Read time: 5 minutes

Good morning! It's Friday, January 5th. Today we’re looking at Illumination Entertainment, an independent studio that produces movies for a fraction of what Disney and DreamWorks do and still rakes in billions!

THE FEATURE

Illumination— Creating a Low-Cost Competitor to Disney and DreamWorks

You know Illumination Entertainment from their hits like Minions and The Super Mario Bros. Movie, which each brought in billions of dollars from worldwide box offices. 

While there's no question that Illumination is a massive success, that success didn't seem likely when it was founded in 2007 to compete against animation industry titans like Disney and DreamWorks. 

So, let's figure out how they pulled it off. 

The Business: A Low-Cost Animation Studio

Universal Studios recruited Chris Meledandri to run its new independent studio, Illumination Studios, after he pioneered a new low-cost animation movie production model at 20th Century Fox. 

When Meledandri was at Fox, he produced hit movies like Horton Hears a Who! and Ice Age. However, while competitors like Disney and Dreamworks never spent less than $100M for each of their movies, Meledandri spent a fraction of that on production. 

For instance, Ice Age only cost $59M to produce but brought in $396M in box office revenue, while Dreamworks' Bee Movie cost $150M to make and brought in just $293.5M (and that movie was considered a hit). 

Meledandri believed that "strict cost controls and hit animated films are not mutually exclusive." And it turns out he was right. 

As the head of Illumination, Meledandri continued employing cost-conscious animation techniques, believing that story quality was more important than ensuring each blade of grass and face wrinkle was rendered properly. Illumination's first big hit, Despicable Me, cost only $69M to produce and generated $544M worldwide (7.9X production cost). 

How They Win: Rejecting the Streaming Service Funnel

The Rise of Gru was set to release amid the COVID pandemic in June of 2020. At the time, the nose dive of in-person moviegoing led people to believe The Rise of Gru would launch on Universal's streaming service Peacock— but that never happened.  

Instead, Meledandri held the movie back for over two years, stating, "It transcends whether or not a decision isn't the best business decision in the movement. I think our global culture of cinema is at stake here." 

Meledandri stated it wasn't a business decision, but it clearly was. The Rise of Gru grossed a stunning $940.7M worldwide. At the same time, movies that launched first on streaming platforms or transitioned to them shortly after release, like Disney+'s Encanto, couldn't crack $100M at the domestic box office. 

While the rest of the movie industry was rapidly moving to streaming platforms, Meledandri had the foresight that they were getting ahead over their skis— and recent data backs this up. 

There are two major downsides for Hollywood doing theater and streaming releases at the same time or in very close succession. 

Firstly, there's lower box office revenue. If consumers can watch a movie from the comfort of their homes, they are likely to do so and not pay for the premium theatre-going experience. 

The second downside is subtler but just as damaging: bad reviews. The experience of watching movies from home can't compare to the immersion of theatres, and critics seem unable to factor this into their reviews. So, when movies have streaming releases, the first reviews, which have the strongest influence on box-office performance, are more likely to be negative and tank interest in the film. 

Key Observation: Don't Abandon What Works for What's New

Effective business leaders are often quick to change, adapt, and evolve to avoid stagnation and decline. However, there can be too much of anything. Hollywood studios were too quick to turn to streaming releases, damaged their intellectual property, and took massive hits.

By not falling for the rush to streaming platforms, Meledandri raked in hundreds of millions of dollars while companies like Disney and Dreamworks saw flop after flop.

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