Growing Competitions Push Blue Sky Studios to Innovate

Case Type: increase sales; business competition.
Consulting Firm: Alvarez & Marsal (A&M) first round summer internship job interview.
Industry Coverage: entertainment; mass media.

Case Interview Question #00706: Blue Sky Studios is an American computer animation film studio based in Greenwich, Connecticut. Using its in-house rendering software, the studio had worked on visual effects for commercials and films, before releasing in 2002 its first animated film, Ice Age, and completely dedicated to producing animated films.

You work for a major New York City consulting firm and have just met with Chris Wedge, CEO of Blue Sky Studios. Mr. Wedge is concerned because DVD sales were much lower than had been projected for the studio’s latest release — Epic. Further, he is also concerned that this decline in sales will repeat itself with the studio’s next release, Ice Age 4: Continental Drift. You must decide, should he be worried about the decline and if so, what actions should he take to counter this potential downturn?

Additional Information: Provide the following information if requested

1. Company

Blue Sky Studios has been highly successful in releasing family-friendly, animated movies that focus on the exploits of talking animals and mythical beasts.

Blue Sky Studios releases only three movies a year (one during the winter holidays and two during the summer).

Blue Sky Studios distributes their movies through 20th Century Fox, a much larger movie studio. The distribution agreement between the two companies stipulates the following:

• 20th Century Fox oversees the distribution and marketing of Blue Sky Studios’ films.
• For use of 20th Century Fox’s distribution network, Blue Sky Studios pays 20th Century Fox 20% of their gross box-office receipts.
• Blue Sky Studios must also compensate 20th Century Fox for all marketing costs that 20th Century Fox spends on Blue Sky Studios’s movies.
• 20th Century Fox has exclusive rights to distribute the DVD releases of any material based on previous Blue Sky Studios theatrical releases (such as direct-to-video sequels).
• 20th Century Fox has the exclusive rights to produce and release television programs based on the characters in any Blue Sky Studios theatrical release.

Large movie companies can survive a bad year by relying on the steady stream of income their film libraries generate. Blue Sky Studios, having a catalog of only 15 movies, lacks that security.

2. Industry Trends

The DVD market for the entire industry is shrinking. Consumers have grown content with the personal libraries they have amassed. The market for catalog titles is showing signs of saturation.

The home entertainment market is fragmenting as options such as the internet and on-demand cable have captured a larger portion of consumers’ dollars and time.

Animated talking animal films, which had been a consistently successful genre at the box office, are now beginning to underperform.

3. Competition

In the past, Blue Sky Studios had only considered two studios as direct competition.

• Walt Disney Pictures, another of the Hollywood majors, has a long history of producing animated features for children.
• Warner Bros. Pictures, another major, has a specialized department Warner Bros. Animation that was specifically created to produce animated releases.

Recently the cost of animation has dropped significantly. This has led to almost every studio, both major and minor, producing animated fare.

Most of these recent animated features have focused on the hi-jinx of a group of talking animals.

4. Technology

Blue Sky Studios is a leader in the animation industry; however, decreases in animation costs have significantly narrowed the gap between innovator and follower.

The emergence of high-definition DVD technology has signaled an eventual change to the format. This will encourage consumers to reinvest in their DVD libraries. However, an industry standard has yet to be established for the technology.

The fragmentation of the industry has also opened avenues for potential growth. For example:

• The Internet looks to become a viable source of movie distribution as sites such as Amazon.com and Yahoo have begun broadcasting films.
• Mobile devices such as iPods, cellular phones, and the PSPs have also provided a window of distribution that had not existed in years past.

5. Consumer Products

Blue Sky Studios controls the licenses on all of its characters; this constitutes the third largest stream of income for the company after theatrical and DVD revenue.

Possible Answer:

The purpose of this case is to challenge the candidate to tackle problems that are specific to the demands of a specialized industry. In this instance, Blue Sky Studios is facing growing competition due to competing technology, the commoditization of its genre and diminishing marginal returns from a primary revenue stream (DVDs).

Although there is no single “right” solution to Blue Sky Studios’s problems, there are some that seem more sensible than others. These include:

• Steer production away from talking animal pictures to avoid the oncoming glut that looks to saturate the market.
• Explore less expensive direct-to-video DVD releases based on new characters. Through direct-to-video releases Blue Sky Studios can build their library, create new franchises and increase their consumer products revenues.
• Exploring cash streams that new technology has made possible such as ringtones, ring backs, and online games.

Additionally, Blue Sky Studios should also be weary about jumping too quickly into a new technology. It must balance being on the forefront with moving to far ahead (for example, picking a high definition DVD format before an industry standard is set).