RealD’s 3D Promise and Peril

I should have an opinion on RealD’s IPO today. Fortunately, I do have one, and I will share it with you now.

If 3D goes big, RealD will scale right along with it. The company is the leading purveyor of 3D projection systems for digital cinemas. By its own estimates, it owns more than half of that market, holding off competitors such as Dolby, Laboratories, Inc., IMAX Corporation, MasterImage 3D, and X6D Limited.

It’s interesting to see Dolby among RealD’s primary competitors. In many respects, RealD is emulating the approach Dolby used to dominate the stereoscopic sound market in cinemas worldwide. RealD has read Dolby’s playbook, and heretofore it’s done better applying it to 3D cinema than Dolby has done.

You can peruse RealD’s prospectus yourself, but here’s an excerpt to whet your appetite:

As of December 25, 2009, there were approximately 16,000 theater screens using digital cinema projectors out of approximately 149,000 total theater screens worldwide, of which 4,286 were RealD-enabled (increasing to 5,966 RealD-enabled screens as of June 1, 2010). In 2009, motion picture exhibitors installed approximately 7,500 digital cinema projectors, an approximately 86% growth rate from 2008, and in 2008, motion picture exhibitors installed approximately 2,300 digital cinema projectors, an approximately 36% growth rate from 2007. Digital Cinema Implementation Partners, or DCIP, recently completed its financing that is providing funding for the digital conversion of up to approximately 14,000 additional domestic theater screens operated by our licensees AMC, Cinemark and Regal. We believe the increasing number of theater screens to be financed by DCIP provides us with a significant opportunity to deploy additional RealD Cinema Systems and further our penetration of the domestic market.

The salient point is that the addressable market is large, the overall penetration rate for 3D projection systems is relatively low, and the market stage is nascent. Moreover, this is worldwide opportunity, not one restricted to the North American marketplace.

That’s a good thing, too, though RealD — like everyone else with valuable intellectual property — is concerned about the fate that might befall it in China. Among noted risk factors in the company’s prospectus, we find the following:

Our business is dependent upon our patents, trademarks, trade secrets, copyrights and other intellectual property rights. Effective intellectual property rights protection, however, may not be available under the laws of every country in which we and our licensees operate, such as China.

Even though that’s a legitimate concern, it isn’t RealD’s biggest worry. The real worries in my view are industry dynamics (namely, 3D’s spread from cinemas to consumer electronics such as televisions, PCs, cell phones, and game consoles), the quantity and qualify of 3D entertainment fare (also known as content), and the ability of the industry ecosystem and consumers to foot the 3D bill.

3D has proven marketable in cinemas, but now it is trying to expand its empire into consumer electronics. That’s an opportunity and a threat for RealD, which obviously wants to extend its hegemony beyond the three-dimensional silver screen.

RealD will have to rejig its business model and its technologies to capture consumer-electronics markets. It will have to enter into new relationships, build or buy new products and capabilities, and market and sells its wares differently. And that’s presuming that 3D makes a successful commercial leap into living rooms, mobile devices, and other display-bearing devices. Much remains to be done on that front.

Then we come to the content issue. You might have noticed that not all 3D films have the box-office wallop of Avatar. Movie exhibitors like the premium they charge consumers for watching 3D movies (though they are less enamored of the added cost of 3D projection systems), but the willingness of the masses to pay more per view is contingent on cinemas offering them experiences they deem worthy of the 3D surcharge.

I’ve scanned the lineup of 3D films slated to hit theaters over the several months. I am noticing — how shall I say? — the pungent whiff of ripe schlock arresting my olfactory senses, even though, incredibly, RealD has not entered the “Smell-O-Rama” business yet.

Sadly, a lot of cheesy horror movies are queued up for the 3D treatment. That’s not good. I’m of the aesthetic view that ostentatious protrusive effects, used to goose the shock value of severed heads and buzzing saws, aren’t the best utilization of 3D technology. I like the immersive depth 3D can bring to quality entertainment and live sports, but I’m not sold on the viability of cheap gimmicks, or of 3D as ornamental gossamer for bad content. Look, a crap movie is crap movie. A 3D turd is still a turd.

And a proliferation of 3D turds will not do the 3D industry any good. Does anybody in Hollywood remember the 1950s . . . or perhaps read history?

Anyway, presuming that 3D is used naturally, that it is applied to good movies rather than as a decorative wrapper for bad ones, RealD still will have to contend with the nasty array of macroecoomic uncertainties that beset all us all.

There’s considerable risk in RealD as an investment vehicle, and there’s also a commensurate measure of promise. Today, on their first day of trading, RealD shares were snapped up eagerly by investors who see more promise than peril. The stock was up sharply from the open, and the company was able to price its offering well above expectations.

That’s an important consideration, by the way. Earlier in this post, I mentioned that RealD intends to take its 3D technology to consumer electronics. As part of that foray, the company is also looking at developing autostereoscopic (3D without glasses) technologies to eventually supersede its stereoscopic (3D with glasses) technology.

All things considered, I don’t think the glasses are going to cut it for casual television viewing in living rooms; nor do I think anybody but the geekiest of geeks will want to be wearing 3D glasses for extended periods while using a mobile device or playing a game console. The company that does autostereoscopic 3D right stands to reap massive rewards. RealD wants to be that company, but it’s not alone — Sony, Samsung, Dolby, 3M, Nintendo, and many others are in the mix, and their advances are closely monitored by HP, Dell, Apple, IBM, Cisco, and other major players.

RealD needs a warchest to fight that battle. Today’s IPO delivers it, as the company makes clear:

We will continue to develop proprietary 3D technologies to enhance the 3D viewing experience and create additional revenue opportunities. Our patented technologies enable 3D viewing in theaters, the home and elsewhere, including technologies that can allow 3D content to be viewed without eyewear. We will also selectively pursue technology acquisitions to expand and enhance our intellectual property portfolio in areas that complement our existing and new market opportunities and to supplement our internal research and development efforts.

Today’s IPO will help RealD pursue its strategic plan. Numerous external factors, however, are beyond its direct control.

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Not Showy, but Dell OEM of Microsoft System Center Essentials Makes Sense

Dell and Microsoft have much in common.

They’re both companies that rode the PC to fame and fortune. They both leveraged client-server computing to grow their businesses. They both do extremely well in the SMB space. They both struggle with branding challenges occasioned by stupendous misadventures in consumer markets. And they both are seeking to reinvent themselves for an era of widespread virtualization and increased adoption of cloud computing.

Dell’s Windows Azure partnership with Microsoft was noted in this august forum earlier in the week. That pitch was directed primarily at larger enterprises and service providers. Now I’d like to turn my attention to a  comparatively modest announcement Dell made Wednesday that speaks volumes about how well it understands its notable SMB customer base.

Sure, in announcing the availability of available a Dell OEM version of Microsoft System Center Essentials 2010, Dell wasn’t revolutionizing the SMB space. It wasn’t even revolutionizing its own approach to that market. What it was dong, however, was continuing to give its customers new options for effectively managing their Microsoft and Dell systems and environments.

By integrating Microsoft System Center Essentials with Dell’s OpenManage portfolio of Dell Management Packs, PRO-pack, and Update Catalogs, Dell will allow its customers to use a single interface to manage technology infrastructure comprising Dell PowerEdge servers, PowerVault and EqualLogic storage, and other products.

Dell will start pricing of its OEMed version of Microsoft Systems Center Essentials 2010 at approximately $5,000. Dell will make money sales of the software, but the overriding objectives are to give customers management options, to make life easier for them, to save them time and money, and — not coincidentally — to keep them in the Dell camp.

The solution is designed for SMBs with up to 50 physical or virtual server operating systems and 500 client devices, and it  provides systems management for virtualized and nonvirtualized environments.

I was briefed on this announcement by Forrest Norrod, VP and GM of Dell’s Server Platform Group, and Enrico Bracalente, senior strategist of system-management product marketing in Dell’s Enterprise Product Group. From that discussion, I understand that Dell is seeing strong and widespread  demand for virtualization from its midrange enterprise customers. The company expects that interest to intensify, and I think you will see Dell continue to build, partner, and buy to address it.

Another takeaway from that discussion is that Dell and Microsoft recognize that they can provide mutual reinforcement for one another, in enterprise markets generally, but particularly in the SMB realm. Dell and Microsoft have a long history of working together, of course, and neither depends exclusively on the other. Still, it’s a relationship that remains far from enervated.

That will surprise the casual observer, but only because the Dell and Microsoft brands have been tainted by their consumer-market follies. On the enterprise side, and especially in SMB, these companies have a lot to offer, as customers will readily attest. In that regard, it’s not surprising that Dell would become the first major vendor to OEM Microsoft System Center Essentials and put it into a bigger-picture customer context.

On its own, this announcement isn’t a particularly glamorous milestone, and it doesn’t rank high on the industry hype meter; but it does qualify as the sort of practical blocking and tackling that keeps SMB customers in the fold. There’s something to be said for that.