Inside the Paramount, DreamWorks Animation Standoff (Analysis)

"Shrek Forever After"
"Shrek Forever After"
 Dreamworks Animation

Paramount’s decision, announced Wednesday, to launch its own animation division seems to be a clear sign that the studio’s five-year-old relationship with Jeffrey Katzenberg’s DreamWorks Animation is in its closing act.

The question now is where Katzenberg will take his company. He has declined to comment on the new development at Paramount. But considering that the nine films that DreamWorks Animation has released through Paramount have grossed about $4.8 billion, he would appear to have an attractive deal to offer. While Warner Bros. would seem to be a likely match, sources cautioned that a number of obstacles may stand in the way.

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A few weeks ago, according to a knowledgeable source, Paramount chief Brad Grey offered Katzenberg a one-year extension on the current distribution deal, which expires at the end of 2012. But he conveyed that any renewal would have to be on improved terms for the studio, which currently distributes DWA’s movies for an 8 percent fee. Katzenberg has yet to respond.

Paramount’s announcement that it will pursue its own animation unit “certainly is a statement of sorts [from Paramount] that we can do this without you,” says a high-level DWA source. But the source says it’s too soon to conclude that the relationship with Paramount has definitely broken down.

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Katzenberg is said to have made efforts to sell his company but is now focusing on pursuing a studio distribution partnership. A top source at Universal parent Comcast says no deal is in the offing there. Fox, Sony and, of course, Disney have their own animation units. That leaves Warners as a possibility. A studio spokesman declined comment on that prospect, but an industry source says Katzenberg is proposing to distribute his company’s two to three films a year at Warners while also providing programming for the Cartoon Network, which is part of the Time-Warner family.

Sources say Katzenberg wants and needs companies that can distribute his product on multiple platforms. “You can’t have a [stand-alone] animation business any more with that kind of overhead when you can make pictures like Despicable Me [which Universal released] for $80 million and do $600 million,” says one. 

An executive with ties to Warners says a deal with DreamWorks Animation “would fit in well,” but adds that Katzenberg “is so detail-oriented that he’s high maintenance.”

Another complicating factor is the perception that Katzenberg might have ambitions beyond running his animation business -- and that would not escape the notice of top executives at Warners who are in contention to succeed chairman and CEO Barry Meyer, set to retire at the end of 2013.

They include studio chief Jeff Robinov as well as television group president Bruce Rosenblum and home entertainment group president Kevin Tsujihara. A source familiar with the players said that the decision about DreamWorks Animation would rest largely with Robinov, adding, “I don’t think he’d fight it [because of] any personal or potential rivalry issues.”

At first glance, the tension between Katzenberg and Grey would seem baffling, given the success the two have enjoyed --  that has included launching the Kung Fu Panda and How to Train Your Dragon franchises. Shrek the Third ($799 million worldwide) and Shrek Forever After ($752 million worldwide) are among the highest grossing titles that Paramount has released. But the acrimony seems to date back to the contentious relationship between DreamWorks and Paramount, which erupted in 2008 when DreamWorks announced it was ending the partnership. Even though DWA had already spun off from DreamWorks into a publicly-held company, Katzenberg was allied with his fellow DreamWorks founders Steven Spielberg and David Geffen

That ill-will -- combined with Katzenberg’s desire to sweeten his company’s deal with the studio -- appears to have trumped all the success. “These guys have not hit it off,” says the DWA source. “Somehow they don’t seem to mesh."

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