Shares of 3-D movie technology company RealD Inc. plunged 14 percent on Wednesday after Sony Corp.'s movie studio told theaters it would stop paying millions of dollars for disposable 3-D glasses for each of its films.
THE SPARK: Sony's decision will stop a supply of money to RealD for the glasses starting next May. Theater owners may pay for the glasses themselves, or force consumers to buy them and reuse them.
RealD has already said that customers reusing eyewear has cut into their revenues. In July, it said product and other revenue fell to $23.8 million from $38.8 million for the quarter through June 24 as more international customers reused previously purchased 3-D glasses at movie theaters.
If Sony's move prompts other studios to stop paying for glasses, it could cut into a large chunk of RealD's revenue. In the most recent quarter, product and other revenue made up about 40 percent of all of RealD's revenue.
THE BIG PICTURE: RealD gets licensing revenue for add-on technology that it supplies to theater owners with digital projectors and gets paid for making 3-D glasses.
As of the end of June, it had 17,500 movie screens installed with its technology globally, up from about 7,500 screens a year ago. In July, it announced deals to install 2,500 more screens with its technology for theater owners Cinemark Holdings Inc. and AMC Entertainment Inc.
THE ANALYSIS: In the most recent quarter, much of RealD's profit improvement was due to its product and other segment posting gross profits instead of losses.
However, Stifel Nicolaus analyst Ben Mogil said RealD charges movie studios less than the 40 cents per pair cost and would only break even on the glasses next year.
"We never viewed the glasses business as an eventual profit center for RealD," he said in a research note Wednesday.
SHARE ACTION: Shares fell $1.72, or 14 percent, to $10.50 in afternoon trading Wednesday. They are well down from their high of $35.60 reached in May after the somewhat disappointing performance of some movies in the 3-D format this summer. Shares are also far below their initial public offering price of $16 when the shares debuted in July 2010.