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The Academy Awards last night got me to thinking about the Kodak patents that IMAX licensed last year. Here is a brief snip of what is involved:

Under the agreement announced Sunday, Imax Co. will have exclusive use of Kodak's laser projection technology. The Kodak patents will allow Imax to provide high-quality digital content for theater screens larger than 80 feet and domed theaters for the first time. Screens that large had previously been limited to film content, the companies said.

IMAX said it expects to introduce the new laser-projection technology by the second half of 2013.

The agreement covers about 100 patents related to laser protection technology, along with certain digital cinema rights to about 10,000 of Kodak's 11,000 total patents, said the person familiar with the deal.

Here is another statement about the deal:

Kodak, based in Rochester, New York, will receive an upfront payment of more than $10 million, a milestone payment and ongoing royalties, said a person with knowledge of the matter.

Kodak engineers will work with Imax employees during the next 18 months to bring the technology to Imax theaters, the company said. Kodak’s technology is expected to illuminate screens as large as 100 feet and dome theaters with a brightness and clarity not currently available, Imax said.

And this too:

"Because this technology produces the deepest blacks, and the brightest 3D of any system demonstrated to date, it will truly make the movies more exciting for consumers, and that creates a strong value proposition for the studios and exhibitors as well,” Kim Snyder, president of entertainment imaging and vp of Eastman Kodak Company, said in a statement.

IMAX digital currently uses two 2K-resolution Christie projectors with Texas Instruments Digital Light Processing technology alongside parts of IMAX's proprietary technologies.

What is interesting about the Kodak deal is that IMAX is paying over $10 million to get these patents. Here is what IMAX spent in total for R&D over the last three years:

2008: $7.5 million
2009: $3.8 million
2010: $6.5 million

This, for the first time, indicates that IMAX wants patent protection for its projection technology. No more Texas Instruments stuff that is offered somewhere else too. Also, don't forget about Laser Light Engines, the company IMAX invested in last year. Here is what they bring to the table (quoting one of their founders; bolding by me):

In the future, there won't be a need for a condenser and splitter as our laser makes narrow band RGB which could easily be delivered directly to the chips. But the optical block of the typical projector, which includes these items, is not part of the module that we can easily modify after the fact. We conceive that our first product offerings will be packages, adapted for each brand and model, which will work with existing optical blocks. It will be a one-time replacement of the lamp and reflector housing that that won’t require a great deal of customer difficulty.

The nature of high pressure bulbs (25 atmospheres in an IMAX bulb) also requires them to be replaced quite often, often before their time - we’re talking 100’s, not 1000’s of hours of use. At 5 movie showings a day, 2 hours each, a thousand hours can be reached in 3 months. Because the special glass, and coatings on the glass, get bombarded with such high amounts of energy they become brittle - an exploding bulb can cause 10’s of thousands in damage. They are not inexpensive, so exhibitors have to turn them on and off between each show. Still, a single high duty-cycle projector might use 10,000 dollars worth of bulbs per year, or more.

While the first generation units won’t have all the power consumption reduction optimized, we estimate that we will ultimately get 2X the light to the screen for the same power consumption, without considering the reduced requirements for AC pulling heat away (which is not insignificant.)

So IMAX is going to better quality (great for consumers) and lower cost of ownership (great for theaters). That's a winner. And, better yet, it may be a plug-in replacement. It's a lot easier to convince a theater owner to do an "upgrade" than it is to do a system replacement.

Since screens over 80 feet have to be serviced by film today, this says to me that IMAX may have an idea to expand its projector base to theaters where such screens exits. Both may benefit by changing the name outside to the IMAX brand. Since the story mentions domes (which is where I see my IMAX movies), I assume that giant screens anywhere are now going to be a market for IMAX projectors.

I have mentioned many times before that it is the hardware end of the business that provides the majority of IMAX's revenue. While film entertainment is increasing rapidly as a source of revenue, the core is still the hardware end of the business.

I have been critical of IMAX in the past, and sold my shares (way too early) years ago, in part because IMAX didn't own its big screen projection technology in such a way that others couldn't poach its lucrative market. I think with the Kodak patents they have plugged this competitive hole. Before anyone else looks to make the leap into this market they will need to consider that IMAX might, in two years or so, control all the screens over 80 feet.

But, there is another twist to consider here:

DLP is the current market-share leader in professional digital movie projection, largely because of its high contrast ratio and available resolution as compared to other digital front-projection technologies. As of December 2008, there are over 6,000 DLP-based Digital Cinema Systems installed worldwide.

DLP projectors are also used in RealD Cinema and newer IMAX theatres for 3-D films.

What if IMAX wasn't just building projection systems for its screens? This year's 95-to-100 screens is dwarfed by the 6,000 digital systems that already exist. There was a time that theaters advertised their digital sound system. It allowed the "state of the art" to become a defining reason for choosing one theater over another. In this race, Kodak and Sony lost to Dolby and DTS. What if "projection by IMAX" became such a defining reason? The market would be very large for tiny IMAX.

A "smaller screen projection system" move is not covered by the patents IMAX acquired or the Laser Light Engines agreement. But, when it finally has the big screen laser market product in use, maybe such a move will be good for IMAX and Laser Light Engines. Just a thought...

I think IMAX has jumped on an opportunity brought on by Kodak's financial woes. If I am correct, this year's earnings will be devastated by R&D spending and the drop in projector system sales. But, with 2013 so close, maybe IMAX will start dropping crumbs of information about their laser projector so analysts will look forward and see the benefits IMAX will have to ramp up system revenue.

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