Katzenberg vs. Grey: Inside the Standoff

How the heated (and personal) rivalry between DreamWorks Animation and Paramount threatens to derail a successful partnership.

Can the rocky marriage between Paramount Pictures and DreamWorks Animation be saved?

Some top industry observers think so, though not because of love. Rather, they think the partnership between mutual antagonists Brad Grey at Paramount and DWA's Jeffrey Katzenberg is too mutually beneficial to scrap: Paramount has done an effective job distributing all DWA films since 2006, and DWA movies like Kung Fu Panda 2 pull in big grosses (even when pundits declare that they underperform). Most important, these handicappers say, DWA seems to lack obvious alternatives.

The edgy relationship between DWA and Paramount took a big hit recently when Paramount declared a plan to form its own animation division. Grey blindsided Katzenberg with the announcement July 6, the first day of the annual Allen & Co. retreat in Sun Valley, Idaho, where both were in attendance. Paramount insists it is serious about having a homegrown animated film in theaters by 2014, but some outside observers think the studio would be foolish to bank on that.

The fight could be cast as a simple negotiation over the distribution fee DWA pays Paramount. Katzenberg is said to want a reduction from 8 percent to 7 percent when the current six-year deal expires in 2012, and Paramount wants a bump up. THR first reported Aug. 1 that the DWA board recently rejected a one-year extension of the existing arrangement, further prolonging the stalemate.

Clearly, Katzenberg will try to strike a deal elsewhere. But a Paramount source predicts that DWA will come up empty. This source says Paramount makes an average of $40 million to $50 million a year from the deal -- not insignificant but not enough to kowtow to Katzenberg's demands.

Fox, Sony, Universal and Disney have in-house or affiliated animation studios, making them less likely to pick up two or three DWA releases a year. Warner Bros., which has only dabbled in animation, has been cited as a possible suitor, but studio insiders have downplayed the possibility, leaving independent distributors or Katzenberg opting to self-release. 

DWA declined comment, but an insider says the company has not made presentations to other studios and no one at DWA is "quaking in their boots," adding, "Maybe we're arrogant, but it's not as if [DWA] is some loser company." During its deal with Paramount, Katzenberg has delivered 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 Paramount has released.

Still, investors have hammered DWA stock lately; analysts cite the Shrek franchise's diminishing value and fatigue among U.S. audiences for 3D, which has boosted DWA grosses.

"Given the situation in the industry and the recent performance of DreamWorks Animation films, it may prove hard to get 8 percent again," says Susquehanna Financial group analyst Vasily Karasyov.

Paramount animated movies probably will not be of the same quality as DWA's, but the studio is banking on doing cheaper pictures that won't need to pull in as much at the box office and beyond. The Paramount source says the cost of doing animation is going down and claims that Rango could be made today for $100 million. That film, released to positive reviews in March, supposedly cost $135 million, though some estimates run substantially higher. It grossed about $240 million worldwide, but outsiders say it lost a substantial amount when marketing and other costs are included.

Even with the bar set comparatively low, some industry veterans are dismissive. "Brad Grey is in for a rude awakening," says one producer. "It's not so easy. They're saying they'll have animated pictures by 2014. No way." These observers see the studio's announcement as nothing more than an attempt to allay Wall Street concerns if the DWA deal ends.

Given that the DWA-Paramount relationship outwardly makes so much sense, the acrimony clearly goes beyond the usual posturing over a deal. It dates to the contentious rupture between the live-action DreamWorks unit and Paramount in 2008. Even though DWA already had been spun off from DreamWorks into a publicly held company, Katzenberg was and continues to be allied with his fellow DreamWorks founders Steven Spielberg and David Geffen, who own stakes in DWA.

"What people don't realize is how personal this rift is," says a source with knowledge of the relationship.

But if Katzenberg can't find a buyer or another distributor, former associates say he might have to stay put, even on less-favorable terms. "Jeffrey's a pragmatist," says one former colleague. "He's not afraid to eat humble pie. He is the most resilient human being I've ever met."

Which is just as well, considering how frosty the relationship has become. "Jeffrey wasn't even invited to Brad's wedding," marvels the DWA insider, referring to Grey's nuptials in April. "I mean, everybody in town was there."