DreamWorks Sale Sounds Wake-Up Call for Indie Films

When the self-proclaimed Dream Team announced the formation of DreamWorks SKG at the Peninsula Hotel 11 years ago, director Steven Spielberg said that he and his partners, Jeffrey Katzenberg and David Geffen, were creating a multifaceted entertainment empire that would “outlive us all.”

It didn’t.

This week, the trio reached an agreement for their studio to be acquired by Viacom Inc.’s Paramount Pictures, underscoring how hard it is for independent firms to survive among media giants. The pending sale, the latest evidence that stand-alone movie studios are a losing proposition, also prompted the question: If S, K and G can’t do it, who can?

“The rules of the filmed entertainment business are changing,” said Amir Malin, who in the last 20 years has run several independent film companies, including the former Artisan Entertainment. Rocked by the soaring cost of talent, production and marketing, slowing DVD revenue and flagging cinema attendance, he said, “a business that should be hugely profitable has become a byword for waste and extravagance.”

Should Paramount complete the $1.6-billion acquisition early next year as expected, DreamWorks would become the second studio in less than a year to be swallowed by a rival. In April, Metro-Goldwyn-Mayer, one of Hollywood’s oldest and most legendary studios, was bought by investors led by Sony Corp.

Now, virtually every studio is owned by a media giant.

That leaves the renamed Lionsgate and a fledgling studio founded by former Miramax Films chiefs Bob and Harvey Weinstein as the last independents that make, market and distribute movies that compete in the big leagues.

And Lionsgate is considered the next takeover target. In fiscal 2005, the company behind such films as “Crash” and the “Saw” horror hits turned its first profit in eight years.

“It’s a tough business,” acknowledged Chief Executive Jon Feltheimer, even though Lionsgate works to keep production and overhead costs below those of major studios.

Hollywood’s junk pile is littered with the names of independent outfits that tried to go it alone: Orion Pictures, Savoy Pictures and Vestron Pictures.

Still, for all the hand-wringing, it’s sometimes hard to remember that the biggest media companies are making more money than ever from global sales of their movies, TV shows, cable channels and interactive games.

But even these behemoths -- Viacom Inc., Time Warner Inc., Walt Disney Co., General Electric’s NBC Universal and News Corp. -- are struggling with stagnant stock prices and pressure to boost profit margins. They also face uncertainty from new technologies and piracy.

Those same companies are slashing overhead to boost their bottom lines. Time Warner’s Warner Bros. studio in Burbank is enjoying a record year at the box office with such films as “Harry Potter and the Goblet of Fire.” But the studio is slashing more than 400 jobs.

Studios have themselves to blame for some of their problems. Profligate behavior is common in Hollywood, where $200-million movie budgets are no longer rare. Big-name directors and actors often get huge cuts of box-office profits even before the studio has made a dime.

For example, it is difficult to eke out a profit when Spielberg is at the helm of a movie. Sources at studios that have distributed films that Spielberg directed say he typically is guaranteed as much as 25% of a studio’s gross.

As a result, the 2002 hit “Minority Report,” which grossed $354 million at the worldwide box office, made only a small profit for DreamWorks and its partner, News Corp.’s Twentieth Century Fox, according to people familiar with the financial details who requested anonymity for confidentiality reasons.

This was just one reason that DreamWorks failed to build the kind of financial safety net it needed to weather Hollywood’s chronic ups and downs. Despite some huge successes -- among them, “Gladiator,” “American Beauty” and “Saving Private Ryan” -- DreamWorks at times was little more than a box-office bomb away from financial ruin.

The company nearly went bankrupt twice, Geffen said during a panel discussion in New York this year, adding that when the animated film “Sinbad: Legend of the Seven Seas” flopped in 2003, the resulting $125-million loss nearly sank his company.

Like all independent studios, DreamWorks lacked the diversified businesses that helped the conglomerates ride out the hard times. And unlike the major studios, which rely on the relatively predictable revenue generated by licensing their vast film libraries for use on DVD, cable and TV, DreamWorks had to build a library from scratch.

In 11 years, it amassed only 59 live-action titles, many of which are co-owned by other studios. (An additional 11 animated films are owned by DreamWorks Animation, which was spun off last year and is not part of the sale to Paramount). MGM, by contrast, had a 4,000-title library.

Based on typical industry practices, DreamWorks would have had to release at least twice as many movies a year as the seven it averaged to justify its $100-million annual overhead.

“When Steven, Jeffrey and I started the company, we hoped to make enough films to rationalize the cost of being our own distributor,” Geffen said Sunday, when the deal was announced. “Sadly, we were never able to.”

In the end, analysts said, it came down to the movies. Whether because of bad choices or fickle audiences, DreamWorks didn’t have enough hits to offset its flops. Its first two movies -- the action film “The Peacemaker” and period slave drama “Amistad” -- were lackluster at best, grossing less than $50 million each. And most of its hits were shared productions, meaning DreamWorks had to split its profits with another studio.

“A lot of their film choices in the early years weren’t so good,” said Richard Greenfield, an independent media analyst. “It’s all about creative success, and whether you end up choosing more right than wrong.”

DreamWorks’ demise as a full-fledged studio was exacerbated by a management vacuum. Geffen disliked the film business and rarely came into the office. Spielberg’s priority was directing movies. Katzenberg was focused on the animation operation, which he still runs.

Like DreamWorks, a start-up studio such as the new Weinstein Co. must navigate the minefields that come with independence. This fall, the Weinstein brothers were forced to give up their lucrative, 800-title library when they split with Miramax and its corporate parent, Disney.

Their company has raised $500 million in equity and expects to add $500 million more in debt. But it could blow through that war chest quickly if too many of its movies disappoint.

For the entertainment industry, the continued consolidation is bad news. For starters, it means huge job losses: MGM’s staff of 1,500 is being squeezed to about 250. It also means fewer buyers vying for the services of actors, directors and writers.

For consumers, the effect of studios’ consolidation is unclear.

Facing shareholder pressure, studios are often reluctant to take creative risks, relying instead on sequels and remakes rather than original ideas.

Yet, even as true independent studios dwindle, each major studio has acquired or launched in-house “specialty” film divisions. These units release lower-budget, smaller movies while serving as feeders for young talent and as laboratories for hatching award-winning projects.

A majority of the 10 Golden Globe best picture nominees -- five dramas and five for musicals or comedies -- came from either independent studios or the specialty divisions of major studios.

“The fact that studios are in both businesses really keeps the level of diversity of films in the marketplace constant,” said Warner Bros. production chief Jeff Robinov. Warner released the big-budget “Batman Begins” and, through its specialty unit, the critically acclaimed “Good Night, and Good Luck.”

Nielsen Entertainment analyst Larry Gerbrandt said the maverick spirit in filmmaking lives on. More films are submitted to the independent Sundance Film Festival each year than are accepted, he noted.

“We haven’t lost independent production,” Gerbrandt said. “What we’ve lost is the independent financial structure.”

Which is what happened to DreamWorks, proving again that some of the richest and biggest names in Hollywood can’t always buy their independence.