POWER LUNCH by Ronald Grover October 29, 1999

Dreamworks: So Many Deals, So Few Profits
As some question the studio's viability, the Katzenberg-Spielberg-Geffen team is turning its focus to making money

Another day, another deal for Dreamworks, the studio that former Walt Disney studio chief Jeffrey Katzenberg created along with fellow moguls Steven Spielberg and David Geffen. The latest: Dreamworks recently joined with director Ron Howard's production company Imagine in a $50 million venture to create movies and TV shows for the Internet.

But five years after the studio opened its doors -- and raised an eye-popping $2.6 billion to finance the first new major film company in since United Artists was created by Douglas Fairbanks and Mary Pickford in 1919 -- Hollywood is divided as to whether Dreamworks is ever going to move much beyond the flashy deals and solidly into the black. Many in Tinseltown are counting the days before Dreamworks closes shop altogether.

Well, odds are they can keep counting. True enough, Dreamworks has had a spotty record at best. Of the more than 40 films the studio has produced, few have been terribly profitable. The studio made a splash with TV show, Spin City, but that's one hit out of five shows it got on network TV. It has folded its TV animation studio and has failed in efforts to build a new studio at Playa Vista near the Los Angeles airport.

SURVIVAL INSTINCT. Still, this is a studio that has no intention of going away. For one thing, Katzenberg, who quit after Disney Chairman Michael D. Eisner refused to make him president of that company, is a driven executive keen on showing Eisner he can create a worthy competitor. And Geffen, Katzenberg's best friend, seems intent on keeping the money flowing even as the studio's TV and film production divisions seem to be burning through it faster than ever.

Geffen has helpful friends. He is close to Paul Allen, the billionaire Microsoft co-founder who has a 21% stake in Dreamworks and is building his own cable-TV empire. Despite talk that Allen was growing tired of Dreamworks' money-losing ways, the billionaire showed he's still behind the company when he put up $50 million for the recent Dremwork-Imagine Internet startup.

Still, it wouldn't hurt for Dreamworks to come up with a megahit -- and soon. The Dreamworks name was on Spielberg's masterpiece Saving Private Ryan, but the studio shared the profits with Paramount Pictures. And Spielberg, who has his own directing deal with the studio he partially owns, took home a chunk of the take as well. By most estimates, Dreamworks made $30 million even after Ryan sold more than $500 million tickets worldwide.

It barely broke even on another film, The Haunting, which cost $73 million to make. And its highly anticipated animated film, The Prince of Egypt, sold fewer videos than anticipated and very little merchandise. Dreamworks figures to make a small pile of money with American Beauty, which has generated $30 million at the U.S. box office and cost $16 million to make. But those profits don't come close to covering the studio's steep overhead costs.

SPIELBERG: HOT. Of late, Hollywood has been abuzz with talks that Dreamworks is looking for ways to link up with another studio to generate some needed cash flow. The company approached MGM three months back about a merger, says MGM Chairman Alex Yemenidjian, although the two sides never got to the talking stages. Dreamworks wanted the $40 million a year that's generated from MGM's library of more than 4,100 old films and 9,000 episodes of older TV programs. Seagram Co., whose Universal Pictures unit lost $38 million in its most recent quarter, has also approached Dreamworks about a possible merger or joint venture, according to knowledgeable Hollywood sources.

Why would Seagram want to be in business with Dreamworks? In a word, Spielberg. The 52-year old director is still the hottest name in show business. He's why Tom Cruise wants to come to Dreamworks to do a film, and why such well-known director as Bob Zemeckis, Ivan Reitman, and Ridley Scott have set up shop at Dreamworks. Katzenberg and Geffen will move heaven and earth to keep the bearded director happy. As part of his deal with them, he can direct four films for other studios. That's why Dreamworks had to share half of Saving Private Ryan with Paramount, and why they will likely share half the profits from the Cruise flick Minority Report with Fox.

In fact, the dirty little secret of Dreamworks is that Spielberg is, well, Spielberg. That means he can go wherever the hot scripts take him. He was ready to make Confessions of a Geisha with Sony, with or without Dreamworks. Instead, he will make the film for Columbia. (Dreamworks ultimately passed on the project.) And in recent weeks, Dreamworks has paid a cool $2 million for the rights to a novel called If Only It Were True, even though there is no English translation of the French novel around for the studio heads to read. Spielberg just wants to direct it, and Dreamworks had to outbid Fox and Universal for the rights to get both the novel and their star director attached to it.

BIG JUMP. Meanwhile, the dealmaking goes on. After some internal tussles, Katzenberg has moved over to helping long-time Spielberg aides Walter Parkes and Laurie MacDonald run the live-action division. Until recently, he has been mostly involved with animated films and the TV production side. Now, he's helping to ramp up to 14 the number of films the company intends to make next year, to go along with a pair of animated films.

That's quite a jump for a studio that this year will release nine movies. But the deals are impressive: Robert DeNiro and Ben Stiller in Meet the Parents, John Travolta in Numbers and Tom Hanks in Castaway. Almost all of them will be made in conjunction with another studio to help keep the costs down.

You might even call it the new credo at Dreamworks: Make films, but try to keep the costs down. Five years back, when they were first starting out, the three company founders never used to worry about such things as costs. These days, everyone seems to be setting their sights just a little lower. Now the Dreamworks team seems to be dreaming of ways to make some money.

Grover, Los Angeles bureau chief for Business Week, offers his reviews of Hollywood doings on Fridays for BW Online

EDITED BY DOUGLAS HARBRECHT _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

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