Is DreamWorks Smart to Drop HBO for Netflix?
And is this something Netflix should be bragging about?
I loved How to Train Your Dragon. It was comical, endearing, exciting, and wholeheartedly original. It transformed a simple-sounding concept into one of the greatest films of 2010.
But when Netflix (NASDAQ: NFLX) announced that it had signed a partnership with DreamWorks Animation (NASDAQ: DWA), I didn't get excited. I didn't jump for joy. I raised an eyebrow or two, and contemplated what this could mean for the future of streaming video. But that was the extent of my emotion.
It's not that DreamWorks isn't a great animation studio. Between Shrek, Kung Fu Panda, Madagascar, and the aforementioned How to Train Your Dragon, the company has given birth to a number of successful franchises. That's more than we can say for DreamWorks Pictures, a separate (non-animation) entity that is most recently known for Cowboys & Aliens, Dinner for Schmucks, I Am Number Four, She's Out of My League, and the Rock ‘Em Sock ‘Em-looking Hugh Jackman flick, Real Steel. None of those movies scream “success story.” Cowboys & Aliens is only being considered a success because it was expected to flop. But its $99 million haul is far less than its $163 million budget. (Contrary to some reports, DreamWorks Pictures is not a part of the Netflix deal.)
Still, DreamWorks Animation is just one tiny studio. It makes more films than Pixar but produces fewer hits. Historically, DreamWorks' movies have earned less revenue than films produced by Pixar. While the Toy Story franchise grew larger and made more money with each sequel, Shrek has been tumbling. The fourth film, Shrek Forever After, made only $238 million domestically – nearly $30 million less than the first film. (The original Shrek earned $267 million at the box office.)
In fact, the only DreamWorks film that bested Pixar (financially) is Shrek 2, which earned $441 million domestically – a few million more than Toy Story 3's domestic haul of $415 million. Internationally, however, Toy Story 3 raked in more than $640 million, crushing Shrek 2's international success by nearly $200 million.
Unfortunately for Netflix, the company will lose the right to stream Disney (NYSE: DIS) properties next year when its deal with Starz (NASDAQ: LSTZA) comes to an end. Thus, Netflix is attempting to replace Pixar with DreamWorks. That's better than nothing, I suppose.
But is this a good deal for DreamWorks, who is walking away from HBO to join Netflix? According to the New York Times, HBO does not allow its partners to sell digital copies of its films when they first appear on the network. Netflix, however, has no such restriction.
The New York Times also reports that with Netflix, DreamWorks could make as much as $30 million per picture. With HBO, the animation studio reportedly made $10 million less.
All told, this sounds like a win-win for DreamWorks. But that's assuming Netflix can maintain (and eventually grow) its subscriber base. If the declines keep coming, however, and if investors continue to sell the stock, DreamWorks may find itself in a tough position. After all, sequel revenue is heavily dependant on the number of people that have seen (and have enjoyed) its predecessor(s). If fewer people see DreamWorks movies as a result of this new partnership, the studio could ultimately lose money on the deal.
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