DreamWorks Animation desperate to save itself

DreamWorks Animation, one of the big animation studios in Hollywood, is in a mess. For quite some time I may add. The studio, which initially used to be the animation arm of DreamWorks SKG before it was spun into a separate company, has been in the animation business for almost 17 years now, beginning from its first release Antz back in 1998. It has made 30 films in this period, and the big movie series which are credited to the studio include some unforgettable ones like Shrek, Madagascar, Kung Fu Panda and How To Train your Dragon franchises. The studio’s films have grossed about $12.5 billion worldwide at the box-office with an average per film gross of $418 million which is behind only Pixar and Disney in the animation world. That’s impressive, right? Just by looking at these few stats, one would not imagine that DreamWorks Animation could be facing any major difficulties. But it is in some serious trouble.

DreamWorks Animation_Logo

Things have been going wrong for DreamWorks Animation over the last 2-3 years. Beginning from late 2012, to be more precise. That was when the massively budgeted ($145 million) Rise of the Guardians became a serious disappointment at the box-office ($307 million). Then was the turn of Turbo in 2013, which was made on a production budget of $135 million and managed only $283 million worldwide. In 2014, things went wrong again; first with Mr. Peabody and Sherman ($145 million budget and $273 million worldwide earnings) and later with Penguins of Madagascar ($132 million budget and $313 million worldwide earnings so far). Each of these movies have earned lower than the average film earnings of the studio we talked about earlier. And each one has been a financial disappointment. For comparison’s sake, look at the figures of Shrek Forever After which was the final one in the franchise – $753 million earned against production budget of $165 million; or look at last year’s successful How to Train Your Dragon 2 – $619 million earned against production budget of $145 million. Despite such hits, the failures in the last 2-3 years have been just too many for the studio to cope with.

DreamWorks Animation_Shrek

Where are things going wrong? The studio’s creativity has dipped, there is no question about that. The movies mentioned above, which displayed poor performances, were weak in terms of their content and storyline, the aspect that really drives an animation movie. The ingenuity and freshness of movies like Shrek and Kung Fu Panda are clearly missing. Post 2008, the year when Kung Fu Panda was released, DreamWorks Animation has been able to manage only one new/original movie which has been successful enough to lead to a sequel, and that is The Croods. As against that it has had five original movies that have flopped on the big screen and were thus not considered worthy of turning into a franchise.

20th Century Fox in 2014_How to Train Your Dragon 2

The studio’s production budgets too are quite high at $135 to $145 million, which may be comparable with a Pixar film, but hurts the studio more when the end-quality is not comparable. The competition in the animation industry is increasing each year, and new studios are managing movies at lower costs with higher entertainment value. Take for example, last year’s The Lego Movie which marked the return of Warner Bros. in the animation space. It was made on a production budget of only $60 million which is less than half of the cost in which a DreamWorks Animation film is made. The movie earned $469 million worldwide, which gives a better earnings to budget ratio than even How to Train Your Dragon 2.

The problems of decline in quality and higher costs of making a film get compounded when the number of films increase for the year. DreamWorks Animation had been making 2 films a year for most of the recent years, which increased to 3 films in 2014. The original, Mr. Peabody & Sherman was a flop; the spin-off, Penguins of Madagascar was a disappointment; the sequel, How to Train Your Dragon 2 was the only one that performed admirably well. More movies in a year requires more staff, more creative heads who can independently take big decisions, and of course, all this leads to higher cost requirements. The failure of one movie can hurt the prospects of another too, as unlike other genres, the brand image of an animation studio is much more valuable in this industry. We do not necessarily seek a Universal Pictures movie or a 20th Century Fox movie, though we are always eager for a Pixar or a Disney flick.

The stock of DreamWorks Animation has also taken a hammering, hitting a 52-week low quite recently. The stock price graph below gives you the picture. Many analysts also remain worried on the liquidity position of the company.

DreamWorks Animation_Stock Price Graph

So the big question now is, how is the studio going to save itself? DreamWorks Animation had been in the news in 2014 as it was actively seeking for someone to buy it out and ease its financial worries. It had held merger talks with toy giant Hasbro as well as Japan’s financial conglomerate SoftBank, though neither deal came through. So now it has announced its restructuring plan which can be summarised as follows.

1) The studio has decided to cut approximately 500 jobs across all locations and divisions of the studio. Considering that the last reported workforce strength is 2,200 for the studio, the reduction of 500 personnel implies a 23% cut which is quite huge.  CEO Jeffrey Katzenberg told analysts in a conference call that DreamWorks Animation is “top heavy” adding that “we have too much corporate staff here”. Now this cut in workforce has followed which would sharply bring down employee costs, but how will it impact the timeliness and quality of work, remains to be seen.

2) The number of movies per year will be brought back to 2 as against 3 seen in 2014. This move makes sense considering the reduction in workforce as well as the need to focus on quality of work rather than quantity.

3) Average production budgets of movies would be brought down to $120 million. This would be the biggest challenge for the studio — to manage a high quality of animation at relatively lower costs.

The studio has thus understandably taken strong decisions on reducing its costs, which is however only side of the coin. The other side is the improvement needed in the quality of its movies. From 2015 to 2018, the studio has 7 movies slated for a release, which include three sequels — Kung Fu Panda 3, The Croods 2 and How to Train Your Dragon 3. The success or failure of the other four movies would however tell the story of how well DreamWorks Animation has managed to pull itself out of its current dire position. With Kung Fu Panda and How to Train Your Dragon franchises quite likely to come to an end, the studio needs some of its original movies to do really well so that it can build newer franchises around them, which also means increased merchandise sales (and video sales too). The studio has already pulled out B.O.O.: Bureau of Otherworldly Operations which was initially planned for a 2015 release, and sent it back to development — possibly a sign that the studio is now unwilling to launch average quality products. I do hope that is the case; I hope that the studio which gave us Shrek and Donkey, Alex and Marty, Po and Master Shifu, remains in existence and manages to pull out more of such memorable characters again. It is a tough road ahead for DreamWorks Animation, but it ain’t a dead end for certain.


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