Paramount & DreamWorks: Splitsville?

Bad blood between the studio and Spielberg could end this Hollywood marriage

By Ronald Grover

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Could Paramount Pictures lose Steven Spielberg and the DreamWorks studio it bought just 20 months ago for $1.53 billion? It's entirely possible. People close to Spielberg say he is vexed that Paramount has treated his team shabbily and grabbed credit for DreamWorks productions. If Spielberg were to leave, says a person familiar with the situation, he could take several of his hitmakers and the DreamWorks name with him.

Spielberg's departure would be a huge blow to Paramount chief Brad Grey, whose nascent turnaround at the studio is based largely on DreamWorks hits, including Transformers and Blades of Glory. In recent months, Grey has been toiling to rebuild his relationship with Hollywood's most powerful director-producer. In early July, Grey went to Spielberg's sprawling East Hampton (N.Y.) compound and gave him a $1 million check from Paramount for the Shoah Foundation Institute, which Spielberg founded in 1994 as a tribute to Holocaust victims. Paramount and its parent, Viacom Inc. (VIA ), express confidence that Spielberg will stick around. "We couldn't be happier with DreamWorks, and I think they're enjoying the success as well," says Viacom CEO Philippe P. Dauman.

A divorce is not a foregone conclusion--and one can't happen until late next year, the earliest Spielberg can get out of his contract. But insiders believe too much bad blood has been spilled to salvage the relationship. Spielberg and his DreamWorks co-founders, David Geffen and Jeffrey Katzenberg, aren't talking about their plans. Still, Geffen, who advises Spielberg on business matters, made sure Spielberg could take back DreamWorks if the relationship went south. Meanwhile, Hollywood insiders say other studios already have expressed interest in working with Spielberg and a reconstituted DreamWorks.

The DreamWorks-Paramount marriage has been rocky almost from the moment, in late 2005, that Grey persuaded the Viacom board to buy Spielberg's baby. DreamWorks wasn't doing particularly well at the time. A string of poorly performing films had just prompted Universal Studios Inc. (GE ), which was mulling a DreamWorks acquisition, to lower its price. But getting DreamWorks was a major coup for Grey, the über-talent manager and producer who'd never run a studio before and had been hired 11 months earlier to turn around Paramount.


The rationale went like this: The untested Grey would use DreamWorks' superior marketing and distribution to overhaul the company. He would have an instant pipeline of hot projects. Plus, Paramount got the DreamWorks library, which was valued at about $900 million at the time and included such films as American Beauty. (Within a few months, Paramount sold a 51% stake in the library to private equity funds for $675.3 million.)

And, of course, Grey got Spielberg, who signed on for three years. "Spielberg is a script magnet. Everyone in town wants to be in business with him, and they bring him the best projects," says DreamWorks' longtime banker, John W. Miller, managing director of JPMorgan Chase & Co. (JPM ) "He only directs the ones he likes, but his studio gets the pick of the rest."

Spielberg brought with him Transformers. DreamWorks also made Blades of Glory, Norbit, and Disturbia, which, along with Transformers, account for nearly half the $1 billion Paramount has generated at the U.S. box office this year.

All the same, say people on both sides, Paramount managed to alienate the director. Early on, Grey addressed a premiere for Dreamgirls and left the impression that the film was a Paramount release. In fact, the film was put into production at DreamWorks and was produced by Geffen, who had long had ambitions of making a movie of the original musical. Press releases began referring to DreamWorks-produced films as Paramount productions. In February, Spielberg told The New York Times that he "took exception" to Paramount "referring to every DreamWorks picture as a Paramount picture."

Spielberg, who is famously loyal and shuns public conflict, also fumed at how Paramount and Viacom treated his friends. He was upset last year when Viacom Chairman Sumner Redstone fired and then publicly trashed actor Tom Cruise, who worked with Spielberg on two films. (Spielberg and Redstone later had a makeup dinner.) Nor did Spielberg like it when Paramount executives criticized Clint Eastwood's marketing plans for Flags of Our Fathers, a DreamWorks production.

Spielberg was especially incensed over slights directed at DreamWorks CEO Stacey Snider, the former Universal Pictures chairman who followed Spielberg to Paramount. Snider, like Spielberg, is a talent magnet, and has a strong following among key filmmakers like Ben Stiller, who produced the Will Ferrell comedy Blades of Glory. Last August, Grey and Snider got into a shouting match. At issue: news articles about a Paramount restructuring in which Grey lumped Snider in with other unit chiefs who reported to him. While true on paper, Snider and Spielberg had been promised autonomy, says an industry executive, and saw the press accounts as a Paramount effort to undermine their freedom.

Grey badly needed to make peace with Spielberg. And to do that he first had to get with Geffen, who was threatening to walk once his contract was up this autumn. In the spring the Paramount CEO sat down with him and over several meetings negotiated a new arrangement that gave DreamWorks more power and autonomy.

Since then the DreamWorks' name has become more prominent in press releases and marketing materials. DreamWorks is hiring its own corporate public-relations executive. And Snider now has the authority to green-light films with a $100 million budget, up from $85 million. If DreamWorks is producing a Spielberg movie, she can spend $150 million. The upshot: DreamWorks is essentially an independent studio inside a studio. "There were moments when it was really challenging," Grey told BusinessWeek in the spring. "But we've put together an extraordinary team, and we're working together to produce excellent movies."

The smart money is betting that Spielberg will move on, despite Grey's charm offensive. "Things are better between them--marginally," says a Hollywood executive who has worked with Paramount. "If it continues like it is, they're gone." In the meantime, Grey has been beefing up the Paramount slate of movies, signing the likes of director Martin Scorsese and Lost creator J.J. Abrams. But if DreamWorks pulls out, watch the talent flee. One of the first to go would be Snider, who has a "key man" contract that allows her to leave if Spielberg pulls out.

What's more, Spielberg could set up an entirely new company called, yes, DreamWorks. That's because DreamWorks Animation Inc. (DWA ), which was spun out of the main DreamWorks studio, controls the name. (Paramount distributes Shrek and other animated films produced by DreamWorks Animation but doesn't own them.)

Spielberg's star wattage is such that other studios would fall over themselves to lavish him with money and autonomy. Private equity shops say they would be only too happy to spot Spielberg a billion or two, but suspect he would feel more comfortable inside another studio. For the moment the director is incommunicado, working in Hawaii on Paramount's Indiana Jones sequel. But the next big action story on his calendar may just be called Escape from Paramount.

Grover is Los Angeles bureau chief for BusinessWeek

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