Eye-Opening Experience

One of the booby prizes awarded at the annual Allen & Co. mogul conference this summer in Idaho was a DreamWorks doll. Wind it up and nothing happens.

That isn’t exactly fair. A lot has happened in the three years since music mogul David Geffen, former Walt Disney studios chief Jeffrey Katzenberg and director Steven Spielberg unveiled their new studio venture in a ballroom crowded with TV cameras, Hollywood players and the media at the Peninsula Hotel in Beverly Hills. Some good, some bad and a lot unexpected.

There were unanticipated shifts in the movie and music marketplace, a wholesale revamping of how the television business operates and a deflation of expectation in interactive entertainment. DreamWorks’ much-hyped planned studio “campus” at Playa Vista can’t get a shovel in the ground, due largely to the original developer’s financial woes. Katzenberg’s high-profile, nasty $250-million lawsuit against Disney for money he claims he’s owed has continued to be a distraction.

Now comes another nail-biting adventure: Next week, DreamWorks launches into Hollywood’s risky and overcrowded marketplace its first live-action film, “The Peacemaker,” a $50-million nuclear thriller starring George Clooney and Nicole Kidman.

Despite all the creative and financial clout possessed by the famous Hollywood troika, DreamWorks’ infancy serves as an object lesson in just how tough it is to make a go of it in one of the sexiest--but riskiest--businesses in the world. The industry is littered with casualties such as Savoy Pictures, albeit none armed with the resumes or bankroll of DreamWorks, which is backed by $2 billion from banks and rich investors like software tycoon Paul Allen.

Wall Street analysts and Hollywood watchers say it’s premature to assess the success or failure of DreamWorks at this early stage, particularly since the studio’s first live-action films are just beginning to roll out and its critical debut animated feature, “The Prince of Egypt,” isn’t due in theaters until Thanksgiving 1998. Still, few would disagree that DreamWorks may have been overly optimistic in its original expectations.

“I think they had irrational exuberance in starting this company,” says Wall Street analyst Harold Vogel of Cowen & Co. “They found it was a lot harder to do. . . . There are unforeseen obstacles.”

Even billionaire Geffen concedes that the trio may have underestimated the effort it would take.

“Were our dreams bigger than our ability to accomplish them? Maybe. But what we’ve accomplished, as far as I’m concerned, is a dream,” he said, lounging in shorts and a T-shirt in the company’s new music offices in a refurbished Beverly Hills warehouse.

How much DreamWorks, which is a private company, has spent to date is a secret, although analysts estimate it is probably $750 million to $1 billion. What started with three moguls is now a 1,500-employee company, more than half of them in animation. They’ll soon be housed in a European villa-style campus in Glendale, complete with a man-made river running through the 15-acre site.

The DreamWorks partners say they hope to refinance the company and pay back their investors before their target date of 2002. William Savoy, who heads Allen’s Vulcan Northwest that invested $500 million in DreamWorks, said he remains bullish on the company and wishes he’d invested the entire $1 billion.

“It’s all about the people you invest with. We have invested with the three best in entertainment,” Savoy said.

Many Wall Street investors were wary of investing in DreamWorks, especially since the company lacked a library of films and TV shows that cushion major studios.

“It’s very difficult to start a new studio. The problem is it is a very capital-intensive business. You spend a lot of money upfront, plus interest and marketing costs, and the revenues come later over the lives of the movies,” one Wall Street investor said. “There are tremendous gaps in the ‘flows-in’ and ‘flows-out’ of the business.”

The entertainment business also has gone through fundamental transformations, which forced DreamWorks “to change paths and strategies in a number of ways, but I think every single company in the business has had to.”

Katzenberg notes that “the last three years are among the most dramatic and traumatic that the entertainment business has faced in 25 years.”

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For starters, at the same time DreamWorks formed, restrictions on network ownership of shows were dropped, drawing in a new class of studio owners that have consolidated the business while making it harder for independent studios to compete. In multimedia, the much-hyped CD-ROM market failed to live up to its hype. Whereas DreamWorks once aimed to be a major player in five businesses--live-action movies, TV, music, new media and animation--the company is concentrating on three. Television and interactive operations are considered less critical; live-action movies, animated features and music will be DreamWorks’ profit engines.

Television has been less than stellar, with one series out of five still standing--the ABC comedy “Spin City,” starring Michael J. Fox. Failures included their first try, “Champs,” which barely lasted a month; an ill-fated sitcom starring Arsenio Hall; the high-profile dud “Ink”; and a syndicated talk show hosted by Connie Chung and husband Maury Povich, which never got off the ground.

DreamWorks minimized its financial risk on TV by forming the first partnership of its kind between a studio and network. DreamWorks paired up with ABC in late 1994 to create programming. So far, ABC has funded DreamWorks’ losses, and although producers generally do not make money in television until they sell the reruns of popular shows in the fourth year, Katzenberg says “Spin City” is in the black due to favorable licensing fees and strong international deals.

“Our misses have been very modest financially, but there’s no such thing as a miss that doesn’t hurt creatively,” said Katzenberg, who oversees television.

Also unforeseen was ABC’s acquisition by DreamWorks’ sworn enemy, Walt Disney Co., where Katzenberg worked as studio chief until a falling out with Chairman Michael Eisner. The acquisition forced the parties to renegotiate their deal, reducing DreamWorks strictly to prime-time production. The new studio had wanted to use its animation division to take charge of ABC’s Saturday morning schedule and sell network-financed shows into syndication--roles Disney is assuming.

Katzenberg admits that “there was a period of time in which our ability to bring talent here was attractive and easy to do. We probably did more of it than we really needed to or wanted to . . . we pulled in the reins a little bit and haven’t made any big TV deals with anybody in over a year.”

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DreamWorks still has several shows in development.

“Basically, what we’ve done is become a creative production company, modest in its size, that is driven 90% by Steven Spielberg’s love of TV animation,” Katzenberg said. Spielberg is involved in TV animated series for Fox and Warner Bros.

Changing rules also made the TV syndication market more difficult for independent producers.

“There’s been an extraordinary consolidation into a handful of companies where production, distribution and delivery systems are all under one roof and there is very, very little shelf space,” said Katzenberg, noting that he always believed “a great show could get on the air . . . and that was the only thing that mattered.”

Today, he said, there is “no access for someone who is solely a production company without a pretty strong affiliation. . . . Going solo like we were with Connie and Maury is not possible.”

He says DreamWorks “sort of pulled back” and will syndicate future shows in partnership with a station group or distributor “that has clout in the marketplace.”

Another area in which DreamWorks is retrenching is interactive products, where the company is teamed with software giant Microsoft Corp. The market for interactive entertainment hasn’t taken off as many predicted, and DreamWorks has cut the number of titles it expected to publish annually from 10 to five, at the most.

Katzenberg said DreamWorks’ new-media division, which had a “Goosebumps” CD-ROM and will be releasing a “Lost World” title, should turn a profit this year. Nonetheless, “we’ve pulled back in the volume of work. Three years ago, interactive was an emerging business, and I think people had hopes and expectations that the CD-ROM business would become very big.”

An area in which DreamWorks is making a bigger-than-expected commitment is music, where it is investing more in executive talent. This, even though the last two years have been tough even for the most established record companies as new labels drive up the price of talent, and retail chains are a shambles.

DreamWorks doesn’t have a single album in the Top 200 national pop charts this week, and recent recordings delivered under big-buck deals with George Michael and Henry Rollins both bombed.

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But it typically takes longer than two years to build a successful record company, and Geffen has hired two of the industry’s top veterans, former Warner music chiefs Mo Ostin and Lenny Waronker. The DreamWorks label has created a strong buzz with releases by rock acts Forest for the Trees and the Eels, rapper Dr. Octagon, comedian Chris Rock and the “Rent” soundtrack.

Geffen notes that his former label, Geffen Records, took nearly seven years to turn a profit. Selling the company to MCA Inc. in 1989 is why he’s a billionaire today.

“Anyone who wants to bet against us is going to be wrong,” he said. “But nobody’s going to be able to tell by looking at us on a release-by-release, year-by-year basis before five years,” said Geffen.

Katzenberg said the company is going to bet more than initially planned on feature animation, its riskiest and potentially most lucrative area. When animated films are successful, as they have been at Katzenberg’s alma mater, Disney, they churn out hundreds of millions in profit through box-office receipts, video sales, television revenue and merchandise. Katzemberg said that by 2002, Dreamworks will release seven animated films, compared with four as originally planned.

“We’re doing more than we thought [we] were going to [do] because of opportunities that came along that we didn’t anticipate,” referring to DreamWorks’ investment in a 40% stake in the animated technology firm Pacific Data Images. The company is producing “Antz,” one of DreamWorks’ two upcoming computer-animated movies. The other (due in 2000) is “Shrek,” with the voices of Chris Farley and Eddie Murphy.

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But feature animation, especially for companies that have a name other than Disney, is a huge risk. The genre is quickly becoming saturated, as such studios as 20th Century Fox and Warner Bros. enter the fray. Disney’s most recent animated films, “The Hunchback of Notre Dame” and “Hercules,” haven’t come close to reaching the heights of “The Lion King.” Some complain that the genre is too formulaic, and that kids want more edgy product.

Katzenberg isn’t daunted by the competition, nor does he believe the public’s appetite for the genre has diminished.

“I am as bullish about the animation business as I was three years ago,” he said.

Then there’s live action.

A year behind schedule, DreamWorks’ original plan called for three releases in 1996, a goal that won’t be realized until the end of this year. After next Friday’s release of “Peacemaker” comes the December releases “Mouse Hunt,” a comedy with Nathan Lane, and “Amistad,” a slave mutiny saga that is the first film Spielberg directed for his own studio. The company expects to release six to eight films next year and is close to finalizing an off-balance sheet deal to raise $350 million to $400 million in new production financing.

Katzenberg said competition in the live-action business has made it more difficult to put films together. He points out that in the last three years, studios went from making 110 to 120 movies a year to 160 to 170. “Yes, it’s gone a little bit slower in terms of how long it’s taken for the development,” Katzenberg concedes of DreamWorks’ movie operation.

(Katzenberg himself is one of the reasons Hollywood cranks out so many movies. At Disney, he was a proponent of churning out far more movies, often sacrificing quality for quantity. Disney and other studios say they’ve reversed field, and are scaling back.)

DreamWorks also underestimated Spielberg’s commitments to existing projects and the time it would take to work through his backlog. Spielberg oversees the live action, which is headed day-to-day by husband-wife team Walter Parkes and Laurie MacDonald.

“Steven was committed to fulfilling all his outside obligations,” said Katzenberg. “I think there were more of them, and they were more demanding, than maybe any of us anticipated.”

Both Katzenberg and Geffen said that even though DreamWorks has been slow getting started in live action, it’s under no pressure to make the same volume as other studios. Said Katzenberg: “We weren’t designed to have that pressure, ever. There never was a commitment to make more than eight or nine movies a year,” a goal they hope to achieve by 1999 or 2000. DreamWorks has signed a number of production deals, including a recent one with Oscar-winning director and Spielberg pal Robert Zemeckis.

The DreamWorks principals say that by the end of next year--when they will have had nine live-action and one animated movie in the market--it will be fair to evaluate the company. They say they have no plans to take the studio public, but acknowledge that companies they are investors in, such as Pacific Data and a GameWorks chain of high-tech entertainment centers, are expected to eventually go public.

Analysts are willing to give DreamWorks the benefit of the doubt for now.

Jeffrey Logsdon, an analyst with Cruttenden Roth in Irvine, said, “We don’t have enough of an operating profile to be skeptical, cynical or wildly enthusiastic. It’s like looking at someone building a housing foundation. They’ve had high visibility and have a high opinion of themselves, and over the next 12 months we’ll be able to see the fruit of their labor and judge whether they either succeeded in their business plan or didn’t.”

Geffen, whose biography is currently being written by journalist Tom King, vows DreamWorks will be a success: “Do you think I want the last chapter of my biography to say this was a disaster? Jeffrey, Steven and I don’t make one nickel from this company unless all of our investors get their money back. So we would have worked for 10 years for nothing. What are the chances that’s going to happen?”

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Times staff writers Sallie Hofmeister and Chuck Philips contributed to this report.

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From DreamWorks to Reality

DreamWorks, founded with much fanfare in 1994, next week releases its first live-action movie, “The Peacemaker.” Although it’s too early to know whether the studio started by Steven Spielberg, Jeffrey Katzenberg and David Geffen will ultimately succeed, it has had to adapt to rapidly changing television, movie, music and interactive markets. Here is a look at some of DreamWorks’ key business areas:

Live-Action Movies

First movie comes out next week, about a year later than initially planned. Two more films, “Mouse Hunt” and the Spielberg-directed “Amistad,” are scheduled for December. Company’s plans for a studio complex in the Playa Vista development have been mired in delay.

Animation

“Prince of Egypt,” the much-anticipated animated movie based on the life of Moses, debuts next fall. Animation is a critical part of DreamWorks’ business plan. As Walt Disney Co.’s former studio chief, Kaztenberg headed a revival of Disney’s lucrative animation franchise.

TV

Four of five series have failed, with “Spin City” considered a modest success. The company has scaled back its ambitions because of changing market conditions.

Music

As with most start-up music companies, any payoff could take years. George Michael’s album for the company fell short of expectations. Some acts, such as Forest for the Trees and Eels, have generated strong buzz among young audiences. Also released soundtrack for popular musical “Rent.”

Interactive

Interactive entertainment hasn’t turned out to be the booming market some predicted, and DreamWorks has scaled back its plans.

Source: Times research