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BUSINESS 478
Section D200
CASE SYNOPSYS FOR:
DREAMWORK ANIMATION SKG
Group F:
Scott Langton
Yikai Yao
Schumann Xia
Amanda Nadeau
Xiao Meng Liu
Date of Submission:
March 18, 2015
INTRODUCTION
DreamWorks Animation SKG is an industry leader in developing animated feature films for
families in the United States and around the world. The studio derives most of its revenue from its
animated movies, but DreamWorks Animation also develops television programming, video games,
merchandise, and live events based on its rich library of characters. Not to be confused with
DreamWorks, DreamWorks Animation SKG is a separate company from the former, after being
spun-off and later becoming publically traded in 2004. DreamWorks Animation’s notable properties
include Shrek, Kung Fu Panda, Madagascar, and How to Train Your Dragon. DreamWorks
Animation is an American company, and is currently headquartered in Glendale, California.
DreamWorks was founded in 1994 by David Geffen, Steven Spielberg and Jeffrey Katzenberg.
In 2000, DreamWorks created DreamWorks Animation, a division tasked with creating animated
feature films. In 2004, DreamWorks Animation (DWA) became a separate and public company headed
by Jeffery Katzenberg while Geffen and Spielberg remained at DreamWorks. From 2006 to 2012
Paramount Pictures distributed films by DWA. Beginning in 2013, 20th Century Fox has the exclusive
rights to distribute all of DWA’s films for the next five years (DreamWorks Animation, 2015).
ENVIRONMENT
General Environment:
The film industry has been prosperous during the last ten years. In terms of market
performance, the S&P Movies & Entertainment Index has increased from 100 points in 2008 to
above 400 points in 2015. Looking ahead, there are many factors currently reshaping the industry,
which DreamWorks Animation may be impacted by if they do not plan accordingly.
The first noticeable change is the booming Chinese market. According to the 2014 Global
and China Animation Industry Report, ‘the Chinese animation film market has shown a rising trend
in both quantity and price since 2011. In 2013, there were a total of 33 animated films released in
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Chinese mainland theatres, including 24 homemade and 9 imported, generating total box office of
about RMB1.64 billion, up 13.34% year on year’ (PRnewswire, 2014).
A second significant change is the advancement of animation technology. As a result of advanced
Computer Graphic (CG) animation software, new entrants can compete without many technical barriers.
The size of animation studios can be small and less capital intensive because of these advancements.
Technological advancements have changed not only how animated films are created, but
have significantly altered consumer behavior. People are increasingly watching movies online
through their computer or mobile devices rather than renting or purchasing physical copies.
According to DreamWorks Animation’s 2013 annual report, there has been a large decline in both
the number of DVD units sold in the last ten years and their profitability. This is problematic since
renting and selling DVDs were once a sizable part of DreamWorks Animation’s revenue.
Industry environment:
The major competitors in the animated film industry are Disney/Pixar, Sony Entertainment,
Illumination Studios, Blue Sky Studios, Toei Animation, Sotsu, and Studio Ghibli. The industry of
animated family entertainment is significantly different from other production industries because of
its distinctive business model, as discussed below.
Most major companies in this industry only make a few films each year. The success of these
films can increase the performance of its related products such as DVD sales, video game sales and
the success of their sequels. As discussed previously, the majority of DWA’s revenue is derived from
these animated films, which typically generate the majority of their revenues within the first month
of release. To maximize box office performance, animation studios need to create films that align
with consumer preferences, which can be difficult since an animated film takes two to three years to
make and consumer behavior is constantly changing. Studios also have to maximize their consumerbase by making their content available on a wide variety of distribution channels. They also need to
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avoid direct competition with other animated films and anticipated releases. For example, DWA’s
B.O.O.: Bureau of Otherworldly Operations was set to release in Summer 2015, but was pushed back
to 2016 due to scheduling conflicts with Marvel’s Avengers: Age of Ultron and Antman.
The bargaining power of customers is high. The threat from substitutes and rivalries are
considered moderate because major competitors avoid competing directly with films developed by
other studios. However, if their film debuts at a similar date, they have to compete intensively in
order to gain higher sales in a short period of time.
CURRENT SITUATION
Recently, DreamWorks Animation has been pursuing massive growth and expansion initiatives
in an attempt to diversify its revenue streams. Within the last two years, they have launched a TV
Channel, a YouTube channel, a publishing division, and entered into a multi-year content contract with
Netflix. However, they have reduced the number of films being produced per year with a projection of
only one being made in 2015, down from the minimum of two in the past. DWA has also acquired the
intellectual property for multiple franchises to expand its brand. Outside of the entertainment industry,
DWA has expanded into real life interactive opportunities with the ‘DreamWorks Experience’ package,
available on cruise ships and resorts throughout the US, where people have the opportunity to meet
characters in different settings and see shows (DreamWorks Animation, 2015).
DWA is currently pursuing a more focused strategy, as can be seen by their most recent
activity. Within the past year, they downsized their workforce by 20% and made changes to top
management. One of the biggest adjustments is the selling of their head office to SunTrust Equity
Funding. They have entered into a rental agreement with SunTrust to continue using the space, using
it as a reminder to themselves that they need to refocus and utilize more cost effective strategies.
DWA has an ongoing partnership with Hewlett-Packard, which provides them with workstations,
servers, and current technology that permits global communication. In 2012, a joint venture was
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formed with a Chinese investment company to create DreamWorks Oriental, enabling them to create
content specifically for the emerging Asian markets (DreamWorks Animation, 2015).
According to financial estimations, with the recent downsizing of DWA they are on track to
save $30 million in 2015. Revenues during 2014 were $232 million, which was a 14.7% increase
from the previous year. However, the total net loss for 2014 was $263 million. Share value dropped
by one third in value, and the current ROE is -23.2%. (DreamWorks Animation, 2015)
CURRENT STRATEGY
Business Level Strategy: Cost Leadership Strategy
The animation production process entails substantial investment and ongoing expenses.
DreamWorks Animation downsized its workforce by 20% to develop two animated films per year.
Moreover, DreamWorks Animation optimizes its animation creation software, Apollo Platform, to
create a cost-efficient process for its animation production (Kaplan, 2014). Therefore, DreamWorks
Animation is using a Cost Leadership Strategy.
Corporate level strategy: Moderate Level of diversification – Related Liked
DreamWorks Animation revenues are derived from the global distribution of its feature films
in the theater and home-video markets. DWA’s 2013 annual report indicates that 70% of total
revenue was generated from feature films, 15% from Television Series and Specials, 9.5% from
consumer products, and 4.7% from others. Therefore, DreamWorks Animation is using a Dominant
Business Diversification Strategy where the dominant business is distributing feature films globally.
International level strategy: Global Strategy
Currently, DreamWorks Animation distributes its films into the global market through
licensing or partnering with local film distributors. Statistics show that DreamWorks Animation
receives 59% of revenue from distributing feature films into the global market (DreamWorks, 2013).
Distributing films into the global market provides more opportunity for DreamWorks Animation to
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increase market size and achieve a larger economy of scale.
Cooperative strategies: Joint venture and strategy alliance
In 2013, DreamWorks Animation entered into a joint venture with three Chinese partners: China
Media Capital (Shanghai) Center L.P., Shanghai Media Group, and Shanghai Alliance Investment Co.,
Ltd. (DreamWork, 2013). The Joint ventures strategy creates opportunity for DreamWorks Animation to
explore the Chinese market. Moreover, DreamWorks Animation cooperates with various distribution
companies to distribute their feature films in the different regions of the world. Furthermore, DreamWorks Animation currently has strategic alliances with McDonald’s, Hewlett-Packard, and Intel. The
relationship provides a better opportunity to build brand awareness and increase customer loyalty.
MAIN STRATEGIC CHALLENGES
Create Exploitable Intellectual Property
As with other entertainment businesses, film studios are dependent on “hit” products to remain
competitive. Studios seek to create franchises from these successful movies by producing sequels,
merchandise, television shows, and live events. DreamWorks Animation, however, are lacking these
exploitable properties. Out of their last six feature films, four did not make a profit. Currently, the
majority of DreamWorks’ licensing revenue comes from one Intellectual Property (IP): How to Train
Your Dragon (DreamWorks Animation, 2015). Each of DreamWorks’ four business units (feature films,
television, consumer products, and live entertainment) are dependent on monetizing DreamWorks’
proprietary IP. The company is relying on the 2016 release of Trolls to become a franchise, allowing
DreamWorks to regain momentum. However, if DreamWorks Animation continues producing
underwhelming films, the health across all of their business units may be in jeopardy.
Restructure its Business while remaining competitive
After reporting a disappointing fourth quarter in January 2015, in which DreamWorks lost $263
million, the company announced that it was restructuring its operations. In an effort to increase liquidity,
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DreamWorks Animation sold its headquarters for $185 million and entered into a leasing arrangement for
the property. The company reduced its total workforce by 18% and announced that it will produce two
feature films per year, instead of three. The firm also closed its Northern California studio, which
developed Mr. Peabody and Sherman, and The Penguins of Madagascar, which both underperformed at
the box office (DreamWorks Animation, 2015). As a result of this restructuring, DreamWorks Animation
has only one film set for release in 2015, Home, which releases on March 27. A key strategic challenge
for DreamWorks Animation is to produce quality, exploitable films despite these downsizing initiatives.
Capture growth in international markets
In 2014, 72 percent of Hollywood’s total revenue was made outside of the United States and
Canada (Cunningham, 2015). The international box office, specifically in Asia, has become a vital
component to a film’s success in recent years. China, for example, became the first international market
to generate $4 billion in ticket sales, growing 34% year-over-year compared to 2013 (Cunningham,
2015). Studios are beginning to tailor their movies to the Asian market in an attempt to capture its large
audience, as seen in Paramount’s Transformers: Age of Extinction and Disney’s Big Hero 6.
A key strategic challenge for DreamWorks Animation is to capitalize on growing markets in
Asia. In 2012, DreamWorks Animation partnered with three Chinese investment companies to
establish DreamWorks Oriental, an entertainment company that will produce feature films
specifically for the Chinese market (DreamWorks Animation, 2014). In addition, both DreamWorks
Animation and DreamWorks Oriental are co-producing 2016’s Kung Fu Panda 3 in an attempt to
bolster sales in the region (DreamWorks Animation, 2015). DWA needs to continue to explore
opportunities in these Asian markets to fully capture the growth in the region.
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REFERENCES
BusinessWire (February 05, 2013) DreamWorks Studios Announces 10 Additional Strategic
International Partnerships Through Its Agreement with Mister Smith Entertainment. Retrieved
from: http://www.businesswire.com/news/home/20130205006659/en/DreamWorksStudios-Announces-10-Additional-Strategic-International#.VQicaBDF8sA
Cunningham, T. (March 11, 2015). China Explosion Drove Record Global Box Office in 2014,
MPAA Reports. Retrieved from http://www.thewrap.com/china-explosion-drove-recordglobal-box-office-in-2014-mpaa-reports/
DreamWorks Animation SKG. (February 26, 2014). 2013 Annual Report. Retrieved from
http://ir.dreamworksanimation.com/investor-relations/financial-information/annualreports-and-proxy-statements/default.aspx
DreamWorks Animation SKG. (March 2, 2015). Q4 Form 10-K. Retrieved from http://ir.dream
worksanimation.com/investor-relations/financial-information/quarterly-results/default.aspx
DreamWorks Animation SKG. (February 24, 2015) Q4 2014 DreamWorks Animation SKG
Earnings Conference Call. Retrieved from http://ir.dreamworksanimation.com/investorrelations/events-and-presentations/default.aspx
DreamWorks Animation SKG. (2015) Our History. Retrieved from
http://www.dreamworksstudios.com/about/history
DreamWorks Animation SKG. (February 24, 2015) DreamWorks Animation Reports Fourth
Quarter and Year-End 2014 Financial Results. Retrieved from http://ir.dreamworks
animation.com/investor-relations/investor-news/press-release-details/2015/DreamWorksAnimation-Reports-Fourth-Quarter-And-Year-End-2014-Financial-Results/default.aspx
Global and China Animation Industry Report.( 2014). PRnewswire. Retrieved from http://www.prnews
wire .com/news-releases/global-and-china-animation-industry-report-2014-300043953.html
Kaplan, Ken (June 20, 2014) The Secret weapon DreamWorks Used to Make ‘How to Train
Your Dragon 2’. Retrieved from: http://iq.intel.com/the-secret-weapon-dreamworksused-to-make-how-to-train-your-dragon-2/
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