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The animation flood: Too much Shrek?

Hollywood can't get enough of computer animation flicks. Will moviegoers join the binge?

Krysten Crawford, CNN/Money staff writer, October 29, 2004

NEW YORK (CNN/Money) - Weeks or months from now, there is a good chance that DreamWorks Animation's decision to go public Thursday will look not only smart, but pure genius.

That's because movie studios big and small are racing to cash in on what has become a sizzling hot genre: animated films, particularly ones based on computer-generated images.

A dozen or more such films are in the works through 2006. But box office analysts say the deluge risks turning off the movie-going masses. Given the exorbitant costs of making and marketing an animated movie, more than a few studios could soon take a bath.

DreamWorks Animation's initial public offering, which raised $812 million and started trading Thursday at 39 percent above the offering price, showed Hollywood that there is space for another animation studio besides industry leader Pixar Animation Studios.

"I don't think it is a one-company industry," said Dennis McAlpine, an independent media stock analyst. "There's room for both DreamWorks and Pixar to thrive."

What about a third player? "That," said McAlpine, "will be hard."

DreamWorks: right place, right time

In many respects, the timing of the $812 million DreamWorks Animation (up $2.53 to $41.28, Research) initial public offering Wednesday was ideal.

It came just weeks after DreamWorks released "Shark Tale." With worldwide box office receipts of $227 million and climbing, showed investors that its animation unit was more than just a one-hit wonder named Shrek.

The IPO also came a week before "Shrek 2," now the top-grossing animated flick of all time, comes out Nov. 5 on DVD. The same day, DreamWorks' arch rival Pixar Animation (down $0.38 to $80.35, Research) rolls out its sixth cartoon comedy, "The Incredibles."

On Nov. 10, Warner Bros. is due to release "The Polar Express," followed nine days later by Paramount's "SpongeBob SquarePants Movie." (Warner Bros., along with CNN/Money, is owned by Time Warner (up $0.09 to $16.57, Research); Paramount is a Viacom (up $0.64 to $36.64, Research) unit.)

Another recent entrant: Miramax Film Corp., The Walt Disney Co. Disney unit known for its costly but award-winning movies, announced a deal in late September with San Francisco animation shop Wild Brain to produce animated films. First up will be a movie based on the popular cartoon strip "Opus." The venture is the latest step by Disney (down $0.07 to $25.05, Research) to beef up its animation operation as its lucrative deal with Pixar is on track to end late next year.

Disney also plans next summer to release "Chicken Little," its first in-house computer-generated, or CGI, movie and is working on others, including "A Day With Wilbur Robinson." At least three more CGI movies are in the works for 2005, including "Madagascar" from DreamWorks Animation. Among the CGIs set for 2006? "Shrek 3."

The tipping point behind the computer animation craze is hard to know.

It could have been the original "Shrek," Dreamworks' surprise 2001 hit. The film brought in over $1 billion in global ticket sales, DVD rentals and merchandise sales and gross profits of more than $400 million, according to research by Fulcrum Global Partners.

It could have been last year's "Finding Nemo," the Pixar-Disney blockbuster that is now No. 2 behind "Shrek 2" on the list of top-grossing animated films and whose home video is a bestseller.

Or, as a few analysts suspect, the stampede began in 2002 with a middling movie called "Ice Age."

With "Ice Age," Twentieth Century Fox entered the CGI arena with a movie that critics panned and yet reaped $550 million in worldwide box office receipts.

Movie analyst David Mumpower, the president of BoxOfficeProphets.com, called it "jaw-dropping" that a poorly-animated film like "Ice Age" could do so well and "goes a long way in demonstrating how much audiences have locked onto anything CGI."

The same could be said of "Shark Tale," which has drawn audiences despite tepid reviews.

The question is, will consumer's appetite for animation last and for how long?

It's about creativity, not computers

"At some point (the market) does get saturated," said Tom Taulli who, as co-founder of Current Offerings, an IPO tracking service, has followed DreamWorks Animation's stock debut.

If that happens with animation, the bloodbath could be ugly. Animation movies take years to develop and the studio costs are enormous, noted McAlpine, the media and entertainment analyst. "At most you might see 2 of these films a year from one studio," he said.

DreamWorks is a good example of how hard it is to make money off cartoons. When investors think of the company's animation business, they think of the blowout success of "Shrek" and "Shrek 2."

But Dreamworks has produced seven other animated feature flicks in the last 10 years, including flops like "Spirit: Stallion of the Cimarron" and "Sinbad: The Legend of the Seven Seas." Weighed down by hefty marketing costs, the animation unit has lost money in three of the last five years.

Production costs next year will run about $370 million, or $45 million more than in 2004.

The goods new for DreamWorks is, its worst box office performers have all been based on hand-drawn graphics. Future studio releases will be CGI or stop motion (also called "claymation") feature films.

Still, the studio's track record has made some analysts nervous about the long-term prospects not just of DreamWorks but also others, whether it's the pioneering Pixar or new entrants like Warner Bros. and Fox.

The quality of CGI films may not matter now, but it will. Once moviegoers have more choices, studios may need even heftier marketing campaigns to gain an edge.

 

 
 
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