Success in the movie business is heavily dependent on distribution. After all, if your film doesn't end up in theaters, no one's going to see it. Jeffrey Katzenberg, CEO of cartoon feature specialist DreamWorks Animation (Nasdaq: DWA ) , understands this as well (or better) than anyone else in Hollywood. So it's no surprise to learn that he engineered an advantageous deal switching his company's distributor.
The Fox went a-courtin'
For many years, DreamWorks Animation's distributor was Paramount, a unit of Viacom (Nasdaq: VIA ) . The studio had a longtime relationship with Katzenberg and his company. This dated back to nearly the beginning of the animation house as an independent entity after it was spun off from parent DreamWorks SKG (originally conceived to be a stand-alone studio, guided by partners Steven Spielberg, Katzenberg, and David Geffen).
Since 2006, DreamWorks Animation and Paramount have combined to bring every one of the former's offerings to the big theater chains, from the wildly successful (Madagascar and its sequels) to the relatively underperforming (Flushed Away).
All in all, Katzenberg's firm is a good one to be in business with. Since being sliced off from DreamWorks SKG nearly a decade ago, the gross ticket sales of each of its movies have exceeded their budgets, at times spectacularly so: The cultural phenomenon that was 2001's Shrek brought in over eight times its roughly $60 million budget, and the first installment of Madagascar saw a gross of over $500 million against estimated production costs of $75 million.
A cagey Hollywood veteran like Katzenberg is well aware of the value of a company like his. As a result, he probably drove a hard bargain once the clock started ticking on the Paramount deal, which is to expire at the end of this year. After negotiations with his soon-to-be-former partner went nowhere and bids from other major studios were found wanting, Katzenberg settled on News Corp.'s (Nasdaq: NWS ) Fox.
Going solo on TV
DreamWorks and Fox's theatrical distribution arrangement is roughly similar to the current arrangement with Paramount: the distributor is to receive approximately 8% of the revenue brought in by each released film. Fox will take a lower cut than Paramount did for digital distribution, at 6% of the take. Additionally, DreamWorks Animation will be free to release its films on its own for domestic broadcast TV and cable (it formerly paid 8% to Paramount for doing so).
For Fox, distributing the cartoon purveyor's movies is a low-risk proposition given the DreamWorks' habit of making successful entertainment that piles up box office receipts. That low risk should reap big rewards; the recently released Madagascar 3, for example, has taken in over $565 million in global ticket sales -- a cool windfall of around $45 million for the lucky distributor.
But like Paramount, Fox has a proprietary animation arm (Blue Sky Studios) that's had big successes of its own. The Ice Age series did Madagascar-like business with each of its films, bringing in spectacular returns for its mother company. So far Blue Sky/Fox has two features that will hit screens in the near future -- an epic adventure called, well, Epic, and a sequel to another hit, Rio 2.
The studio will have to figure out a way to space its releases at sufficient distance away from those of DreamWorks Animation -- or risk box office cannibalization. This won't be an easy task if a hard-charging, tough dealmaker like Katzenberg is determined to bring out his company's movies on dates that conflict with his new partner's release schedule.
Now, to boost those grosses
So it looks like the big winner in this deal is DreamWorks Animation. The freshly signed arrangement lasts for five years, taking care of the cartoon house's feature distribution needs. Other media are well covered, too, and the company's even taken care of streaming video thanks to its distribution deal with Netflix (Nasdaq: NFLX ) , which was signed late last year and will be in force from 2013 to 2018.
For the company's shareholders, hopefully all of the above will clear the way for the moviemaker to boost its financials. After all, results in recent quarters have been relatively weak -- second-quarter revenue, for example, was down 26% year over year to $163 million, while net income came in at $13 million as opposed to the $34 million in the same quarter of 2011.
To its credit, DreamWorks Animation has invested in diversification, with plans to spend approximately $3 billion to build an animation studio and entertainment complex in China. It's also gone the acquisition route, recently shelling out $155 million plus debt servicing to buy Classic Media. This will provide the opportunity to leverage that company's considerable intellectual property, which includes such old animation favorites as Casper the Friendly Ghost, Lassie, and Rocky & Bullwinkle.
Like the Fox deal, those deals are potentially lucrative moneymakers. Unlike the Fox deal, they'll take a while to come online and start producing revenue. Until then, hopefully the company will continue the long winning streak it's enjoyed with its profitable films. Otherwise, future deals might not be so advantageous and (potentially) lucrative.
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