Brad Grey, Paramount's Comeback Kid?

Even though the Paramount chairman quarreled with Spielberg, he deserves credit for a summer movie lineup that could produce hefty profits

Bill Clinton, it turns out, doesn't have a lock on being the comeback kid. Let me offer up Brad Grey, the Paramount Pictures chairman vilified last year as the movie studio exec who chased away Steven Spielberg. That's still a major league problem for Grey, who will probably see Spielberg shuttle off to another studio any day now. But give the Paramount biggie some credit for a summer lineup that could produce Hollywood's heftiest box office for parent Viacom (VIAB).

By now you know the Iron Man story. The turbocharged Robert Downey Jr. flick about a man and his suit has turned comic book company Marvel (MVL) into a movie production phenom. But less well-known is that Paramount, which distributed the film under a 2005 deal with Marvel, will most likely pocket a cool $60 million profit—with just about no risk, mind you. Add that to the almost certain boffo performance of Indiana Jones and the Kingdom of the Crystal Skull, which Paramount releases on May 22, as well as Dreamworks Animation's (DWA) Kung Fu Panda (opening June 6), and Paramount's studio $104 million operating earnings are likely to jump by 60% this year and double by 2009, figures Bernstein Research analyst Michael Nathanson.

The $5.5 billion a year studio isn't exactly making all the films that will show up in its earnings column this year. In fact, word around Hollywood is that Paramount executives didn't see much of the Indiana Jones footage until director Steven Spielberg was ready to show it to them—even though Paramount footed the film's $125 million bill. Same for Kung Fu Panda, which was made on Dreamworks Animation's dime. But we're quibbling here: Give Grey some credit for getting in bed with folks who know how to make movies, and (after some initial stumbles) getting out of their way. There are way too many movie moguls who have a problem with that last part. "His job is to articulate strategy, and that meant putting us in business with great talent, great partners," says Paramount Vice-Chairman Rob Moore. As for Indy, it was Grey's job to green-light the film, says Moore, after reading a script he liked.

Jump-Starting the Studio

What no one can deny is that Grey & Co. are starting to see some dividends from the rush to jump-start an all-but-moribund studio that the former talent manager inherited when he got the job in early 2005. Some of the deals were already in place: Outgoing studio Chairman Jonathan Dolgen had revamped the deal to make the fourth Indiana Jones flick that eventually got Spielberg and producer George Lucas interested again. But the Marvel deal was all Brad Grey, who was quick to snatch the agreement, says Iron Man producer Avi Arad. Arad, who ran the Marvel studio in 2005, says he contacted several studios but Grey agreed to distribute the film during the course of an initial phone call.

As for Spielberg & Friends—O.K., early on Grey got some well-deserved grief for taking too much credit for films that the superstar director and his team were making. But Grey made amends for that, offering several concessions to the Dreamworks crew. And as part of a the $1.6 billion acquisition of Dreamworks that he helped craft in late 2005, Grey secured for his studio a well-oiled distribution and marketing team that it desperately needed to lure filmmakers to the studio. That helped him get the distribution rights to Shrek and other films by Dreamworks Animation, which was split off from Spielberg's live action operation. This summer's already buzz-heavy comedy Tropic Thunder, starring Robert Downey and Ben Stiller, came from the Dreamworks deal. Paramount also won sole control of a little film called Transformers that he had shared with Dreamworks.

Last year, the film starring those form-changing robots minted north of $700 million, according to the movie Web site Box Office Mojo.

The price of admission for getting much of this year's haul wasn't very hefty, either. Paramount's $60 million profit for distributing Iron Man in theaters and DVD comes after it recouped the roughly $60 million or so it spent to distribute and market the flick—meaning a pretty nifty return on its short-term investment. Grey has a similar low-risk deal with Dreamworks Animation, which pays Paramount an 8% distribution fee (after Paramount collects its expenses) for distributing Dreamworks' animated flicks, according to a Dreamworks filing with the Securities & Exchange Commission. These deals are as close to free money as anything Hollywood ever offers.

Galloping Growth

That's one reason why Bernstein's Nathanson figures Paramount's operating profit will grow at a compounded annual rate of 35.5% through 2010, beating the growth of studios controlled by Walt Disney (DIS), News Corp. (NWS), and Time Warner (TWX). Sure, the studio will have some bombs: I'm betting it will have a misfire with the June 20 Mike Myers comedy The Love Guru, which, frankly, is being promoted with a less-than-enticing trailer. Moore says the heavy promotion for the film hasn't yet started, and Myers will go into promo-overdrive soon. Even without the off-beat comedy, Paramount has a good pipeline of movies now. Next year it releases the long-anticipated Star Trek flick from J.J. Abrams. And even if Spielberg does leave for studios unknown, next year Paramount is scheduled to release a Transformers sequel, which is moving ahead with director Michael Bay and star Shia LaBeouf signed on.

There is always the small, maybe microscopic, chance that Spielberg decides to stay on at Paramount, despite lingering animosity between the studio and the director's camp. Of late, the Paramount folks have been quietly telling people around town that maybe, just maybe, the superstar filmmaker will somehow be a part of a deal that keeps him at the studio and that he will still be tied to Paramount for several projects into the future. He is eager to make two major films, on Abraham Lincoln and on the watershed 1968 Democratic convention in Chicago, and both are currently controlled by the Viacom unit. The betting is still that Spielberg signs instead at NBC Universal. Universal's parent company, General Electric (GE), is said to be putting together a fund with outside investors to re-sign the Dreamworks team that left it in 2005. Where does that leave Grey? Well, you know about these comeback kids: They always seem to, well, come back.

Before it's here, it's on the Bloomberg Terminal.