Paramount and DreamWorks: Splitsville?

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

by Ronald Grover

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Could Paramount Pictures (VIA) lose Steven Spielberg and the DreamWorks (DWA) 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, 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 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 (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.

'Script Magnet'

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 (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."