Mean, Green Profit-Making Machine

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By this weekend, DreamWorks' computer-animated "Shrek" is expected to surpass "The Mummy Returns" as the highest-grossing movie of 2001. There may be another film released this summer that takes in more money than "Shrek," which just passed $180 million in box office and is likely to end up taking in somewhere between $240 million and $250 million in the U.S., but there's little chance that one will be more profitable.

"Shrek" has turned into the early summer blockbuster that Disney's "Pearl Harbor" had been predicted to be. While the World War II romantic drama sinks quickly at the box office, "Shrek" continues to do well and is on track to become the biggest moneymaker ever for DreamWorks.

In fact, "Shrek" should join such select titles as "Toy Story" and "Star Wars: Episode I The Phantom Menace" as one of the most profitable movies in recent memory, possibly netting DreamWorks $400 million or more over the next few years. With that level of success, the studio started in 1994 by Steven Spielberg, David Geffen and Jeffrey Katzenberg has finally fulfilled its promise of creating the kind of blockbuster return on its investment that they had promised when they created the company. It also vaults DreamWorks into the front ranks of the motion picture animation field, after several moderately successful attempts.

Like DreamWorks' "Chicken Run," "Shrek" was extremely well reviewed and sophisticated enough to appeal to adults as well as children; evening performances were as packed as matinees. The film's script (by "Aladdin" writers Terry Rossio and Ted Elliott) about a lovable ogre (voiced by Mike Myers), his affable donkey sidekick (Eddie Murphy) and a princess in distress (Cameron Diaz) received high praise and seemed to satisfy a wide audience in the same manner as the "Toy Story" films. In addition, critics took delight in "Shrek's" playful satirical jabs at Disney, giving it a kind of hip sensibility.

As with many hit movies, "Shrek" also had good timing. It arrived in theaters in mid-May after a drought in family-friendly films (the only exception being Miramax's hit "Spy Kids," which was pretty much played out by that time). Then it got a boost from the Memorial Day holiday, when its only competition was "Pearl Harbor," which skewed to older audiences and opened to mostly poor reviews and weak word of mouth.

"Shrek's" first real test will come this weekend, when Disney's "Atlantis: The Lost Empire" goes out nationwide, followed by "Dr. Dolittle 2" from Fox opening next Friday and "Cats and Dogs" from Warner Bros., which opens on July 4. But popular family films have greater staying power in theaters than more adult fare--kids go back to a movie they like again and again--so "Shrek" should be able to do solid business for a while.

The profitability level of "Shrek" should be comparable to that of "Toy Story" and close to that of "Toy Story 2," though Disney had to split its profits on both those movies with Pixar, which co-produced the films. Among animated movies, only "The Lion King" and "Pocahontas" were more profitable, the former generating $1 billion and the latter about $600 million, according to sources close to Disney.

The success of "Shrek" is being counted in more than dollars and cents. Company marketing chief Terry Press says that for the first time with "Shrek," the media and theater owners are speaking of the movie as a DreamWorks production. "To refer to it as 'DreamWorks' Shrek' means something, because it implies that it's a name that audiences will recognize and that DreamWorks makes a certain kind of animated movie," Press says.

Brand-name association is invaluable, as the Walt Disney Co. has long known. It's difficult to put a price tag on that kind of mass recognition. And although it will require several more animated hits of comparable quality and success to cement that relationship, for now DreamWorks can content itself with having an animated movie that rises to a level of profitability only Disney has enjoyed to date.

"Shrek" was a moderately inexpensive movie for animation, though not as cheap as DreamWorks contends. Although company executives claim that "Shrek" cost $48 million, that figure doesn't factor in a couple of false starts in different formats. The real price is probably more than $60 million but still below the $90 million or so spent on "Toy Story 2," another computer animation film, and nowhere near the reported $150 million Disney spent on a conventional animation movie like "Tarzan." Factor in "Shrek's" marketing and releasing costs--DreamWorks is famously generous when it comes to spending ad dollars--and the figure is significantly more than $100 million.

Nonetheless, "Shrek" should be DreamWorks' biggest profit-making film. Although the company has had several major hits, including "Gladiator," "Saving Private Ryan" and "Deep Impact," all those movies were shared ventures with other studios--"Shrek" is not--and most involved substantial profit participation on the part of talent. "American Beauty" is probably DreamWorks' biggest solo hit to date, having grossed $350 million worldwide on a budget of about $20 million.

Starting with 1998's "Antz" and last year's "Chicken Run," the company has also started to rake in the bucks in animated movies, though on nowhere near the same level as "Shrek," which represents a watershed for the company. One of the reasons DreamWorks was founded was to establish a presence in the animation business.

"When animated movies are profitable, they're hugely profitable," notes DreamWorks distribution head Jim Tharp.

Theatrical release is only the beginning for "Shrek," which is expected to be a bestseller on home video and DVD and has the potential to gross almost as much overseas as it has in the U.S. The film's roll-out in foreign territories began last week, says Tharp. "The trend for international box office continues to grow," he says. "New theaters are being built in South America, Europe and Asia. Overseas box office is going to continue to grow as a percentage of the whole [revenue] pie."

DreamWorks' animated films to date have mostly done either the same or slightly less business overseas than in the U.S., the one exception being "The Prince of Egypt," which fared better overseas. Most industry observers don't expect "Shrek" to play as well internationally as Disney's animated films; Disney's "Dinosaur," for example, grossed internationally almost twice the $135 million it did in the U.S. But the attention "Shrek" received in competition at the Cannes International Film Festival should raise the film's profile internationally. Even if it were to gross as little as $150 million, combined with its U.S. take, "Shrek" would return somewhere around $200 million to the company just from its theatrical run (studios receive about half the actual gross; the other half goes to the theater owners).

Ann Daly, DreamWorks home video chief, expects "Shrek" to play in theaters throughout the summer and hinted at the possibility of a re-release in early October, leading into a holiday video and DVD push. But those plans are not definite, according to Press.

Because "Shrek" will be in the running for the first feature animation Academy Award--the Oscar category kicks in for 2001 films--there's the possibility of holding back the video release in favor of an Academy re-release early next year. And video (and DVD) is where "Shrek" will amass most of its profits, with revenue comparable to its theatrical take. Though home video sales have peaked recently, the introduction of the DVD format (which sells mostly to adults) has made up for some of the shortfall.

"Shrek" has already been sold to NBC for a reported $30 million, which is based on domestic gross of $200 million with incentives built in if it exceeds that sum, which is a certainty. About $100 million total can be anticipated from worldwide cable and television. Merchandising from the movie will be small (maybe $20 million) compared to such giants as "The Lion King" and "Pocahontas." As Daly points out, those films were released in the 1990s, when movie-related merchandising was a much more lucrative market than it is today ("Lion King" is believed to have given Disney $300 million in profits from merchandising alone, according to a former studio executive, even before it became a smash Broadway show).

With few exceptions (the "Star Wars" series), movie merchandise is no longer a guaranteed gravy train. But as did "Toy Story," "Shrek" is already seeing an upturn in merchandise sales, which is expected to increase further when it comes out on video and, especially, when the sequel is released. If the merchandising picture improves, it could enhance the film's profitability for years to come.

The only downside to "Shrek" is how to follow it. Disney is still trying to live up to "The Lion King" and DreamWorks' future animation titles will be measured against the "Shrek" yardstick. A sequel to "Shrek" was recently announced, and DreamWorks has several other projects in the pipeline. The next release, scheduled for May 2002, will be the traditional animated adventure "Spirit: Stallion of the Cimarron." Two additional computer-generated films are in the works, "Tusker" (about elephants) and "Madagascar" (animals from the Central Park Zoo are stranded on the African island). Aardman, the British-based maker of "Chicken Run," is planning to update the classic Aesop fable "The Tortoise and the Hare" for DreamWorks.

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