Michael Lewis

Set up in 2003 by Michael Lewis and Joshua Greer, Beverley Hills-based RealD has seen its cache and profits rocket in recent years.

The company that provides the technology most widely used for watching 3D films in cinemas, now has over 15,000 installations of its 3D Cinema System in 60 countries worldwide.

In the US, Regal, the world’s largest cinema circuit, recently announced that they plan to double the number of RealD systems across their circuit for a total of 3,000 screens, while the company’s international rollout goes from strength to strength.

With the number of 3D films being released each year on the rise, the future looks decidedly bright for the company, which has recently inked significant deals with Sony (its largest shareholder) - to marry the Sony 4K projector and its new 3D dual lens adapter with RealD technology - and with Samsung, who will be using RealD technology in its upcoming HDTVs.

Our goal always was to crack the technological problems facing 3D. We had been working on this technology for a couple of years and we were convinced that it had to be digital to solve a lot of problems. We married technology that had been used by NASA, the military and Fortune 500 companies for years with digital technology and we came up with a very simple upgrade to a digital projector that could project right-eye and left-eye frames 144 times per second. That’s how we solved the upgrade to digital.

We worked both sides of the fence, with key exhibitors and studios. Walt Disney were one of the first we met with. Dick Cook, who was running the studio at the time, had a look at our system in 2005 and said ‘Can you get 100 screens up in time for Chicken Little?’ With that commitment we were able to go to the exhibitors simultaneously and say ‘look – if you install our system you can provide a better product.’

Chicken Little was the defining moment both from a business standpoint and a technological one. There was a fundamental shift, much like colour and sound was, in how we experience visual media. That ushered in the new 3D, or real 3D, and we’re now approaching 12,000 screens in 60 countries. Last year 3D accounted for 22% of the US box office and this year a lot of people think it’ll be close to 40%.

If you go back to November ’05 the industry was in a bit of a lull. People were wondering whether cinema was still relevant. This brought some enthusiasm back.

When 3D is done well it’s fantastic. When it’s done badly it’ll cause you headaches and eye-strain. We’ve always focused on being the best form a qualitative standpoint. That’s why the 15 largest exhibitors in the world use our system. We have double the amount of light of any of our competitors and we’re the only system that can get to the large 80-foot screens. Our business model is very simple. It’s a pay as you go model, by which the exhibitor pays us a percentage of the ticket on a royalty after installing the system. We do all the maintenance and upgrades and ensure there is no technological obsolescence. We’re also very passionate. This is our only focus. We’re not distracted by other business opportunities.

We’ve increasingly started to target Europe. We opened the London office two and half years ago since then Europe and now Asia have been phenomenal for us. If you look at the UK, we are 80%-plus of the market. We’ve taken that strategy in Europe. In France we are used by the top three exhibitors, Germany we are four of the top five. Our international revenue, as of last quarter, was 57%, whereas the previous quarter was 53%. International is now our biggest revenue source with less screens than domestic. I see our business evolving to the same ratio as the overall industry box office of $20bn-plus international vs $10bn US, a 2:1 ratio. While the US box office is pretty static in terms of admissions, the international market grew 9% last year. You have newer theatres, and two significant drivers: a new middle class and a strong appetite for Hollywood films.

Rising Star in Russia is one of our major partners and we recently did a 500-cinema deal with Wanda cinemas in China, the territory’s largest exhibitor. We’ve opened offices in Shanghai, Hong Kong and Tokyo. Asia is going to be big for us. South America and Central America have also been very strong. You have to customise your model, though. There are big local challenges and risks.

I think it’s clear that we’ve got past the ‘if’ issue with 3D in cinemas. My opinion is that this is much like colour and sound. It’s inevitable and it’s a better experience. The biggest driver and the biggest risk is the quality of the image. Unlike other businesses, you can’t do 3D 90% as well and cut costs, it either works well or it doesn’t. It’s binary. So, qualitatively that’s the most important thing. When Warner decided that Harry Potter wasn’t fully baked and they weren’t ready to release in 3D — that type of thing is important for the growth of the industry. It has to respect that we have something unique here and act accordingly.

No. We’re in the early days of a technology that is moving towards something we’ve seen in science-fiction movies, whereby the screen disappears and images are able to be directed when and where we want them in a virtual, holographic, manner. We’re only in the vinyl stages of this, moving into eight-track. A lot of exciting things are going to happen in the next ten years. The key drivers for us in our business are the underlying display technologies – the refresh rates on the TVs, the resolution and all those things allow us to do better 3D. Those will all get better.

We view the cinema business as top of the food chain. We have a very good cinema business. We are constantly looking to improve it, most recently doubling the light output from our XL systems. We’re now going into much bigger screens with some of the XL W and big screen auditoriums.

We recently confirmed a joint development agreement with Samsung. We’ve also done licensing deals with eyewear companies from Oakley to Calvin Klein for premium 3D glasses that work as sunglasses, specs and 3D glasses.

For us it’s about delivering premium quality. There’s more work that needs to be done in the mobile arena. The refresh rates are not up to speed yet but they’ll get there and I’m sure Real D will become more involved with these platforms. Every visual display device is an opportunity for us.

We are bullish on where we see this market going. Being a public company gives us currency and a capital structure for flexibility. We have a philosophy: build it or buy it. We’re up 50-60% after the IPO.