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Animation not enough, DreamWorks looks to diversify

“How to Train Your Dragon 2” took in $50 million last weekend in North America for DreamWorks Animation, which is seeking revenue outside of traditional moviemaking.

AP

“How to Train Your Dragon 2” took in $50 million last weekend in North America for DreamWorks Animation, which is seeking revenue outside of traditional moviemaking.

GLENDALE, Calif. — For months, DreamWorks Animation has been working on a secret prototype for a product that it hopes will change how the world’s children meet Santa each Christmas. Code name: DreamHouse.

At shopping malls that buy in — and two national operators have, Forest City and General Growth Properties — Santa will sit inside a 2,000-square-foot “cottage” with walls that are essentially giant video screens. Children will go on a virtual sleigh ride with Shrek before meeting Santa. No more waiting in line; appointments will be made by app.

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“It’s an amazing, beautiful, big theatrical statement that represents our efforts to diversify into new areas,” said Jeffrey Katzenberg, DreamWorks Animation’s chief executive. “We’ve made bets, and now it’s about execution.”

Diversification has been Katzenberg’s mantra for at least two years, ever since an effort to sell his small studio ended without success.

The need to become part of a larger conglomerate or expand into other businesses reflects a reality Hollywood is loath to admit: Movies by themselves are a slow- to no-growth business.

A lasting film enterprise, at least in today’s marketplace, must have other engines.

DreamWorks Animation, one of moviedom’s last studios not tied to a conglomerate, has none of the buffers of, say, a Walt Disney Co., which can lean on consumer products, TV, or theme parks if an expensive movie flops.

(DreamWorks Animation, which is publicly traded, operates separately from Steven Spielberg’s privately held DreamWorks Studios, which has lately been having troubles of its own.)

The competitive field of computer animation is no longer a sure thing, which has added to Katzenberg’s expansion effort. DreamWorks Animation has had to take write-downs on three of its last four original films. Even success can hurt its stock.

“How to Train Your Dragon 2” took in a hefty $50 million last weekend in North America, but Wall Street wanted more. The studio’s shares dropped 13 percent between Friday and mid-Monday, to $23.85, before making up ground to close at $24.98.

Hence the importance of projects like the DreamHouse, which Katzenberg also intends to introduce overseas. “The goal is to create annuities so we don’t have lumpy earnings,” said Michael Francis, DreamWorks Animation’s chief brand officer.

Francis said he was “extremely enthusiastic” about the DreamHouse’s business model, but he declined to give details, citing competitive concerns.

The studio’s most prominent diversification efforts have involved television and the Internet.

The company has contracts to produce a jaw-dropping 1,100 episodes of original cartoon programming for Netflix. Last year the company acquired AwesomenessTV, a thriving collection of YouTube channels focused on teenagers.

On Monday, the studio introduced DreamWorksTV, a family-oriented YouTube channel.

Last year, 71 percent of DreamWorks Animation’s revenue came from new films, according to Anthony Wible, an analyst at Janney Montgomery Scott.

Next year, he expects the split to be closer to 48 percent. This rapid shift “is a key reason we like the company,” Wible said in an e-mail. (Net income for 2013 totaled $55.1 million, an improvement from a loss of $36.4 million a year earlier).

Overlooked in Katzenberg’s expansion frenzy has been an aggressive move into consumer products.

The studio, under the guidance of Francis, who spent his earlier career at Target, ultimately serving as chief marketing officer, has quietly built a hefty merchandising division. Eighteen months ago, the studio had 69 consumer products executives. Now there are roughly 180, and hiring continues.

“It takes boots on the ground and long-term planning that was just not happening before,” Francis said. “When I was at Target, Jeffrey used to call and ask why DreamWorks wasn’t as effective as its peers with licensing. And I would say, ‘Well, because you want retail to do all the work. You call me up and thump your chest about your latest movie and expect me to spend my money creating a strategy.’”

Despite his determination to become a consumer products titan, Katzenberg faces some skeptics — namely analysts who wonder what kind of grip the DreamWorks Animation brand and stable of characters has on mothers who do much of the buying. Success will also require new movie and television hits.

Francis’ various efforts began to enter the marketplace this month with the release of a tablet computer for children, the DreamTab, and a huge array of products tied to “How to Train Your Dragon 2.” (The first movie had one retail partner; the sequel has 70.)

But DreamWorks Animation’s brand will become significantly more noticeable later this year, when a new in-house publishing unit begins to release books and experience-based products like the DreamHouse begin to roll out.

“We’ve just begun to scratch the surface with experiences,” Francis said.

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