The Animation Duopoly is Officially Over (DWA, DIS)

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), 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 ... and 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, though that's unfortunately not enough to save that company) ... they even beat out the newest James Bond film.

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.

And this isn't the first time we've seen a big animated film come from outside the supposed Pixar/Dreamworks duopoly -- Fox's 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.

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 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.

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Investing with the World Cup?

I've been twiddling my thumbs for several days while I look for somewhere to deploy my cash and get fully invested during this downturn. I've been mostly looking at energy and materials stocks since they've fallen farther and faster than many others, and for reasons that I don't believe are sustainable.

But I haven't been willing to pull the trigger yet -- Pride International still looks incredibly cheap to me but I fear the scandal and wonder if we might see a further decline if and when more details emerge ... SeaDrill is now looking like a bargain, something it has not been for about six months, but I already have a large underwater SDRL.OL position and I'm a little cautious. And I just bought Chesapeake Preferred for some safer natural gas exposure and would rather wait for more downwared movement before adding to that position. I'm sure there are other great candidates out there as well, I'm keeping my eyes open.

But in the meantime I've been watching and listening to the World Cup games and wondering, in the back of my mind, whether there are any investment lessons or ideas in the world's greatest sporting event. Probably not, but I'll humor myself. Here's what came to mind.

If there are any lessons to take away for me, the significant one is probably "be patient" -- successful soccer teams can't press all their men forward at all times, they have to wait for good opportunities and then jump in with both feet to press the attack. Patience has been hard to learn as US team follower, I was shocked at how terribly they performed in their first game, but the patient fan waited to judge ... and they dramatically outplayed Italy in their second game. Now my lesson is to be patient while I chew my nails awaiting the Ghana game on Thursday.

But might there be some ideas for investing here? In the US, this is still a minor sport -- but for the first time all the games are available nationwide on both TV and radio. I well remember watching previous Cups on Univision because many of the games weren't televised in English, and, frankly, my college Spanish didn't do me much good on the radio broadcasts (though it's still thrilling to hear Andres Cantor scream "GOOOOOOOLLLLLLLLLLLLLLLL!" -- even if you cant' tell which team or player scored). Hopefully soccer is catching up with hockey here at home, though I'm not holding my breath, and I've been thrilled to be able to catch almost every game.

But that probably doesn't make much money for everyone. Sure, I imagine a few soccer diehards signed up for XM radio (XMSR) in order to get the broadcasts of every game ... but XM has already warned that they'll be missing their customer acquisition targets for this year, and I don't imagine this will make the difference.

And Disney (DIS), owner of the US World Cup broadcasters ABC and ESPN, is doubtless making more money on showing a US soccer game on saturday afternoon than they would on MacGyver reruns, and hopefully ESPN gets better ratings for the other games than they do for poker ... but it's probably not going to move the needle. I actually like Disney partly because of the dominance of the ESPN franchise, but I wouldn't buy at these post-Pixar prices and didn't pay enough attention to buy a year ago when it was a certifiable bargain.

So what about other countries? I have focused a lot on international investing of late -- India (IFN) is probably the weakest major nation in the world when it comes to sports, and Norway (home to my SeaDrill investment) isn't setting anything on fire unless it's the Winter Olympics, but a lot of my other holdings are in cup-crazy lands.

Korea is still riding high from their strong performance in the last Cup, and they've done well so far this year. Thanks in large part to the utter disappearance of the French team, they've got a chance to make it to the next round. If we read into this, is Korea a better investment than France? I think you don't need to know what an offsides trap is to know that's pretty likely -- Korea is low priced explosive growth, France is a few dominant international companies and a domestic economy totally crippled by tradition. I actually own a Swiss company as well, UBS, but I'd like to see the Koreans beat the Swiss and outpoint France to move forward.

Cemex (CX) is one of the materials companies I've been keeping a very close eye one, and it's one of the largest companies in the Mexican market. Will Mexico's possible advancement make any difference to this major international cement company? Not likely -- infrastructure development around the world, continued residential and commercial construction in the US and elsewhere ... that's what moves CX's needle. Oil prices and the US consumer have more of an impact on the Mexican economy than does soccer fandom, I expect.

On the other hand, if Angola manages to really clobber Iran, and Mexico falls badly to Portugal, group favorite Mexico would be sent home -- so would a huge success in the next round or a failure to advance have more of an impact on beer consumption in Mexico? Not sure whether Mexicans drink more in celebration or in wallowing, but I still like FEMSA, brewer of Dos Equis and Tecate and remain interested if I can get a good price on those shares.

Brazil, home of one of my other large positions, GOL Linhas Aereas Inteligentes, might shut down if they win the Cup yet again -- but even in what might be the world's most soccer-crazed nation I don't expect it will cause travel behavior to change. It might get very interesting if 5,000 Brazilian Cup fans get stranded by the possible cancellation of Varig flights to Europe, but I think the largest impact might be that a nation distracted by Ronaldo's enlarged tummy might have not payed enough attention to the final wrapup of the bankruptcy proceedings, which have now led to purchase by an employee and investor group. I expect GOL's executives are cheering just as loudly for this purchase as they are for Ronaldinho, Varig was incapable of managing itself efficiently before because the airline was run largely for the benefit of the employees -- how much worse might that get now that the airline will be answerable directly to the employee and retiree unions?

I was actually a little surprised when I didn't hear Cramer running out his standard shtick for any large sporting event. During the Super Bowl and during the NCAA Final Four, he yelled for investment in companies that profit from online streaming video and big screen TVs -- I may have missed it, but I didn't hear that this month, though certainly plenty of folks around the world are catching highlights from their desks and buying new big screen TVs to watch their heroes compete. I expect that's because the market has been in a precipitous downturn this time around and there has been recent fear of an inventory glut from Corning and AU Optronics on large screen components (even though Best Buy and Circuit City recently announced that they sold many more of these sets than anyone expected -- too bad none of those sales were to me).

But I actually do still like Akamai very much -- Cramer has been pooh-poohing it in the short term, probably rightly as most stocks that have more than doubled in the past year are seeing a lot of selling pressure, but I imagine Akamai's getting a fair amount of business from their clients around the world as they manage streaming Cup video clips and, perhaps in some countries, full games.

So probably no lessons or real investment knowledge to be gleaned from the World Cup -- but at least a few interesting things to think over as we wait for the next great game.

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