If Fantasmic has an AA dragon that breath fire, so why not here.
I had a conversation with someone involved with the project, in which I asked the same question. Basically, it comes down to this: Operating in the daylight all day versus one shot in the dark in the evening.
In order to keep an animatronic from looking totally creepy, designers and engineers need to accomplish a stunning level of life-like behavior. The more time and light a viewer has to look at something, the more lifelike it needs to be. (That's why so many dark rides are, well, dark.) Remember that Disney went through nearly a year of frustrations and cost overruns to get "Murphy" to operate at all. Universal didn't want to risk that with a focal point of Diagon Alley.
Throw in scale as an exponential cost, and it would have been prohibitive to make the Gringotts dragon move. So Universal Creative went with the most lifelike pose it could design and threw in the fire effect to create some dynamism in the piece.
Thanks Robert for giving as always an interesting answer.
FWIW, potentially interesting aside: There's a theory called the "uncanny valley" that details how being close-but-not-there is worse than missing by a mile when it comes to creating animatronics. It applies to human-style animatronics, but some pros I've heard have said that there's a similar effect for any animatronic depicting a living thing.
When you try anything, the project gets larger and ultimately impossible to achieve. I assume they may have tried for simple movements that didn't work on paper. Then they tried something more complicated and it was quickly shelved.
The dragon is so beautiful & effective that I'm glad Universal went that route. Just about everyone stops what they're doing in Diagon whenever the dragon roars & shoots the huge fireball apx. every 15 minutes. It's quite an astonishing performance that we never got tired of, during the apx. 40 hours we spent in Diagon Alley.
Honestly, sounds like it could have been a case of the Everest Yeti all over again. The dragon doesn't need to move, its fire and appearance speaks volumes as is.
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