2D or 3D…That Is The Question

“Empowering Filmmakers to Create Immersive Entertainment”

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2D or 3D... that is the question Aug. 8, 2011


Summary .................................................................................................... 3

3D at the Box Office - Sustaining the entire industry ................................... 4
U.S./Canada Box Office ......................................................................................................... 5
3D successful on international markets .................................................................................. 6

Comparing 2D vs. 3D - Movie goers prefer 3D ........................................... 6
3D performance at the Box Office – Current market analysis ................................................. 6
3D Movies – highly appealing to the younger generation ....................................................... 9
3D performance at the Box Office – 2D vs. 3D financial projections ......................................10
A viable ecosystem is developing around 3D ........................................................................14

The Artistic debate – choice of 2D vs. 3D ................................................. 16
After the screen goes black................................................................................................. 18

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Summary

The challenges faced by someone wanting to analyze the 3D box office are not insignificant… a
multitude of variables include increasing number of 3D releases, increasing number of 3D
screens, unpredictable release schedules. Studios do provide 3D to 2D gross ratios, however
they don’t release admission figures, there is no industry data on how many 3D seats are
available each weekend or what portion of those are filled.

The misconception that 3D movies are very expensive to produce, being afforded only by big
budget studios, combined with the above-described challenges in analyzing their box office
performance, makes independent producers think twice before embarking on a 3D project.

Most producers should want their films to fulfill five major objectives:

1. Powerfully convey an engaging story.
2. Generate the largest audience possible.
3. Recoup expenses, and maximize ROI.
4. Take advantage of new media distribution channels.
5. Generate revenue for as long as possible.

In this paper we demonstrate a quantitative analysis that 3D productions have stronger and
longer lasting effects on revenues and earnings, have the potential to complement the
producer’s vision of the story, intrinsically attracting higher audiences than a 2D production.
Amid pushback over pricing on 3D tickets, backlash over inferior 3D content, a close look at the
available data suggests that the noise around 3D does not spell the beginning of the end for 3D
movies. The numbers show sturdy legs for 3D movies, audiences continue to prefer the 3D
experience if the content and storyline is worth watching in 3D.

We will show the advantages of a 3D release as compared to a 2D only theatrical release. 3D
offer many more channels of distribution resulting in increased and prolonged revenue streams.

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3D at the Box Office - Sustaining the entire industry
Despite the traditional successes and failures that characterize the movie industry, 50 to 70% of
box office revenues are continuously generated by 3D movies.
3D Box Office opening weekend: revenues (in US$ millions) and 3D share of Box Office1

1 PriceWaterhouseCoopers: “3D Here and Now…”
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U.S./Canada Box Office

U.S./Canada box office repeated its peak 2009 performance in 2010, reaching $10.6 billion, up
15% over five years ago. 3D was a key driver – 21% of 2010 U.S./Canada box office - $2.2
billion – came from 3D screenings, almost double the 2009 total. 25 films were released with 3D
versions in 2010, up from 20 in 2009.
U.S./Canada Box Office (U.S.$ Billions)2

Spotlight: U.S./Canada 3D Box Office in US$ Billion3
The 3D showings in 2010 were nearly double the 2009 total - $2.2 billion or 21%.

2,3 MPAA: Theatrical Market Statistics 2010

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3D successful on international markets
Over the past five years, global box office receipts have climbed 30% to a record-high of $31.8
billion.4
During the past year, 3D and the Asia-Pacific market were the two chief factors that powered
those international numbers. Despite flat ticket sales in many international territories, increased
surcharges on 3D admissions made up the difference.

Comparing 2D vs. 3D - Movie goers prefer 3D
3D performance at the Box Office – Current market analysis

To satisfy the audience demand, 3D releases have continuously increased for the past years.
The films released in 3D proved to be highly successful, more than 50% of all 3D movies
released in 2010 made the top 20.5

* For the purpose of the analysis, by 3D movies we mean films released in 3D along with 2D
version.

The huge difference can be explained by two factors: 3D films are more attractive to the
audience or they are more widely promoted by distributors. Without available data to verify if
any of the marketing campaigns or 3D technology is responsible for this discrepancy, we
assume that 3D movies have a much higher chance of doing well at the box office, compared to
2D movies. Even if the correlation between marketing budget and box office is significant, it is
highly possible that the distributors decided to heavily promote their 3D movies, meaning the
decision to produce the movies using 3D technology was also responsible for the box office
success. Below is the list of the top 20 grossing movies in 2010, measured according to
domestic gross revenue numbers6:

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The Hollywood Reporter: How 3D Is Fueling the International Box Office
5,5 http://www.the-numbers.com

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* 3D releases are in bold

As 3D ticket prices are on average $3 more than for a 2D screening, would be more accurate to
rank the movies based on total ticket sales. When we sorted the top 20 movies by number of
tickets sold, the previous top 20 is unchanged, just slightly rearranged. This proves that indeed
3D releases are more popular. Below is the new ranking based on ticket sales7:

7 http://www.the-numbers.com
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There is no public data available to separate 3D and 2D ticket sales for the same movie. The
information available on six 3D released films is presented below.8

The numbers above show that moviegoers generally tend to choose a 3D version versus a 2D
version. The exception is Despicable Me, for which we assume that given its release schedule
– crowded mid-summer with The Last Airbender and Toy Story 3 – there were only a limited
number of 3D screens available for a proper release of Despicable Me.
Below is the revenue stream generated by the 3D movies for which both 3D and 2D data are
available9:

A study of the opening weekend 3D revenue, released by the International 3D Society in
2010, promotes the idea that 3D ticket revenues outpaced 2D ticket sales by margins of 2 to 1
in the opening weekend. Society President Jim Chabin: "While this study is just a snap shot of
what opening weekend's 3D grosses look like, these kinds of trends do reflect that consumers
are obviously thrilled by 3D."
Reviewing the opening weekend statistics, we noticed that eleven 3D titles ranked #1 at the box

8,9 http://www.thrintelligence.com

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office in the opening week and 4 titles held the second position, meaning that about 71.4% of all
3D movies released in 2010 were at the top of the box office (#1 or #2) in their opening week.

3D Movies – highly appealing to the younger generation

In 2010, more than one in three people in U.S./Canada viewed at least one movie in 3D.
U.S/Canada moviegoers only 222.7 million, more than half, 52%, viewed at least one movie in
3D. As with general audiences, 3D viewing is highly correlated to age; more than 50% ofall
young people ages 2-17 saw a 3D movie in 2010, compared to 36% of the overall population.
On average, people under 40 viewed more than one 3D movie in 2010, while those over 40
averaged fewer than one10.The high appeal to the younger generation growing up with 3D
movies and accepting them as the norm confirms the potential of 3D technology to maintain a
solid fan base and deliver a sustainable revenue stream long term.

U.S./Canada Percent of Moviegoers and Population Viewing 3DBy Age

10 MPAA: Theatrical Market Statistics 2010
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3D performance at the Box Office – 2D vs. 3D financial projections

We created a financial model that compares financial performance of a 2D movie with the
performance of the same movie converted to 3D. Our financial projections show a substantial
increase in revenues and ROI for the 3D movie, over each distribution window. Since there is no
public data available for all the movies to separate 3D and 2D ticket sales and revenues, for the
purpose of this analysis we used the data available on the six 3D released movies presented on
the previous page.Based on our analysis we draw the following conclusions:
- A 2D movie has the ability to earn at least 41% higher revenues at the box office, after
being converted to 3D
- The producer’s share to negative cost ratio increases from 1.6:1 to 2.6:1 when
converting a movie to 3D
- The ROI of a converted movie increased to 238% from 150%.
In our analysis we used the following assumptions:
1. Negative cost of the 2D movie is $25M, adding $4M for the 3D conversion (conversion
costs: $20K to $80K per min. - based on complexity and creative direction - $2M to $8M
per feature film. - based on a 100 min runtime.
2. Most pictures are considered successful if they attain $50M at the box office. We
assumed box office revenue of $50M for the analyzed 2D movie.
3. We increased the 3D picture’s revenue by 41%, according to our analysis on the six
movies mentioned above.
4. Film rental’s agreed fee was set at 50% each for exhibitor and distributor. Note that this
agreement could be more favorable in the case of a studio distribution.
5. Direct distribution expenses typically include advertising and prints and are in the range
of $25M - $35M. We use $28M for our analysis.
6. Home entertainment gross income is set at 72% of film rental.
7. DVD and Blu-Ray duplication expenses: we use $3/unit sold, a conservative estimate,
higher than most actual expenses but lower than higher titles with larger theatrical
grosses.
8. Premium cable direct distribution expenses are primarily legal fees, travel and festival
representations and should not exceed $150,000.
9. Premium cable distribution fee and network distribution fee are set to 0%, but they can
be as high as 35% of the cable or network gross in the case of a studio producer.

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10. Below is a detailed financial projection, comparing a movie box office performance for
both of its 2D and converted 3D version.
11. The below projections are for illustration purposes only, to showcase the earning
potential of a converted 3D movie. However, as mentioned in this paper and in various
media sources, the storyline, the content offered, could significantly influence the
financial performance of a 3D movie.
12. The box office gross, ancillary revenues and costs associated with each distribution
window projected here are based on industry averages and the six movies performance
mentioned above (Toy Story 3, Alice in Wonderland, Despicable Me, How To Train
Your Dragon, Clash of the Titans, The Last Airbender). The box office gross for a
single film is absolutely unpredictable, regardless of financial model used or the films
budget, cast, genre. The costs associated with each distribution window may also vary.

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11 Financial projection model based on: John J. Lee Jr., Anne Marie Gillen, “The Producer’s Business Handbook”,
rd
3 edition
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A viable ecosystem is developing around 3D

With the emergence of the 3D technology and increasing popularity of 3D movies, theater
operators have a higher incentive to convert to the new technology. From both the studio and
audience perspective, more theaters are needed to eliminate the bottlenecks that occur when
too many 3D movies are released within the same time frame.

As of March 2011, the U.S. boasted 16,231 digital screens, with 8,963 of them equipped for 3D.
Abroad, the number of digital screens stood at 23,511, with 17,059 offering 3D. Those numbers
are increasing by the week. China alone is adding roughly three screens a day, all digital, which
means they can be easily converted to 3D12.

Another positive finding is that when a 3D movie is good, it can reach a wide audience; there is
no negative impact on the films dvd/blu-ray sales. Once the audience perception of the picture’s
entertainment value is established, ancillary revenues derived from post theater distribution
windows will provide reliable revenue streams for years to come.

Below is an analysis of top grossing films in 2010 and top grossing DVD titles, supporting a
strong correlation between box office performance and DVD sales13.
When a movie with a strong content is produced using 3D technology, financing has proven
abundant for filmmakers. More than 48 movies are scheduled for 201114.

12 The Hollywood Reporter: How 3D Is Fueling the International Box Office
13,14 Price Waterhouse Coopers: “3D Here and Now…”

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48 3D movies are scheduled for 2011

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The Artistic debate – choice of 2D vs. 3D

"I've always liked 3D," declares Martin Scorsese on the set of Hugo, his first movie shot in 3D,
due to be released later this year. "I mean, we're sitting here in 3D. We are in 3D. We see in 3D.
So why not?"15
There is still controversy surrounding 3D, with many analysts and reviewers predicting either the
death of the format or the triumph of the 3D revolution. Some analyst argue that high prices for
a 3D ticket and uncomfortable glasses will lure away consumers from 3D movies, ultimately
leading to the demise of the technology. Most recently, the
Pirates of the Caribbean: On Stranger Tides low 3D
ticket sales fueled this controversy16.
Only 37 percent of the “Stranger Tides” opening $90
million came from 3D screens (an additional 9 percent
came from IMAX), according to Disney stats releases, putting the film behind previous 3D loser
Clash of the Titans; just 52 percent of the “Titans” opening weekend gross came from its
hastily put together post-production 3D conversion."Clash"also played in fewer 3D locations,
with 1,602 (or 42% of the total location count), compared to "Stranger Tides”, which opened at
2,747 3D engagements (66% of its total locations)17.
The worldwide sales of Disney's four "Pirates" films crossed $3 billion, making the series one
of Hollywood's most successful franchises. With “Stranger Tides” the first pic in the series
released in 3D, biz insiders questioned whether audiences comfortable with the previous 2D
screenings of the franchise, felt the need to pay extra cash for the 3D experience. That was the
reason Disney released “Stranger Tides” in both 3D and 2D, says Dave Hollis, studio's exec
VP of motion pictures sales and distribution, in an interview with Variety18."Giving consumers
the choice is very important in helping drive global box office," he said. "There are some
consumers who will gravitate toward 3D, and there are those that won't."
The fourth installment of the “Pirates” sold better in 3D with overseas audiences, with 66% of

15 http://www.guardian.co.uk/film/2010/nov/21/martin-scorsese-3d-interview-kermode
16 http://3dradar.techradar.com/3d-tech/3d-hurting-movie-industry-says-analyst-25-05-2011
17,18,19 http://www.variety.com/article/VR1118037521?categoryid=13&cs=1&cmpid=RSS%7CNews%7CLatestNews

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the film's record-setting $260.4 million international debut coming from 3D. Moviegoers outside
the U.S. have embraced the format more consistently; however, that acceptance varies market-
to-market.19

Interestingly enough, those who did see "Stranger Tides" in 3D said they liked it more: 94% of
3D screenings scored a "highly favorable" rating vs. 81% for 2D, according to opening-weekend
exit polls. That should bode well for the 3D version in repeat frames.
A research by the Cinema AdvertisingAssociation in the UK also supports the high
acceptance of 3D overseas, especially the younger generations embracing the technology - 61
percent of children cinemagoers (under 15s) are more likely to see a film at the cinema if shown
in 3D, that representing 37 percent more likely than the average UK cinemagoer20.
Most industry observers believe that virtually all films should be shot in 3D for both box office
and creative reasons, given there is a compelling story to tell.
"Cinema goers are incredibly discerning, so it is not enough to simply have fantastic 3D visual
effects. A films success also depends on a compelling storyline which 3D can really enhance
and build on to create a really rewarding viewing experience," said Jeremy Payle, Sales Director
at Digital Cinema Media in an interview with Tech Radar.21
All in all, 3D has been and continues to be a good thing for the British cinema-going public, he
concluded: "The explosion of 3D films has created a real boost to the UK film industry. In 2010
annual admissions were the 4th highest of all time!

20,21 http://3dradar.techradar.com/3d-tech/exclusive-brits-lapped-pirates-caribbean-3d-says-cinema-boss-25-05-
2011

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After the screen goes black22
3D has hit its third era of mainstream popularity. But unlike
the '50s or the '80s, the 3D market doesn't seem destined for
a crash. New technologies have greatly improved the visual
experience, and massive box office returns justify the cost of
upgrading theaters with 3D-capable projectors.   The next
frontier for 3D movies appears to be the home market.
It is more important than ever for the producers and directors to offer a great story enhanced
with the most advanced technologies available. Each movie is a brand. A strong brand
established at the box office will drive the performance in the subsequent distribution windows.
With the development of new platforms that allow consumers to get 3D content outside the
movie theater, from 3D home entertainment systems to 3D PCs or mobile devices, consumers
who had a positive 3D experience in the theaters will want to relive those emotions after they
leave the theaters. Moviegoers would want to pay a premium for the same 3D content to be
available in their homes, PCs or phones, prolonging the life of the movie and exposing the same
creative vision the producer staged for the big screen to a larger audience who missed the
theatrical release, maximizing revenues and profits long after the screen goes black.

For most filmmakers, the choice is not whether to embrace 3D, but when.

Authors:
Adrian Dascal, MBA
Duke University, The Fuqua School of Business
adrian.dascal@fuqua.duke.edu

Mark Menta, President
MALIBU FILM GROUP
8335 Sunset Blvd. #325, Hollywood, CA. 90069
Phone: 877-310-FILM, Fax: 877-354-FUND

mark@malibufilmgroup.com www.malibufilmgroup.com

22 Inspired by the high rate of 3D screen penetration forecasts in the home entertainment and mobile market, PWC:
“3D Here and Now…”
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2D or 3D…That Is The Question

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