DreamWorks Needs a Partner to Take on Disney

DreamWorks has another misstep on its hands as audiences failed to turn out for “Mr. Peabody & Sherman.” Is it time to take a different approach?

Mar 14, 2014 at 7:06AM

Kids are apparently significantly more interested in a dimwitted (albeit lovable) snowman than they are in the world's smartest dog. At least it seems that way if you compare the more than $1 billion Disney's (NYSE:DIS) "Frozen" has taken in to the disappointing early returns for DreamWork's Animation's  (NASDAQ:DWA) "Mr. Peabody & Sherman."

Disney -- specifically its Pixar division -- has been able to crank out hit after hit while DreamWorks has struggled. That's largely because of the power of the Disney brand and the might of the Disney machine behind each title. As a stand-alone company, DreamWorks lacks that supporting muscle to its movies, struggling to be a legitimate competitor to Disney. That's why it would be better served as part of a bigger conglomerate.

Why does DreamWorks Animation exist?

DreamWorks Animation was salvaged from the previous incarnation of DreamWorks, which released non-animated films along with animated ones. At the time of the spin-off, the logic appeared to be that animation -- as Disney has proven -- offered steadier returns and had less risk than releasing live-action movies.

The problem for DreamWorks is that while animation has been a lower-risk/higher-reward model for Disney, that formula does not automatically apply to just any company offering an animation-only slate of films. Without the theme parks, live shows, television channels, and other parts of the Disney machine, DreamWorks faces an uphill battle with each film.

How bad off is DreamWorks?

"Mr. Peabody & Sherman" had a $32 million opening weekend domestically -- less than the company's $43.7 million average opening weekend, according to Deadline.com. The film, with an estimated budget of $145 million, will struggle to earn $100 million in the United States. It's still early to tell how it will do globally, but a U.S. opening this soft means the movie is unlikely to be profitable. 

DreamWorks has had its share of successes like "The Croods," which hauled in $585 million globally, and "How to Train Your Dragon," which brought in almost $500 million. The company has had some stinkers too, including "Turbo," which lost money (at least during its theatrical release) despite global receipts of $282 million, and "Rise of the Guardians," which lost money on $306 million in global box office.

In general the company has struggled to find consistency and its year-to-year fate is heavily dependent upon the box office takes of its two yearly film releases.

DreamWorks is not Disney

One of the biggest challenges facing DreamWorks Animation is that its brand name means nothing.

Though it certainly has a number of deals in place to make money aside from theatrical releases, DreamWorks cannot approach the might of Disney. There are kids and parents who love Disney and follow anything the company does. DreamWorks lacks that sort of brand equity and must market each movie on its own.

How successful is Disney?

Disney owns the Pixar brand, which has released 14 movies starting with "Toy Story" in 1995. Those releases have all topped the U.S. box office and have all been financially successful, ranging from more than $1 billion in global box office for "Toy Story 3" to the $362 million (in 1995 dollars) for "Toy Story," according to Box Office Mojo. Adjust for ticket price inflation, reports the box office-tracking site, and the original would have done more than $366 million in present-day dollars in the United States alone.

Disney's own animation brand is not quite as successful but it has been on a nice run recently. "Frozen" pulled in over $1 billion globally, while 2012's "Wreck-It-Ralph" brought in $471 million, and 2010's "Tangled" nabbed nearly $600 million, BoxOffice Mojo reported . 

Can DreamWorks compete with Disney?

DreamWorks reported $706.9 million in revenue and $55.1 million in profits in 2013.

"We made significant progress in 2013, transforming and positioning DreamWorks Animation for long-term success as a diversified family entertainment company," said CEO Jeffrey Katzenberg in a press release.

That sounds nice But later in the same release, the company reported just how difficult the movie business is. "The company's full-year 2014 results are expected to be driven primarily by the performance of "Mr. Peabody & Sherman" and "How to Train Your Dragon 2," the release said.

One of those films has already if not tanked certainly under-performed, and while the "Dragon" sequel seems like a sure thing, it has a darker tone than the first movie and is not guaranteed to be as successful. While DreamWorks has expanded into television and further diversified away from movies, it's not a juggernaut that can shrug off a $200 million writedown on "John Carter," as FT.com reported. 

DreamWorks needs a partner

The logical partner for DreamWorks would be Comcast (NASDAQ:CMCSK), which owns both NBC and Universal. A DreamWorks owned by Universal would have access to NBC and its cable channels and Universal's theme parks (where it already has a deal for rides based on its Shrek characters that pre-dates DreamWorks Animation being a stand-alone company). The DreamWorks brands would fit nicely into the Universal portfolio and a marriage would give the company the heft to truly take on Disney.  

Without a partner -- and Comcast is the best but not the only option -- DreamWorks will always lag well behind its rival. On its own, it can't produce enough hits to offset the inevitable failures. Disney can look to its other properties when a movie underperforms expectations; DreamWorks just has more pressure on its next film. With each film costing more than $100 million to make (not counting marketing costs), each movie represents a huge risk.

DreamWorks has shown that it can produce hit movies. With the right partner those hits can be nurtured into even bigger revenue producers and the risk of failure can be mitigated. Without a partner the company is always a few bad films away from going out of business.

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Daniel Kline has no position in any stocks mentioned. He regrets taking his son to see "Mr. Peabody & Sherman." The Motley Fool recommends DreamWorks Animation and Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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