DreamWorks Animation (NASDAQ:DWA) is in something of a slump, presiding over three weak box-office projects recently.
Remember "Rise of the Guardians?" Many don't. Released in November 2012, "Guardians" made a little over $300 million worldwide -- it cost $145 million to make (all film stats are from Box Office Mojo), so when you add in advertising and marketing costs, you've got a problem. "Turbo" -- a saga of snails and racing -- was released in summer 2013 and saw a worldwide gross of slightly over $280 million with a price tag of $135 million. More recently, "Mr. Peabody & Sherman," which cost $145 million, has so far made $266 million around the planet.
Yes, DreamWorks Animation has had hits ("Shrek," "The Croods," "Madagascar"), but the current track record has put Wall Street on notice that perhaps the former Disney executive and current DreamWorks CEO Jeffrey Katzenberg-- who has a reputation for being a hard-working, competitive Hollywood leader -- is in need of new ideas.
DreamWorks Animation's nightmare: budget costs
Failure is part of the Hollywood game. Can't do anything about it. That doesn't mean an executive can't be smart about risk management.
The key to playing the blockbuster game, to making bets that make sense, is to keep costs as low as possible. I know: easier said than done. It is. But Katzenberg needs to do some innovative things, put together a disruptive approach, even if it is one that will yield criticism from pundits and colleagues. He's got to put shareholder value before (almost) everything else.
Right now, to make a blockbuster animated or live-action picture, you're talking hundreds of millions of dollars to film and sell. It's unavoidable in the current mindset.
I have, however, a very specific suggestion for Katzenberg.
Do not use celebrity voice talent
A book by Nicole LaPorte, entitled "The Men Who Would Be King: An Almost Epic Tale of Moguls, Movies, and a Company Called DreamWorks," mentions Katzenberg giving the talent behind the original "Shrek" feature millions of dollars in bonus money upon the feature's success. As a shareholder, I have a problem with this.
I won't pretend that I know what voice acting actually entails, because I don't. I've never supplied a voice to a cartoon character, and I'm sure it's harder than it looks. However, I simply can't condone paying famous talent millions of dollars for this type of work. Mike Meyers, Eddie Murphy, and Cameron Diaz, the stars behind "Shrek," obviously deserve to be paid. But millions of dollars in bonus money? That's difficult to accept. Corporate CEOs are oftentimes criticized for accepting board-approved compensation packages that are exorbitant. Should shareholders more closely scrutinize the compensation packages given to voice thespians? Something else to consider: the voices might not travel around the world as some markets will overdub them in the relevant language.
Avoiding celebrity talent can save money. But what type of talent will be utilized?
Here's an Awesome suggestion
DreamWorks Animation has to think smarter. Shareholders know that Katzenberg purchased AwesomenessTV, a YouTube network, for purposes of making his company less dependent on animated stories. I'm not a fan of this strategy. I didn't like Disney's (NYSE: DIS) purchase of Maker Studios, and I never took to the AwesomenessTV strategy. Disney, at least, has other assets driving its share price: Marvel, Pixar, all that. It's a major media company that is dipping its toes in the waters of a platform that may or may not be replaced in the future by some other new 'net-kid on the block; it's more the move of a bored dilettante. In Katzenberg's case, he's really counting on AwesomenessTV to turn into something big, and fast.
But I'd argue that, as an experiment, DreamWorks Animation should exploit the heck out of this AwesomenessTV asset and just use that platform to find voice talent. It would represent a rather fine example of maximizing the potential of an asset, in my opinion, and the cross-promotion will enhance value for both companies.
The argument against doing this centers on the value that star talent can bring to a project. The expertise of a Seth Rogen (he supplied his talents to "Monsters vs. Aliens") cannot be denied.
But I can't fully buy into the notion that Katzenberg has to pay big to effectively tells the stories he wants to tell. What exactly drives the success of an animated project? Does anyone really know? When one fails, is it the fault of the voice talent, the writing talent, the x-talent? I'm not sure anyone would have an answer to such a query. Sure, one might argue that stars in live-action films are important; cartoons, though, are a different beast. What drives that spectacle? Maybe it isn't so much an Eddie Murphy or a Seth Rogen as it is an advancement in mathematical algorithms and computer science.
Give it a try at least
DreamWorks Animation might at least take a chance at using its AwesomenessTV asset, which is supposed to be an incubator for talent anyway, to find new voices and keep costs down.
Obviously there are other costs associated with a production besides talent. Keep this in mind though: "Despicable Me 2" supposedly cost $76 million to make and brought in $970 million worldwide. Granted, I guarantee you there must have been a big drain on profits in terms of talent participation -- I'm sure Steve Carell wasn't working cheap in that regard -- but, again, I would be stubborn and not give away any significant amount of cash flow on any project and try to keep the investment reasonable.
Consider this suggestion, Mr. Katzenberg. Shareholders will thank you for it.
Steven Mallas owns shares of Disney and DreamWorks Animation. 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.