Plenty Of Dreams, Not Enough Works?
There's nothing Hollywood loves more than a good show. And in late May, DreamWorks SKG--the new studio being hatched by entertainment superstars Steven Spielberg, Jeffrey Katzenberg, and David Geffen--put one on.
Commandeering space on the Universal back lot, the Dream Team lit up a soundstage with coming attractions: clips of George Clooney and Nicole Kidman on location in Manhattan shooting DreamWorks' first movie, The Peacemaker, and then an ear-shattering rock video by singer George Michael. Lyricist Stephen Schwartz crooned songs from The Prince of Egypt, an animated film scheduled for a 1998 release. Playing to a select audience of 150 employees, investors, bankers, and joint-venture partners, Katzenberg announced: "This is show-and-tell time."
Indeed. Twenty-two months after DreamWorks was launched with great fanfare, what do the three moguls have to show for themselves? Precious little that the general public can see, hear, or play. The studio produced two television shows last season, with dispiriting results: Champs was quickly canceled, and High Incident barely got picked up for next season. The film unit has gotten off to a slow start because Spielberg, who heads it, has been busy fulfilling commitments to make several films for other studios. The Peacemaker, directed by E.R. director Mimi Leder, won't be out for about a year, and Spielberg's first directorial effort for the studio likely won't get inside a cineplex until mid-1998.
What's more, the studio is six months ahead of schedule in its expenditures. With 800 employees and substantial capital outlays to build a new studio, fund joint ventures in interactive games and video arcades, and launch a consumer-products division. DreamWorks is spending its $2.7 billion in capital at a clip of $400 million a year. Profits are five years away at best. Factor in Hollywood's treacherous economic climate--a glut of product, skyrocketing expenses, and studios' reliance on big film libraries in lean times--and any new studio's long-term viability looks tenuous.
But this is Hollywood, and no one is worried. DreamWorks' bankers, investors, and joint-venture partners are uniformly enthusiastic about the studio's progress. Even other showbiz executives say DreamWorks will make it. The law of averages, they figure, favors proven hitmakers like Spielberg, Katzenberg, and Geffen. "If anyone has a chance to make it, it's these three," says former MCA Inc. Chairman Thomas P. Pollock.
Clearly, DreamWorks' biggest asset remains the track records and reputations of its founders. Each is contractually bound to work exclusively for the studio for a decade, though Spielberg is allowed three extracurricular projects. But the Dream Team has a lot more than money and contracts fueling their drive to make DreamWorks work. Failing would be personally and professionally devastating for the trio. "You're always competing with your own past," says Spielberg, "It's the reach muscle. You have to reach for something new in life. And with these guys, I have the Schwarzenegger of reach muscles." Adds Geffen, who acts as the group's chief dealmaker: "This is a marathon, not a sprint. Watch where we are at the end of the race. I would rather die than fail."
And despite its slow start, DreamWorks recently has been making deals and starting new projects at a fast clip. It just bought the music rights to the hit Broadway show Rent. It has two high-profile TV shows debuting this fall--ABC's Spin City, with Michael J. Fox, and CBS's Ink, with Ted Danson. In TV, DreamWorks is already "a major player," says CBS Entertainment President Leslie Moonves. "It's their ability to get the best talent in the business to come work for them."
To be sure, a good deal of top talent has flocked to DreamWorks. TV producers such as Gary David Goldberg and Linda Bloodworth-Thomason and filmmakers such as Rain Man producer Mark Johnson and Crying Game director Neil Jordan have all signed on. To run its music unit, DreamWorks outbid Walt Disney Co. and others to land former Warner Music CEO Mo Ostin. Maury Povich and Connie Chung will do an interview show in 1998. Some of the hires--however well-known themselves--seem awed by their new bosses. "You can get some pointers from Steven Spielberg at one end of the company, then from Katzenberg at the other," marvels Danson.
60-YEAR STREAK. Leveraging their cachet as partners has enabled the Dream Team to negotiate some extraordinarily favorable deals. This is the new studio's secret weapon, and it may be what allows it to break Hollywood's 60-year streak of failed studio startups. Consider the deal DreamWorks struck to build a new studio in Playa Vista, a gritty suburb near the Los Angeles airport. The 1,087-acre parcel had been a white elephant for the developer, Maguire Thomas Partners, which for two years had been unable to attract a major tenant. So Maguire Thomas hired Jeffrey S. Berg, chairman of the ICM talent agency, to help. Within hours of the announcement that DreamWorks was being formed, Berg had Spielberg, Geffen, and Katzenberg trudging through the dusty site.
DreamWorks got quite a bargain. Maguire Thomas will raise $7 billion to build DreamWorks a 100-acre studio complex, as well as other commercial and residential space. Lured by DreamWorks' presence, other entertainment tenants, including special-effects house Digital Domain and Silicon Graphics Inc., have signed on. The project also includes 13,000 homes. The developer is betting that true Angelenos would love nothing better than to live next door to a movie studio. DreamWorks even gets one-third of the cash generated as those homes are sold. For DreamWorks, the price of admission is only $66 million, rather than the $200 million it would have cost to build the studio on its own.
Indeed, DreamWorks is adept at persuading others to split the bill for many of its ventures. On top of the $27 million it invested for a 1% stake, Microsoft Corp. is sharing the $30 million cost of DreamWorks Interactive, whose interactive-game products will be in stores this Christmas. "This [is] a very, very smart deal," says Microsoft Chairman William H. Gates III.
DreamWorks was also able to strike a remarkably sweet deal with ABC. Typically, the producer of even a hit show loses money on it until reruns can be sold in syndication after three seasons. ABC is picking up half of DreamWorks' tab for producing shows--even ones that don't air on ABC. If its shows make it to a second season on ABC, DreamWorks pockets half of the revenue ABC gets for ads during the show. "A lot of folks see that as a very one-sided deal," says former HBO Chairman Michael J. Fuchs. Retorts ABC network chief David Westin: "We didn't give away the store. We're in business with guys who know what it means to make hits."
DreamWorks has also formed a partnership with Sega Enterprises Ltd. to launch a chain of 30,000-square-foot video-game arcades. By the end of the decade, DreamWorks and Sega plan to have 100 to 125 in malls and downtowns across the country. Spielberg, a game fanatic who will help design the arcades, personally helped pitch them to Melvin Simon, a shopping-mall titan from Indianapolis. That sort of megawatt assist is one reason Sega gave DreamWorks a 25% stake in the $150 million venture for only $10 million.
"THE MOTHER LODE." But in the high-risk, high-reward areas of film production and animation, DreamWorks prefers to go it largely alone. It will handle its own distribution in the U.S., thereby getting all the upside from any animation hit or Spielberg extravaganza but also paying most of the huge production and marketing costs. At the industry average of $54 million per film, that adds up to big bucks, though the studio intends to release only 10 films a year. Major studios typically release 20 or more.
Even so, DreamWorks seems undaunted by the amount of money flying out of its coffers. Spielberg recently paid a record $2 million after just hearing a pitch about an autistic couple from Rain Man writer Ronald Bass. And Bass gets an additional $1 million to write the script. "It was the most emotional pitch I have every heard," Spielberg told Katzenberg later. A little chancy, perhaps? DreamWorks regards any Spielberg project as being a sure thing. "I don't see this as a risk," says Katzenberg. "Can you think of a theater in this country [not taking] a Spielberg film?"
These days, Katzenberg spends three hours a day overseeing the animation unit, which expects to turn out a film a year starting in 1998. Animation, Katzenberg believes, is "the mother lode." The Lion King and Beauty and the Beast each brought in more than $1 billion in tickets, video, music, and consumer products for Disney. And Katzenberg has done his best to re-create the Disney animation factory by hiring away from Disney 40 animators and key music writers Hans Zimmer, Schwartz, and Elton John.
But DreamWorks' plunge into animation is perhaps its riskiest endeavor. Other studios, and Spielberg himself, have failed in the past to challenge Disney's supremacy. Disney's well-oiled publicity machine, including its ABC network and theme parks, will give its forthcoming Bugs a big send-off when it likely opens against The Prince of Egypt. Even though Katzenberg plans to build up his own promotional arsenal, "Disney isn't going to let these guys come in without a major fight," says Schroder Wertheim & Co.'s David Londoner.
All this activity, obviously, is incredibly expensive. DreamWorks will spend more than $1.3 billion by 1998 before it even has a significant collection of revenue-generating products. But DreamWorks is building assets, and its investors are a patient lot. Microsoft co-founder Paul G. Allen committed $492 million for an 18.5% stake, and Samsung Electronics heiress Mie Kyung "Miky" Lee put in $300 million. Chase Manhattan Bank arranged a $1 billion credit line. "I have a lot of money. I can wait," says Allen, who sees potential ways to fit his other media and technology ventures with DreamWorks' creativity.
SELL-OFF? How will everyone get their money out of DreamWorks? Down the road, a public offering is probable. A sale to a larger company is always an option. One possible acquirer could be MCA, which already distributes DreamWorks' music and videos in the U.S., as well as its movies in some international markets. "We haven't discussed anything like that, but I definitely want to stay in business with them," says Edgar Bronfman Jr., president of MCA parent Seagram Co.
But before any IPO and before any sell-off to a bigger entertainment empire, the DreamWorks trio will first have to start producing hit movies, TV shows, and music. Yes, much about DreamWorks is now real--the deals, the product pipeline, and the plans for the new studio complex. But the only reality that will count a few years from now is whether these well-pedigreed partners can deliver on the high expectations that swim around DreamWorks. Watching the trio pull it off will be the kind of show Hollywood really loves.
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