Media Management and Leadership Fall 2012

DreamWorks Animation

Executive Summary

DreamWorks Animation creates high-quality entertainment, including CG animated feature films, television specials and series and live entertainment properties for a global audience. They have theatrically released 25 animated feature films, including the franchise properties of Box-office hits like Shrek, Madagascar, Kung Fu Panda and How to Train Your Dragon. DWA’s films Shrek 2, Shrek the Third, Shrek Forever After, and Madagascar 3: Europe's Most Wanted are among the 50 highest-grossing films of all time. DWA is currently investing and expanding hastily in many different directions and risk falling into the “doom loop”. To further excel as one of the animation industry’s giants, DWA should focus on a creating a good SMaC recipe, embrace a constant and diligent work approach and improve the overall quality and content of their films by returning “back to basics”.

Industry Overview

Animation production is a highly competitive market. The studios compete with a variety of companies for the service work, access to time slots for broadcast of television programs, access to theatrical outlets for feature films, acquisition of characters, storylines, ideas and treatments with which to build its library, the recruitment and retention of talented personnel, and the licensing and distribution of its related products. DWA attempts to differentiate themself from competitors through high quality level of CG animation, production processes, training of skilled animators and proprietary software. Many studios have announced their intention to increase their release of animation films per year, and DWA is no exception recently announcing their plans to increase their movie releases to three films per year. The DVD market has reached maturation and sales are continuously declining, while the market for digital and video-on-demand platforms is significantly increasing. Digital piracy is also an area of concern. More consumers are accessing content online, and although the 3D technology restrains the illegal downloads of movies it is affecting both DVD sales and movie attendance both internationally and domestic.


DWAs competitors include producers of animated, traditional animated and live-action films. Main competitors are Disney/Pixar Animation Studios Inc., Sony Pictures Animation, Blue Sky Studios Inc., and Lions Gate Entertainment. Besides Lions Gate, a key distinction between DWA and its competitors is that it is the only pure animated play in the entertainment segment. DWA derives substantially all of its revenue from CG animated feature films, while the other competitors are part of large conglomerates that have various income sources.

Continuing enhancements to commercially available computer hardware and software technology have lowered and will continue to lower barriers to entry for studios or special effects companies whom intend to produce computer-animated feature films or other products. Competition from animated feature films and family-oriented feature films will likely continue to intensify over the next several years. Due to a potentially large number of family-oriented films scheduled for release over the next few years, it is possible that the market for these films, whether animated or live action, will become further saturated. The increase and improvements in technology has democratized the market, making independent producers and movie studios possible competitors as well.

DreamWorks Animation

DWA went public in 2004, but the company’s stock price has decreased approximately 50% since 2010. During the course of 2012 DWA has embarked on many new strategic developments. DWA is currently investing robustly in overseas expansion and is looking to start its own television channels. In February, they announced a joint venture in China to build a $350 million Shanghai-based animation studio, Oriental DreamWorks. This was a tactical move to expand international distribution by planning to produce original animated and live entertainment content, theme parks, games and consumer products within China and worldwide. In July, they won a $155 million bid to acquire Classic Media (now DreamWorks Classic), bringing in a large and diverse collection of characters and branded assets predicted to bring in franchise business and possibilities to leverage across the motion picture, television, home entertainment, consumer products, digital theme parks and live entertainment channels. In august DWA left Paramount and replaced it with a five-year distribution deal with 20th Century Fox for both domestic and international markets. This agreement lowered the cost for video-on-demand and allowed DWA to keep its revenue from domestic television, such as sales to Netflix. The distribution deal requires DWA to pay Fox a distribution fee of 8% for theatrical and 6% for digital platforms. DWA also recently entered into an arrangement with BBC, extending the international free TV rights for a number of catalog titles. DWA’s newest box-office release Rise of the Guardians was expected to be one of the highest grossing movies amongst the new releases in November, but received mixed reviews and has presently underperformed at the box-office. Budgeted at $145 million, this movie was more expensive than the generic DreamWorks Animation film. DWA is now planning on increasing their movie releases to 3 films per year, and raising their credit line to $400 million. They also plan to make further savings after completing recent investments to improve animation and lighting tools. They expect production costs to return to approximately $130 million per picture in 2013. 1

Very recently DWA hired Michael Francis as its first [1]chief global brand officer, hoping that his experience as marketing officer at Target Corp. will help sell more toys and clothing derived from DWA’s animated characters. 2 DWA is currently facing challenges within disappointing 3-D revenue, monetizing in the declining DVD market, digital piracy and increased competition in the family movie market. All of DreamWorks Animation's feature films are produced in 3D, but the once promising 3D audience is no longer guaranteed. For DWA, a box-office flop has a major negative impact on annual earnings, stock price and future cash flows. Due to the unpredictability of the box office, DWA generally seeks to manage its risk ensuring that one of its releases is a sequel. Sequels are inherently less risky because of their proven fan base.

Amongst DWAs primary revenue streams in 2012 was Madagascar 3, which contributed with approximately $47 million to the quarter and grossed approximately $640 million in worldwide box office. Puss in Boots contributed revenue of approximately $45 million to the quarter, primarily from worldwide pay TV. DWAs library contributed revenue of approximately $51 million to the quarter.

Recommendations & Implications

DreamWorks Animation has been named one of the "100 Best Companies to Work For" by FORTUNE Magazine for four succeeding years, and is repeatedly ranked in the top tier by Great Place to Work Institute. Their innovative and creative culture includes strategies to foster spontaneous discussions, encourage risk-taking, openly discuss mistakes and provide a sense of job security, share successes and nurture professional development. [2]

The free, spontaneous and creative culture is a result of the companies CEO Jeffrey Katzenberg drive and unwavering will and commitment to succeed. Jim Collins in “Good to Great” describes this as part of level 5 leadership skills. Katzenberg manifests his desire to give 110% on what he does regardless of the cause and strives to exceed expectations in both management style and in the production of animation movies. 3

Katzenberg executes what Collins describes as the hedgehog concept; he is deeply passionate, extremely enthusiastic and thrives to create his own heritage by being the best in the world at that one big important thing that makes DWA great; making humoristic, high quality, animation movies that appeal to all ages. Although the culture and management style at DWA should be fostered and encouraged going forward, DWA’s success is ultimately resultant from the quality of their films. The animation industry is a competitive market and holds uncertain projections towards the future popularity of 3D technology, so the importance of creating good content is more significant than ever. For DWA, their primary focus should be improving quality and content of their films if they want to excel further. Katzenberg describes himself as utterly fearless and believes that creating something unique and original will bring the most success, although this mindset equals risk and the occasional failure. When initially seeking to find the company’s identity, Katzenberg did as Jim Collins recommended in his book “Great by Choice”; he fired bullets before cannonballs. After leaving Disney and starting DreamWorks Animation he wanted to find his own course and identity by continuously trying and failing by producing serious narrative movies like “Prince of Egypt” and “The road to El Dorado”, then more successful and humoristic movies like “Ants” and “Chicken Run” before firing the cannonball known as “Shrek” 2001. This movie integrated all of DreamWorks success elements- humor, satire, originality, agelessness and the voices of big comedy stars. After launching this movie and establishing DWA’s identity, DWA found their unique heritage and “own thing”. Their most recent movies have had a more dramatic narrative and have not harvested the same amount of success.  Katzenberg prides himself in giving his employees the opportunity to fail, but it is equally important that he confronts the brutal facts after a box-office flop by thoroughly investigating what went wrong (rather than assigning blame and risk repeating the mistake). By utilizing long-term metrics to reach the six sigma he will develop the quality of process outputs by identifying and continuously reducing defects, constantly improving and minimizing variability in production, manufacturing and business process. By doing so DWA stands a better chance to succeed in achieving future cost savings and also minimizing the chance of future film failures. Like the former CEO of Disney, Michael Eisner’s, whom identified the company’s heritage in classic films and introduced seven-year release cycles on Disney’s classics, Katzenberg should return “back to basics” and revive the core elements of what determines a DWA recipe for a Box-office success. (Paul Hardart. Lecture. Nov 26 2012)

DWA is currently taking on many large investments, expanding and acquiring new partnerships and deals hastily. Although it is good that they are developing and advancing in growth possibilities, Katzenberg should be wary not to do more than what they are capable of doing and loosing focus on what he does best and where he can make money (hedgehog concept). Katzenberg may be falling into the first stage of decline in what Collins describes as “how the mighty fall”. Collins explains it as leaders undisciplined pursuit of more and how they become arrogant about their success and almost view it as an entitlement.  As a result, they lose sight of what caused their success in the first place. One of Collins keys to greatness was Level 5 Leaders; leaders that have an important blend of humility and will. Collins states, “Like inquisitive scientists, the best corporate leaders we’ve researched remain students of their work, relentlessly asking questions–why, why, why? “Knowing people” drive their organizations to decline in two ways–they become dogmatic about their specific practices OR overreaching by “moving into sectors or growing to a scale at which the original success factors no longer apply.” In light of DWA’s recent multiple scaling and scoping, Katzenberg should ask himself two questions;

1.     Does your primary flywheel (the thing that made you successful in the first place) face inevitable demise within the next five to ten years due to forces outside your control–will it become impossible for it to remain best in the world with a robust economic engine?

2.     Have you lost passion for your primary flywheel? (Paul Hardart lecture 11.12.12)

If Katzenberg does not address these issues, DWA risks falling into the “doom loop” as a result of expanding and investing in many different directions too quickly. Increasing movie releases from 1,5 to three movies a year should not be necessary if the movies produced are good enough to attract sufficient revenue. A box-office hit enables the possibility for future income without much additional cost as a result of franchise, sequels, and licensing characters. He should practice the 20-mile march and approach growth slowly, steadily and methodically rather than rushing to expand in all different directions and eventually loosing focus on what DWA does best.

To solve these issues, Katzenberg should measure and evaluate the reasons for former and recent movie flops and successes, zoom out to get a comprehensive view of the situation and return back to basics by reviving the technique that once made stars like Shrek and Madagascar. He should then pursue the technique with a SMaC (specific, methodical and consistent) recipe. The more uncertain an environment is, the more important it is to use empirical creativity (shooting bullets) and then fanatical discipline (a good SMaC recipe) when deciding to approach a new idea. It is equally important that Katzenberg continues to sustain the company’s good image and attract talented people by keeping the workplace a “cool” place to be associated with, and to avoid the pitfall of what Collins describes as the “lone genius” CEO. Passion has to come from doing things that make people passionate on their own, such as the company’s mission, which in DWA’s case is being “committed to fostering a culture that embraces innovation, creativity, collaboration and a solid dose of fun”. Although the latitude for individual behavior and entrepreneurial spirit at DWA is necessary, great companies also have a culture of discipline. Without discipline, things will inevitable start to break down as DWA expands. To approach this discipline it is beneficial to make a “stop doing” list by determining what projects DWA is taking on that have future value and what projects are merely clutters[3].   In order to do this, they must determine where they should allocate their resources, which can be done by breaking down the company’s various elements into a Boston Matrix. DVD sales are still amongst the company’s primary revenue sources, but have low market growth and limited opportunities and should not be further invested in, although the current cash flow still makes it a profitable area to maintain. According to the Boston Matrix DVD sales would be classified as “cash cows” and should only be expended a certain amount of effort and promotion, as this area will inevitably turn into a “dog” (and probably removed from the market). Rather, DWA should distribute more resources to promoting the digital and video-on-demand platforms and further expanding their international audience by making movies that travel well. These are areas with high growth potential, but have not fully gained their potential market share. A large percent of DWA’s revenue is derived from worldwide box offices and would be classified as “stars”. The DWA brand is internationally well established and despite the expense of developing it through parks, television and live entertainment, it has huge potential and they should work hard to realize it. Digital and video-on-demand platforms have massive potential and are undoubtedly worth the additional investments. 1/3 of all American households currently use the online streaming site Netflix and as more digital platforms continue to form, DWA will improve their leveraging prospects. Despite it’s promising future, it is hard to determine how to effectively monetize digital platforms and this area would currently classify as a “problem child”. If developed advantageously this area will expectedly turn into a “star” and secure DWA’s future evolution. DWA’s specialty in 3D technology is also a grey area and would be categorized as a “problem child”. 3D is currently not generating as much traction as originally anticipated and is suffering from a low market share. This area is risky and costly to develop, but has real growth potential and could become a lucrative “star” if marketed successfully through the help of the four P’s (product, price, place and promotion). DWA must determine the cost of promoting it to a stronger position and evaluate the probability that 3D will get a secure hold in the market and gain enough traction to generate future profit. Jim Collins explains that despite the diverse economic circumstances in various industries, good great companies can be winners even within industries that aren’t rising stars. For DWA the key subjects to remember is to not be the “the Prince of Egypt”, but rather the “king of content” and that “slow and steady wins the race”.





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