Success for Paramount’s ‘Rango’ could lead to end of deal with DreamWorks

Paramount Pictures’ “Rango,” a family movie about a chameleon sheriff in the Wild West voiced by Johnny Depp, marks the studio’s entry into the crowded field of big-budget digital animation.

The little critter could cause some big headaches.

Computer animation is one of Hollywood’s few growth industries, with nearly every major studio now wanting to stake a claim in a market dominated by Pixar Animation, Disney and DreamWorks Animation. And “Rango,” which opens Friday, will put Paramount into direct competition with one of those industry giants, DreamWorks, which has been the studio’s chief supplier of family animated films.

The fresh rivalry is a result of Hollywood’s growing push to meet the public’s demand for a genre that has grown immensely popular compared with such previous staples as star-driven dramas and comedies. Five of the top 10 movies released last year in the U.S. and Canada were animated, including two from DreamWorks: “How to Train Your Dragon” and “Shrek Forever After.”

It’s a landscape that few foresaw as recently as 2006, when Paramount and DreamWorks entered into a seven-year pact for the Viacom Inc.-owned studio to distribute the movies of the newly independent animation company. Paramount had released several animated films based on Nickelodeon shows such as “SpongeBob SquarePants,” but it stopped soon after signing with DreamWorks. Now, however, the opportunity is too big for Paramount to leave entirely to a partner.

“There is significant potential for franchises in the family and animated segments of the business, and we will continue to develop and pursue these opportunities,” said Paramount Vice Chairman Rob Moore. “There’s no question that in working with DreamWorks we have learned a lot about how to successfully launch animated movies.”

Paramount has two animated movies following “Rango”: Steven Spielberg’s motion-capture film “The Adventures of Tintin: The Secret of the Unicorn,” set for release in December, and another “SpongeBob” picture. Studio executives say more will follow, including a possible “Rango” sequel.

The distribution agreement with DreamWorks ends in 2012 and must be renewed by early that year in order to set release dates for 2013. Although the two companies have worked together smoothly, a major point of contention must be resolved for their relationship to continue.

DreamWorks Chief Executive Jeffrey Katzenberg has said he intends to seek a reduction in the fees his company pays Paramount to release its movies. People close to Paramount, however, say the studio will not budge much below the current fee of 8%.

A strong box-office performance for “Rango,” which should be No. 1 this weekend with close to $50 million in ticket sales, could give Paramount leverage in the negotiations as it would no longer be reliant upon DreamWorks for animated movies.

“If the economics of a continued deal make sense, then we’d be happy to renew our agreement with DWA,” said Paramount Chairman Brad Grey. “If they don’t, we’d wish DWA nothing but the best and we would continue to produce and release our own films.”

There’s no assurance that Paramount will be able to develop a pipeline of digital animated movies on the level of DreamWorks and Pixar. DreamWorks’ animated movies have provided Paramount reliable profits of about $50 million per picture, Katzenberg has said.

But the potential profit for Paramount if “Rango” is a hit would be much higher. (It also faces the risk of losing tens or hundreds of millions on a flop.) While Universal Pictures had a surprise hit last year with “Despicable Me,” many studios have had misfires, such as Warner Bros.’ “Legend of the Guardians” and Weinstein Co.’s “Igor.”

“The last several years have been littered with attempts to replicate the Pixar-DreamWorks model, and for the most part they have failed,” said Doug Creutz, an analyst at Cowen & Co.

As Universal did with “Despicable Me,” Paramount outsourced the animation for “Rango” rather than support its own overhead of artists. The movie, which has received mostly positive reviews, is the first animated feature made by George Lucas’ special-effects company Industrial Light & Magic and the first venture into animation for “Pirates of the Caribbean” director Gore Verbinski.

DreamWorks Animation is not worried about Paramount’s return to animation, noting that the market has grown despite increased competition, said a person familiar with the matter.

The person said DreamWorks has been happy with Paramount’s marketing and distribution services, but noted that as a public company, it has a responsibility to negotiate the best possible deal.

Still, given the two companies’ long track record, many people in the industry believe DreamWorks and Paramount will ultimately end up renewing their vows.

“What DreamWorks brings to the table is tent-pole films that have an extremely high chance of success,” Creutz said. “There are very few studios that will walk away from that.”

ben.fritz@latimes.com

richard.verrier@latimes.com