Spielberg and partner David Geffen have felt slighted that they haven't received more credit within Viacom, given the success of their movies. Recent hits such as "Transformers" and "Blades of Glory" have lifted Paramount out of the doldrums and heightened resentment that has been mounting between the DreamWorks founders and the company's owners since the deal went down 19 months ago.
Big egos often collide in Hollywood. In this case, Geffen has butted heads with Viacom's 84-year-old chairman, Sumner Redstone. Internal power struggles, backbiting, perceived snubs and accusations of credit grabbing have also marred the marriage.
Smarting from seller's remorse, the DreamWorks principals are expected to bolt late next year. Geffen has been telling people in Hollywood that he and Spielberg would look for a new backer and studio home as soon as they are free to do so.
Geffen plans to exercise an out in his contract that frees him to leave next year. If he exits, Spielberg has the right to follow him out the door. Stacey Snider, who runs DreamWorks, can walk if Spielberg departs.
Any breakup is sure to be messy for both sides. Spielberg is knee-deep in movie productions at the Melrose Avenue studio. He and his DreamWorks partners would be forced to leave behind hundreds of projects, including a planned movie version of Alice Sebold's bestseller, "The Lovely Bones," to be directed by Peter Jackson of "The Lord of the Rings" fame. Spielberg pursued that property for many years. They would also abandon key executives at DreamWorks as well as those they installed in senior positions at Paramount.
Essentially, Spielberg & Co. would be starting from scratch, returning to the days in 1994 when DreamWorks was formed. A departure would lead to an even more bitter rivalry with Paramount as the two camps competed head to head for movie projects, talent and consumer dollars.
The questions for Paramount would be: Did the studio get its money's worth when it paid up for the 11-year-old live-action studio from Spielberg, Geffen and Jeffrey Katzenberg? And what value do the remains of DreamWorks have without the talents of the self-described Dream Team?
At the time of the acquisition, Paramount was criticized for overpaying. But its top executives say the purchase easily will pay for itself.
"The deal for us has been highly profitable and is ahead of schedule," Paramount Pictures Chairman Brad Grey said in an interview Thursday. "It would always be better to have Steven and DreamWorks with us, but of course we'll be OK" if they leave.
Grey acknowledged that the DreamWorks deal "really accelerated our turnaround."
DreamWorks' hits, which also included "Norbit," "Disturbia" and "Dreamgirls," have played a major role in the recovery of Paramount, which had few projects in the pipeline when Grey took the helm in early 2005. At a time when Paramount's own movies, including the expensive flop "Stardust," have been underperforming, DreamWorks' output has catapulted its owner from last to first place in industry market share.
Still, Viacom's top brass got tired of the speculation about Geffen's chronic unhappiness and desire to leave Paramount.
At an investor conference in New York on Tuesday, Viacom Chief Executive Philippe Dauman said of the likely divorce, "We're planning for that." He went on to assure investors that the financial effect on Paramount and Viacom would be "completely immaterial."
That comment ratcheted up the ill will. Jumping to the defense of his partner, Katzenberg shot back Wednesday: "To suggest that not having Steven Spielberg is completely immaterial just seems ill-advised," he said to the same group of investors in New York. "I think calmer heads need to prevail here."
Katzenberg runs publicly held DreamWorks Animation SKG Inc., which is not owned by Paramount but has a multiyear distribution deal with the studio.
In a business as unpredictable as Hollywood, DreamWorks and Paramount could wind up having a rapprochement and drawing up new employment contracts.
Grey said he remains hopeful. "The temperature has to go down a little bit," he said. "If there's an economically prudent deal that makes sense for us, of course I want Steven and DreamWorks to be part of Viacom. No one respects Steven and David more than I do."
But most industry observers believe that's a long shot.
The DreamWorks partners declined to comment.
In December 2005, when Paramount agreed to acquire DreamWorks, players on both sides heralded the union as a win-win. Geffen was thrilled when Paramount's Grey persuaded the Viacom board to buy the company after extensive negotiations with NBC Universal fell apart in the eleventh hour.
For Grey, landing DreamWorks was a coup. Not only could the former talent manager, who had never run a studio, benefit from the expertise of such heavyweights as Geffen, Spielberg and Katzenberg, but it also gave him a way to fill Paramount's production and distribution pipeline with ready-made movies.
To help finance the costly acquisition, Paramount sold DreamWorks' 59-film library, which includes the Oscar-winning hits "American Beauty" and "Gladiator," to a private equity group headed by billionaire George Soros for $900 million. That brought Paramount's investment to $700 million, although the studio has the right to buy the library back in 2011.
Paramount has several means for recouping that outlay.
The studio retained worldwide distribution rights to the library, which throws off millions of dollars in fees a year. It also collects an 8% distribution fee on every movie it releases for DreamWorks Animation, which was spun off from the live-action studio in 2004. Paramount has earned about $60 million a movie from animated blockbusters such as "Shrek the Third."
Over the course of the seven-year deal with DreamWorks Animation, Paramount could potentially reap $800 million from the two movies a year it releases if the historical performance of computer-generated hits is an indicator.
Paramount also makes millions of dollars in ticket sales from DreamWorks' live-action hits. This summer, "Transformers," which Paramount co-owned before buying DreamWorks, grossed close to $700 million worldwide. It's expected to be a giant DVD seller later this year. Paramount could net as much as $200 million once all revenue streams are counted, according to industry executives.
The new film franchise will spawn several sequels and other cash-generating opportunities and could single-handedly make the DreamWorks acquisition worthwhile.
That's not to say Paramount hasn't lost money on any DreamWorks movie. For one, director Clint Eastwood's expensive war drama, "Flags of Our Fathers," which grossed less than $35 million domestically, lost about $40 million for Paramount and its financing partner, Warner Bros.
"We looked at this as a long-term deal," Grey said. "Clearly in 2007, it went even better than we imagined. I'm delighted we made the deal."
Even if he leaves, Spielberg will remain the crown jewel of the acquisition for many years. He and director Michael Bay have signed on to make "Transformers 2," scheduled to hit theaters in the summer of 2009.
Spielberg, who is currently shooting "Indiana Jones and the Kingdom of the Crystal Skull" for Paramount, is planning to direct another movie in the coming months, a drama based on a script by "The West Wing" creator Aaron Sorkin.
Paramount also has been able to build a first-class global distribution operation by plucking several top DreamWorks executives, including the heads of its theatrical distribution, home video and international television units.
For DreamWorks, Paramount's marketing and distribution team has contributed mightily to its success. Yet Geffen has told associates privately that he resents lining Paramount's pocket with the proceeds of DreamWorks' hits, even though he was the one who orchestrated the sale.
Geffen, who made his original fortune in the music industry, also has complained to friends that Paramount received a huge discount when it bought the company. What he fails to mention is that DreamWorks was coming off a cold streak in 2005, with such costly flops as "The Island." That prompted NBC Universal parent General Electric Co. to slash its bid for the studio by $100 million at the last minute.
Not long after making the Paramount deal, Geffen and his partners acquired a nasty case of seller's remorse. The first signs of tension surfaced late last year, when Geffen accused Grey of grabbing too much credit for his pet project, "Dreamgirls," which was co-financed by Paramount.
Spielberg was also miffed that Paramount executives habitually referred to DreamWorks releases as their own. The celebrated director also didn't think Paramount was honoring its contractual promise to give him and DreamWorks the kind of autonomy they deserved.
Spielberg was upset that his longtime ally Snider felt belittled by Grey. Relations between Spielberg and Paramount were so strained this spring that Grey agreed to give him and Snider more power and money. Paramount raised DreamWorks' annual production allotment to between $350 million and $400 million and its overhead and development fund to $60 million. Also, DreamWorks can now greenlight any Spielberg-directed movie costing up to $140 million and any other film up to $100 million.
If the DreamWorks honchos vacate Paramount, they will be entitled to take their company name and logo with them.
There's rampant speculation that Spielberg and DreamWorks will return to Universal Pictures, where the director began his career decades ago. However, Geffen is talking to several studios about a potential new home.
For Grey, losing Spielberg and the Dream Team would be viewed as a black eye. Does he have any regrets about the relationship going south?
"In any new relationship, there are going to be bumps in the road," Grey said. "And certainly we've had bumps in the road. But the results have been stunning, and I'm feeling confident that Paramount is running on all cylinders with a wide portfolio and we are well positioned for the future."