Oct. 7 (Bloomberg) -- Paramount Pictures chief Brad Grey is counting on Steven Spielberg’s animated “Tintin” and “Rango,” a collaboration with Johnny Depp, to strengthen the Viacom Inc. studio’s film slate and increase profitability.

After losing Spielberg’s DreamWorks studio and Marvel comics, franchises that helped Paramount double revenue in four years, Grey says he can fill the gap.

“We’re very confident about where we are, bullish about the future and also pretty proud of the strategy that we put together about four and one-half years ago,” Grey, 51, said in an interview on Paramount’s Los Angeles lot.

In a year of record U.S. theatrical revenue for the industry, Paramount’s chairman and chief executive officer is dealing with the loss of two box-office draws. DreamWorks left a year ago and will distribute films through Walt Disney Co. A month ago, Burbank, California-based Disney agreed to buy Marvel Entertainment Inc., maker of “Iron Man,” Grey’s biggest U.S. release in 2008 and his No. 4 film worldwide.

Grey’s pay-television business also is in limbo as Paramount and New York-based Viacom try to sign up customers for the new Epix channel that starts this month. The studio continues to struggle with profitability as well.

“They have a lot of heavy lifting to do,” said Tuna Amobi, a New York-based analyst with Standard & Poor’s who rates Viacom shares “hold” and doesn’t own them.

Grey has breathing room. The studio will continue to make movies with Marvel and will be in business with Spielberg for years as well, he said. Grey also points to accords with “Star Trek” director J.J. Abrams and Martin Scorsese to show the studio hasn’t been hobbled.

Grey’s Regime

Because Paramount owns “Tintin,” a potential franchise based on a Belgian comic series, and “Rango,” a 2011 film from “Pirates of the Caribbean” director Gore Verbinski, the projects have more profit potential than movies distributed for Marvel, said Grey.

Under Grey, Paramount’s theater, DVD and TV revenue doubled to $6 billion in 2008 from $3 billion in 2005, his first year.

This summer’s “Transformers: Revenge of the Fallen” and “Star Trek,” two movies owned by the studio, lifted U.S. and Canadian ticket sales to $1.4 billion as of Oct. 4, putting Paramount second behind Time Warner Inc., according to Box Office Mojo, a Sherman Oaks, California-based researcher that tracks receipts. A third “Transformers” will be out in 2011, director Michael Bay said Oct. 1 on his blog.

Margin Shortfall

Profitability hasn’t followed. Operating income fell to $26 million last year, or less than 1/2 of 1 percent of sales, from a 2004 peak of 6.1 percent. The studio lost $148 million in the first half of 2009, hurt by the industrywide drop in DVD sales. News Corp.’s Fox film division had a 14 percent margin in its most recent year.

“Wall Street keeps hoping margins will improve and they have not,” said Laura Martin, an analyst with Soleil Securities in Pasadena, California, who rates Viacom stock “hold” and doesn’t own it.

Because of profit concerns, Paramount in August delayed the release of “Shutter Island,” a Scorsese thriller with Leonardo DiCaprio. That deferred third-quarter costs and will bolster margins when results are reported on Nov. 3, said Michael Nathanson, a Sanford C. Bernstein & Co. analyst in New York who rates Viacom “outperform.”

“There is a balance toward realizing the profit that we think is important for Paramount and Viacom, and distributing movies,” Grey said. “That was a decision we made based on the economics.”

Epix Problem

In pay television, the studio and Viacom are co-owners of Epix with Lions Gate Entertainment Corp. and Metro-Goldwyn-Mayer Inc. Scheduled to start this month, Epix has announced one carrier, Verizon Communications Inc.’s FiOS TV, with 2.5 million viewers.

Paramount’s old partner, Showtime Networks, is in 17 million U.S. households, according to the company. CBS and Viacom, both based in New York, are controlled by Sumner Redstone, who serves as chairman of each.

Paramount reported $61 million in sales and $23 million in first-half income from Epix, even though it’s not operating. Viacom also reported a $10 million loss on the investment in the period. Grey referred questions to Viacom, which wouldn’t comment.

“Epix cannot pay fees to its partners indefinitely if it is not generating revenue,” said Michael Morris, a UBS AG analyst in New York who recommends Viacom and doesn’t own it.

The channel is expected to become “cash positive” in late 2010 or early 2011, Viacom CEO Philippe Dauman said at a Sept. 16 Goldman Sachs Group Inc. conference. He also said he anticipates more carriage agreements by the start date.

DreamWorks Animation

In addition, Paramount’s rights to distribute films from DreamWorks Animation SKG Inc., the Glendale, California-based maker of the “Shrek” movies, expire after 2012, filings show.

Jeffrey Katzenberg, CEO of DreamWorks Animation, said on May 28 the current terms are no longer “competitive” and he expects a more favorable accord by mid-2010.

“It’s my hope that we’ll extend that deal, as long as the economics make sense for us,” Grey said.

Viacom rose 33 cents to $28.85 at 4 p.m. in New York Stock Exchange composite trading. The Class B shares have gained 30 percent in the past year. Of 30 analysts who follow the company, 10 recommend the stock, 16 say hold and 4 have sell ratings.

‘Ramping Up’

Paramount was last at the U.S. box office among the majors when Grey replaced Sherry Lansing, who ran the studio for 13 years. The new chief bought Spielberg’s DreamWorks SKG for $1.6 billion and agreed to distribute films for Marvel.

“The idea was to quickly ramp up our output,” Grey said. “It takes three years usually to do that, when you’re doing it on your own. It takes a significant amount of time until you have your own material.”

Paramount isn’t losing Spielberg or Marvel right away. The Marvel accord covers five more films through “Iron Man 3.” The first “Iron Man” took in $585 million worldwide, according to Box Office Mojo.

Under the DreamWorks split, Paramount may co-produce and co-finance 17 projects and has some distribution rights, said Steven Rubenstein, an outside spokesman for Paramount. Spielberg, 62, is producing and directing “The Adventures of Tintin: The Secret of the Unicorn,” scheduled for 2011 by the studio, and may be involved in other films.

“Paramount remains the home to a great deal of his development,” Grey said. The studio will be “in business with Steven for decades.”

The split saves Paramount about $50 million a year in overhead, Dauman said on Sept. 16, and the studio no longer has to manage an independent film subsidiary, according to Grey.

Fewer Films

Like other studios, Paramount is making fewer movies. It plans to distribute 14 to 15 in 2010, down from about 20 in recent years, Grey said.

Coupled with DVD revenue and TV sales from “Transformers” and “Star Trek,” Paramount may boost margins next year, said Alan Gould, an analyst with Natixis Bleichroeder in New York.

“There’s no reason why Paramount shouldn’t be earning at least $200 million to $300 million a year,” said Gould, who recommends investors buy Viacom shares and owns them.

To contact the reporters on this story: Michael White in Los Angeles at mwhite@bloomberg.net

Last Updated: October 7, 2009 16:09 EDT