Is DreamWorks' Dream Nearly Over?

Rumors are swirling that its live-action unit may sell out to NBC Universal. It's a deal that would make a lot of sense

By Ronald Grover

It's a sad tale of how tough Hollywood can be when three of its most illustrious members -- Jeffrey Katzenberg, David Geffen, and Steven Spielberg -- are crying uncle. But that's the way it looks, as rumors circulate that the founders of DreamWorks SKG are negotiating to sell their 10-year-old live action studio to General Electric's NBC Universal (GE ).

Could it happen? For the right price, anything in Hollywood is for sale. And David Geffen, who has built and sold two record labels in the last 20 years (ironically, one of them to Universal), is nothing if not an opportunistic seller. And much as I hate to say it, now is the time to sell. Neither DreamWorks nor General Electric would comment for this story.

There's no question that DreamWorks knows how to make hot films. Last year its hits included Collateral, starring Tom Cruise, and Anchorman: The Legend of Ron Burgundy, along with some surprise winners, such as the supernatural thriller The Ring. And it has had its share of Oscar winners, including American Beauty and Gladiator (which it made with Universal.)


  But DreamWorks is too small a studio to swim with the Hollywood sharks. It doesn't have a library large enough to reap a steady DVD cash flow or other media properties such as cable channels that would help it withstand disappointments (see BW Online, 6/12/05, "A Scary Picture at DreamWorks").

Anyone who has ever financed a movie knows there are disappointments lurking at every corner. Take the recently opened megabomb The Island, which DreamWorks co-financed with Warner Bros. (TWX ). In a business as fickle as film, you need some way to hedge against those multimillion-dollar losing bets.

In hindsight, DreamWorks really put up a "for sale" sign when it spun off its animation unit last October in an IPO. DreamWorks Animation (DWA ) produced the company's real moneymakers -- computer-generated animation flicks. This category, which includes the two Shrek movies, A Shark Tale, and Madagascar, has been the most consistent winner. Moreover, these movies have few profit participants (read: actors who want a piece of the action) and can sell a bazillion dollars' worth of toys, lunchboxes, and other knick-knacks.

As part of its spin-off, the new animation unit pays its former parent an 8% distribution fee to ship its movies to theaters. The standard fee is around 15%. The reduced fee is great for the animation arm but not so spiffy for the private company owned by the Three Amigos.


  Even before the animation unit was spun off, there was a sense that the grand experiment undertaken by Katzenberg, Geffen, and Spielberg was running on fumes. It had sold off its music unit, closed its games unit, and slashed the number of TV shows it made (remember last Fall's short-lived Father of the Pride on NBC?).

And despite an arrangement that called for Spielberg to make most of his films for DreamWorks, a funny thing happened: In recent years, he has made just about none of them exclusively for DreamWorks. His latest, War of the Worlds, is a Paramount film that's being distributed jointly by the two studios. His next film, about the 1972 Munich Olympics (no specific title yet), will be distributed this Christmas by Universal along with DreamWorks.

That's the problem when you have a superstar director: He directs what he wants to direct, choosing from material given to him by just about every studio in town. Remember the Oscar-winning Saving Private Ryan? That was from a script that Paramount showed Spielberg, and it was co-produced by the two studios, with Paramount distributing.


  It has often fallen to Geffen to use his considerable negotiating skills to make sure that DreamWorks got a piece of the action. True, with a co-production DreamWorks takes only half the risk, but with a Spielberg flick the risks are minimal, and the studio only gets half the money -- for theatrical release as well as library sales.

It's a vicious cycle when a studio never seems to have enough money to make the films it wants to make, so it takes on more partners. And the results can be downright disastrous when it leaves the studio with 50% of a stinker. DreamWorks will soak up huge losses for the Michael Bay-directed The Island.

The DreamWorks trio has considered selling before. They held talks some years back with MGM (MGM ), which at the time was a standalone company. The plan was brilliant: DreamWorks would make original films, since MGM was turning out mostly duds, while the joint company would live off MGM's massive library of older hits, such as the Rocky and Pink Panther franchises. That deal, which was pushed by MGM, never got off the ground because DreamWorks didn't want to give up control of the company to Kirk Kerkorian, MGM's majority shareholder.


  Now, with its money-making animation unit spun off, it's far more likely DreamWorks would be willing to part with the more difficult live-action side. And certainly NBC-Universal could use a little juice for its film unit, which ranks in the middle of the pack in terms of box-office market share. This year, it had a disappointment with the unexpectedly weak Cinderella Man. Universal has had its share of hits, to be sure, but its biggest can be traced to Spielberg or DreamWorks, including Jurassic Park and Meet the Fockers, which was co-produced with DreamWorks. Currently, Universal distributes DreamWorks' films on DVD.

So the issue really comes down to price, as it does in just about every Hollywood deal. The number that's being tossed around is $1 billion for the live-action unit, which sounds pricey for a studio with a tiny library and few assets other than the scripts on its executives' desks. And GE has a history of driving a hard bargain.

There's a good chance the deal won't happen, even though it looks like it makes sense for both parties. But it should.

Grover is BusinessWeek's Los Angeles bureau chief

Edited by Patricia O'Connell

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