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Eye-Opening Experience

Ambitions Still Intact, Studio Copes With Industry Changes

September 19, 1997|CLAUDIA ELLER and JAMES BATES

One of the booby prizes awarded at the annual Allen & Co. mogul conference this summer in Idaho was a DreamWorks doll. Wind it up and nothing happens.

That isn't exactly fair. A lot has happened in the three years since music mogul David Geffen, former Walt Disney studios chief Jeffrey Katzenberg and director Steven Spielberg unveiled their new studio venture in a ballroom crowded with TV cameras, Hollywood players and the media at the Peninsula Hotel in Beverly Hills. Some good, some bad and a lot unexpected.

There were unanticipated shifts in the movie and music marketplace, a wholesale revamping of how the television business operates and a deflation of expectation in interactive entertainment. DreamWorks' much-hyped planned studio "campus" at Playa Vista can't get a shovel in the ground, due largely to the original developer's financial woes. Katzenberg's high-profile, nasty $250-million lawsuit against Disney for money he claims he's owed has continued to be a distraction.

Now comes another nail-biting adventure: Next week, DreamWorks launches into Hollywood's risky and overcrowded marketplace its first live-action film, "The Peacemaker," a $50-million nuclear thriller starring George Clooney and Nicole Kidman.

Despite all the creative and financial clout possessed by the famous Hollywood troika, DreamWorks' infancy serves as an object lesson in just how tough it is to make a go of it in one of the sexiest--but riskiest--businesses in the world. The industry is littered with casualties such as Savoy Pictures, albeit none armed with the resumes or bankroll of DreamWorks, which is backed by $2 billion from banks and rich investors like software tycoon Paul Allen.

Wall Street analysts and Hollywood watchers say it's premature to assess the success or failure of DreamWorks at this early stage, particularly since the studio's first live-action films are just beginning to roll out and its critical debut animated feature, "The Prince of Egypt," isn't due in theaters until Thanksgiving 1998. Still, few would disagree that DreamWorks may have been overly optimistic in its original expectations.

"I think they had irrational exuberance in starting this company," says Wall Street analyst Harold Vogel of Cowen & Co. "They found it was a lot harder to do. . . . There are unforeseen obstacles."

Even billionaire Geffen concedes that the trio may have underestimated the effort it would take.

"Were our dreams bigger than our ability to accomplish them? Maybe. But what we've accomplished, as far as I'm concerned, is a dream," he said, lounging in shorts and a T-shirt in the company's new music offices in a refurbished Beverly Hills warehouse.

How much DreamWorks, which is a private company, has spent to date is a secret, although analysts estimate it is probably $750 million to $1 billion. What started with three moguls is now a 1,500-employee company, more than half of them in animation. They'll soon be housed in a European villa-style campus in Glendale, complete with a man-made river running through the 15-acre site.

The DreamWorks partners say they hope to refinance the company and pay back their investors before their target date of 2002. William Savoy, who heads Allen's Vulcan Northwest that invested $500 million in DreamWorks, said he remains bullish on the company and wishes he'd invested the entire $1 billion.

"It's all about the people you invest with. We have invested with the three best in entertainment," Savoy said.

Many Wall Street investors were wary of investing in DreamWorks, especially since the company lacked a library of films and TV shows that cushion major studios.

"It's very difficult to start a new studio. The problem is it is a very capital-intensive business. You spend a lot of money upfront, plus interest and marketing costs, and the revenues come later over the lives of the movies," one Wall Street investor said. "There are tremendous gaps in the 'flows-in' and 'flows-out' of the business."

The entertainment business also has gone through fundamental transformations, which forced DreamWorks "to change paths and strategies in a number of ways, but I think every single company in the business has had to."

Katzenberg notes that "the last three years are among the most dramatic and traumatic that the entertainment business has faced in 25 years."


For starters, at the same time DreamWorks formed, restrictions on network ownership of shows were dropped, drawing in a new class of studio owners that have consolidated the business while making it harder for independent studios to compete. In multimedia, the much-hyped CD-ROM market failed to live up to its hype. Whereas DreamWorks once aimed to be a major player in five businesses--live-action movies, TV, music, new media and animation--the company is concentrating on three. Television and interactive operations are considered less critical; live-action movies, animated features and music will be DreamWorks' profit engines.

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