Ballantyne of Omaha - Digital Divide

Written by John Zorabedian

Saturday, 01 March 2008

CEO John Wilmers explains how this analog film projector manufacturer is making the transition to digital cinema.   The advent of digital projection and 3D should rejuvenate the cinema industry,  converting more than 30,000 US movie screens to digital over the next few years. But thus far it has not been a smooth transition from film, and for the largest manufacturer of film projectors, Ballantyne of Omaha, the transition has been both a challenge and an opportunity. John Wilmers, CEO Ballantyne has manufactured and supplied film projectors since the 1930s, servicing more than 50,000 screens worldwide. Transitioning to digital projection has meant the company had to find a partner—NEC of Japan—that produces digital equipment, which Ballantyne will distribute to its network of cinema chains. The biggest snag for the cinema industry, however, has been financing the changeover—cinema chains don’t want to pay for the new projectors themselves. “When we went public in 1995, everyone said we were in a buggy-whip business with our film projectors, because the change to digital was going to happen,” said John Wilmers, president and CEO of Ballantyne. “But since that time, we’ve sold thousands of film projectors. Even in early 2008, there is still healthy demand for traditional film projectors and parts as the transition to digital technology starts to pick up some momentum.” To finance the transition to digital format, the cinema industry is relying on third-party groups to pay for the purchase of the projectors. The movie studios then pay the third-party groups via virtual print fees, a per-screen fee paid for each film exhibited in digital format. So far, Wilmers estimates, more than 3,000 of the nation’s 37,000 screens have made the transition this way. During this time, Ballantyne has positioned itself to become a distributor of projectors for its clients through a partnership with Japanese electronics giant NEC. To prepare for expected demand for digital cinema services, in July 2007, Ballantyne purchased a projector service company that will install and maintain the projectors. “We’re basically in the last phase of the transition,” Wilmers said. “What we’re waiting on is the funding plans that are the vehicles to fund the changeover to digital cinema.” In the meantime, Ballantyne continues to manufacture and sell film projectors and parts. “The people who said we weren’t going to sell any more film projectors have been proven way off the mark,” he said. Re-focus This is not the first time the cinema industry—and by extension, Ballantyne—has faced a major transition in its business. In the period from 1999 to 2003, many of the large cinema chains built too many cinemas with too many screens. During this period, the concept of the multiplex was trumped by the even larger megaplexes, and several companies entered bankruptcy to unload some of these properties. Ballantyne had its best year in 1999, grossing revenues of $86 million. The following year, Ballantyne’s revenues shrank to just $46 million. As the company fought back to profitability, Wilmers said, it strengthened its financial and strategic position. “We worked our way back from a challenging environment, so we’re conditioned to the challenges we’re facing today,” he said, such as strict controls on costs and active management of inventories. The company’s profitability has taken somewhat of a hit during the transition because of the slow timing, as Ballantyne has staffed up its digital service operation. “If we continue to build our service business, and we don’t see the digital transformation is thing rolling, we will have loaded up on a lot of expense without a lot of return,” Wilmers said.  “But we are confident the demand is coming, and there just aren’t many companies out there with the expertise and personnel to get the job done.” Ballantyne’s position remains strong due to its impressive industry connections: the company has long-standing relationships with leading exhibitors, including two of the partnerships to distribute digital projectors to three largest of the major national cinema chains (Regal Cinemas, AMC, and Cine-mark), representing 165,000 of the country’s 37,000 screens. “We’ve provided and installed several machines for our prime customer, Regal Cinemas, and we have a joint venture we formed with RealD, one of the leading 3D providers,” Wilmers said. “The popularity of 3D has been a catalyst in jumpstarting the rollout of digital cinema, as the 3D process requires a digital projector.” Some 500 to 600 screens have 3D-capable machines, which have proved popular for 3D movies and for carrying alternative content such as concert movies like “U2 3D” and Disney’s “Hannah Montana and Miley Cyrus.” Intermission Ballantyne continues to manufacture some film projectors at its production facility in Omaha, Neb. And although the cinema companies would like to have the transition to digital complete this year, that will probably not be logistically possible, Wilmers said. The wide transition window means Ballantyne can continue to manufacture, refurbish, and supply parts for the old projectors. “We do about $7 million to $8 million a year in the replacement parts business,” he said. “That’s at a margin of more than 40%, so it’s been a very important part of our business each year. It will decline when the rollout really begins in earnest, but that’s a ways away. I don’t think that business is going to go away for the next three years anyway, particularly when you consider international markets and demand.” The manufacturing facility in Omaha also provides the company with a solid base of operations for the rollout of digital projectors when the distribution business finally picks up. With 150 employees, assembly and repair shops, and storage capacity, the facility is a strong asset for the company. “We’re going to leverage that facility even though we’re not making many film projectors anymore,” Wilmers said. “We’re using the space and the people we have to integrate the components of digital cinema systems prior to shipping them to theaters. This capability allows us to prepare in advance of orders, enabling us to continue to deliver to our customers what they asked for and when they asked for it.” Wilmers noted that quality, customer service, and responsiveness are the factors on which the company has built its reputation, and the way it expects to succeed in digital. “We’ve got a great workforce, and we’re using them to make this transition in a way where we’re going to be successful at it.”