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WIKI ANALYSIS
DreamWorks Animation SKG (DWA) is a leading digital animation film studio. As a group, its eight films have grossed over $4.6 billion dollars in box office revenue. Notable successes include the Shrek franchise and Madagascar, both CG animated films. Shrek 2 remains the highest-grossing animated film, as well as the third-highest grossing film, of all time in the domestic box office [1]. In 2006 the company generated $394.8 million in operating revenue [2].
The company releases only two movies per year. Due to the unpredictability of the box office, DWA seeks to manage its risk ensuring that one of its releases is always a sequel. [3]. Sequels are inherently less risky because of their proven fan base. However, with only two movie releases per year, a box-office flop could still have a major negative impact on the studio's annual earnings and future revenue [4]. Dreamworks which derives 50% of its revenue from DVD sales could be significantly impacted by continuing declines in the DVD market.
Business Financials
In recent years approximately two-thirds of DWA's revenue has been from the domestic arena, with the remaining one-third coming from international markets. The studio's three primary sources of revenue are ticket sales (30%), home entertainment sales (50%), and television licensing (17%).
DWA remains highly dependent on its flagship Shrek franchise. The first two Shrek movies accounted for roughly half of the company's revenue since 2001. These factors combine to give DWA a volatile earnings stream. The company's revenue growth has ranged from 258% in 2004 (the year Shrek 2 was released) to negative 57% in 2005 (a non-Shrek release year) [5].
Trends and Forces
- Unpredictability of Box Office Performance: The success of film releases is very difficult to project. Since DWA releases only two films per year, a single box office failure could have a major negative impact on annual earnings and future cash flows. Notable successes include Shrek 2, which grossed $436.7 million at the domestic box office, and Madagascar, which pulled in $193.2 million [8]. Flops include Wallace & Gromit: The Curse of the Were-Rabbit, which grossed a mere $56.1 million in ticket sales, and Flushed Away, managing slightly better at $61.7 million [9]. In order to achieve revenue diversification and a more stable earnings stream, DWA will need to find another franchise hit besides Shrek.
- Declining Box Office and DVD Sales: Domestic movie attendance in recent years has grown sluggishly, if at all, as more and more people turn to alternatives like DVDs, television, and online video. That said the DVD market has also begun to mature with consumer spending dropping 2% in 2006. If this trend continues, it could have a dramatic impact on DWA's business since they make more than 50% of their revenue off of DVD sales.
- Crowding of the Animation Market: Because of its relatively new introduction into the market, CG animation is currently one of the most popular and profitable movie genres [10]. This in turn has attracted more and more entrants into the field and increased the level of competition. Additionally, advances in CG animation technology are lowering the barriers to entry for independent studios [11]. These factors mean diluted box office returns for individual releases and higher production costs as studios compete for talent and increase advertising before the launch of a movie [12]. The intensification of product release has also diluted the sale of home entertainment units.
- Technological Advance: Increased competition in the CG animation genre has diluted home entertainment sales largely due to the increased competition for shelf space [13]. However, new technology such as digital and video-on-demand platforms provide the potential for endless shelf space, and eliminate manufacturing and distribution costs. Additionally, the DVD market has reached maturation in the past two years and sales have slowed [14]. However, the next generation of DVD formatting, embodied in the Blu-Ray vs. HD-DVD debate, provides studios with new opportunities for growth. DWA and its Paramount distributor recently announced that they will use the HD-DVD format exclusively for worldwide distribution [15].
- Digital Piracy: The rising incidence of online piracy poses a growing worry for the movie industry. As more consumers switch to broadband and compression technology continues to shorten movie downloading time, the rate of film piracy looks set to increase [16]. The negative impact on studios is two-fold, as pirated films hurt DVD sales and drive down movie attendance. The Motion Picture Association of America estimates that the industry lost $6.1 billion to piracy in 2005 [17].
Competition
DWA competes with studios who produce CG animated films, traditional animated films, and live-action films [18]. One key difference between DWA and its competitors is that it is the only pure animated play in the entertainment space, and (along with Lions Gate Entertainment) one of two pure plays on the entertainment segment. While many of the other major studios are part of large conglomerates with varied sources of income, DWA derives substantially all of its revenue from one source - CG animated feature films [19]. Some main competitors include:
A brief comparison of DWA and Pixar, chief rivals in the CG animation market:
| Year | Revenue (millions) | Revenue From DVD Sales (millions) |
|---|---|---|
| 2003 | $301 [20] | $57.1 [21] |
| 2004 | $1078 [22] | $732.8 [23] |
| 2005 | $462 [24] | $608.8 [25] |
| Year | Revenue (millions) | Revenue From DVD Sales (millions) |
|---|---|---|
| 2003 | $262.5 [26] | $250.4 [27] |
| 2004 | $273.5 [28] | $260.8 [29] |
| 2005 | $289.1 [30] | $274.8 [31] |
Market Share
Given DWA's volatile earnings stream, its market share can vary widely from year to year. On average DWA captures about 5% of the studio market [32]. The top twelve studios in 2005 by domestic market share are listed below:
| Rank | Company | Market Share |
|---|---|---|
| 1 | Warner Bros | 15.6% |
| 2 | Fox | 15.3% |
| 3 | Universal | 11.4% |
| 4 | Buena Vista | 10.4% |
| 5 | Sony/Columbia | 10.4% |
| 6 | Paramount | 9.4% |
| 7 | DreamWorks Animation SKG | 5.7% |
| 8 | New Line | 4.8% |
| 9 | Lions Gate Entertainment (LGF) | 3.2% |
| 10 | Dimension Films | 2.1% |
| 11 | Miramax | 2.1% |
| 12 | MGM/UA | 2.1% |
Notes
- ↑ DWA 2006 10K, Item 1, pg.2
- ↑ DWA 2006 10K, Item 1, pg.3
- ↑ DWA 2006 10K, Item 1A, pg.20
- ↑ DWA 2006 10K, Item 1A, pg.20
- ↑ DWA 2006 10K, Item 7, pg.48
- ↑ DWA 2006 10K, Item 6, pg.41
- ↑ DWA 2006 10K, Item 1, pg.2
- ↑ DWA 2006 10K, Item 1, pg.2
- ↑ DWA 2006 10K, Item 1, pg.2
- ↑ DWA 2006 10K, Item 1A, pg.23
- ↑ DWA 2006 10K, Item 1, pg.18
- ↑ DWA 2006 10K, Item 1, pg.19
- ↑ DWA 2006 10K, Item 1, pg.18
- ↑ USA TODAY, "Video Slips as DVD Market Matures", January 3, 2006
- ↑ Seeking Alpha, "DreamWorks and Paramount: Only HD-DVD", August 21, 2007
- ↑ BBC News, "Online Film Piracy 'Set to Rise'", July 9, 2004
- ↑ Motion Picture Association of America, "2005 U.S. Piracy Fact Sheet"
- ↑ DWA 2006 10K, Item 1, pg.18
- ↑ DWA 2006 10K, Item 1A, pg.21
- ↑ DWA 2006 10K, Item 6, pg.41
- ↑ DWA 2006 10K, Item 1, pg.2
- ↑ DWA 2006 10K, Item 6, pg.41
- ↑ DWA 2006 10K, Item 1, pg.2
- ↑ DWA 2006 10K, Item 6, pg.41
- ↑ DWA 2006 10K, Item 1, pg.2
- ↑ Pixar 2006 10K, Item 6, pg.37
- ↑ Pixar 2006 10K, Item 7, pg.41
- ↑ Pixar 2006 10K, Item 6, pg.37
- ↑ Pixar 2006 10K, Item 7, pg.41
- ↑ Pixar 2006 10K, Item 6, pg.37
- ↑ Pixar 2006 10K, Item 7, pg.41
- ↑ Box Office Mojo
- ↑ Box Office Mojo, "2005 Market Share and Box Office Results by Movie Studio"
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