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DreamWorks Sale Highlights Studio Obstacles
LOS ANGELES – Steven Spielberg, Jeffrey Katzenberg and David Geffen tried to harness their collective star power in 1994 to do what hadn’t been done in more than 70 years √≥ start a Hollywood studio from scratch. They called it DreamWorks SKG, the letters standing for the last names of the founders.
Sunday, DreamWorks ended its 11-year run as an independent company by agreeing to be sold to Paramount Pictures, a unit of Viacom Inc., in a deal valued at $1.6 billion. The sale highlights the enormous, perhaps insurmountable, challenges facing an independent company with hopes of competing against massive media conglomerates.
“It’s very hard for anyone to enter the business from the ground up,” said Harold Vogel, author of the book “Entertainment Industry Economics.”
“It’s not the talent of the individuals. They were superb, they had a brilliant idea, they had connections. But the costs of running the business ran much faster than they expected.”
DreamWorks accomplished much in its short life, including winning several Academy Awards, producing a hit TV series and making the most successful animated movie in history.
The company, under Geffen and Spielberg, will continue to make films that will be distributed by Paramount.
DreamWorks Animation SKG, under the leadership of Katzenberg, was spun off into a public company last year and is not included in the Paramount deal, although it will distribute its films through Paramount.
DreamWorks had grand plans to become a major player in music, film, television, video games and the Internet. But over the years, it scrapped plans to build a high-tech studio lot in Los Angeles, sold DreamWorks Records to Universal Music Group and curtailed its TV production.
“When Steven, Jeffrey and I started the company and had to put an entire infrastructure together from day one, we had hoped to be able to make enough films to rationalize the cost of being our own distributor,” Geffen said Sunday.
“Sadly, we were never able to make enough films to make that economically sound.”
Distributing is a fixed cost that runs into the tens of millions of dollars for a staff that can sell films to theaters in the U.S. and abroad.
A handful of independent film companies still remain, including the Canadian company Lion’s Gate Films.
Lion’s Gate has been able to build a substantial library of films, in part through acquisitions. An extensive film library from which to sell pictures on DVD and to cable and television is key to producing the kind of cash that can reduce the risks of box office flops.
“Library values are like real estate in Southern California √≥ they generally go up every year,” said David Miller, an analyst at brokerage firm Sanders Morris Harris.
DreamWorks was able to build a library of only 59 live-action film titles. Ownership of the more lucrative animated films was transferred to DreamWorks Animation.
A number of production companies make films but distribute them through third parties. Those companies include Pixar Animation Studios, which produces one film a year and distributes through The Walt Disney Co. Revolution Studios, which made such movies as “The Fog” and “Rent,” distributes its movies through Sony Pictures.
One company trying to succeed where DreamWorks failed is The Weinstein Co., formed by brothers Bob and Harvey Weinstein.
The brothers formed Miramax in 1979 and sold it to Disney in 1993. Earlier this year, they left Disney to form their own company after disagreements with Disney’s management.
The pair left behind their library of around 800 films and, like DreamWorks, is starting from scratch to make and acquire films and build their own distribution network.
The Weinstein Co. does have the right to make sequels of some of its Dimension films, including “Sin City” and “Scary Movie.” And it just entered a joint venture to distribute its own DVDs, which will save it potentially millions of dollars in fees over the years.
The Weinstein Co. has raised about $500 million in cash and an equal amount in debt financing. That might not be enough. Vogel says a minimum of $2 billion is needed to comfortably finance both the production of a full film slate and distribution.
“The barriers to entry are high, which is why guys like the Weinsteins and anyone else who wants to go out and start this has to find external financing,” Miller said.
“The risk remains very high that businesses like this will crash and burn,” he said.