DreamWorks Animation at a crossroads

Animation company mulls solo path, partner options

Now that Paramount is getting its toon division together, Jeffrey Katzenberg is under even more pressure to choose a future distribution path for his DreamWorks Animation. One option — to turn DWA into a standalone studio with a distribution arm — has one major hurdle: money.

Not that Katzenberg necessarily needs to raise more. He just doesn’t want to spend it if he doesn’t have to.

When DWA’s distribution deal with Paramount Pictures expires at the end of 2012, a deal with another studio or an indie is certainly possible. Alternately, DWA could go it alone, via innovations in its digital distribution and international deals.

But the solo route would not come cheaply. Any deal with a different distrib would require the right terms, and DWA’s board has said that reupping with a theatrical and homevideo distribution fee higher than 8% is out of the question.

The plot thickened on that impasse in July, when Paramount announced the launch of its own animated division, which will make one $100 million film per year. With a key exec now in place — Par announced Monday that it had tapped former Walt Disney Feature Animation topper David Stainton to head the division — and more to surely follow, it’s even less likely that the studio will budge on its demands for a better deal.

DWA releases two or three films annually, such as this year’s “Kung Fu Panda 2” and “Puss in Boots.” Last year, the company released “How to Train Your Dragon,” “Shrek Forever After” and “Megamind.”

For 2012, it has “Madagascar 3” (June 8) and “Rise of the Guardians” (Nov. 21). Under current terms, Par covers the marketing and distribution costs for DWA’s pics and gets reimbursed once the box office grosses start flowing into DWA’s coffers. It also takes an additional 8% fee off of the B.O. haul, as well as 8% of the homevid revenue.

DWA would probably not have difficulty putting together a P&A fund, as marketing coin — the first to be repaid — is easy to come by. Still, a DWA distribution effort likely won’t have the purchasing power that a Paramount affords.

DWA has generated $5.5 billion in B.O. revenue from 11 films since 2006, while that grows to $10 billion, once homevid revenue, pay TV sales and other revenue sources are factored in. Over the life of its seven-year deal with Paramount, DWA will have paid the studio $700 million in distribution fees.

Should Katzenberg go its own way, DWA would get to keep that revenue for itself — estimated to be around $80 million to $100 million a year, according to a Barclays Capital report from June 27. But the studio would also have to pony up the distribution and pricey marketing coin upfront, rather than defer payment once each pic is released.

That kind of flexibility is what’s enabling Katzenberg to consider taking DWA independent. Here’s what DWA’s number crunchers are considering:

• Production: DreamWorks spends around $130 million to produce its pics. As of June 30, the company had $113 million in cash on hand.

• Marketing and distribution: Par averages $105 million on prints and advertising to release DWA’s toons domestically and spends another $45 million to release them overseas.

• Homevideo: To handle homevid costs, Par ponies up $3 per unit and another $1 to ship them to retailers, amounting to $50 million per title — a conservative estimate. Marketing costs another $20 million per pic.

• TV: Fees to release pics to broadcast TV and pay TV channels and pay-per-view platforms costs another $10 million per pic.

To start distributing films, DWA would have to staff up and hire not only a distribution team but also marketing and sales staffers — consisting of roughly 35-50 people, that would cost around $5 million a year in overhead. They would be based at the company’s Glendale, Calif. campus.

That crew would need to spend three months prepping each theatrical release, another six months handling the domestic and international releases, followed by three months releasing the homevid. Physical distribution, however, would only be required for three months out of the year during a pic’s domestic release, since international distribution would be outsourced.

Some bizzers question whether two or three DWA toons each year would earn enough coin to offset the overhead costs of running the company’s own distribution arm. According to sources, three releases each year would make the company commercially viable, while two releases would require each title to make at least $200 million domestically — which just six of DWA’s 18 titles have done.

But DWA is said to be considering several cost-effective alternatives, including distributing its pics digitally to theaters, eliminating costly print and shipping fees. According to the National Assn. of Theater Owners, 21,781 of 39,000 screens can play pics received by digital means.

Another option would be to employ a rent-a-system distribution deal where DWA pays a fee that amounts to a percentage of box office per domestic release (likely less than what Paramount is currently collecting from DWA). Practice is primarily used by independent producers through companies like Relativity or some of the majors.

Any distribution exec will have to deal with the domestic decline in 3D ticket sales, at least — and for family 3D films especially: Since 2009, DWA has generated 60% of its box office from higher-priced 3D tickets domestically. But that has dropped, with “Kung Fu Panda 2,” earning 45% of its B.O. from 3D.

The percentage is higher overseas, including territories like China — with the second highest number of 3D screens outside the U.S. — where DWA is planning to build an animation facility, based in Shanghai, to produce toons developed for the Chinese market.

Under its current arrangement DWA still has the option of extending its contract with Par through the end of 2013, while it figures out which moves it wants to make. That would give Par more toons to release — DWA has three skedded that year with “The Croods” (March 22), “Turbo” (July 19) and “Me and My Shadow” (previously announced for Nov. 8) — until it can release its follow-up to “Rango.”

Another option is Universal, which once distribbed the company’s homevideo titles. U’s exclusive deal with Chris Meledandri’s Illumination Entertainment (“Despicable Me,” “Hop,” “The Lorax”) isn’t expected to put the brakes on talks with DWA, given that the company isn’t exclusively U’s toon studio.

DWA could also move to another major, or even minimajor like Lionsgate, that wants to beef up its slate with toons.

Outside of getting its films into theaters, DWA brokers its own deals involving its TV shows, licensing and consumer products, stage shows and digital distribution of homevid titles.

Last month, DWA opted to exit its pay-TV deal with HBO, which was due to expire in 2014, and instead stream its films and TV specials through Netflix, starting in 2013. Deal could pay it around $30 million per pic, analysts said.

That deal comes as DVD sales decline and Blu-ray (something DWA was late to embrace) and digital sales have yet to make up for the losses. DWA films typically earn 40% of their revenue from homevideo, mainly DVD sales. Analysts expect “Kung Fu Panda 2” to earn around 30% from disc sales.

DreamWorks’ library typically pumps out around $100 million a year, but is expected to grow to $150 million as more pics get added.

Offscreen, the company has aggressively wooed families by launching character-driven programs with hotel chain Gaylord Resorts and Royal Caribbean. Walmart and McDonald’s have also been retail and promo partners for the studio. And the company produces musicals and touring shows based on its pics, which are expected to generate around $30 million this year. It has spun off animated TV shows from “Madagascar,” “Kung Fu Panda” and “How to Train Your Dragon” to air on Nickelodeon and Cartoon Network.

For now, however, Katzenberg remains quiet about his plans.

“As I have (said) for five years and one quarter, Paramount continues to do an excellent job for us,
” Katzenberg said in an April quarterly earnings call with analysts. He added that DWA won’t likely address any talks until this time next year at the earliest.

DWA declined to comment for this story.

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