealD did $113 million in gross revenue in the nine months ending December 2009.  Just in the March 2010 quarter, the company’s gross revenue exceeded $76 million.  Avatar was the primary driver of this spike in revenues, which the company warns will not be repeated in the June quarter.
• The company’s rapid deployment continues.  Just between March 26 and June 1, RealD’s deployed screen count increased from 5,321 to 5,966 (up 12%).  The 14,000 screen deployment by Digital Cinema Implementation Partners (discussed in our April RealD post) will represent dramatic growth.  The cost is that the company is forecasting $40 – 50 million of capex in the March 2011 fiscal year.
• Growth creates its own challenges.  For example, the company’s freight and logistics expense grew $16 million in the March 2010 year to handle the logistics of eyewear.  Further, the company forecasts that it will spend $4 – 7 million in the June and September quarters to cover expedited shipping of eyeglasses and to build eyeglass inventory.  The logistics of handling expensive 3D eyewear remain a difficult operational challenge for the company and exhibitors.
• RealD sees continued growth in the 3D movie pipeline.  They estimate that 23 3D movies will be released in 2010 and 33 will be released in 2011.  By comparison, there were 27 3D releases in the entire 2005-2007 three-year period.
• RealD’s board is going Hollywood.  Upon the consummation of the IPO, Frank Biondi Jr., James Cameron and Sherry Lansing are all joining the board.  Biondi has served as CEO of both Universal Studios and Viacom.  James Cameron, of course, is the force behind Titanic and Avatar.  Sherry Lansing is a longtime Hollywood player who was once president of production at 20th Century Fox.
• The company has sharply raised its own estimate of its value.  Remember per our April post that RealD has to account for the warrants it issued to exhibitors by estimating the value of its stock as those warrants vest.  As of March 2010, management estimated the company’s per-share value to be $23.07, up 65% in only three months.  This does create the anomalous situation that RealD is preparing to sell stock to the public at a significant discount (35 – 43%) to the board’s estimate of value.
• Don’t let them confuse you with a stock split!  The company has effected a 3-for-2 stock split since its April filing, so any quick per-share comparisons are risky unless you are clear on whether you are talking pre-split or post.

With the Dow Industrials down 268 points yesterday and 92 points today, perhaps RealD’s biggest near-term worry is the market.  Stay tuned for the roadshow!

2010. 22 Reflections on quality from Digital Hollywood and The Cable Show

Recent wanderings got me pondering quality – across many fronts, from content to technology to the overall experience.  The definition, of course, can hinge on what side (economically) you represent.  Is quality an intangible that we recognize, like obscenity, when we see it but can’t articulate in concrete terms?

At Digital Hollywood a few weeks ago I listened to two different panels that addressed quality but from very different perspectives.

The first panel consisted of representatives from studios, media distributors, agents and creatives.  One of the studio panelists addressed quality by saying, “For us quality means we need to have a celebrity or other name attached otherwise it just isn’t quality content.  We are an old media company after all.”

In contrast, a 3D panel, with representatives from AEG Live, IMAX, Sony, 3ality, Cinedigm, Reliance MediaWorks, a movie director and the 3D VFX Supervisor from Avatar, addressed quality very differently.  The participants discussed aesthetic challenges along with making and presenting 3D content.  Their entire focus was on the overall consumer experience and how it had to justify the added ticket cost.  Quality meant that the consumer experience had to be exceptional.  I asked myself if perhaps James Cameron had been the “name” that attached itself to the whole 3D ecosystem enabling it to break out as a hot “new” industry focus.

Still pondering this issue of quality I headed up to San Francisco (sure to get some “techie” inputs).  Running into Rich Maggiotto of Zinio, we flipped through his company’s assortment of magazine and related pages on an iPad (many of the top magazines are available for subscription viewing through Zinio on a PC, iPad or iPhone and the experience is stunning).  He showed me a few newer online ad options and I would watch them (I usually don’t).  I asked Rich about quality from his perch.  He spoke of the user experience and the tough balance of providing branded or name content while weighing the extensive list of popular alternative content that the consumer can get so easily.

Flying home I wondered about the studio audience bleed.  The vast majority of media-related dollars (content not technology) come from what is termed old media sources.  Yet at the consumer level little distinction exists between old and new media as they continue melding together.  Has the definition of quality changed?  Or does it rest, ultimately, in the individual?  Chris Anderson, years ago, in his Wired piece on “Free” used the example of his kids – if given a limited two hour window to watch content – choosing not Star Wars the movie but YouTube videos of Lego Star Wars characters made by other nine year olds.

My last step pondering quality occurred when I attended The Cable Show at the Los Angeles Convention Center.  The exhibits were lavish and celebrity-strewn.  The show was visually stunning with large, high def screens lining the aisles.  Every step of the media distribution (cable) process was represented; from the studios, to the cable companies, to technology providers and enablers.  Cablevision had one of the best and most lavish booths refreshment-wise with nice champagne, assorted ice creams and a coffee bar.  The first two were known brands while the later was brand-less.

And that offering, by a cable company, sums up my current state of mind with respect to quality.   The flavor or form often varies per person or their mood (I had a coffee, later in the day maybe it would have been champagne; 24/7 my kids would have chosen ice cream).  But you aim to provide the best overall experience, ensuring that each offering tastes good, and let the consumer decide for themselves.

Challenges faced in the continuing battle to provide and monetize a consumer experience will always rest on consumers’ ultimate determinations of quality.  As the various providers along the value chain try to provide an experience based on an amorphous but sometimes recognizable definition the consumer continues to benefit.  From 100 plus channels, to the iPad, 3D, Glee, Avatar, YouTube (my kids’ favorite) quality itself is being monetized, sometimes more directly than indirectly.

I’d greatly appreciate hearing what others think of quality.

Ideas came from, other than the people above:  John Rubey, AEG Live; Greg Foster, IMAX; Buzz Hays, Sony; Angela Wilson, 3ality Digital; Chuck Comisky, Avatar; Keith Melton, director; Jonathan Dern, Cinedigm; Jim Hannafin, Reliance; Marty Shindler, The Shindler Perspective; Keith Quinn, Paramount; Pam Schechter, NBC/Universal; Jonathan Foqualityrd, ContentFilm International; Chris Jacquemin, WME Entertainment; Michael Kernan, NuMedia Studios.



2010.20 Digital Hollywood halftime highlights

Longer blog post to come … but after two (out of four) days at Digital Hollywood at Loews Santa Monica, a few comments, inputs, ideas and debates stand out so far.

1. The best comment of the show so far came from Paul Colichman, co-founder and CEO of Here Media, who articulated a core belief of his company, “If you make it too expensive or too difficult for consumers to get, they will steal it from you. So make it so that they don’t want to steal it for you. If they are going to steal it, make it from you and not someone else (so you can at least make some advertising revenue off it).”

2. My personal second favorite insight came from Kevin Yen – YouTube’s Director of Strategic Marketing (and at Google for years before that). After not answering many questions (to be fair, he was asked to provide some very specific, thus far undisclosed numbers – not something the representative of a public company can just do) he came out with a worthy insight. Asked about what he was surprised to hear so little covered in the press, he answered the inevitable interface changes that would occur when television and other content was delivered mainly (or increasingly) over the Internet. Deflected momentarily from the point, he then added a comment about social networks such as Facebook and other types of customization (so no Google search for a TV listing) perhaps forming a base for such interface.

3. A panel called “Beyond Avatar” discussing 3D was surprisingly unattended (after the 3D buzz at both ShoWest and NAB). The panel included John Ruby, AEG Live; Greg Foster: IMAX; Buzz Hays, Sony 3D; Angela Gyetvan, 3ality Digital; Chuck Comisky, 3D Stereo VFX Supervisor on Avatar; Keith Melton, director; Jonathan Dern, Cinedigm Entertainment Group; Jim Hannafin, Reliance MediaWorks; and Marty Shindler, The Shindler Perspective. It was an amazing panel and full of highlights. My favorite (and it’s so hard to pick) is that current screen capacity for upcoming movie releases is less than half the 10,000 needed. A second was that many of the technical production givens had to be thrown out with 3D because the visuals are so different (such as that you can’t break the plane since 3D has no screen plane).

4. Ross Levinsohn of Fuse Capital said that he loves advertising and ad based businesses. Media has been ad based in the past to the tune of $85 billion a year ($40 billion untargeted). That’s a lot of dollars to shift. The ad networks – centered around remnants – have destroyed the Internet.

I don’t traditionally like ad only supported business models (Google being, as always, the exception) but Levinsohn made a great point. No one can ignore the shift of so many billions of dollars spent (or discount it too much even if it doesn’t result in a dollar for dollar end game shift).

5. Sharon Waxman, Editor in Chief of TheWrap (which just raised $2 million in funding) said she realized network news was dead when she was interviewed in an over the top deluxe Beverly Hills hotel suite with cameras, lights etc. and asked the same type of questions she asks using her Flip video camera. End conclusion being true or not, she raised a good point.

6. With about thirty pages of notes in my pad I started asking people I met at the show what I should write about on the blog. Two recurrent answers: customization of the consumer experience (a crime it isn’t being done more yet) and that no one yet has figured out a working business model to monetize content (we bundle up a disparate bunch of revenue streams and hope it is a business model; at least now people have had some time to test what works and what doesn’t and some things seem to be working – even if only on a limited scale)

7. I prefer conferences in Santa Monica to those in Vegas (I live in Santa Monica).

More to come later in the conference and upon further reflection. These are the few immediate thoughts that stuck.

2010.18 RealD files for an IPO

NOTE: this posting was slightly delayed because we were busy last week in connection with NAB.

On April 9, 2010, 3D technology company RealD Inc. filed an S-1 registration statement for an IPO. This is our second post this week on IPO’s. That is some coincidence, but it also reflects the fact that the IPO pipeline is the strongest it has been since before the financial crisis. A select group of entrepreneurs should be paying attention. As a service to our dear readers we thought we would provide summary and perspective on RealD’s filing.

RealD’s business is growing nicely. RealD generates substantially all of its income by enabling 3D viewing of motion pictures in theaters, both installing 3D projection equipment and providing eyeglasses for viewers. As of March 26, 2010, the company had its proprietary technology installed in 5,321 digital theaters. This number is up 152% from 2,108 screens in March 2009. Further, the company is working to install another 4,900 screens pursuant to agreements with existing licensees.

The Company is aligned with Digital Cinema Implementation Partners (DCIP). The three exhibitor co-owners of DCIP – AMC, Cinemark and Regal – are all licensees of RealD. Given that DCIP completed $660 million in financing in March to continue its digital cinema deployment, that roll-out should give RealD a tailwind of new theaters to support. DCIP’s financing will fund the digital deployment of approximately 14,000 screens. RealD’s exhibitors also have penny warrants equal to 8.9% of the Company’s pre-IPO shares – while no individual warrantholder reaches the 5% threshold required for disclosure in the S-1, it is safe to assume that the DCIP owners hold a chunk of these warrants.

The Company has recently valued its equity at $578 million. Other than paying a registration fee to the SEC for aggregate IPO proceeds of up to $200 million, neither the Company nor the underwriters (JPMorgan and Piper Jaffrey) take a view on RealD’s IPO value. However, for accounting purposes the Company is required to value its exhibitor warrants as they vest, because the value of such warrants must be deducted from revenue (as if they were a sales allowance, which in a way they are). In December 2009, the Company estimated the fair value of its common stock to be $21 per share, which suggests a pre-IPO equity valuation of $578 million.

RealD’s business model is a direct play on the commercial success of 3D. RealD is definitely eating its own cooking. By the terms of the majority of its exhibitor deals, RealD buys and installs the necessary equipment at the exhibitor, and then collects a per-attendee fee from the exhibitor. The exhibitor thus takes limited risk (they are giving RealD some exclusivity), while RealD has a business model with some capital intensity (they buy and install the equipment up front) but high margins on incremental revenue. So…

RealD should be marketing its IPO on a terrific March 2010 quarter. Because of RealD’s business model as noted above, the March quarter should be strong. Avatar was released 12/18/2009 and rolled well into Q1, and Alice in Wonderland was released 3/5/2010. Those two smashes alone should give the company continued strong growth.

RealD’s bet on 3D is a slightly different play than, for example, Cinedigm’s (NASDAQ: CIDM) economics on digital cinema. Cinedigm gets a “virtual print fee” from a studio every time it delivers a digital movie file to a screen. Oddly, Cinedigm’s revenue goes up with the velocity of movies delivered, not how long they stay in theaters. So for example, Avatar’s long run in Q1 will modestly depress Cinedigm’s results, while the big Avatar gate will favorably affect RealD’s. That difference works both ways, a quarter of weak releases will probably help CIDM and hurt RLD.

It’s the glasses, stupid. Currently, RealD’s income statement is dominated by eyeglass sales, not exhibitor licensing. For the nine months ended December 2009, gross licensing revenue was $44.4 million while product sales (eyeglasses) were $68.4 million. The licensing business is highly profitable on a stand-alone basis, but the gross margin on eyeglass sales is currently negative (RealD lost $9.2 million on its eyeglass sales).

RealD is handling eyeglasses differently in North America and overseas. In North America, it is receiving a per-admission eyeglasses fee from the exhibitor, and is assuming that eyeglasses last eight weeks for the purposes of amortizing their cost. Overseas, RealD is selling the glasses outright. As anybody who has seen a 3D movie knows, the glasses are a logistical challenge for the exhibitor, and Joe Morgenstern at the Wall Street Journal has written about the quality issues with 3D glasses (subscription required). RealD is working to increase recycling of glasses and generally to reduce their cost. In the long term, this logistical challenge is probably second only to the success of 3D generally in determining the long-term profitability of the company.

3D in the home – just starting. The Company is working to license its 3D technology to consumer electronics manufacturers, and also has 3D technologies on the way which do not require eyeglasses. However, these initiatives do not yet have any impact on the Company’s revenue and near-term prospects. This IPO will be bought and sold largely on the prospects for theatrically released 3D content and RealD’s competitive position.

Stay tuned for updates as the IPO proceeds!