DreamWorks Animation (NASDAQ:DWA) is running away from the movie business. The studio behind blockbuster hits like Shrek and Madagascar just announced a major deal with Netflix (NASDAQ:NFLX) to bypass theatergoers and bring its content directly to the video streamer's audience.
The move is part of a push by DreamWorks to lessen its reliance on the few theatrical releases that have dominated its annual business results.
Sure, that home run strategy worked fine in 2011, while hits like Puss in Boots and Kung Fu Panda were pulling in over $1 billion at the box office and grabbing Oscar nominations to boot. But the problem is that a single flop like last year's Rise of the Guardians can be brutal to DreamWorks' bottom line. The company had to take a $165 million writedown and announce layoffs after ticket sales on that film disappointed.
So DreamWorks has been cleaving costs out of its development process, aiming to get per-movie spending down to $120 million from the $150 million level it's at now. And it's been working on diversifying its revenue stream, for example by purchasing Classic Media and its content library last year for $157 million.
The new Netflix deal should go even further toward making theatrical releases a smaller part of DreamWorks' business. Netflix called it the "largest deal for original first-run content in [its] history." And it fits perfectly with Netflix's plan to focus on targeted, curated content at the expense of broad basket deals like the one it let expire with Viacom earlier this year.
DreamWorks is far from done with movies, though. The Croods reached blockbuster status quickly in the first quarter, raking in over $480 million at the box office. DreamWorks' second film, Turbo, comes out next month and could surprise to the upside as well. But it is DreamWorks' progress on the small screen -- and away from unpredictable theaters -- that has to have management the most excited.
Fool contributor Demitrios Kalogeropoulos owns shares of Netflix. The Motley Fool recommends DreamWorks Animation and Netflix. The Motley Fool owns shares of Netflix. 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.