Betting On Cinemas in Troubled Times

SAWA August 2009 Newsletter

The economic outlook continues to be filled with dark clouds, but more
evidence surfaced in recent weeks that movie exhibition is weathering the
storm better than most businesses. The blockbuster numbers for Transformers:
Revenge of the Fallen, which crossed the $300 million mark in a brisk 13
days, boosted the stocks of the three biggest publicly traded theatre
circuits, Carmike, Regal and Cinemark, while shares in Imax rose 19% in the
days following the action spectacle's premiere.

At the end of June, Merriman Curhan Ford analyst Eric Wold changed his
recommendation on Regal shares from "neutral" to "buy," and advised
investors to buy Carmike and Imax stocks.
"Any investor concerns heading into quarter-end can be alleviated and
investors can build positions in the coming weeks into what we believe will
be strong second-quarter results and third-quarter outlooks from the theater
exhibition group," Wold stated on June 30. At press time, Harry Potter and
the Half-Blood Prince, Jerry Bruckheimer's 3D family film G-Force, and the
promising comedies

The Ugly Truth, Julie & Julia and Judd Apatow's Funny People were still on
the horizon. Harry Potter alone should ensure an extremely robust July box
office. Meanwhile, revenue from advertising in U.S. cinemas had its slowest
gain in the seven years these numbers have been tallied, but the 5.8% rise
in 2008 still represents something positive. "Media has seen such huge
slippage-with audiences and advertisers both leaving-that to have a medium
with growth is significant," Cinema Advertising Council president and
chairman David Kupiec declared. (The CAC derives its statistics from member
theatres, which account for 82% of U.S. screens.)

Kupiec said theatres are closing more ad deals this year, but because of the
weak economy, they are smaller in size. The good, sustaining news for
theatre owners is that advertisers pay a premium on a CPM basis for cinema
advertising compared with television-about twice the going TV cost-because
the recall rate is as much as five times greater, according to Kupiec.
The benefits of onscreen advertising are yet another reason why cinemas are
a smart bet in this struggling economy-for advertisers, investors, and a
public longing for relatively inexpensive but often spectacular
entertainment.

A World D igital F orecast A new digital-cinema briefing by London-based
film-analysis specialist Dodona Research predicts that roughly 20% of the
world's cinema screens will be converted to digital projection by 2012,
driven by the new wave of 3D film releases. Nearly 12,000 screens have
converted to digital projection worldwide out of a total of around 110,000
globally. The research predicts that 18,000 screens are expected to have
converted to digital projection by the end of 2009. Currently, 5,000 screens
worldwide have 3D capabilities, a number expected to double by the end of
2009, according to Dodona.

Beyond the one-fifth of screens switching to digital by 2012, the timetable
for converting the remaining 80% remains murky due to the world economic
crisis. "Cinema owners still find it hard to justify replacing their 35mm
projectors with more expensive digital equipment," the report noted, citing
difficulties with finding a payment model to support conversion and "tougher
financing terms since the onset of the banking crisis last year" as issues
that have made the challenge "doubly difficult."

But recent news shows the digital transition continuing its momentum. The
U.K. Film Council in early July announced the launch of a 1.2 million euro
($1.9 million) three-year pilot scheme to
bring digital-cinema equipment to more rural areas. Distribution and
exhibition fund chief Pete Buckingham stated, "This new pilot scheme will
bring a top-quality cinema experience to the three pilot areas, so that
people can enjoy the wide range of films on offer in urban areas, right on
their doorstep."

Meanwhile, in Norway, Film & Kino, the Norwegian interest organization for
cinemas, is launching an initiative billed as the world's first
non-commercial, complete national digital rollout, with
agreements with 20th Century Fox, United International Pictures (the local
distributor for Paramount Pictures and Universal Pictures in Norway), Walt
Disney Studios Motion Pictures International, and Warner Bros. Pictures
International. The rollout, beginning in late 2009, will transform all of
Norway's cinemas, big and small, to modern DCI-compliant digital-cinema
houses.

"This is a great undertaking for a small country", said Jorgen

Stensland, director of consultants at Film & Kino. "Under these agreements,
Disney, Fox, Paramount, Universal, and Warner have committed to deliver wide
releases to Norwegian digital cinemas. The deal also covers our own mobile
cinema in rural areas. We are happy that Norwegians will be able to
experience the perfect quality of a DCI-compliant digital exhibition, which
will also give our audiences the opportunity to see the new generation of 3D
films that are underway."

Here's hoping other countries follow the bold and forward-looking example of
these pioneers in Norway. Vindication for Pixar's Up It's no secret that we
at Film Journal International are fans of Pixar and their amazing run of ten
critical and commercial successes. And so it was particularly gratifying to
see Wall Street analyst Richard Greenfield admit that he was "dead wrong"
when he
predicted that Disney and Pixar's Up would face a rocky box-office road,
largely because of its gruff senior-citizen lead character and the lack of
obvious merchandising hooks. What Greeenfield didn't factor into his
equation was the consistent originality and imagination of the Pixar writers
and animators who turn unorthodox premises into movie magic. Up has
surpassed movies like

The Incredibles, Cars and Wall-E to become Pixar's second highest grossing
picture in North America after Finding Nemo. The alchemy between moviemakers
and their audiences is something even the most astute investment analysts
simply can't compute.