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July 28, 2005
So… DreamWorks is about to take a hit of $50 million or so on The Island.
Let the rumors begin!
I have been saying for a long time that the DreamWorks model stopped working the day the Dynamic Trio decided not to build a studio lot. Without a deep library, without a significant TV division, without a TV network, without a music arm, without a significant publishing arm, without a studio lot… and ultimately, without an animation division, what is the business model?
DreamWorks is a wonderful place in many ways… but it is a production company on a lot of steroids.
Marketing and publicity are capable of being masterful and often are. $190 million for a one-quadrant mediocrity like Madagascar? I mean, hold a freakin' parade, not a Wall Street analysts death march.
Distribution knows exactly what it's doing and the team is solid.
But as Revolution Studios found out, trying to walk in DreamWorks footsteps, it doesn't really work.
The business of financing movies the way a studio finances movies requires deep pockets and a wide array of cash flows to keep things on an even keel. One movie is not going to shut down any of the majors. Not only is $50 million or even $100 million, while a horrible amount to lose, not an earthquaking red stain on the bottom lines of Disney, GE/NBC/Universal, Viacom, News Corp or Sony, but the studios that size have a loaded pipeline of product that at least offers the hope of turning it all around in a hurry.
Revolution survived the term of their deal at Sony because Sony gave Roth & Co. a deal that was all pot o' gold, not much rainbow. Essentially, it was no-lose for the Revolution side. And Sony ate it… big.
DreamWorks has partnered with Spielberg's home company, Universal, on Home Entertainment and what's left of the television division… the first years' losses from which DreamWorks has never quite recovered financially. Amblin not only still exists, but it still sits on the Universal lot and is where most of DreamWorks' production and distribution meetings, as well as most meetings involving the three principals (when not about Katzenberg's Glendale-based animation company) still take place.
So, any reduction of the DreamWorks live action business - since DreamWorks Animation is technically a completely separate business - is first a matter of simple accounting. How much money can they spend? How much money will they spend? How do they keep from falling into the red?
There is another major piece of the puzzle that remains a weight over both animation and live action. Paul Allen wants his money back and between the troubles over DVD reporting in animation and this loss, which all but guarantees a red bottom line for live action this year, there is little to suggest that the studio will be in a position to generate $400 - $500 million for Allen any time soon.
So what do you do if you are three of the wealthiest, most powerful men in Hollywood in a bad financial situation?
They probably don't fire anyone. Dumping Adam Goodman, who has had The Island carefully tagged over the last few months as his first DW film, is unlikely. The choice to greenlight this film, which a few key internal players felt was ill-advised from the start, was not really his call. And Spielberg is loyal to his people.
It certainly isn't going to be Terry Press, who has done everything short of pulling a rabbit out of her own rectum while dancing on a giant stone elephant at Hollywood & Highland in order to get this thing going. And even more than Adam, she is family.
And that is the answer in a nutshell. DreamWorks is not like other companies, for better and for worse. Laura Holson's NYT look at the troubles that some Wall Streeters have with DreamWorks Animation pointed this out well. Katzenberg is used to being all things to all people as he feels the need to change hats…. not very Fortune 500.
While the hum around Transformers has been all about whether Bay would direct, the question now is, will (or can) DreamWorks pay the bills for a film this size? (The current answer in-house is a definite "yes.") Checks aren't about to start bouncing, but a look at the production track at DreamWorks makes it pretty easy to figure that the annual production budget at he studio is now (pre-Island) under $250 million a year… perhaps under $200 million… including acquisitions.
That's a third of what Miramax had to work with in its last years at Disney.
It's about a seventh of what most of the majors start with each year.
And the problem becomes operating a competitive company that isn't in the acquisitions and low-budget European-made film biz that Miramax was in when it was making big money or the low-end thrillers & comedy that made Dimension work. Every film doesn't have to be an $80 million investment… but the freedom to make that call is the difference between being in the game and not being in the game.
So what do you do?
It would be very easy for Spielberg, Katzenberg and Geffen to decide, quietly, that they are going to cut the annual production budget back to $100 - $150 million for four films made in-house with partners, to thin out marketing and distribution, and to do a deal with Universal or someone else to release for them.
But the problem remains, what about Paul Allen's money?
And there is the foundational problem... is this still a good business for Steven Spielberg to be in or is he just wasting his powers without the kind of return he is used to getting? That question could overcome all of the ego and preening that demands keeping a damaged machine rolling.
It looks like DreamWorks will at least need to find a major investor who can get some benefit out of the investment. This is why I still see the value of a company like EA, for whom a deal for exclusives to Spielberg-directed product alone would make a $500 million investment well worth their while. Mix things up with animation and more cash could take the pressure off... even as EA is having some quarterly problems of their own.
The idea of Universal acquiring the studio is kind of goofy, really. I count the live action library at 52 films, which doesn't account for the split deals that make library ownership murky. Beyond that, there is little doubt that Universal or any other studio would be happy to fund this team as a provider of a generally set number of titles a year, much as Universal has with Imagine, Disney with Bruckheimer and now, Rudin, Sony with Revolution and WB with Joel Silver. But how much money could actually be offered in a straight acquisition?
How do you define "a studio?" And how do you define "in the studio business?"
The entire decade of DreamWorks has been rocky and this bad trip to The Island could be the proverbial straw, whether the changes are overt or covert. The pressur eis on and it is for real. But "Climb Every Mountain" could be the company theme song. And here they go again.
LATE ADDITION: An excellent piece on DW by Kate Kelly and Merissa Marr at the WSJ brought up a key element that has escaped me... a major piece of the value of DreamWorks live action is that they have distribution rights to all the DreamWorks Animation films. That alone could add $50 million to $100 million a year in net revenue to DreamWorks SKG. Interesting....
