MKTG381 Revised

DreamWorks Animation SKG, Inc.

Secondary Data Analysis

Helena McClenny, Alexa Alsept, Felecia Clow, Laura Barrow

MKTG

381

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DreamWorks Animation SKG Inc. (DWA) NASDAQ Ticker: DWA CEO: Jeffrey Katzenberg

DreamWorks Animation SKG Inc. branched off from the Viacom family in 2004 and

became its own publically traded company though it retains close ties with Paramount a

subsidiary of Viacom who DWA relies solely on to distribute its motion pictures and home

entertainment. In 2012, Katzenberg’s total compensation was $3,999,998. $1 of which was

earned in salary, and $3,999,997 earned in stock equity for DWA. Katzenberg received no

compensation based off of a “bonus” system.

DreamWorks Animation SKG Revenue and Net Sales: 2010-2012

Period Ending Dec 30, 2012 Dec 30, 2011 Dec 30, 2010

Total Revenue 749,842 706,023 784,791

Cost of Revenue 678,672 480,747 506,422

Gross Profit 71,170 225,276 278,369

Operating Expenses

Research Development 4,891 2,864 3,183

Selling General and Administrative 131,242 112,554 108,342

Non Recurring - - -

Others - - -

Total Operating Expenses - - -

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Operating Income or Loss (64,963) 109,858 166,844

Income from Continuing Operations

Total Other Income/Expenses Net 11,326 13,315 (280,346)

Earnings Before Interest And Taxes (53,637) 123,173 (113,502)

Interest Expense - - -

Income Before Tax (53,637) 123,173 (113,502)

Income Tax Expense (17,215) 36,372 (284,141)

Minority Interest - - -

Net Income From Continuing Ops (36,422) 86,801 170,639

Non-recurring Events

Discontinued Operations - - -

Extraordinary Items - - -

Effect Of Accounting Changes - - -

Other Items - - -

Net Income (36,422) 86,801 170,639

Preferred Stock And Other Adjustments - - -

Net Income Applicable To Common Shares (36,422) 86,801 170,639

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Current Market Share and Trends:

DWA stock price as of April 19, 2012: $19.65

As displayed in the table above computed by Wolfram Alpha, though there was a

significant peak during 2010 overall trends show stock DWA stock price to be at a fairly

consistent decrease from 2010-2012. However things appear to be leveling out and becoming

more stable from mid-2011-present meandering right around the $19.00 mark.

Finding relevant information about DWAs current market share proved exceptionally

challenging because DreamWorks Animation SKG, Inc. is a publically traded company while all

of the company’s direct competitors are private animation studios who do not disclose crucial

information need to calculate proper market share. However, using the table below that gives

revenue information for DreamWorks Animation and the animation industry overall we were

able to compute a rough estimated market share.

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Direct Competitor Comparison

DWA PVT1 PVT2 PVT3 Industry

Market Cap: 1.67B N/A N/A N/A 3.28B

Employees: 2,400 N/A N/A N/A 6.57K

Qtrly Rev Growth (yoy): 0.21 N/A N/A N/A 0.38

Revenue (ttm): 749.84M N/A N/A N/A 2.47B

Gross Margin (ttm): 0.30 N/A N/A N/A 0.38

EBITDA (ttm): 105.48M N/A N/A N/A 546.58M

Operating Margin (ttm): 0.13 N/A N/A N/A 0.16

Net Income (ttm): -36.42M N/A N/A N/A N/A

EPS (ttm): -0.43 N/A N/A N/A 1.47

P/E (ttm): N/A N/A N/A N/A 19.68

PEG (5 yr expected): 1.92 N/A N/A N/A 1.36

P/S (ttm): 2.16 N/A N/A N/A 1.33

Pvt1 = Blue Sky Studios, Inc. (privately held)

Pvt2 = Pixar Animation Studios Inc. (privately held)

Pvt3 = Walt Disney Animation Studios (privately held)

Industry = Animated Movie Production, Theaters

Calculated Market Share: 749.84M/2.47B= 30.357%

The Market Share of 30.357% represents the share of market in the animated movie

production industry only and does not reflect the movie industry as a whole. When compared

directly to the entire motion picture production industry and the large, publically traded, motion

picture studios; The Walt Disney Company, Time Warner, or Viacom, market share is

dramatically reduced to a small fraction of the market, only 2.4%. Market share in this industry

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depends greatly on public opinion regarding the productions being released. A string of

unpopular movies has the potential to disrupt and displace significant numbers of market share

because consumers view the products produced by these companies to be highly elastic and

substitutable. Over the course of the past three years DreamWorks Animation’s market share has

seen a steady decrease coming off the high of box office hits like KungFu Panda 2 in 2011, to a

complete box office flop in 2012 with Rise of the Guardians.

Industry Classification Codes SIC 7812 & NAICS 512110

DreamWorks Animation Studios specializes in the production of animated motion

pictures. The industry classification codes that this sort of motion picture production falls into

would be the 7812 SIC classification, and the 512110 NAICS classification both of which

encompass the production of motion pictures through animation.

SIC 7812: motion picture and video tape production, largely incorporates all companies

whose primary function is the production of videos or motion pictures with the intent to exhibit

for sale. The category is broad including cartoon motion picture and animated film production to

music video, commercials, or television film, and the distribution of all of these media. This

large teleproduction category does not however include “live” programs.

NAICS 512110: motion picture and video production, a category dealing with almost

identical margins as the SIC 7812 classification. NAICS 512110 categorized companies whose

“primary [engagement is] producing, or producing and distributing motion pictures, video,

television programs, or television commercials.” Animated cartoon production, as well as

films/motion picture production and distribution, which are the primary workings of

DreamWorks Animation Inc., fall under this government classification code.

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Current Industry Environment and Trends

Overall demand for the production of motion pictures and other teleproduction services

has remained fairly constant. There have however been serious changes to demand for the

traditional “theater” experience as well as a huge swing in home-entertainment trends that will

play a large role in a digital shift for the entire industry. Companies that are unable to adjust to

the new technology trends will likely be left behind as instant online downloads and portable

devices with video playing capabilities continue to become more widely used by a large portion

of the public.

Technology is the biggest force affecting the teleproduction and motion picture industry,

creating both opportunities and obstacles for the companies fighting for a larger market share in

a highly saturated market. In recent years, home-entertainment primarily consisted of physical

video sales in DVDs and Blu-ray discs since VHS tapes, according to IBIS World, have become

obsolete. However Digital Entertainment Group(DEG) reported “digital sales (of motion

pictures) grew about 35.0% in 2012 to account for 30.0% of the home video market,” a 150%

increase from the digital movie sales DEG reported in 2011.

These numbers directly reflect a huge market shift that is forecasted to continue to

increase dramatically over the next five years. Popular devices like the iPad, Kindle Fire, and

other portable tablets, and smartphones provide consumers with instant and very convenient

access to digital copies with just a few touches of their finger. Acknowledging this shift and

catering to the techno savvy new market will create a large potential for capital gains for the

industry in the upcoming years.

But at the same time that technology and instant digital access is creating opportunities

for the industry it has also taken a significant toll on other aspects of the motion picture industry.

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Box office sales at movie theaters have dropped significantly since 2009 reflecting high numbers

of unemployment and lower disposable incomes. Instead of going out to see a movie in theater,

many people are willing to sacrifice waiting to see a movie once it is released on film, or

available through rental programs like Netflix and Redbox, instead of paying high box office

prices. Many people have also used the readily available technology to pirate illegal copies of

box office films. Controlling piracy is extremely difficult because it is being done online by such

a large number of people through dozens of various sites. Piracy is a very serious issue that

dramatically reduces a studio’s revenues and continues to deter people from visiting movie

theaters. Revenue generated through box office sales traditionally makes up about 13% of the

studios revenue on a given film but it cannot sustain these numbers if box office sales continue to

decrease and piracy continues to increase.

There is however a light at the end of the tunnel. Since the downturn of the economy in

2009 disposable income has been very low and many people have not put buying movies or

going out to see movies at the top of their priority lists. This however is forecasted to change as

over the next five years IBIS World predicts disposable income to increase 2.4% stimulating

consumer spending, resulting in a 2.5% yearly gain of revenue in the industry through 2018.

Competitive Analysis

In the movie production industry, DreamWorks Animation (DWA) has many strong

competitors. Larger companies have proven to have success in this industry due to their available

finances to sponsor the high risks that is involved in motion picture production. Most of these

large companies produce a diverse portfolio of movies that cater to a wider variety of potential

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viewers which is a likely culprit to their success.1 Smaller companies, like DreamWorks

Animation, tend to focus work into a niche’ markets, with a much more specific target audience.

There are clear advantages and disadvantages to taking a niche’ approach. The primary

disadvantage being that DreamWorks is limiting its potential market share and creating a very

distinct brand association with a certain type of motion picture, that if they want to expand and

branch out into other types of movies later, will be difficult to alter consumer perceptions.

Advantages however include saving a great deal of money by having a narrow focus and clear

company vision of high quality computer animated family friendly films and not having to waste

labor on branching out from that vision.

As shown below in the table, it is apparent that DWA’s competitors are much larger

companies: The Walt Disney Company, Time Warner Inc., News Corporation, Viacom Inc., all

of which have many more resources at their disposal, and all of which that do not specify in one

particular “type” of movie as DreamWorks does. There are however a few companies that do

strictly animation type films are a part and sub-brand of larger firms such as: Pixar in the Walt

Disney Company, Blue Sky in News Corporation, and Universal Pictures in NBC Universal.

1 http://clients1.ibisworld.com/reports/us/industry/competitivelandscape.aspx?entid=1245 2 http://clients1.ibisworld.com/reports/us/industry/majorcompanies.aspx?entid=1245 3 http://www.mergentonline.com/competitors.php?compnumber=110904

Company Revenue( $ Million) Profit ( $ Million) # of Employees

The Walt Disney Co. (DIS) 5,8722 605 166,000

Time Warner Inc. (TWX) 4,658 358 34,000

News Corporation(NWSA) 4,438 637 48,000

Viacom Inc. (VIA) 3,906 268 10,620

NBC Universal (NBCU) 5,614 131 34,000

DreamWorks Animation SKG Inc. (DWA) 749.83 -36.4 2,400

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Because these sub-brands specialize in animation, they are a more representative a true

competitive threat to DreamWorks. However, due to the fact that most of these sub brands are

private and not traded publically, acquiring complete share data on the smaller subdivisions of

the large corporation is much more difficult to find and much less complete than the data

available for the parent brands.

The Walt Disney Company is an obvious market leader in the industry raking in revenue

reaching $5,872 million in 2012 and employing 166,000 people, nearly seventy times the number

of employees DreamWorks Animation SKG currently employs. Other key market players

include NBC Universal with $5,614 million in revenue and Time Warner Inc., $4,658 million.

Working as a small company in a sea of giants has proved difficult for DWA. The motion picture

industry is highly saturated with many names that have been around for a substantially longer

time than DreamWorks and have a large and loyal market share and positive brand association.

The above table shows the top three market leaders compared to DreamWorks

Animation. It is obvious when looking at the spread of the market that DreamWorks has a long

way to go to be able to compete with the top companies in the industry, though DWAs market

4 http://clients1.ibisworld.com/reports/us/industry/majorcompanies.aspx?entid=1245 5 http://clients1.ibisworld.com/reports/us/industry/keystatistics.aspx?entid=1245 and http://finance.yahoo.com/q/co?s=DWA+Competitors

Company Market Share

The Walt Disney Co. (DIS) 19.2%4

NBC Universal (NBCU) 18.4%

News Corporation 14.5%

DreamWorks Animation (DWA) 2.4%5

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share might be skewed by the several major productions that DWA has coproduced with

Paramount Studios, a part of Viacom that holds a respectable 12.8% of the market share.

Target Market Profile: Local Market Audience Analyst

From the data collected by the Local Market Audience Analyst we see that the age group

of children DreamWorks would want to target in Snohomish County would be 10 to 14 year

olds. There are also a many adults age ranging from 35 to 54 that could have children that would

be a good group to target in this county. The data from Households by Household Type supports

this, showing that there are more Family Households in Snohomish County than there are

Nonfamily Households. More data shows that there are considerably more married couples with

children and male householders with children in Snohomish County than there are singles and

married couples without children. The household average for this county is $76,365 a year and

the majority of the population would be classified as Blue and White Collar.

This county has a population that goes out to movies frequently, many try to avoid

watching TV commercials, and believes that the use of advertising to children is unethical. Many

have the belief that how they spend their time is more important than money and there is an

importance places on spending time at home with their family. This population enjoys cooking at

home and prefers healthier foods to fast food. (For the data collected, see attached excel sheet.)

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Works Cited

"DREAMWORKS ANIMATION SKG, INC. SWOT Analysis." DreamWorks Animation SKG,

Inc. SWOT Analysis (2012): 1-8. Business Source Complete. Web. 18 Apr. 2013.

Kaczanowska, Agata. "IBISWorld Industry Report 51211a: Movie & Video Production in the

United States." 2013. IBISWorld. Web. 16 April 2013.

Local Market Audience Analyst. SRDS Media Solutions, n.d. Web.

<http://www.claritas.com/SRDS/home?user_id=1366394523100373683&auth_token=IjE

FwV7c1e2KBS2%2B%2BohtlfWyDLo%3D>.

Mergent, Inc. DreamWorks Animation SKG Inc data report. (2005). Mergent Online database.

Western Washington University, Bellingham, WA. 16 April, 2013.

Roberts, Johnnie L. "Working The Dream." Newsweek 145.20 (2005): 46-47. Business Source

Complete. Web. 19 Apr. 2013.

“Seeing Red.” Hollywood Reporter 411.9 (2009): 27. Business Source Complete. Web. 18 Apr.

2013

Walfram Alpha. N.p., 18 Apr. 2013. Web. 18 Apr. 2013.

https://courses.wwu.edu/webapps/portal/frameset.jsp?tab_tab_group_id=_2_1&url=%2F

webapps%2Fblackboard%2Fexecute%2Flauncher%3Ftype%3DCourse%26id%3D_3127

1_1%26url%3D

Yahoo Finance. Edgar Online, n.d. Web. 18 Apr. 2013.

http://finance.yahoo.com/q/is?s=DWA+Income+Statement&annual

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"2013 Market Share and Box Office Results by Movie Studio." 2013 Market Share and Box

Office Results by Movie Studio. N.p., 2013. Web. 18 Apr. 2013.