DreamWorks Animation SKG Inc. is fast approaching its self-proclaimed Labor Day deadline to secure a new distribution deal for its animated feature films. The Glendale-based studio, which produced hit series such as “Madagascar,” “Shrek” and “Kung Fu Panda,” must decide whether to continue its relationship with partner Paramount Studios, or strike a deal with another studio. Paramount has handled the company’s worldwide distribution since 2006. Under the agreement, which expires at the end of the year, the studio receives 8 percent of the revenue from each DreamWorks Animation film. Some industry analysts say DreamWorks likely will chose a new partner despite years of a mutually beneficial partnership with Paramount, as tension between the studios has mounted over terms of a contract renewal. Published reports have narrowed potential partners to 20th Century Fox and Sony Pictures. Brokerage and investment banking firm Stifel Nicolaus also named Sony as a front-runner in a company update released earlier this month. During a conference call with analysts on July 31 to discuss second quarter earnings, DreamWorks Animation CEO Jeffrey Katzenberg said the company was in discussions with “multiple studios” about a distribution agreement. “We stated last quarter our plan was to communicate our decision by Labor Day and our timing has not changed,” Katzenberg said during the call. DreamWorks must work fast on sealing a deal. Its last film with Paramount, “Rise of the Guardian” hits theaters in November. The studio follows that up with “The Croods” in March and “Turbo” in June. New deal In addition to feature films, a new distribution deal will likely include a DreamWorks Animation branded television channel. While the studio is still in the planning stages for the channel, Katzenberg said the success of its content in international markets has created new opportunities. “It is something we are actively talking about with those possible partners,” he said. In its current agreement, DreamWorks has charged Paramount with handling distribution and associated marketing and advertising costs for domestic and international theatrical, television and home entertainment licensing as well as non-theatrical exhibition (airlines, schools, etc.) and new media. While continuing the relationship with Paramount is certainly possible, David Miller, managing director in the Los Angeles office of investment bank Caris & Co., said DreamWorks appears to want more control over certain deal-making rights. For that reason, the company may instead offer a higher percentage of its film revenue to a new partner while holding on to the digital distribution rights for streaming and video-on-demand. He explained that the cost to self-distribute content for electronic channels is generally less costly than self-distributing to theaters. “You don’t need a third party to do electronic delivery and (to be) taking 8 percent (of the revenue)” Miller said. Meanwhile, he said, Paramount is at the point where the overhead for distributing DreamWorks films has become too much and those are “valuable dollars” that could be spent on their own films. Competitive market In its Aug. 1 report, Stifel Nicolaus detected “some strain” between the two studios based on comments DreamWorks executives made during the earnings call about costs for film prints and advertising for “Madagascar 3.” In the first two months of the film’s release, Paramount had incurred about 65 percent of the prints and ads expense, which DreamWorks expects to reach the high end of its guidance of $150 million to $175 million, said Lew Coleman, president and chief financial officer, during the July 31 conference call. As a result, Paramount has accelerated its request for payments from DreamWorks. “It is not how business has been conducted up until now but it is in the agreement,” Katzenberg said. “The timing of it is what it is.” In the crowded animated film market, DreamWorks Animation has set itself apart by releasing all of its films in 3D since 2009. While adult interest in 3D may be cooling off, children — the target audiences for animated films — still enjoy the novelty of wearing the glasses, said Paul Dergarabedian, the box office analyst for Hollywood.com. Given DreamWorks Animation’s consistent box office pull, any studio that becomes the distributor will have access to the ready-made films that bring in huge audience numbers. “You are buying turnkey 3D animated product with a terrific track record,” Dergarabedian said. Three of the highest grossing domestic movies of the summer were animated films: “Ice Age: Continental Drift” from Fox, Disney Pixar’s “Brave”, and “Madagascar 3: Europe’s Most Wanted” from DreamWorks Animation. Discussions on the distribution agreement began following the early June release of “Madagascar 3.” But industry analysts debate how much leverage the $500 million worldwide box office for the film will give DreamWorks and Katzenberg. “You’re only as strong as your last movie,” Dergarabedian said. “‘Madagascar 3’ is a great calling card and it proves they have something to offer that audiences want.” Miller of Caris & Co. has a different view. With “Madagascar 3” tracking to analysts’ expectations, the movie’s performance will not be a factor, he said. “It is not that Jeffrey Katzenberg’s hand is stronger because of the success of ‘Madagascar 3.’”
DreamWorks Deadline Nears
