On Friday, Dreamworks SKG (the brainchild of Steven Spielberg, David Geffen and Jeffrey Katzenberg) got its first taste of life as a public company: they got sued.
Yes, apparently those pesky shareholders who bought into the vision of the three amigos were a bit miffed by Dreamworks huge quarterly profit miss. The miss was due to the major wiff job Shrek 2 had in the DVD market.
OK, in fairness I should restate that last sentence. The miss was due to Dreamworks horrific forecasting and expecations of Shrek 2 in the DVD market. The video itself did not do too poorly, it was the expectations that Katzenberg and team led their shareholders to believe that was the problem. To sum it up, here's what happened...
1. Katzenberg travels all over the world promoting that Shrek 2 will be bigger than cold fusion
2. Dreamworks floods the market with copies of the movie
3. The movie debuts in the DVD market to huge numbers (Katzenberg figures he'll get 33% of total sales in the first week)
4. Ooops, turns out new titles are burning out much faster (around 50% of sales are done in the first week). Note to Jeffrey: pick up a Video Business magazine once in a while, even I knew that one.
5. Because of their inability to understand the DVD market as it actually is (versus how they want it) Dreamworks is flooded with returns.
6. The returns and lack of sales equal a huge miss in profit expectations (25% miss). Stock takes a dive.
7. Dreamworks gets sued.
OK, here's the deal, yes businesses make mistakes, but what they don't do is forget to WARN Wall Street about a potential miss. Dreamworks screwed up big time by not letting The Street know what was going on with Shrek 2. The Street found out when the rest of us in the Proletariot did (that's never good) and responded accordingly.
Shareholders, feeling that past guidance given by management was clearly misguided, got the shaft and responded in the only way they know how: via a class action lawsuit.
Hawk's View: The bottom line is Katzenberg's hubris got in the way. This is no longer a private company. The public has a huge interest and a right to know what is going on. Dreamworks board and CEO should have taken a more conservative approach in announcing the expectations of Shrek. Katzenberg is an animator and creator at heart. He should not be the face of the company when it comes to giving a financial view to The Street. Look for current CEO Richard Enrico to take a bigger role in the future and look for Dreamworks to write a check to the angry shareholders.
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