Market Insight

DreamWorks Animation kicks TV production into turbo

June 18, 2013

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DreamWorks Animation (DWA) has committed to a major strategic shift, revealing a TV production slate worth $1bn as well as details of key licensing deals. The firm, which formerly focused largely on feature film production, such as Shrek and Madagascar, has slated 1,200 hours of TV shows to enter production over the next five years. DWA expects the shows to create an additional $100m per year in revenue on top of its existing TV sales. Netflix will be DWA's exclusive subscription television partner, pre-ordering 300 hours of the studio's output in a major multi-territory deal to encompass all of the platform's territories. A free TV deal with German kids' channel Super RTL will take 1,100 hours of the shows, and more territory-by-territory deals are imminent.

The multi-region Netflix deal covers the USA, Canada, Brazil, Mexico, multiple other Latin American territories, Scandinavia, the Netherlands, UK and Ireland. The first series created as part of the deal is scheduled for 2014, according to the platform. A precursor to this announcement was the series Turbo F.A.S.T., announced earlier this year as the first of Netflix's originated kids series, an episodic series adaptation of a DWA feature film along the lines of this new slate.

Classic Media, named as an important source of material for the new programming, became part of DWA a year ago in a deal worth $155m. It owns the rights to children's brands such as Caspar, Lassie, Postman Pat and Richie Rich.

This is an important diversification by a major producer towards a 'substantial and consistent revenue generator', in the words of DreamWorks' senior management. Breaking that statement down reveals some important strategic underpinnings. In terms of substance, DreamWorks and Classic Media are sitting on a wealth of intellectual property capable of creating substantial revenue, but were previously without sufficient outlet among their partnerships to exploit those rights to the fullest. DWA's partnership with 20th Century Fox has proved useful for co-ordinating movie releases and shaping production costs, but the lack of a dedicated kids' TV channel from Fox has meant there was no obvious place to channel and monetise a TV series. Walt Disney, as a major competitor, was never a likely partner for TV deals, and while DWA has supplied TV series to Viacom-owned Nickelodeon and Turner Broadcasting's Cartoon Network, both companies have their own animation studios and would be unlikely to accommodate the large volume of DWA programming. The final option, of founding and running a proprietary cable channel, seems to have been less attractive in the near-term than this raft of rights deals.

Secondly, the term 'consistent' is key. DreamWorks historically was a film studio vulnerable to underperformance of new releases - in Q4 2012, it wrote off $86.9m costs for Rise of the Guardians. The company may well be looking to diversification to moderate quarter-on-quarter income fluctuations, which are undesirable from both a cash flow and an investor relations point of view. Having experimented with, among others, versions of Shrek and Penguins of Madagascar on linear TV, a large commitment to multiple strands and series of episodic TV will allow DreamWorks to scale up its production processes to reach the goal of consistent revenue generation. The Classic Media acquisition last year is key: DreamWorks revealed that 50 per cent of its 2013 TV series revenue will come from the Classic library, and it must be assumed that the new programming slate will also utilise characters from Classic's 3,600-hour library.

Exclusivity for a single online platform across multiple territories is an innovative move, but it also seems to have made financial sense for DWA. Management made reference to the 'full and fair value' received from the Netflix licensing agreement; presumably this sort of deal was equivalent in scale to any set of territory-by-territory subscription TV deals. It is even easier to see why Netflix benefits: as a complement to the platform's high-profile originations policy, these shows will help it further to distinguish its offering from competitors'. The purchase also ties in with Netflix's 'recognition factor' approach to unique content - for instance, bringing in name feature film talent such as the Wachowskis and David Fincher to make series; and leading with remakes/ reboots of already-popular programming, such as Arrested Development. Netflix will benefit from both the production values with a brand like DreamWorks Animation, as well as the sheer volume of hours - at 300, four times the amount of unique Netflix programming to date.

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