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In 1994, former Disney chairman Jeffery Katzenberg, acclaimed film director Steven Spielberg and record mogul David Geffen teamed up to help form DreamWorks SKG, an independent film studio over which the three principal founders would hold a controlling stake. The next year, the company founded DreamWorks Interactive. The studio was founded with a full development staff established to work on games based on DreamWorks properties internally (e.g., Small Soldiers, Trespasser: Jurassic Park), while also having a robust publishing arm for funding quirky and unique games and distributing them though publishing partners.

DreamWorks set the tone for their publishing efforts early by partnering with Earthworm Jim creator Doug TenNapel in 1995. TenNapel had recently left Shiny Entertainment to form his own studio, The Neverhood, Inc., and pitched Spielberg on a game using all claymation visuals. DreamWorks Interactive signed The Neverhood, Inc. to a multi-game deal and the company was set to work on its first game, a point-and-click adventure sharing the name of its creators. Released on October 31, 1996, The Neverhood was critically acclaimed for its creative art style, witty humor and catchy music. However, the game was a sales disappointment and only sold around 42,000 copies, a problem compounded by the game's large budget due to having to build a set and numerous models and purchase equipment to film the stop-motion photography and convert the footage of models and scenery into interactive game elements. Low sales would be a recurring problem for The Neverhood, Inc.'s following two games, and many other DreamWorks Interactive games as well.

In Fall 1999, DreamWorks Interactive, struggling after releasing numerous flops and having an underperforming parent company, developed and released through Electronic Arts their most ambitious and ultimately successful game: Medal of Honor. Created by co-founder Steven Spielberg, the game was meant to be a companion piece to his film from the year before, Saving Private Ryan: a World War II game that sought to accurately portray the experiences of the soldiers who fought against the Nazis in Europe. The game wound up being the hit the company needed and, according to Spielberg, would've been able to stay in business based on the sales of Medal of Honor alone. However, they found out too late, as their parent company had begun negotiations to sell DreamWorks Interactive prior to the game's release.

On February 24, 2000, DreamWorks sold the Interactive division and the Medal of Honor IP to Electronic Arts. The studio would go on to develop two more games as an EA subsidiary - the first Medal of Honor sequel, Underground, and Clive Barker's Undying - before its closure in 2003. DreamWorks Interactive was merged with two other studios EA intended to close - EA Pacific and Westwood Studios - to form EA Los Angeles.

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