Brad Grey's Paramount Launches Animation Division, Leaving DreamWorks Hanging (Updated)

Grey tells TheWrap: “It makes sense to work with Nickelodeon and build this into a global film business” as DreamWorks Animation deal set to expire

Updated 1:33 p.m. PT

Paramount is getting into the animation game. 

The studio announced on Wednesday that it is launching an in-house animation division and expected to release its first film through the unit in 2014. 

Also read: Jeffrey Katzenberg's Dilemma: Stock Woes, TV Dreams, No Buyers

In an interview with TheWrap, Paramount Chairman & CEO Brad Grey said that budgets on each of the division's films will be in the $100 million range and that the studio plans to release one picture a year. 

"That's a price point we think is a smart business," Grey told TheWrap. "The global market is virbant for family fare, particularly if we stick to that price range."

The move comes as Paramount's renewal of its current distribution pact with DreamWorks Animation remains very much in doubt. That deal is set to expire in 2012.

Paramount, which makes an 8 percent distribution fee on DreamWorks' films, has offered to extend the distribution pact for another year, according to an individual with knowledge of the talks. Were the studio to extend the arrangement further into the future, it would have to be for a larger fee or cut of the profits. 

A spokeswoman for DreamWorks Animation declined to comment. 

Further straining the relationship, Katzenberg has clashed with Paramount's leadership, according to individuals with knowledge of the situation. Now that Paramount is serious about creating its own in-house product, analysts say that could severely weaken DreamWorks' hand.

Paramount's move follows release of the studio's first CGI animated effort "Rango." Featuring the voice of Johnny Depp, "Rango" made $240 million worldwide, but cost $135 million to produce, making it something of a box-office underachiever. 

Paramount is clearly positioning itself as a major player in the animation field, but breaking in won't be easy. Once the domain of Disney, its Pixar division and DreamWorks, the animation landscape has become increasingly competitive one in recent years.  

"With pretty much every major studio having an animation unit, the competitive pressure in the market has intensified for everyone," Tony Wible, an analyst with Janney Montgomery Scott, told TheWrap. "It hurts your windows and makes it harder to secure screens and licensing dollars."  

Warner Bros. and Fox have ramped up their animated output scoring hits with films such as "Happy Feet" and "Ice Age," and Universal launched its own division, Illumination headed up by Chris Meledandri in 2007. Sony also has an animation division. 

On Wednesday, Grey said that the company was uniquely positioned to spin out animated hits. To that end, it will draw on other members of the Viacom corporate family in developing its films, in particular the kids network Nickelodeon.

"We will build our animation division hand in glove with Nickelodeon. They make great family movies, so it makes a lot of sense to work with them and with Viacom's consumer products division  to build this into a global film business," Grey said. 

Though Paramount's distribution unit has been widely praised for its work rolling out hit films such as "Iron Man" and "How to Train Your Dragon," the fact has remains that it has only served as a distributor for Marvel and DreamWorks Animation on many of its biggest blockbusters. Under Grey and Vice Chair Rob Moore, the studio has been working to strengthen its production arm, so that the company will be less dependent on distribution pacts and enjoy a bigger slice of the profits — a move that was made increasingly important after Disney's 2010 acquisition of Marvel ended that gravy train for Paramount.

"Paramount has proven that it is really a powerhouse studio, but I'm not sure this initiative will really move the needle," Marla Backer, media analyst with Hudson Square Research, told TheWrap. 

For years, the knock on Paramount has been that it was little more than a high-end clearing house for other peoples' movies. By launching its own animation house on Wednesday, Paramount moved to shore up its film factory.  

"When I got there six years ago, the cupboards were bare," Grey said. "It's taken a lot of hard work from all of us to get us to a place where we control our own destiny."