Three Moguls Aboard

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Changing industry dynamics, like the rapidly escalating costs of making a movie, caught DreamWorks off guard. Its $1 billion in seed money was perhaps a fifth of what was needed, says media investor Harold Vogel, author of Entertainment Industry Economics. But the backbreaker has been DVD sales, where many films now derive most of their profit. Moviemakers are so beholden to retailers like Wal-Mart and Best Buy that studio execs routinely confer with them before setting release dates. There are so many new releases that retailers afford each a much shorter shelf life. And with 80% of U.S. households owning DVD players, fewer people are rushing out to replace their old tapes--slowing DVD sales. Those shifts have made forecasting sales difficult and, Geffen says, "sort of blindsided us," helping lead to what has come to be known as the Shrek wreck. Early this year, the company told analysts that it expected to sell 55 million Shrek 2 videos--a figure it has lowered to about 40 million. That's still a phenomenal number. But investors had pushed up DreamWorks Animation shares, expecting an additional $50 million of profit that won't materialize. The stock, once as high as $42, now sits at $23.

Shifting home-video economics are a problem not just for DreamWorks. Pixar had to lower estimates for The Incredibles. Yet the issue is most acute at DreamWorks, which has had a tougher time finding its animation groove. Pixar is the one pumping out hit after hit, from Toy Story to A Bug's Life to Monsters, Inc., and that has attracted Wall Street's admiring eye. In Hollywood, it's said you're only one hit away from success. DreamWorks has high hopes for Bee Movie, with Jerry Seinfeld, and Shrek 3, both due out in 2007. But by then, Fox, Sony and Disney all plan to be bigger computer-animation players. With so much clutter, DreamWorks' dream may be deferred again.