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DreamWorks’ Strategy Was Right, But Its Execution Was Wrong

DreamWorks' Strategy Was Right, But Its Execution Was Wrong

This was the
week when DreamWorks
Animation announced
that they
were eliminating 500 positions,
and shuttering the venerable
Pacific Data Images (PDI)
which the studio had
acquired in 2000. As news
of the job losses
filtered through, many turned
their attention to the
reasons behind the cuts.
Poor box office results
were quickly pinpointed,
but few took the
time to fully explore
the actual cause of
the company’s stumble.

Scapegoats were suddenly
everywhere, from the
number of staff, to
the free food in
the cafeteria, to poor
creative decisions. Every pundit
with a keyboard was
only too happy to
proclaim their opinion and/or
disdain for the direction
the studio had taken which
brought them to this
point. What the all
managed to overlook, were
the two actual reasons
why things have become
critical for the company.

The first is
that budgets have remained
exceedingly high; the last 12 features have
cost an average of $143 million each. DreamWorks has
not produced a film
for under $125 million
since 2006’s Over the Hedge. This
is despite falling technology
costs, and increased competition
in the industry. In a day and age when a
film as gorgeous as A Monster in Paris can be made for in and around $30
million, the budgets of DreamWorks’ features start to look rather bloated.

pussThe American box office just isn’t as
robust as it used to be either. Rising ticket costs have pushed total grosses
up, but have resulted in less people actually attending screenings. The bottom
line is that a film costing $145 million (as Rise of the Guardians did) has to
bring in a lot more than a film costing $80 million such as Over the Hedge.
Assuming the usual yardstick for these things of double the budget, that means
the breakeven points are $290 million for the former, but just $160 million for
the latter. At $11.50 a ticket, that means that Guardians has to be seen by
11,304,348 more people to make a profit. Granted they can be spread around the
world, but that still a heck of a lot of people that have to see a film, and if
attendance is down, it becomes a downright challenge. Yet this pales into comparison
to the other development that has had a deep impact at the studio: DVD sales.

Once a bastion of the animation industry
and last hope for films that failed to light the box office on fire, home media
(DVD and Blu-Ray) was the second chance. It was where studios could be
reasonably sure of a sale, and the generous revenues that went along with it.
Many animated films were lucky enough to recoup their remainder of their costs
through DVD sales, and if the film was a success, then the money was the cherry
on the cake as far as the studio was concerned.

The internet has decimated the market
though. Home media sales are in free fall and will never recover. Disney, recognizing
this, has stopped releasing direct-to-video films; they are no longer
profitable enough. For DreamWorks, home media represented a large portion of a
movie’s revenue. To have it swept from under them in just a few years was
surely not far off a punch to the gut. Revenues from Netflix and other
streaming services are still a fraction of what they were before, and may never
reach the $18 billion banner year that home media had in 2004.

pussCombined, this means that DreamWorks
became ever more dependent on a box office success, but never adjusted their
budgets accordingly. The box office is incredibly risky, and if your film
succeeds or fails based on it, isn’t it better to aim cheap?  The market is clearly capable of sustaining
three DreamWorks picture a year, but when Universal/Illumination is releasing
films that match or exceed yours in terms of quality, for half the cost ($65
million for Despicable Me), at some point you need to do a reality check.

Which highlights the second point:
DreamWorks’ competitors caught up.
In the good ol’
days, Pixar ruled the
CGI roost with DreamWorks
following close behind.
Once parity was established
as far as the
quality of the animation,
it became obvious that
creative superiority would separate
the wheat from the
chaff. While fart jokes
continued to permeate
a lot of DreamWorks’
output, the studio reached
a creative peak in
2010 with the original
How to Train Your
Dragon. The general consensus
was that the studio
was, in fact, perfectly capable
of equaling Pixar in
terms of creative quality,
and at least for
a short time, was
superior.

Since then though, the animation industry has witnessed a
massive influx of new players such as Illumination, Warner Bros, and Laika, and
existing studios increasing their output such as Sony Pictures Animation, Blue
Sky and Disney Feature Animation. The combined result was not only a much more
crowded release schedule, but also thriving competition between the players.

No longer was one studio setting the bar for all to reach,
almost every original film seemed to improve the quality of the technique in
the eyes of the public. The level of sophistication necessary in 2014 was far
greater than in 2004. While DreamWorks continued to put out good films, none
outside of How to Train Your Dragon 2 managed to deliver a knock-out punch in
the minds of critics and audiences. They were middle-of-the-road films with
middle-of-the-road receipts.

You cannot fault DreamWorks for trying. As a small,
independent studio, three films a year was going to be a huge commitment no
matter how much money was spent. Disney can spread the cost and risk of producing
a feature among numerous divisions each as large as DreamWorks is whole. When
the risk doesn’t pay off, DreamWorks has nothing to cushion the blow. The
perfect storm of excessive budgets, creative banality, and increased
competition combined to hamstring their efforts, and produce the layoffs we saw
this week. There is no doubt that the studio will survive, but it does raise a
lot of questions about feature animation, and whether it’s all a sign that the
market is beginning to run out of steam.

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