By Erich Schwartzel
GtLENDALE, Calif.-- Jeffrey Katzenberg, chief executive of
DreamWorks Animation SKG Inc., until last year sent an occasional
email to his animation studio's employees. He would recount daily
activities--breakfast with Steven Spielberg, for example--and
outline his work expanding beyond the big screen into ventures like
television, consumer products and overseas operations.
"I would read his blog and get exhausted," says a former
DreamWorks production coordinator who left recently. She noticed a
pattern: The busier Mr. Katzenberg was, the more off-track the
studio's film division--famous for hits like "Shrek" and "Kung Fu
Panda"--seemed to her and fellow production managers. "The creative
confidence wavered because of his absence," she says.
His peripatetic itinerary reflected a desire to branch into
multiple platforms and industries--from television to publishing,
theme parks to YouTube, mall attractions to children's toys--to
reduce DreamWorks' reliance on the unpredictable returns of two or
three films a year. But the company began making creative decisions
that left audiences wanting and gave new ancillary businesses
little good material to work with.
In January, after several critical and commercial flops,
DreamWorks carried out a restructuring dramatic even by
show-business standards.
Mr. Katzenberg's long string of early successes helped him
become one of the last true moguls in Hollywood, even if his studio
is considerably smaller than most of his rivals'. His legacy will
depend in large part on how he resolves DreamWorks' current
crisis.
Mr. Katzenberg declines to be interviewed. He has repeatedly
outlined to investors, employees and associates where he thinks the
studio went awry. Its simultaneous aims of releasing three animated
features a year and creating a diversified entertainment empire
stretched it too thin and forced "the most painful" period in its
history, he told investors in February.
He has vowed to focus on films--a strategy that got a major
boost this weekend with the successful opening of the studio's
release, "Home."
Directors and producers who have worked with Mr. Katzenberg say
it will be good if his focus holds. Many say he is among the few
executives who can cut through development chaos and see broad
issues with a feature's plot or characters.
"He's like your perfect audience member," says one associate on
"Rise of the Guardians," a 2012 DreamWorks release. "He's a really
smart person who hasn't been completely immersed with every
detail."
In the restructuring, the studio would reduce its slate back to
two movies a year--a resizing that forced a cut in workforce and
overhead costs. It laid off about 500 workers, nearly 20% of
employees, and closed a Northern California operation. It sold its
Mediterranean-style Glendale headquarters for much-needed cash,
leasing it back.
The restructuring and string of flops contributed to a
fourth-quarter loss of $263.2 million--its worst quarter
ever--compared with net income of $17.2 million a year earlier.
DreamWorks' stock closed at $22.68 Friday, down from a peak of $44
in February 2010 and its IPO-day close of $38.75.
The story of how DreamWorks went from hit machine to frequent
box-office disappointment has multiple plotlines: changing
economics in Hollywood, an expanded conception of what constitutes
family entertainment and executive decisions that overestimated the
risks the studio could afford financially and creatively.
Of the six features DreamWorks released since November 2012 and
before last week's "Home," two were hits and four resulted in
write-downs--a troubling ratio, given the studio's modest output.
It lost money in three 2014 quarters. During that same time, the
three big-budget animated releases from its main competitor, Walt
Disney Co., were hits including "Frozen."
Overall, U.S. box-office returns increased or stayed flat every
year from 2005 to 2010, the Motion Picture Association of America
says. After a drop in 2011, they rose in 2012 and 2013 before
falling last year by 5%.
Interviews with current and former employees at the studio show
a company where workers of all ranks grew to have little faith in
creative decisions, watching as fast changes forced expensive
rewrites and schedule changes kept production budgets
fluctuating.
The overhaul also has put Mr. Katzenberg in the position he has
tried to avoid: significantly dependent on feature films. The
studio's only planned 2015 release, "Home," grossed an estimated
$54 million this weekend--a strong opening that bests DreamWorks'
"The Croods," which opened in March 2013, going on to gross $187
million.
Mr. Katzenberg, who has characterized 2015 as a "reset year" for
DreamWorks, has told investors that a lot is riding on "Home," and
that the studio should break even this year on an operating-income
basis if "Home" does the same. Based on its opening weekend
performance, that is likely.
Since January, Mr. Katzenberg has instigated a top-to-bottom
creative renovation. Chief Creative Officer Bill Damaschke left
this year and was replaced by two studio producers, Bonnie Arnold
("How to Train Your Dragon") and Mireille Soria ("Madagascar") as
feature-animation heads. The company says this new regime's work
will be on display in 2016.
The tumult is an inflection point for the 64-year-old Mr.
Katzenberg and his Hollywood legacy. He made his name in the 1980s
and '90s as Disney's movie-studio head, where he helped spark an
animation renaissance with hits like "Beauty and the Beast" and
"The Lion King." Soon after leaving Disney in 1994, he started
DreamWorks SKG with Mr. Spielberg and music mogul David Geffen,
taking the animation division public in 2004.
DreamWorks developed a unique voice in animation--between Disney
sentimentality and edgier fare like "The Simpsons"--and often hired
celebrities for voices. At its IPO, it was flying high off the
"Shrek" franchise. For several years, a DreamWorks release seemed a
guaranteed box-office hit.
Move to diversify
Then Mr. Katzenberg changed DreamWorks' narrative to one of
expansion into a global entertainment company. Particularly
time-consuming were efforts in China, where he has traveled nearly
monthly for the past three years.
DreamWorks' string of box-office disappointments began in 2012
with "Rise of the Guardians," which grossed a weak $103 million
domestically and led to an $87 million impairment charge. Many
insiders point to the "Guardians" failure as symptomatic of things
to come. It was the first of several misses.
Evidence Mr. Katzenberg was overtaxed showed during the
"Guardians" development, say executives and associates on the
project. He was there "when he could be," says one. "He was spread
in a thousand different directions. He was basically running an
empire."
"When ambition and capacity began to hurt each other, it might
have happened around that time," says another creative person on
the project. "There were times when it took a long time to get
notes from Jeffrey." That was particularly troubling because
"Guardians" didn't fit the mold of earlier DreamWorks fare: It was
darker, proving a harder sell to audiences.
Mr. Katzenberg had a lot on his plate then. He announced
Oriental DreamWorks, a joint venture with Chinese investors, with
goals of expanding into film production, theme parks and live
entertainment, nine months before the "Guardians" release.
On a mid-2012 investor call--four months before the "Guardians"
debut--Mr. Katzenberg said he was committed to diversification
"more today than ever before." On the docket: an arena tour tied to
the "Dragon" franchise, technology ventures in videogaming and
apps, and a third TV series. DreamWorks also bought Classic Media,
a portfolio of characters for more TV and consumer-product
ventures.
In 2013, DreamWorks started breaking out quarterly results for
new business segments including TV, consumer products and online
video. Among efforts to boost those divisions, it designed movies
like "How to Train Your Dragon 2" with toy tie-ins in mind.
Then, when the box office got rocky, Mr. Katzenberg said he was
shifting focus back to movies. In April 2014, after "Mr. Peabody
& Sherman" performed poorly, he said "getting our feature-film
business back on track is my No. 1 priority."
Mr. Katzenberg's priorities seemed to volley between hit movies
and empire-building. The next quarter, after scoring a hit with
"Dragon 2," he said the strategic goal was "to transition
DreamWorks Animation into a global branded family entertainment
company."
Two months after "Penguins of Madagascar" flopped, he told
investors his focus was on producing moneymaking movies.
Family films shift
DreamWorks's decision to increase to three features annually
came as the family-entertainment market was growing crowded. Eleven
to 16 animated features a year were distributed in wide release
between 2011 and 2014, according to box-office-tracking firm
Rentrak Corp. In the early 2000s--the "Shrek" heyday--it was
typically around seven to nine.
Competition was coming from traditional players like Disney's
Pixar Animation and newer studios like Illumination Entertainment,
producer of the "Despicable Me" films. DreamWorks maintains vast
ranks of in-house animators and has production costs that can reach
$140 million a movie, requiring consistently high returns.
Illumination normally spends under $80 million.
Animated-feature budgets often reflect a studio's overhead more
than direct cost: Unlike in live-action shoots, many animation
expenses relate to staff salaries, real estate and computer
infrastructure.
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And DreamWorks has little ability to offset film losses the way
larger companies like Disney can, where revenue sources like theme
parks and cable TV tend to smooth out box-office results. Last
year, when DreamWorks entered talks to be acquired by SoftBank
Corp. and then by Hasbro Inc. , some employees thought a takeover
would bring similar stability. (DreamWorks in 2012 announced a deal
with Twentieth Century Fox to distribute its movies; Fox's parent,
21st Century Fox Inc., was until mid-2013 part of the same company
as The Wall Street Journal.)
What's more, superhero epics from the likes of Disney's Marvel
Studios have become viable family entertainment. Even R-rated "The
Hangover Part II" from Time Warner Inc.'s Warner Bros. was seen as
eating into DreamWorks' business when it opened the same weekend as
"Kung Fu Panda 2" in 2011, executives said at the time.
"PG-13 movies are the new-order family movie," says one
distribution executive. Animated films "are not
counterprogramming."
Costly rewrites
Animators inside the company say rewrites and plot changes put
some projects off-course. When executives decided in mid-2014 to
swap release dates of "Penguins" and "Home," analysts considered it
a savvy move, as the spinoff "Penguins" was considered a more
guaranteed play.
"We have both the flexibility and creative manpower to be able
to make these kinds of changes," Mr. Katzenberg told investors on a
July 2014 call.
Behind the scenes, it wasn't a seamless process, employees say.
DreamWorks's India facility was producing much of "Penguins," but
the hurried release forced a nearly-24-hour production cycle across
the company's offices. The accelerated schedule rushed the
completion of the shots and sequences, project managers say; worker
overtime increased costs. The movie, initially budgeted at $125
million, ended up costing $132 million.
"It was a scramble," says a technical director on the film.
Shifting "Home" to a later date also increased costs as the studio
spent more time on it. In February 2013, executives said "Home"
would have a budget of about $120 million; it cost about $15
million more.
DreamWorks has said it expects future budgets of $120 million to
$125 million.
The studio couldn't bump a release date too often, says a former
executive, lest investors assumed the project was troubled.
DreamWorks has to please constituents with conflicting timelines,
he says: quarterly returns for Wall Street and the years it takes
to nurture films properly for audiences.
Though the switch proved to give "Home" a better release date,
it failed to work for "Penguins" at a time when DreamWorks needed a
hit. After its release last Thanksgiving, "Penguins" didn't deliver
what investors sought, grossing $83 million domestically--the main
driver of a $57.1 million fourth-quarter impairment charge. Mr.
Katzenberg cited its poor performance when announcing the layoffs
to employees.
Mr. Katzenberg has said he is optimistic DreamWorks can weather
the storm. The studio "made 17 out of 17 hits here for a very, very
long period of time," he said in the February call. "It's not that
long ago."
"Getting the feature-films business back on track," he said
during the call, echoing his words from April, "is my No. 1
priority."
Write to Erich Schwartzel at erich.schwartzel@wsj.com
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