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Three Moguls Aboard

4 minute read
Jeffrey Ressner/Los Angeles and Daniel Kadlec

No one doubted the artistic talent at DreamWorks SKG when it was launched in 1994 amid hype befitting its superstar founders, Steven Spielberg, Jeffrey Katzenberg and David Geffen. Overlooked in the face of such Tinseltown royalty, though, was that none were proven CEOs–a niggling detail that has become hard to miss after a series of gaffes since the trio sold shares of its animation division to the public last year.

First the newly public DreamWorks Animation appears to have mishandled first-quarter earnings information. In May its shares fell 5% just before the company disclosed disappointing results. The Securities and Exchange Commission is looking into whether there was any insider trading, and six shareholder lawsuits stemming from the stock drop have been filed. The company botched forecasts for home-video sales of Shrek 2 not once but twice, blowing its credibility on Wall Street and prompting the company to scrap a planned $500 million stock sale. “Are they rookies? Do they have any controls?” asks analyst David Miller at Sanders Morris Harris, echoing concerns of many investors.

That is hardly the pace-setting media juggernaut the founders, with their impeccable pedigrees, envisioned. Spielberg is the creative force behind Jaws, Jurassic Park and the new War of the Worlds. Katzenberg was Disney’s animation genius. Geffen discovered the Eagles and introduced Guns N’ Roses to the world. Together the moguls planned to move beyond movies and music to TV, toys and the Internet.

Their dreams aren’t dead yet. But some Wall Street analysts wonder whether the moguls need to hire a new CEO, a role Geffen took on at investors’ request. Spielberg just wants to make movies; Katzenberg is CEO of the publicly traded animation company, which remains majority owned by DreamWorks’ founders and early investors. Success has been spotty on all fronts. DreamWorks never built the studio complex it had planned and gave up on its TV, record and Internet ambitions. Its animated movies–other than the Shrek franchise–have been unspectacular. “Probably our eyes were bigger than our stomachs,” Geffen tells TIME. “We made a lot of mistakes, and hopefully, we’ll make fewer in the future.” Katzenberg declined to comment.

Changing industry dynamics, like the rapidly escalating costs of making a movie, caught DreamWorks off guard. Its $1 billion in seed money was perhaps a fifth of what was needed, says media investor Harold Vogel, author of Entertainment Industry Economics. But the backbreaker has been DVD sales, where many films now derive most of their profit. Moviemakers are so beholden to retailers like Wal-Mart and Best Buy that studio execs routinely confer with them before setting release dates. There are so many new releases that retailers afford each a much shorter shelf life. And with 80% of U.S. households owning DVD players, fewer people are rushing out to replace their old tapes–slowing DVD sales. Those shifts have made forecasting sales difficult and, Geffen says, “sort of blindsided us,” helping lead to what has come to be known as the Shrek wreck. Early this year, the company told analysts that it expected to sell 55 million Shrek 2 videos–a figure it has lowered to about 40 million. That’s still a phenomenal number. But investors had pushed up DreamWorks Animation shares, expecting an additional $50 million of profit that won’t materialize. The stock, once as high as $42, now sits at $23.

Shifting home-video economics are a problem not just for DreamWorks. Pixar had to lower estimates for The Incredibles. Yet the issue is most acute at DreamWorks, which has had a tougher time finding its animation groove. Pixar is the one pumping out hit after hit, from Toy Story to A Bug’s Life to Monsters, Inc., and that has attracted Wall Street’s admiring eye. In Hollywood, it’s said you’re only one hit away from success. DreamWorks has high hopes for Bee Movie, with Jerry Seinfeld, and Shrek 3, both due out in 2007. But by then, Fox, Sony and Disney all plan to be bigger computer-animation players. With so much clutter, DreamWorks’ dream may be deferred again.

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