Cineplex Inc. is looking beyond blockbusters and popcorn with a $40-million takeover of EK3 Technologies Inc., a digital sign maker whose clients include some of the largest retailers and restaurant chains in Canada.
Cineplex already owns its own digital signs division with a roster of clients across the country, but it accounts for a tiny portion of the company's revenue.
Now Canada's largest movie theatre chain wants to expand its digital business to buffer the company against structural changes in the movie business.
"We want to diversify to be less reliant on the movie slate," said chief executive officer Ellis Jacob.
"It's not something that happens overnight … but this is an area that has grown quite substantially in recent years."
The move is part of a broader initiative the company has undertaken to expand its core theatre business while finding new sources of revenue.
It recently introduced a "super ticket" at its theatres that allows anyone who buys a regular ticket to get a digital copy when the movie is released on DVD. Cineplex last month announced a deal to spend $200-mllion to bump its market share in Canada to just over 70 per cent through the purchase of 24 Empire Theatres locations in Atlantic Canada.
The deal couldn't come at a better time for the London, Ont.-based EK3. It was looking for venture capital to expand into the United States when its bankers at RBC Capital Markets introduced its executives to their counterparts at Cineplex. EK3 got its big break in 2004 when it won the contract to provide digital menus in Tim Hortons restaurants, an essential win that gave the company a chance to prove its digital menus could be integrated into traditional menu boards.
"That gave us an opportunity to start building our reputation," said chief executive officer Nick Prigioniero.
It has since signed deals with retailers such as Target and Wal-Mart for in-store television displays, most commonly seen showing a steady stream of advertisements to bored shoppers waiting in long checkout lines. The company just signed another deal with Tim Hortons, which will see it run a pilot program in London franchises called TimsTV. The restaurants will have televisions installed that show a steady diet of Tim Hortons commercials and tales of Canadiana, and will also sell space to outside advertisers.
Cineplex earned an $8-million profit in its last quarter, with its Cineplex Digital Solutions division accounting for less than 10 per cent of all revenue. The division makes electronic signage for clients, such as the interactive screens that are installed at rest stops along Ontario's Hwy. 401.
"This is about the changing face of retail and how much more effective it is having digital signage," said Cineplex chief financial officer Gord Nelson.
EK3 is privately owned with approximately 145 employees. It posted about $26-million in revenue last year and earnings before interest, taxes, depreciation and amortization of about $4-million. It plans to keep its London and Toronto offices open, and hopes to set up an American office by the end of the year.
Each company has about 7,000 screens installed across the country, and both expect revenue to double within two years. They believe the pace of growth is sustainable, particularly because of the low rate of adoption so far among retailers and restaurateurs.
When EK3 started working with digital displays a decade ago, Mr. Prigioniero said, a 42-inch screen sold for about $42,000. That's now closer to $400, giving the company's customers an opportunity to incorporate digital advertising at a cost that isn't all that much higher than traditional printed signage (and can be updated constantly).
"The cost of infrastructure is coming down dramatically," he said. "Now you can create a low-cost display and people can communicate with their clients. It used to be you had to prove the return on investment – but now if you go into a store such as Aldo you'll see a giant video wall in the store. It's more about an experience."
Editor's note: Cineplex's "super ticket" program allows regular ticket buyers to get a digital copy of films when they are released on DVD. An earlier version of this story said incorrectly that the buyers would get a DVD at the same time.