RealD’s Michael Lewis at the company’s headquarters in Beverly Hills.

RealD’s Michael Lewis at the company’s headquarters in Beverly Hills. Photo by Ringo Chiu.

The summer was a flop for RealD Inc.

After announcing disappointing ticket sales for 3-D films during the important moviegoing season, company shares plummeted to an all-time low this month. One analyst even suggests it’s time for a takeover.

But executives at the Beverly Hills entertainment technology firm hope their fortunes will improve as soon as this week, with the 3-D release of “Gravity” on Friday.

RealD, which installs equipment in movie theaters that allows films to be shown in 3-D, gets its revenue by taking a cut of ticket sales. The lackluster summer in the 3-D world is cause for concern for analysts who see a downward trend developing. Some believe the format just isn’t living up to the hype created four years ago after the release of “Avatar.”

“There’s a place for 3-D. It’s just not as big as the analyst community originally thought it was,” said Brett Harriss, an analyst who follows RealD at Gabelli & Co. in New York.

One problem: Moviegoers are proving to be picky when it comes to paying an extra $3 or more to see a movie in 3-D.

That presents a challenge to the RealD business model because it’s box office dependent. The company gets a fee of about 50 cents for each 3-D ticket sold. That money backfills RealD’s installation costs of the 3-D systems, which usually run $7,000 to $10,000 per screen.

Early optimism for the format continued after “Avatar.” The next big studio 3-D movie to open in the United States, “Alice in Wonderland,” generated about 70 percent of its domestic box-office revenue from 3-D ticket sales.

But in RealD’s most recent quarter ended June 30, the company disclosed that U.S. moviegoers overwhelmingly chose the 2-D version of films such as “World War Z.” Just 35 percent of U.S. box-office revenue for films released in 3-D versions came from 3-D ticket sales. (International results were better. About half of ticket sales for 3-D releases came from 3-D tickets.) RealD lost $1.5 million for the quarter (-3 cents a share) on $59 million in revenue.

The format hit bottom with the July release of “Despicable Me 2,” which generated just 27 percent of its opening-weekend box-office revenue in the United States from 3-D ticket sales. RealD also disclosed disappointing 3-D ticket sales for August, which sent shares down to an all-time low of $6.58 on Sept. 13. Shares rallied a bit thereafter, closing at $7.22 for the week ended Sept. 25. (See page 48.)

RealD’s challenges are only more glaring in context, as the domestic box office generated a record $4.75 billion this summer, up about 10 percent from last year.

Hit films such as “Iron Man 3” benefited from studios spending hundreds of millions in promotion, but there wasn’t much done to raise awareness for 3-D showings, said James Marsh, an analyst who follows RealD at Piper Jaffray in New York.

“The marketing message doesn’t elaborate on why I should do one or the other,” he said. “It leaves it up to the consumer to assess whether they’re getting their extra $3 worth. That’s the inherent challenge. There’s no marketing message.”

What’s more, RealD is continuing to spend millions to install 3-D projection systems in theaters around the world.

More marketing

This isn’t the first time RealD has run into a summer selloff. Last year, the company’s shares lost more than one-third of their value, from $15 in July to $9 in October, before rebounding back to around $15 this June, when the pattern repeated.

RealD spokesman Rick Heineman said he sees near-term opportunities for the company, given the release of films such as “Gravity” this week and later ones for the holiday season.

RealD’s confidence in “Gravity” is based partly on a concerted effort to better market the film’s 3-D experience. The campaign includes a trailer with director Alfonso Cuarón discussing the creative decisions behind the added dimension and how it adds to the experience. The 3-D is supposed to make viewers feel a semblance of weightlessness as they float in space alongside stars George Clooney and Sandra Bullock.

“We wanted it to be realistic,” Cuarón says in the trailer. “We pump it up here and there when we have some excitement going on. …We didn’t want it to be 3-D for the sake of fake excitement.”

It will be an effort to dispel the notion among some consumers that 3-D is just an add-on for studios, exhibitors and RealD to wring a few more dollars from them. Analyst Marsh said he’s seen evidence of moviegoers feeling that way after a bad experience or two paying extra to see a 3-D film.

Heineman said RealD is addressing technical complaints of some 3-D moviegoers, such as screens that are too dark. He said the experience will only continue to improve as directors such as Ang Lee (“Life of Pi”) continue to work in the format. Lee is working on a boxing movie that will be shot with 3-D in mind.

But analysts aren’t convinced demand will pick up substantially in the near term.

In a note downgrading RealD stock to “hold” this month, analyst Ben Mogil at Stifel Nicolaus in Toronto wrote that it’s time for RealD to slow down its installations of 3-D systems, given the high costs and recent waning demand. He estimated that the company will spend $7 million on U.S. installations this year.

“At this stage, in the domestic market, there are few weekends where 3-D screen capacity is an issue,” Mogil wrote. “Similarly, the European installation pace is relatively heady considering declining trends there.”

He added that RealD should enter into a joint venture for its home entertainment 3-D effort, which is still in research and development in Boulder, Colo., and other sites. RealD is expected to spend about $25 million this year on the initiative.

The company has already branched out to large-format theaters, an Imax-competitor brand called Luxe that will feature large screens, high-quality audio and either a 2-D or 3-D video presentation. The rollout is beginning in Europe but is expected to come to the United States as well.

Also, RealD Chief Executive Michael Lewis said in the company’s most recent earnings call with analysts that it’s working to reduce operating expenses.

Gabelli’s Harriss sees one big way for RealD to lower expenses: sell itself to a larger company also in the business of providing technology to theaters. He said a sale to audio technology firm Dolby Laboratories of San Francisco would make sense.

“There is the existential question of: Does it make sense for it to be part of a larger company?” Harriss said. “The company that is always mentioned is Dolby. If they were to be acquired by Dolby, it would be the best outcome for them.”

A Dolby spokesman said he could not comment on rumors or speculation.

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