DreamWorks Schooled

The animation studio fails to make like Pixar, in either word or deed, as <I>Shrek 2</I> won't sell.
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A lesson in humility from Steve Jobs? Who would have thunk it.

It happened Tuesday, though. Wall Street expected animation giant

DreamWorks

(DWA)

to follow up

last week's strong report from Jobs'

Pixar

(PIXR)

with its own solid gains.

But instead, DreamWorks execs found themselves red-facedly admitting that they recorded no DVD sales for

Shrek 2

in the first quarter, due to heavy retail returns. The company slashed full-year guidance, saying it would basically break even the next two quarters. That's not what investors wanted to hear, and it prompted a 20% selloff in the stock over two days.

Clearly, the stock's plunge should teach CEO Jeffrey Katzenberg & Co. a lesson in dealing with investors. It's not unfair to wonder if someone at DreamWorks should have anticipated a slowdown in DVD sales, regardless of the fact that

Shrek 2

got off to a record-setting pace last fall.

Analysts on the call reproached the company, asking execs when exactly they got a sense that DVD sales picture wasn't as rosy as expected. Katzenberg's crew came across like kids hiding report cards from their parents.

The excuses followed: These things are hard to track; this was such a big gargantuan hit we just thought it would grow and grow and grow; how do you model for such incredible retail sales, the purple dog ate my homework. Wall Street doesn't give a tinker's damn if the dog ate your homework.

Still, a little perspective might be helpful.

Shrek 2

is No. 7 in all-time worldwide box office, according to Internet Movie Database. It is the highest-grossing animated film of all time, hitting over $880 million.

More perspective:

Shrek 2

nearly doubled the box office take of the original

Shrek

, and did double the take at

Toy Story

and the

Ice Age

. It beat out Pixar's

Finding Nemo

by a hair and

The Incredibles

by about $250 million. It has sold 35 million DVDs. Yesterday, the green ogre finally burped.

These are growing pains as the company realizes it must answer to investors every three months. This is still a superior operation that continues to produce big animated hits.

Katzenberg has run this company with a deft hand. Indeed, he is perhaps the most competent executive in Hollywood. The hand-wringers out there should realize that a year from now, this company will look a lot better. Hollywood is cyclical and so are things like DVD sales.

What might more aptly irk investors looking forward is how long it takes for these studios to produce their work. It is easy to understand why Pixar and DreamWorks can only produce one or two computer-generated animation movies per year. The process is exacting and time-consuming.

But what investors should be looking at is what new production model Katzenberg and Jobs are thinking about to get more product on the shelves. Why doesn't DreamWorks animation have a small flash animation division that could churn out smaller-scale movies for $1 million to $5 million? Why is it not replicating the small independent film model to find that diamond in the rough? Surely there is enough talent floating around out there.

When the company was private, Katzenberg could have shrugged it all off. Yesterday, he learned who his daddy is.