December 12 2005

Paramount is not buying DreamWorks. They are renting the cachet of Steven Spielberg & David Geffen for a few years.

There was something that smelled funny about the late Friday announcements (by way of reporters getting information from mostly unnamed sources who, miraculously, started spilling their guts all at the same time) about Paramount "buying" DreamWorks.

$1.6 billion? That was at least $300 million more than the company appeared to be worth to G.E. Why would Viacom, a company desperate to appear tight and headed to a great future, be overspending on a studio with a significantly fainter pulse than MGM had when Sony "bought" it?

That question was answered on Sunday, when David Geffen went on record with various media outlets explaining the deal. My guess would be that as Viacom and Geffen took the temperature of Wall Street on this deal, they were coming back with some cold thermometers. So the story of why this deal is so great for everyone became the topic of a number of media conversations on Sunday. Some outlets were, as always, more spun than others. But they all (at least all of them that I have read so far) missed the bottom line. Paramount isn't buying very much here.

They aren't buying the library, which they are going to try to sell at a significantly inflated price like hot coats off the back of a truck. There is no reason to think that they can sell the library, which has been valued at under $800 million by investors previously looking to buy, for $1 billion

Distribution rights to DWA films at 8% is worth, at most - based on the Shrek 2/Shark Tale year - $50 million a year and, on an average year, is worth about $30 million. And it cost Paramount $75 million paid to DreamWorks Animation to close the deal, so the realistic total return to Paramount on the DWA distribution deal over their seven years, including their buy-in cost, is about $170 million.

Though The New York Times continues to insist that the deal "gives Paramount access to the eight new films on DreamWorks' slate for 2006 (a ninth film is co-financed with Paramount)," I'm still trying to figure out the math. Dreamgirls, which was already co-owned by Dreamworks and starts shooting in January, is presumable the "ninth film." The only films sitting around in the can at DreamWorks are She's the Man and The Last Kiss. There is a Tom Tykwer film called Perfume, which is domestic distribution only for DW, that should be ready in the fall. And there is Clint Eastwood's $80 million Iwo Jima epic, Flags of Our Fathers, which is also a split deal, this time with Warner Bros. That's four. And there are two DWA films, Over the Hedge and Flushed Away, that really aren't on the DreamWorks slate, though I suppose they must be in the count. That's six. Perhaps DreamWorks has another two films tied up in the basement of The Adobe, petting Precious. (There is an outside shot that the Michel Gondry/Jack Black project will start rolling in time for a 2006 release… but it is a hope, not a reality.)

Regardless, three of the four live action films I count cannot be expected to gross as much as $50 million domestic. Flags of Our Fathers can be expected to be both a commercial and awards season success. And if the animated features gross $150 million each, that generates a check of $24 million for Paramount. Wow!

I find it breathtaking that media outlet after media outlet has described this as a kickstart to Paramount. An Amanda Bynes comedy, a Zack Braff comedy, and a Tom Tykwer drama. That would be a kickstart to Paramount Classics maybe.

Flags of Our Fathers and Dreamgirls are, surely, going to be terrific additions to the Paramount line-up, which has nine films scheduled for 2006, and even fewer targeting 2007. But after that, we're back to the same hit and miss business at DreamWorks that we are subject to at Paramount, albeit with more experience at the helm.

For all intents and purposes, this deal is designed to sell off the DreamWorks library to cover the cost of getting the company back to square one fiscally. And then, Paramount will commit roughly $500 - $600 million to fund DreamWorks' productions for three years.

And what happens if they can't get the money they are hoping for from the library? I don't know.

The first question is, "Who is going to pay premium prices for this library?" Then, one asks, "Who will be paying a premium when, according to the Variety report, 'Par will retain distribution rights to the pics?'" Huh? (Claudia Eller and Sallie Hofmeister report that what Par will retain is licensing rights for theatrical showings… which is a small business at this prices.) And what is the exact availability of Home Entertainment on those titles now anyway? Universal has had those rights for a while. So what exactly is the mystery buyer getting for their billion dollars?

For all intents and purposes, the library deal is very much like the one done for MGM's library, though Paramount does not have the pressing HD-DVD concerns that Sony had. For all intents and purposes, Universal could buy the library for itself without the other baggage (and get Spielberg back in three years).

There are many other bizarre elements to the latest telling of this story. For instance, Geffen suddenly claims that Paul Allen was not still in the red on DreamWorks, when it was widely reported that he made about half of his initial investment back on the DreamWorks Animation IPO. And DWA was, in fact, trying to do another private offering this summer to pay Allen off when all hell broke loose on the Shrek 2 DVD numbers trouble. Is it possible that SK&G went into their own pockets and paid Allen out then? Yes. And as far as I can tell, it is the only way that Allen's "payout" on this deal can be "all profit" for him.

Moreover, the notion that this is a happy situation for SK&G is a stunningly blind call. Three of the most powerful, daring, skilled men in Hollywood history are selling their company off after 11 years in a veritable fire sale and what do they walk away with? They have stock in DWA. And from this Paramount deal, they get $16 million for each year they spent with the company. Oh, and did I mention, they each put in $100 million at the start? So each partner gets about $6.6 million a year for their effort, plus their DWA stock.

Even for Jeffrey Katzenberg, the least overwhelmingly wealthy of the trio, the investment of time, energy, and power was not reciprocated by anything close to what each of these men could have earned had they not created this studio. Geffen would make more than his total payout for 11 years by putting his fortune in an interest-bearing savings account at your local bank for one year.

And so, after all the fanfare, DreamWorks is Paramount's new Imagine… which a much bigger infrastructure. They will have about $200 million from Paramount a year to make movies. Steven will stay in The Adobe and Geffen will go back to Malibu, except while on the set of Dreamgirls, his one true passion project. DreamWorks will likely partner up with other studios for more expensive films. Spielberg may make a few movies for DreamWorks under Paramount, the most hopefully anticipated being another Indiana Jones movie, though the buzz of the moment says, "Warning… about to fall apart again."

And we get left with a lot of hype printed by a lot of reporters who should know better.

Does Terry Press report to Gerry Rich?

Does Adam Goodman report to Gail Berman?

Where is Rick Sands going again? He wanted to work for an independent company? Is he going back to The Weinsteins? Is there another "independent" job for him?

What does Jim Tharp's distribution group do now, exactly? Maybe they build the new international distribution arm of Paramount. Or maybe not.

How many jobs will be duplicated in the name of six films a year? And if carrying a staff of 500 for six films a year put DreamWorks in the poor house now, how will this be better next year? Expect significant layoffs… on either side… or both sides.

But the biggest unasked question is, come 2009, what does Paramount own from making this deal?

Whatever movies were made in the four years, perhaps. And the name DreamWorks, perhaps. And? Well, there will be a few years left on a not-terribly lucrative DreamWorks Animation distribution deal. A bunch of development projects.

No Spielberg commitment. No Geffen commitment. No 59-film library.

Spielberg and his band of merry men will have the freedom to re-encamp at Universal or Columbia or Fox or Disney or even Paramount, negotiating another deal for a production fund that has the allure of promised Steven Spielberg movies.

Paramount is buying almost nothing. The real assets are being either sold off or rented for a few years

Paramount put the deal together in a week when Universal couldn't close for almost a year in no small part because they are not paying the full fare and Universal would have been doing just that. Journalists are writing about the off-the-cuff feel of this deal as though Brad Grey was Dean Martin, smoothly coming together with a new Rat Pack. It's a good story. But it's not a realistic business perspective.

And don't be so sure it's all over. It took Sony more than six months to do due diligence on MGM and, like Paramount, they ended up being a minority financial partner in the overall deal. God bless Paramount if they sell off the library before the new year. But until that part of the deal closes...

All drama aside, this was a desperation deal for DreamWorks and a bit of an money overreach for Paramount. But that's no reason that it won't work out for everyone. It always concerns me when there is so much hype and so little substantive value in a deal. And it certainly makes me sad to think about the DreamWorks library being reduced to just another faceless commodity. (Maybe Geffen will buy it for Spielberg as a Chanukah gift.)

DreamWorks: The Studio is dead. DreamWorks: The Rich Man's Imagine is born.

And wait for the re-run - same time, same channel - in 2008.

E-ME.