Paramount’s new animation division spells likely end for DreamWorks deal

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Paramount Pictures is launching its own animation division, spelling a likely end next year to its longtime agreement to distribute movies for DreamWorks Animation.

The relationship between the two companies has been strained recently over how much DreamWorks pays the Viacom Inc.-owned studio to release its films, according to people with knowledge of the matter.

One person familiar with the thinking of top executives at Paramount said the studio offered DWA Chief Executive Jeffrey Katzenberg a one-year extension to his company’s deal, which expires in 2012, for the same fee DreamWorks now pays Paramount: 8% of film revenues.

After 2013, Paramount is only willing to accept a higher fee, the person said. Not coincidentally, the studio expects its new animation group to release its first movie in 2014, the same year it will demand better terms from DreamWorks.

Katzenberg is very unlikely to accept such an offer, as he has repeatedly told investors that he intends to seek a reduction in the fee.

The move by Paramount leaves DreamWorks Animation in a difficult position . Most other studios, including Walt Disney Studios, 20th Century Fox, Sony Pictures and Universal Pictures already have animation divisions. The only studio without a feature animation group is Warner Bros., whose parent company, Time Warner Inc., has been long rumored as a potential buyer for DreamWorks Animation. However, Time Warner chief Jeffrey Bewkes has told associates he would not overpay for the asset.

A DreamWorks Animation spokeswoman declined to comment.

Paramount has been distributing DreamWorks animated films since 2006 when it acquired Steven Spielberg’s live-action DreamWorks Studios, which it divested in 2008.

However, Paramount has since moved into the family-animation business itself. Its first such movie, ‘Rango,’ was released in March and did decent business, grossing $243 million worldwide.

It’s unlikely the movie, which featured the voice of Johnny Depp will make a profit given its production budget of close to $150 million, but the well-reviewed picture established Paramount in the animation business.

Going forward, Paramount Chairman Brad Grey said the studio will seek to make animated films for no more than $100 million. Like Universal’s family-entertainment unit, Illumination Entertainment, Paramount will seek outside companies to produce its animated movies, rather than hiring its own animators.

Paramount is currently considering executives to run its animation group.

Meanwhile, it will release DreamWorks’ next film, ‘Puss in Boots,’ in November.

-- Ben Fritz

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Upper photo: A scene from ‘Rango.’ Credit: Paramount Pictures

Lower photo: DreamWorks Animation CEO Jeffrey Katzenberg. Credit: Matt Staver / Bloomberg