DreamWorks SKG was founded in 1994 by three entertainment enthusiasts, Steven Spielberg, Jeffrey Katzenberg, and David Geffen (The Cornell Daily Sun). The SKG appended to the title is representative of the first letter of each of their last names. DreamWorks SKG is involved in a variety of entertainment segments such as film, music, and television. At the time of its creation, all three individuals were involved in film production. Jeffrey Katzenberg had been recently fired as a studio chairman at The Walt Disney Company, Steven Spielberg had temporarily suspended his lucrative directing career, and David Geffen was involved in film production as well as the record industry. Each of the individuals had something to offer, Spielberg with his experience in making live-action movies, Katzenberg’s animation movies, and Geffen with his music background (Reference for Business).
Financially, the company began with two billion dollars, supplemented with various high-tech partnerships. A portion of the initial money, $500 million, was contributed by a very interested Paul Allen, co-founder of Microsoft. Spielberg, Katzenberg, and Geffen also contributed roughly $33 million to the initial funds (Reference for Business).
During the first few years in business, DreamWorks success was like a roller coaster. Its first film, The Peacemaker, was released in 1997, and only reached $12 million on opening weekend. In the years to follow, DreamWorks released several more successful films such as Mouse Hunt, Deep Impact, and Antz. In an attempt to delve into other entertainment segments, DreamWorks released two television shows High Incident and Champs, which were failures. However, in 1996 DreamWorks released Spin City for ABC, which turned out to be quite successful (Reference for Business).
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By the late 90’s and early 2000’s, DreamWorks was pumping out very successful films, many earning multiple awards such as American Beauty, which received “Best Picture” at the Oscars in 1999. In 2000, DreamWorks created a new division called DreamWorks Animation, which produced animated feature films. With the release of Shrek in 2001, DreamWorks started competing head-to-head with Disney’s animated movies. In 2004, DreamWorks Animation became its own publicly traded company (Reference for Business).
The revenue generated by the film industry is massive, with very few players responsible for the total. In 2008, the U.S. box office generated nearly ten billion dollars (Ars Technica). The eight major film companies responsible for most of the gross revenue include DreamWorks SKG, Fox Entertainment Group, MGM Holdings Inc., NBC Universal, Paramount Motion Pictures Group, Sony Pictures Entertainment, Time Warner, and Walt Disney Motion Pictures Group (Motion Picture Access). Most of the previously mentioned film companies are involved in a variety of film production methods including live action, digital animation, animation/live action, hand animation, and stop-motion animation. Live action films account for the majority of the gross revenue generated domestically, at $8.6 billion with a little over 87% of the share. Digital animation accounted for $1 billion and held over 10% of the share. The other film production methods accounted for the remaining 2.4% (The Numbers). Many of the eight major film companies have a subsidiary that produces animated movies. The companies include Fox Entertainment Group with Blue Sky Studios, Sony Pictures Entertainment with Sony Pictures Animation, Time Warner with Warner Bros. Animation, MGM Holdings Inc. with MGM Animation, and Walt Disney Motion Pictures Group with Walt Disney Pictures (Motion Picture Access).
DreamWorks Animation, on the other hand, is its own publicly traded company, strictly dedicated to animated film production (DreamWorks Animation SKG). With this advantage, DreamWorks Animation is attempting to outperform some of the broadly-oriented rivals in that segment. DreamWorks Animation has accomplished this by partnering with various high-tech companies such as Pacific Data Images (PDI) (Reference for Business). These partnerships allowed DreamWorks Animation access to advanced imaging technology without the costs of recreating the technology in-house. In addition, DreamWorks Animation uses a unique system to create its animations that allows for lower costs (Linux.com). Lastly, DreamWorks Animation can better serve the animation market because of its primary focus on animation. Therefore, DreamWorks Animation is using a Focus Differentiation strategy to penetrate the film production market.
In order to be successful in the animated film segment, DreamWorks Animation has made several strategic actions. To begin with, in 1995, DreamWorks SKG purchased a portion of Pacific Data Images, and collectively the two companies created the movie Antz, which was released in 1998. With the success of the movie, in 2000, DreamWorks SKG acquired most of PDI. The partnership with PDI created competitive advantage for DreamWorks; because of the cutting-edge technology they had available for use. DreamWorks has continued to make use of this partnership, and the conglomerate is often referred to as PDI/DreamWorks (Reference for Business).
Several years later DreamWorks Animation was spun-off from DreamWorks SKG to become a separate company with the sole purpose of creating animated movies (Reference for Business). This action was to focus on a segment in which the other, larger, film companies only had subsidiaries. By creating a entirely separate publicly traded company, DreamWorks Animation has a unique advantage in that it can focus on what it does best, animated movies. In the film industry, the target market for animated films varies greatly from that of live-action. This creates an environment where DreamWorks Animation can avoid being trampled by larger companies and focus on a smaller market. DreamWorks Animation has exploited this niche to become a leading player in film animation.
DreamWorks Animation has cut costs by creating a unique system for generating its animations. After analyzing requirements, the company decided that it needed a system that was easily upgradeable, reliable, and had advanced capabilities. To accomplish this, it selected to use a Linux based platform, which is an alternative Microsoft Windows or Mac OSX operating systems. Because computer generated animation is such a demanding process, it can be quite time consuming to develop. This, in turn, creates huge costs for producers because of the time necessary to make minor changes. With DreamWorks’ advancements, it was able to reduce the time necessary to create one scene, from three hours to real-time. Therefore, when changes to the animation were required, they could be made nearly instantaneously (Linux.com).
In recent years, an increasing number of film production companies are releasing 3D movies because of their popularity. In addition, many companies are beginning to realize that 3D movies are cash cows as a result of their high ticket prices. With this in mind, Katzenberg, CEO of DreamWorks Animation, stated that “every film DreamWorks makes from now on will be made in 3D (CG Society).” Katzenberg is betting that 3D films are here to stay this time around, unlike the 3D craze in the 1950’s. One of the largest contributing factors to this renewed interest is the fact that 3D movies can now be produced in a more cost effective manner. This is largely due to the advancements in technology, which allows companies such as DreamWorks to “use the latest stereoscopic 3D technology to build its movies from the ground up (CG Society).” Katzenberg explains that 3D film production will be quite rewarding for DreamWorks Animation:
“I believe CG animation is in the best position to take advantage of the latest advancement in 3D technology,” said Katzenberg. “Since our films are made digitally, it presents numerous opportunities for our filmmakers. And by moving into this area now, DreamWorks Animation is developing expertise that will differentiate our films and provide a lasting competitive advantage (CG Society).”
In spite of a tough economic climate the past few years, DreamWorks Animation has performed above and beyond expectations. In 2009, DreamWorks reported “double-digit year-over-year growth in revenue and earnings per share (Market Watch).” Revenue increased by 12% from 2008-2009, and earnings per share increased 10% (Market Watch). The following table demonstrates the performance of DreamWorks Animation for the past few years:
Figure1. Adapted from “DreamWorks Animation SKG, Inc.” Morningstar Equity Research, p. 2. Copyright 2010 by Morningstar.
In comparison to other film production companies, DreamWorks Animation is quite small in size. The following table compares DreamWorks Animation with the more broadly-oriented Walt Disney Company:
Figure 2. Adapted from “DreamWorks Animation SKG, Inc.” Morningstar Equity Research, p. 2. Copyright 2010 by Morningstar.
COMPETITIVE ADVANTAGE / VRIO FRAMEWORK
When DreamWorks SKG spun off DreamWorks Animation, this did not create a true first-mover advantage, because it was not the first occupant in the segment. However, it can be thought of as a first-mover strategy in the sense that DreamWorks Animations was an entirely separate company dedicated to animation, unlike the other broadly-oriented film companies. DreamWorks did this to become a significant occupant in the animation segment of the film industry, which created a competitive advantage.
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DreamWorks Animation partnered with high-tech companies such as PDI, which allowed access to important technology. As a result, this created a competitive advantage for the company. The capabilities that DreamWorks Animation has at its disposal are costly to implement in-house, and may be costly and/or difficult to acquire. In addition, because it has majority interest in PDI, DreamWorks Animation can readily employ the capabilities. With the necessary technology in its grasp, DreamWorks Animation is able to grow within its segment.
Another capability advantageous to DreamWorks Animation is its custom system used to generate the animated films. Because the system environment has been modified to better suit the specific needs of the company, this capability is difficult to match. By using this capability DreamWorks Animation can reduce time-related costs that other industry companies are faced with. This allows the producer to focus on animations, without having to worry about the time needed to edit a scene.
STRATEGIC FIT / FUTURE PERFORMANCE
As a focus differentiator, DreamWorks Animation has penetrated the animation segment of the film industry and has become a pivotal player in that market. With the many supportive capabilities available to the company, it has successfully expanded within its niche, and continues to grow. Strategically, DreamWorks Animation fits seamlessly within the film industry, because of its focus on a single, smaller segment.
The arrival of more advanced 3D technologies, and the associated cost savings definitely provides a promising outlook for the company. Because of its advanced capabilities, DreamWorks Animation will be able to fully take advantage of this opportunity. Therefore, in the next few years, the performance of the company should meet and possibly exceed expectations.
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