Last November, DreamWorks Animation Chief Executive Jeffrey Katzenberg power-talked his way through the flashy Beverly Hills eatery Spago at an event to promote the DVD release of his company's hit Shrek 2. Flanked by the animated film's superstar voices, Mike Myers and Eddie Murphy, Mr. Katzenberg was on a mission to make Shrek 2 as big a smash on DVD as it had been in theaters.

It worked -- for a while. The Shrek 2 DVD made a killing over the holiday season, and DreamWorks put out a statement about the records it had broken in the important DVD market, now the most profitable piece of the movie business.

But Mr. Katzenberg's enthusiasm ran ahead of itself. Earlier this year, DreamWorks got a shock as retailers started returning millions of unsold copies of the DVD. The Glendale, Calif.-based animation studio dropped a bombshell on May 10 when it disclosed the news. In just its second quarter since becoming a public company, DreamWorks fell short of earnings forecasts by 25 percent and its stock tumbled as Wall Street wondered why the mistake wasn't disclosed sooner.

The miscalculation by DreamWorks, a company founded by some of the biggest names in Hollywood, highlights how the fast-changing DVD market has become increasingly difficult for studios to navigate.

The reason for the change: intense competition for shelf space, as both movie studios and TV producers unleash a flood of new discs every week. DVD sales are now mimicking the big-bang nature of the theatrical business, where movies make most of their money in the first few days before being knocked out by a slew of newcomers.

When a DVD title stops selling, major retailers are quicker these days to send unsold copies back to make way for new titles. So while DreamWorks shipped tens of millions of Shrek 2 discs, retailers started returning them once the title showed signs of running out of gas. Shrek 2 sold 33.7 million DVD and VHS copies world-wide in its first eight weeks -- but only 1.3 million in the first quarter of 2005.

It wasn't unreasonable to have high hopes for Shrek 2. The sequel about the green ogre was the biggest box-office hit of 2004, bringing in $920 million world-wide, almost twice as much as the original. Shrek 2 went on to become the top-selling domestic DVD of 2004, according to Nielsen Entertainment.

In January, DreamWorks said it had sold 37 million units world-wide, but that number later turned out to be too high.

For Mr. Katzenberg, the Shrek 2 miscalculation is a hard lesson in running a public company. For a decade, he operated DreamWorks as a private concern with partners Steven Spielberg and David Geffen. The fallout from previous foul-ups -- like the studio's 2003 bomb Sinbad: Legend of the Seven Seas -- was largely hidden from view because DreamWorks was closely held. The businesses Mr. Katzenberg headed earlier in his career at Walt Disney Co. and Paramount Pictures were within the operations of much larger companies.

People close to the company say that Mr. Katzenberg has responded aggressively, launching a drive to revamp DreamWorks's internal checks in home video, in hopes of preventing another mistake.

DreamWorks will have other chances to showcase its ogre: it has more sequels to Shrek in the works. As Mr. Katzenberg told analysts on the day of the earnings release: We have learned from this and I am hoping for a few more titles of this magnitude, so we can implement the lessons we have learned.

Source: Post Gazette