GLENDALE, Calif. — For months, DreamWorks Animation has been working on a prototype for a product 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 already have, Forest City and General Growth Properties — Santa Claus 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.
“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 Mr. 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 company 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, the Walt Disney Company, 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.)
Computer animation is no longer a sure thing, which has further motivated Mr. Katzenberg in his expansion effort. The company has had to take write-downs on three of its last four original films.
Even success sometimes is not enough. “How to Train Your Dragon 2” took in a hefty $50 million last weekend in North America, but Wall Street wanted more. Shares fell 13 percent between Friday and mid-Monday, to $23.85, before making up ground to close at $24.73 on Tuesday.
Hence the importance of projects like DreamHouse, which Mr. 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.
So far, 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 studio acquired AwesomenessTV, a thriving collection of YouTube channels focused on teenagers. On Monday, it 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 it to be closer to 48 percent. This rapid shift “is a key reason we like the company,” Mr. Wible said in an email. (Net income for 2013 totaled $55.1 million, an improvement from a loss of $36.4 million a year earlier).
Overlooked in Mr. Katzenberg’s expansion frenzy has been an aggressive move into consumer products. The studio, under the guidance of Mr. 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,” Mr. 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.’ ”
DreamWorks Animation has been able to move quickly in part by capitalizing on upheaval at Disney Consumer Products, which is across the street in this Los Angeles suburb. In 2011, Disney pushed out its merchandising chief, Andrew P. Mooney, who immediately started advising Mr. Katzenberg. (Mr. Mooney is now chief executive of the sports apparel company Quicksilver.)
Mr. Mooney’s replacement at Disney, Bob Chapek, carried out a bold overhaul that left dozens of employees looking for work. Mr. Francis has so far hired at least 70 former Disney employees. One of the most recent was Jim Fielding, former president of Disney Stores Worldwide. Mr. Fielding is now leading a September charge into stores by AwesomenessTV.
DreamWorks Animation’s merchandising onrush comes as Hollywood’s unsexy consumer products business starts to attract more investor attention. “Disney Consumer Products: World’s Most Valuable Afterthought?” read the headline of a March report from Todd Juenger, a Bernstein Research analyst. Mr. Juenger estimated that merchandise would be Disney’s fastest-growing unit through 2018, in part because of Mr. Chapek’s strategies.
On Monday, the International Licensing Industry Merchandisers’ Association released data showing that 2013 sales of film-, television- and celebrity-themed merchandise totaled $51.4 billion, a 4.3 percent increase from a year earlier.
Despite his determination to become a consumer products titan, Mr. Katzenberg faces some skeptics — namely analysts who wonder what kind of grip the DreamWorks Animation brand and stable of characters have on mothers who do much of the buying. Success will also require new movie and television hits.
“Having success in our core movie business is critical,” Mr. Katzenberg conceded. But he defended his brand and characters like Shrek the ogre, Po the panda and the penguins of “Madagascar.” “These characters are known throughout the world, and they are beloved,” he said. “Beloved.”
Mr. Francis said that efforts were underway to bring DreamWorks Animation to higher-end retail. The fashion designer Jeremy Scott, for instance, is working with characters for a line of clothing for young women; early concepts even included a “Shrek” bra. “Everything we are doing is carefully designed to make our brand continue to ascend,” Mr. Francis said.
Results of Mr. Francis’s 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,” Mr. Francis said.
Coming next year to London and then five additional cities is a permanent walk-through attraction called “Shrek’s Far, Far Away Adventure.” Other plans include licensing characters for an amusement park as part of the New Jersey Meadowlands megamall and a trio of indoor theme parks in Russia. There is also a shopping and entertainment complex in Shanghai called the DreamCenter.
“It’s a lot to bite off,” Mr. Francis said. “But we’re hungry.”