A studio with lots on the line

“It’s time,” the fairy godmother cruelly informs “Shrek 2’s” green ogre, “you stop living in a fairy tale.” Can the same now be said to DreamWorks?

Founded 10 years ago, the studio is poised to enjoy a monster beach season, as every one of its four summer films stands out as a potential blockbuster: the computer-animated sequel “Shrek 2,” the Steven Spielberg-Tom Hanks immigration story “The Terminal,” Will Ferrell’s news comedy “Anchorman: The Legend of Ron Burgundy” and Michael Mann’s hit-man drama “Collateral.” No studio could wish for a more enviable slate, a commercial mix of top stars and distinguished filmmakers. It’s saying something when DreamWorks’ biggest summer gamble, “Collateral,” stars no less than Tom Cruise.

But like all once-upon-a-time stories, there have been many surprise turns for DreamWorks to get this far. Just as “Shrek” has proved to be much more of a phenomenon than anyone possibly could have envisioned, DreamWorks itself has become much less of a studio than initially projected and hyped. By the studio’s own admission, this summer represents a critical juncture in the company’s history. Yet no matter how well DreamWorks’ next several movies perform, the studio’s future is as much an industry guessing game as the budget for “Spider-Man 2.”

Conceived as a fully integrated multimedia enterprise to include a record label, a publishing arm, a TV studio, interactive movies, live entertainment and a video game division -- all housed in a state-of-the-art digital campus in Playa Vista -- DreamWorks now stands primarily with just two core businesses: animated and live-action movies, and both divisions are coming off disastrous years. The studio’s live-action duds include “Biker Boyz,” “Anything Else,” “Win a Date With Tad Hamilton!” and last weekend’s Ben Stiller-Jack Black disappointment, “Envy,” which grossed $6.1 million in its debut. In animation, the studio’s last film, 2003’s “Sinbad: Legend of the Seven Seas,” barely grossed $26 million. In addition to DreamWorks’ abandoning several businesses, the studio’s production chief, Michael De Luca, recently left and is now at Sony, replaced by longtime DreamWorks executive Adam Goodman.

“There have been huge disappointments along the way,” says Jeffrey Katzenberg, the former Disney studio chief who along with Spielberg and music mogul David Geffen announced the partnership in October 1994.

“It’s been hard, but it’s also been rewarding. I kind of feel like we are coming to another watershed moment for us,” Katzenberg says in a meeting at the company’s Glendale headquarters. “When I look at what DreamWorks is today, I think it’s a very exciting business going forward. And it is in fact a very different business from where we started 10 years ago, or where we imagined we would be today.”

More dramatic changes could lie ahead. Geffen’s ongoing role in the studio is ambiguous since DreamWorks no longer owns a record label, and the studio’s biggest investor, software billionaire Paul Allen, soon will be able to start cashing out some of his $660 million DreamWorks investment. Among the options the privately held DreamWorks is considering to help pay Allen and other investors: An initial public stock offering of the studio’s animated division, with the ambition of attracting a multibillion-dollar market capitalization like that of Pixar Animation Studios.

But before DreamWorks can contemplate securities filings and quarterly earnings, it first needs to turn out a string of hits. And that’s why no other studio is as eager for summer to begin.

Honing a formula for success

On a recent afternoon at various locations around Southern California, all four of the studio’s summer movies were racing toward completion. Producer Aron Warner was overseeing the film printing for “Shrek 2,” Spielberg was preparing for a “Terminal” scoring session with composer John Williams, Mann was finishing his “Collateral” sound mix, and director and co-writer Adam McKay was editing “Anchorman.”

Yet, as evidenced by an advertising campaign that started last November, no single movie matters as much to DreamWorks as “Shrek 2.” The first film, released in April 2001, performed the miraculous double feat of generating a windfall of profits (as much as $1 billion, DreamWorks estimates) and establishing DreamWorks’ animated storytelling style.

From its inception, the studio’s animated movies were designed to veer away from Disney’s narrative model, which Katzenberg closely shaped while he ran the studio. The one thing DreamWorks did hope to emulate, though, was the animation profit Disney collected in the early 1990s. In an initial DreamWorks business plan, the studio confidently projected that, thanks largely to animation, DreamWorks would generate earnings of more than $600 million by 2003.

It hasn’t come close. One person who has seen DreamWorks’ books says that despite annual revenues exceeding $2 billion, the studio has never managed to make a material cash profit. Katzenberg says the company has been profitable but won’t discuss numbers. (The studio also won’t disclose “Shrek 2’s” costs, which rival studios estimate at as much as $120 million.)

Settling on a distinct DreamWorks filmmaking approach proved as elusive as earnings. “The Prince of Egypt” was a grown-up Old Testament tale, “Antz” was essentially a Woody Allen comedy, while “Sinbad” was an “Indiana Jones” swashbuckler. None of the early movies was a runaway success, while others, including “Sinbad” and the mock Hope-Crosby comedy “The Road to El Dorado,” were busts. Not until “Shrek” did DreamWorks hit upon a winning formula: Rather than make movies that appealed to the child in all of us, DreamWorks found a way to reach the adult inside all children.

Even though it accelerated DreamWorks’ exit from traditional, two-dimensional animation, “Shrek” stood apart from other animated movies not because it was drawn inside a computer but because it married an old-fashioned plot with a sophisticated sense of humor. Thanks to its irreverent comedy, teens flocked to the film as steadily as families, and it grossed more than $267 million in domestic theaters and sold countless videos.

The sequel, which opens May 21 and has been invited to the Cannes Film Festival, might be even more accomplished than its predecessor. The same principal characters are back, as Shrek (voiced by Mike Myers), Princess Fiona (Cameron Diaz) and Donkey (Eddie Murphy) travel to Far Far Away to meet Fiona’s disapproving parents (John Cleese and Julie Andrews). The most notable addition to the cast is the raffish but occasionally hairball-choking cat Puss-in-Boots (Antonio Banderas).

“Shrek 2’s” animation is more advanced, especially in terms of lighting, crowds and skin. Unlike the first “Shrek,” the sequel isn’t obsessed with poking fun at Disney (even though the competing studio still takes hits), choosing instead other pop culture targets such as Beverly Hills, “Mission: Impossible,” Diaz boyfriend Justin Timberlake and consumerism. When a giant “Shrek 2” gingerbread man attacks a Starbucks clone called Farbucks, its patrons dash to another Farbucks ... directly across the street.

For all its contemporary gags and inversions of fairy tale conventions, “Shrek 2” endeavors to be heartfelt. The first movie, says Andrew Adamson, who co-wrote and co-directed both films, “is about two characters who are losers who find each other and accept each other for who they are. To some degree, it’s about Shrek learning that he was lovable.

“This next story is about Shrek learning how to love.... These are two ogres, and they’ve gotten married. They have an idea of what happily ever after is going to look like. But everyone around them has expectations of what they think Shrek and Fiona’s happily-ever-after is meant to be. That’s the theme of the movie to me: You can make your own happily-ever- after regardless of parental or societal expectations.”

As the country argues whether gay and lesbian couples can enjoy the same legal rights as straight couples, “Shrek 2” suggests ogre love isn’t totally unrelated to the debate. “I wasn’t trying to make any kind of political statement so much as a personal statement,” Adamson says from his native New Zealand, where he is preparing to direct his next film, Disney’s “The Lion, the Witch & the Wardrobe.” “You should be able to love whomever you want to love.”

A dream partly dismantled

Its record label has been unloaded to Vivendi Universal, its Playa Vista campus has been abandoned, its video game division sold, its short-film website closed, and its TV studio has been transformed into a production company, letting networks shoulder series programming costs (the company’s ambitious animated Siegfried & Roy comedy “Father of the Pride” is on NBC’s fall schedule).

One of the few original DreamWorks plans that continues to be central to the studio is live-action filmmaking. Unlike traditional studios that crank out as many as 20 movies a year, DreamWorks’ live-action division has been content from the beginning to turn out eight or so releases a year. The thinking has been that with a comparatively small number of films DreamWorks could control quality, but few recent studios have thrived with such a limited out- put.

The DreamWorks strategy hasn’t always been as fruitful as its Oscar-winning windfalls “Saving Private Ryan,” “American Beauty” and the co-production “Gladiator.” The live-action division has not seen one of its films gross more than $40 million since February 2003’s “Old School,” last fall’s “House of Sand and Fog” didn’t collect any Academy Awards despite three nominations, and DreamWorks released only three movies (all of which fizzled) in the first four months of 2004.

Agents, producers and executives who do regular business with DreamWorks say the studio in the last several weeks has been picking up its sometimes sluggish pace. Spielberg, who works closely with the live-action division, has a variety of movies he may direct next. “They seem to be very aggressive in putting movies together,” says Jim Wiatt, president of the William Morris Agency. “They’re acting differently. They do want to go out and make a lot of movies.”

DreamWorks nonetheless has catching up to do. David Fincher (“Fight Club”) a short time ago bowed out of directing Leonardo DiCaprio in “The Lookout,” considered a top DreamWorks script, and director Vadim Perelman (“House of Sand and Fog”) just left the studio’s “The Talisman.” The co-production “Tulip Fever” from “Shakespeare in Love” director John Madden was canceled after an English tax rebate was revoked and, citing budget concerns, DreamWorks dropped out of a Paramount co-production of filmmaker Cameron Crowe’s “Elizabethtown.” The studio may have only one more live-action movie this year after the summer fusillade concludes.

To step up its output, the studio recently bought the drama script “Red-Eye,” has signed director Michael Bay for the thriller “The Island,” and started negotiating with director Barry Sonnenfeld to remake “The Heartbreak Kid,” even though Sonnenfeld and DreamWorks live-action co-head Walter Parkes have been feuding since 2002’s “Men in Black” sequel, which Parkes produced.

DreamWorks executives are busily developing an array of movies for the years ahead, among them the sequel “The Ring 2” with Naomi Watts and a remake of “The Man Who Came to Dinner” that could star Sarah Jessica Parker and Hugh Grant. The studio’s numerous co-productions include director Rob Marshall’s “Memoirs of a Geisha,” Jim Carrey in “Lemony Snicket’s A Series of Unfortunate Events” and “Meet the Fockers,” a follow-up to the comedy hit “Meet the Parents.”

“I’ve learned painfully,” Parkes says of the live-action division he runs with his wife, Laurie MacDonald. Last year’s results, Parkes says, “represent an exciting experiment that, like many things for us, didn’t work. [The poor performance] represents a certain amount of naivete on my part.”

Parkes says he assumed various components of DreamWorks live-action unit would be more productive than they actually were. Part of the problem, agents say, is that Parkes and MacDonald aren’t often in the office: Unlike most people in their position, Parkes and MacDonald personally produce movies, including “The Terminal,” “Ring 2” and “Lemony Snicket.”

“I let myself get much too involved in the particulars,” Parkes says, adding that he may produce fewer movies in the future.

The challenge for any studio is to assemble a full slate of pictures, which inevitably means making and releasing movies that you know may not be good but fulfill an audience need. DreamWorks has tinkered with lowbrow teen comedies, but its films tend to be literate dramas aimed at sophisticated moviegoers. It’s a lofty goal, but a very difficult business, where the machinery can easily jam.

“If necessary, we will hold a project until it comes together under what we think are the best possible circumstances,” Parkes says. “In fact, two of our movies -- ‘Collateral’ and ‘The Terminal’ -- are movies that could have been made in very different circumstances as early as 18 months before this summer. But it was our feeling that both were good enough material that they deserved to have an opportunity of attracting the kinds of stars they ultimately did, which is one of the reasons when 2003 was anemic.”

Both June 18’s “The Terminal” and Aug. 6’s “Collateral” offer unfamiliar performances by their leading men. In the former film, Hanks plays an Eastern European immigrant stuck in a New York airport after a coup in his fictional home country. In the latter, Cruise plays his most unsympathetic part -- a contract assassin -- since 1999’s “Magnolia.”

“The Terminal” was conceived before the Sept. 11 attacks and has been updated to reflect America’s increasingly conflicted feelings about immigration and foreign “threats.” One of the film’s most unlikable characters is its only prominent Caucasian male -- a Department of Homeland Security commissioner played by Stanley Tucci. “The country’s detaining so many people there’s no ... room anywhere,” Tucci’s character, Frank Dixon, complains at one point. The objects of Spielberg’s affections are the many working-class minorities and immigrants who make airports run and pass through its international gates.

If “The Terminal” is one of Spielberg’s most romantic movies (Hanks’ waylaid traveler falls for a flight attendant played by Catherine Zeta-Jones), “Collateral” is among Cruise’s darkest. The actor plays Vincent, a contract killer sent to Los Angeles with a long list of assignments. In the span of one night, Vincent hijacks a taxicab driven by Max (Jamie Foxx) and kills any number of people at point-blank range.

“He does bad things in this picture,” Mann says of Cruise’s character. “He’s a sociopath. You get a sense that this guy is very skilled at what he’s doing. These are not crimes of passion. These are crimes of dispassion.”

It’s also clear Vincent is unraveling as the evening wears on (the movie was filmed entirely in Los Angeles at night). At one point, Vincent says of the city, “Too spread out and disconnected,” before quickly adding, “That’s me.”

Guarding the franchise

As important as “Shrek 2” might be to DreamWorks, so too are “Shrek 3” and (naturally) “Shrek 4.” Warner, who produced the first two films and is now developing the third, says he and the film’s other makers have urged DreamWorks to not oversell the new sequel.

DreamWorks has tried to limit its “Shrek 2” promotional partners and will not be sending Myers, Murphy and Diaz to each and every TV talk show to plug the film. DreamWorks even studied Sony’s overblown campaign for last summer’s “Charlie’s Angels: Full Throttle” to see how not to promote a movie into the ground.

Adamson and Warner know how much is riding on their film and how tough audience expectations can be to fulfill, but they have tried not to obsess about it either. “We didn’t spend a lot of time saying, ‘Oh my God, oh my God. We have the first one hanging over us!’ ” Warner says. “If you walk around with that thought, you will paralyze yourself.”

DreamWorks has several other computer-animated films in production, including this fall’s “Shark Tale” (which inevitably, and perhaps unfairly, will be compared to “Finding Nemo”) and next summer’s animal comedy “Madagascar” (which may be beaten into theaters by a similarly themed movie from Disney called “The Wild”). Despite its recent stumbles, DreamWorks is still attractive to investors, and in late April Japan’s Kadokawa Holdings spent $100 million to buy nearly 3% of the studio.

“We’ve had one miserable year, and when it comes, it’s just no fun,” Katzenberg says. “It’s humbling and humiliating for all of us. When stuff doesn’t work, it really bothers us a lot, and we take it really personally. Maybe that’s got everybody more focused, which is what we have been for the last year -- about what we need to do to not have that happen a second time.”