"Penguins of Madagascar" Proves Dreamworks Can't Compete With Disney

Since being spun off as a publicly traded company in 2004, DreamWorks Animation (DWA) has struggled to find consistent success. 

The company has had some hits, but its successes pale in comparison to Walt Disney (DIS -0.93%), which has had an unprecedented run of success with its Pixar label and has surpassed DreamWorks with its Walt Disney Animation branded movies, including the blockbusters Frozen and Big Hero 6. Led by Jeffrey Katzenberg, DreamWorks Animation studio may not even be the clear No. 2 animation brand as Comcast's (CMCSA 0.15%) Universal has built its Despicable Me series into a billion-dollar brand and Fox (FOX) is nearing that with its Ice Age franchise which has its next installment due in 2015.

Even when you just look at the past two years of major animated releases, (minus the still-in-theaters Big Hero 6 from Disney, which is on its way to being a hit and Penguins, which is not) you can see where DreamWorks has struggled dramatically compared specifically to Disney.  

Source: Box Office Mojo

The problem for DreamWorks is that its highs aren't high enough and its lows are too low. With big-ticket animated movies being budgeted in the $130-$150 million range (Penguins had a $132 million budget, according to Box Office Mojo) before marketing costs three of its last five films Penguins, Mr. Peabody & Sherman and Turbo are likely money losers. How to Train Your Dragon 2 and The Croods were profitable but well below Disney's biggest hits and Universal's Despicable Me 2. 

What happened?

The DreamWorks story has grown iffier over its recent releases; the company failed miserably in its attempt to establish a new franchise with March's Mr. Peabody & Sherman, which resulted in a $57 million writedown, Variety reported. 

Failing with a new title is one thing (though it's something that seemingly never happens with Pixar films), but further concerns for DreamWorks arise when you consider that Penguins of Madagascar -- an attempt to extend the popular Madagascar series of films -- seems to be a break-even proposition at best.

After the failure of Mr Peabody & Sherman, DreamWorks moved Penguins to the Thanksgiving slot, switching it with Home, an adaptation of the children's book The True Meaning of Smekday, which will now be released in March 2015, Variety reported. That ostensibly minimized the risk as the more established franchise title would take the high-profile/high-competition holiday date while the unproven movie would open in the less pressure-packed spring season.

That thinking seems to have failed as Penguins of Madagascar stumbled to $36 million at the domestic box office over the five-day Thanksgiving holiday, according to Deadline. That's below the expected $50 million and a disappointing number for a spinoff from a franchise that scored over $746 million globally with its last outing -- Madagascar 3: Europe's Most Wanted. Though the film has yet to open in most non-domestic territories.

"Penguins will generate $105 million at domestic box offices, far below the pre-release consensus of $175 million. That could result in a write down if the film can't drive at least $350 million overseas," according to Deadline. 

Sterne Agee analyst Vasily Karasyov told the entertainment industry site that's unlikely to happen saying that he's pessimistic that international sales will be 3.3 times greater than domestic sales. "The highest ratio for a DreamWorks Animation title in the last five years was Kung Fu Panda 2 at 3.0; [the] ratio for Puss in Boots which is a good comparable title is 2.7," he said.

Losing money, or even eeking out a small profit is only part of the equation when it comes to the problems caused by Penguins. The movie's lackluster reception will likely kill off any plans for a new franchise, could potentially lessen interest in future Madagascar movies, and harm ancillary revenues like licensing and merchandising associated with the existing Penguins TV show.

Penguins of Madagascar has underperformed at the box office. Source: Dreamworks 

DreamWorks needs a new strategy

With film budgets well over $125 million, DreamWorks's bets big on new releases, and when they flop, the business takes a hit (as does its stock price at least in the short-term). The company has expanded into television, but its shows are all based on titles that were box office hits. Keeping up that model and growing the company requires new blockbusters, which the brand has struggled to deliver.

It's a complete feast or famine plan which leaves little room for repeated failures. That's OK when for Disney, whose film revenue is a tiny piece of the overall puzzle, but it's a game of Russian roulette for a company whose success or failure is determined almost entirely by its movies.

Because DreamWorks is largely just a movie company it either needs to greatly expand its release slate to include lower and mid-budget films or find new ways to diversify its revenues. Its best bet would likely be to either sell itself to a more diversified player, merge with a compatible company, or find other ways to be less reliant on having to hit a home run nearly every time at bat.