Reality Is, DreamWorks Never Needed a Studio

Shortly after pulling the plug on a proposed $250-million studio near Marina del Rey, rumors had director Steven Spielberg and his partners, David Geffen and Jeffrey Katzenberg, putting their DreamWorks SKG complex instead on a bluff near Santa Barbara.

An even more laughable one had Spielberg in talks with Las Vegas casino impresario Steve Wynn to build a studio in Las Vegas. Cirque du DreamWorks on the Strip. They could call it DreamWorks SKGSR (Spielberg, Katzenberg, Geffen, Siegfried & Roy).

Then there were the real proposals, which were almost as funny as the rumored ones. Lancaster, about a 90-minute limo ride from the Westside, has 47 acres for DreamWorks. Palmdale and Santa Clarita also weighed in.

Meanwhile, Los Angeles City Council members are tripping over themselves to suggest sites: North Hollywood, Northridge, Wilmington, maybe East Los Angeles. Councilman John Ferraro vowed that any proposed financial goodies such as tax breaks used to attract DreamWorks be broadened “to include every square inch of the city of Los Angeles.” Look out Reseda, Cheviot Hills and San Pedro.

Ever since the three moguls abandoned the proposed Playa Vista studio project earlier this month, virtually every public official living in a ZIP Code starting with 9 has entertained grandiose visions of luring DreamWorks. No doubt one driving force is the prospect of a photo op with the world’s most famous director and his two mogul partners, with everyone holding a gigantic pair of scissors at the ribbon-cutting ceremony.

Wasting time on things that will never happen is something bureaucrats do well. Add this one to the list.

But the reality is DreamWorks doesn’t need a full-fledged studio lot. It never has and never will.

That’s why it could negotiate such a sweetheart deal at Playa Vista, threaten to walk when things went a little sour with lenders and eventually make good on its threat to leave without any substantial backup plan other than to simply expand its current office space on the Universal Studios lot and at its Glendale animation facility.

During the time that DreamWorks was considering building a studio at Playa Vista, an oft-cited fact was that it would be the first full-fledged, owner-occupied studio lot built since the 1930s. That’s no historical accident. There’s been no reason to build one.

No studio today needs to be in the real estate business. Studios today have big lots with sound stages because studio founders such as Adolph Zukor, Jack Warner, Carl Laemmle and Walt Disney built them when studios really did need them. Today, the lots run like a side business for studios. It’s not a bad one, often bringing in fees to rent stages and equipment. And the sound stages provide homes for studio TV shows such as “Friends,” “E.R.” and “Frasier.”

But DreamWorks doesn’t need its own sound stages, its own studio commissary, a studio tour, a prop department or a wardrobe annex where you might find a Catherine Zeta-Jones gown from “The Haunting” gathering dust. It does need office space, which is just a cell phone call away to a commercial real estate broker. As for everything else, there’s no point in buying when you can rent.

If that’s the case, then why did DreamWorks spend so much time and effort trying to build at Playa Vista?

The reason was simple: Spielberg wanted it. He liked the idea of building his own studio. The location was near the ocean. You could build Cape Cod-style buildings around a lake. You could design a digital “studio for the 21st century” rather than get stuck using one built in the 1930s modeled after car factories in Detroit. Sound stages could even have enough room between them so trucks could turn around. And there was the romanticized appeal of being able to drive through a studio gate with your company name above it.

When building a new DreamWorks studio lot from scratch was first proposed nearly four years ago, it seemed like a decent idea. Especially if local politicians and developers would get on their knees, salivate and offer enough giveaways to make it a great deal (i.e. for free, or close to it).

*

But from a business standpoint, it never made sense even from the start. Geffen realized that, and was never shy about saying it. Katzenberg took the approach that if it could be done, fine. But it was clearly Spielberg’s baby. Asked why DreamWorks continued to chase the Playa Vista project when efforts continued to drag out year after year, executives there would inevitably respond: “Because Steven wants it.”

If it didn’t make sense then, it really doesn’t make sense now. Even five years after the company was formed, DreamWorks is still a start-up by entertainment industry standards given how long it takes to hatch, develop and finally launch projects in Hollywood.

According to people who saw documents related to financing proposals at Playa Vista, DreamWorks had a loss of more than $200 million last year on revenue of more than $1 billion. (To be fair, one has to cut DreamWorks some slack on the $200-million loss figure given the way studio revenue from such things as video sales and TV airings flow in long after a movie is made.)

Nonetheless, this is an operation that has and will continue to chew up lots of cash getting its projects going and paying for its overhead. Why get into yet another risky business in real estate? A $250-million project can easily turn into a $300-million one, which can easily turn into a $350-million one. Even rich moguls have an aversion to sinkholes.

The simplistic explanations as to why DreamWorks didn’t go to Playa Vista (personality clashes, neighborhood protests) miss the point. Although in some ways they played a role, at its heart it was undeniably a failed business deal. One litmus test of the viability of DreamWorks’ Playa Vista project was that so many people took a pass at financing the project, save for investors and pension funds already involved in the development’s overall commercial and residential real estate deal. They obviously had a vested interest, but even they had limits on the accommodations they would make.

The failure of DreamWorks to build a studio may seem hard to reconcile with the fact that three of the studio’s four principals in Playa Vista (Geffen, Spielberg and DreamWorks investor Paul Allen) are billionaires and could easily finance the entire deal individually out of their own pockets. (Katzenberg, thanks to the more than $250 million Walt Disney Chairman Michael Eisner is paying him in a breach-of-contract settlement, isn’t hurting either.)

*

But a cardinal rule of being a successful billionaire is that you are loath to risk your own money, preferring instead to use other people’s cash. You also don’t become a billionaire by making bad financial decisions, no matter how much you’d like to have Cape Cod offices overlooking a lake near the ocean.

Listening to city officials offering a home to DreamWorks, one gets a vision of nomadic billionaires wandering the streets of Los Angeles County looking for a permanent home where they can finally put down roots. You can even picture them carrying “Will Work for Tax Breaks” signs.

The mentality of public officials wasting time on this is reminiscent of what small towns did across the country back in 1985 when General Motors was looking for a site for its Saturn plant before finally deciding on Spring Hill, Tenn. Politicians fell over themselves scrambling to offer GM the best deal. The difference is that GM needed its own plant to build it cars. DreamWorks doesn’t need a plant to make its movies, TV shows and albums.

Add to all of this the reality that Hollywood has finally got religion on cutting costs. Studios these days aren’t in the mood to build big lots, especially studios that have already wasted four years trying.