Pride of Spielberg and Katzenberg takes a fall

It's pathetic really. So much of what happens in Hollywood has to do with pride and ego. Take DreamWorks, the movie studio co-owned by Steven Spielberg, which has just been handed a timely $1.2bn lifeline from the Indian entertainment giant Reliance.

DreamWorks was founded in 1994 because of wounded pride and damaged ego. Jeffrey Katzenberg, one of the company's founders, felt he had been terribly slighted by Michael Eisner, who then ran the Walt Disney Company. Katzenberg (right) had been Eisner's loyal lieutenant during Disney's most successful years and felt he should be better rewarded. Eisner balked and famously admitted his true feelings for his diminutive underling: "I hate the little midget."

Thus the slighted Katzenberg persuaded music mogul David Geffen and filmmaker Spielberg to join him in what was trumpeted as a grandiloquent venture: Hollywood's first new fully fledged movie studio in 60 years.

Launched in October 1994 to enormous fanfare, DreamWorks offered its three principals and Paul Allen, the Microsoft co-founder who was its main financial backer, tremendous ego-gratification, including the cover of Time magazine.

DreamWorks was going to build a fabulous new studio which would have as much as 1.5 million sq ft of studio space as part of a huge 47-acre 'Entertainment, Media & Technology campus' which itself would be part of an even more massive development - on land once owned, appropriately enough, by Howard Hughes - which would include some 13,000 new homes, parks, shops, churches, museums and schools. And DreamWorks itself was to be not just a movie studio but a television, music and game production company.

Gradually, over the next decade, almost every aspect of this grandiose dream fell by the wayside. Not a single brick of the studio was ever laid. The television production company had some successes, including the mini-series Band of Brothers, but never found its footing. The music division was sold in 2003 and shut down in 2006.

All that remained was what became the core business, film production, including animation. The animation division, overseen by Katzenberg, was undoubtedly the most financially successful part of DreamWorks, with Shrek its best-known franchise. For most of its first decade, the live action film division, for which Spielberg was responsible, had a much spottier track record, winning Oscars with films like Saving Private Ryan, American Beauty and Dreamgirls, but stumbling financially.

By early 2006 it became clear to Spielberg, Geffen (right) and Katzenberg that they would have to swallow their considerable pride, take hits to their oversized egos and sell the company, which they did, to Paramount, for $1.6bn. DreamWorks animation was hived off as an independent company, while live action movie production moved onto the Paramount lot.

The business relationship with Paramount was a tremendous financial success. In the last couple of years DreamWorks had a terrific run of hits including Disturbia and Transformers, which took $319m in the US. But the personal relationships were a disaster.

Spielberg and Geffen continually felt slighted by Paramount's bosses, particularly after a top executive for Viacom, which owns Paramount, said that whether DreamWorks remained with Paramount was "completely immaterial" to the financial future of the company. The matter came to a head in late 2007 with furious comments by Geffen about Sumner Redstone, the imperious, irascible, aging head of Viacom.

"Nobody is going to treat me or my partner [Spielberg] in that manner and stay in business with us," Geffen fumed. "Nobody. Redstone, he is accustomed to bullying people. And I will not be bullied. There is no fight I will run from. I am absolutely unafraid of Sumner Redstone."

And so the company that was founded on a slight to Jeffrey Katzenberg's ego now decided to look for a new home because of perceived slights to Geffen and Spielberg. In its latest guise, funded by Reliance, Dreamworks will make just six films a year. Geffen has decamped, leaving Spielberg the only one of the original triumvirate. Hardly the grand studio they once dreamed about. But at least their egos are intact. For now. ·