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Two years ago, if you were looking to make money in the movie business it looked like the only sure-fire hitmakers were the computer-generated animators.

The brightest beacon by far was Pixar (now owned by Disney (DIS) ), with its steady release of hit after hit after hit. Toy Story, Monsters, Inc., later the Incredibles and Cars. From very early on, it looked like this Steve Jobs company could do no wrong, and that no one else was going to be able to master this business.

Then came Shrek and Shrek 2, one of the highest grossing films of all time, and Jeffrey Katzenberg's Dreamworks Animation (DWA) became a worthy competitor in the computer animation space. To take advantage of that success, they spun off the company from Daddy Dreamworks and had a very successful IPO -- at least for a little while. I bought shares of this one (I've since sold them at a loss), as it looked to me like Pixar and Dreamworks were the only two companies that had the creative juice to build the next generation of animation hits.

Well, it's certainly starting to look like I was wrong. After a lousy year for DWA and a risky change of ownership for Pixar (will Pixar save Disney, or will Disney bureaucratize Pixar to death?), any remaining claim that these two companies own the space sounds thinner and thinner.

One need look no further than this month's box office for another indication.

What happened this month? Well, the animated penguin musical Happy Feet had a great opening weekend (including at Imax (IMAX), though that's unfortunately not enough to save that company). They even beat out the newest James Bond film.
Pixar Toy Story
And the latest release from Dreamworks Animation, Flushed Away, rode a similarly ubiquitous marketing campaign to ...blah. Running on several thousand more screens than Borat, it was clobbered and has so far pulled in less than $50 million. Very disappointing results for a film that cost $150 million to make.

Oh, and here's the important bit: Happy Feet was produced by Warner Brothers (TWX).

And this isn't the first time we've seen a big animated film come from outside the supposed Pixar/Dreamworks duopoly -- Fox's (NWS) Ice Age and Ice Age 2 were both huge hits, with Ice Age 2 the second biggest hit of the animated year so far, second only to Cars and significantly stronger than the best DWA performer of the year, Over the Hedge. And if you believe Boxofficemojo.com, Ice Age cost about half as much to produce as Cars or Flushed Away.

Now, it's possible that this is a fluke -- maybe Warner Brothers and Fox are on to something with the ice-themed films, and once the vein of polar bears, woolly mammoths and penguins is tapped they'll fall back behind the leaders.

Or that a story about sewer-dwelling rats and slugs (Flushed Away) just doesn't have the universal appeal that you might have guessed.
Flushed Away
But I think it's more likely that DWA and, to a lesser extent, Pixar are just going to have to share the marketplace. There have been no shortage of poor performing animated films this year, from Flushed Away to Barnyard to Garfield: a Tale of Two Kitties and the Ant Bully (those last two barely beat out Al Gore's An Inconvenient Truth, which must really hurt) -- but it's clearly a mistake to bet that Dreamworks is going to have a hit every time out ... and there's no guarantee that Disney's Pixar will continue to be able to outperform the other big studios.

There's money in animation again, but it didn't take long for all the big studios to realize it and start to compete. Which means the risks have gone up considerably in this hit-driven business, where a year's earnings really do ride on one film for a small, focused company like Dreamworks Animation. And if you add in the fact that Dreamworks and Pixar generally produce animated films with higher budgets than the competition, the risk climbs a bit more. (As an example, Ice Age cost about $59 million to make and grossed $176 million; Cars cost $120 million to make and grossed $244 million ... so they made roughly the same amount of money, but the return on investment for Fox was much higher than for Pixar in this case).

Nine of the top ten computer-animation hits of all time are from either Pixar or Dreamworks -- five years from now, I don't imagine you'll be able to say that. I'm glad I no longer own DWA, and I think it's going to take some hard work to keep Pixar at the top of the leader board.

Full disclosure: As of this writing I do not own any of the stocks mentioned here.

DIS vs. DWA 1-yr chart:

DIS vs. DWA 22 11 06

Source: Memo to Pixar and Dreamworks: The Animation Duopoly is Over