DreamWorks Wakes Up to Reality

After ridding themselves in less than one week of their two biggest distractions, the principals of DreamWorks SKG--Jeffrey Katzenberg, David Geffen and Steven Spielberg--face a big question: Where do they go from here?

The settlement of Katzenberg's breach-of-contract lawsuit against former employer Walt Disney Co. for about $250 million, on the heels of DreamWorks' decision to pull the plug on its Playa Vista studio fiasco, now puts the pressure on the partners to get the fledgling studio dealing with substantive issues. Among them: how to stem continuing start-up losses that come with trying to build a studio amid an industrywide retrenchment and what to do about a live-action movie division that needs more product.

The three men are nearly at the halfway point of their 10-year partnership, which sources said at times felt the strain of Katzenberg's three-year legal battle with Disney and the four-year effort to build a "studio for the 21st century" at Playa Vista.

Since early April, Katzenberg has seemingly spent more time in a courtroom than in his own office as he pursued his fight with Disney over the bonus it owed him. He and other key DreamWorks officials spent countless hours preparing the case, meeting with outside lawyers and, finally, appearing for 32 days at a court hearing in Century City law offices that ended last week.

When it comes to day-to-day operations, Katzenberg is de facto chief executive of DreamWorks, raising questions about how disruptive his absence was to company business.

"Was I razor-focused? Was my attention distracted by this? Absolutely," admitted Katzenberg, known as an obsessive micromanager. "Did that have an impact? Did the company suffer? Yes, but it's hard to quantify how it did."

Katzenberg objected to a suggestion that relations with Spielberg and Geffen had been strained over his prolonged legal duel, insisting, "There was never a time when they didn't stand behind me privately and publicly." However, he acknowledged, "they did make accommodations in their schedules and their priorities. . . . Was it a sacrifice? Yes."

Probably the biggest disruption was to the company's animation division, to which Katzenberg devotes most of his time and energy. However, he doubts that any of the creative problems that arose during the making of the new $80-million animated film, "The Road to El Dorado," could have been averted by his having spent any more time on the process.

" 'El Dorado' has gone through the natural problems these films go through," Katzenberg said. "There were more than average, but not more than ever. Do I think those challenges were impacted by my litigation? No."

While Katzenberg has no direct responsibility for running DreamWorks' live-action movie division, which is overseen by Spielberg, he is involved in "helping strategize" that part of its business, which is in flux.

For some time, the DreamWorks partners have been trying to figure out how to get more films in the pipeline to justify the kind of overhead the studio carries.

In April, Geffen acknowledged the need to release more movies and was grappling with how to achieve that since Spielberg and his two production chiefs, Walter Parkes and Laurie MacDonald, "can't oversee more product than they already are."

But since then, no adjustments have been made, an indication that strategic decisions such as this one seemed to be tabled until Katzenberg could refocus his attentions.

"Maybe those things would have been more aggressively addressed if I was there utzing people along," Katzenberg conceded.

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DreamWorks has had mixed results in its movie business, doing well with such live-action hits as "Saving Private Ryan" and "Deep Impact" (though Paramount Pictures owns half of each) and the animated films "Antz" and "Prince of Egypt," but not so well with "In Dreams," "The Love Letter" and "Amistad."

Just how well DreamWorks, a privately held company, is doing financially has always been a mystery to Hollywood. Its financial figures have been a closely guarded secret, and what numbers have been revealed privately to a limited number don't appear to tell the whole story.

DreamWorks has periodically floated private documents to potential investors related to a possible investment in Playa Vista.

According to people who have seen the financials, the studio showed a loss of slightly more than $200 million last year, with revenue of more than $1 billion, with specific mentions that its TV operation didn't do very well in 1998 and noting that it was the studio's first full year of revenue from film.

But those prospective investors also note that there are some caveats to the loss number. As is the case with most entertainment companies, money flows in for as long as seven years after the initial costs are incurred for a film from such things as video sales, television broadcasts and foreign business.

So the $200 million wouldn't have taken into account such things as video revenue for "Antz" and "Saving Private Ryan" or most of the box- office receipts from "Prince of Egypt," which was released at the end of the year. And, unlike other studios, DreamWorks doesn't have a library of past films producing revenue.

"You came away saying that this is still a start-up venture," said one source who saw the numbers. "Their financial figures didn't wow anybody. On balance, they probably did the right thing for their business in getting out of Playa Vista."

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Nonetheless, Hollywood has long believed that DreamWorks may soon seek to form a partnership with a major studio out of financial necessity. When asked about persistent speculation that DreamWorks is considering even grander strategic moves in the near future, such as a possible merger with Universal Pictures or some other entity, Katzenberg said, "Everybody else thinks we are or should be doing something, but we're certainly not looking to do it."

He did, however, acknowledge that "you always have to keep an eye out for opportunities, remain open-minded enough to consider things, but there's nothing in our sight lines today that would change the way we're operating."

Despite speculation about a merger with Universal, which distributes DreamWorks' videos around the world and its films in foreign markets, relations have cooled somewhat between the two companies. Sources say DreamWorks was concerned about the timing of a revamping of Universal's foreign video operation as "Antz" and "Prince of Egypt" were about to be released.

The speculation about a possible DreamWorks-Universal combination resurfaced after the Playa Vista project died. It has long been speculated that DreamWorks would wind up expanding Spielberg's Amblin Entertainment studio on Universal's back lot as its permanent home.

Katzenberg said there are no plans to do so and that the partners are "extremely comfortable" with the current setup: running live action out of Universal, music out of Beverly Hills and animation out of its new facility in Glendale, where DreamWorks is entitled to develop several hundred thousand more square feet of space.

Katzenberg admitted disappointment over the time and energy lost on making Playa Vista a reality.

"It was a very grand, exciting idea 4 1/2, 5 years ago," he said. "And maybe it was just a little too grand, in the end." What once appeared to be a very worthwhile undertaking "became more impractical as time went on," particularly because the financial markets radically changed and made it more difficult to fund a project of this size.

"The cost of the project itself escalated dramatically," Katzenberg said. "And there was a big demand for back lots five years ago, and now there's not."

Katzenberg said he also regrets the time and energy that went into the lawsuit. He is "greatly relieved" to have the "huge burden" behind him, he said.

Back to his self-professed "maniacal and reasonably crazy" work habits, Katzenberg said he's ready to devote "100% of my efforts and focus to what I care most about--this company."

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Persistent Distractions ...

* DreamWorks has been distracted by two high-profile matters almost since its inception about five years ago: partner Jeffrey Katzenberg's bitter breach-of-contract lawsuit against former employer Walt Disney Co., which was settled last week for an estimated $250 million, and the company's failed plans to build its own studio and headquarters at Playa Vista, which it recently scrapped because of financing and cost problems.

* Halfway into the 10-year partnership of Katzenberg, director Steven Spielberg and music mogul David Geffen, the company's track record is mixed. In film, it has released such hits as "Saving Private Ryan" and the animated "Antz," but it's had duds in "Amistad" and "In Dreams." DreamWorks is counting on big-name projects next year, such as Robert Zemeckis' "Cast Away," starring Tom Hanks, and Spielberg's "Minority Report," starring Tom Cruise. In TV, the company has the hit series "Spin City," but television has proved an expensive business for DreamWorks. In music, it hasn't yet scored a hit album.

* Animation remains the biggest bet for the company, with three films planned for next year: "The Road to El Dorado," "Chicken Run" and "Shrek."

* The company is dogged by persistent rumors that for financial reasons it may seek a strategic partner or merge with a major Hollywood studio. It adamantly denies that any such plans are in the works, but it acknowledges being open to interesting business opportunities.

* Hollywood insiders and Wall Street analysts still question whether the company will ever live up to the hype that greeted the formation of the "dream team" in 1994.

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