Paramount in home entertainment merger talks

Viacom’s Paramount Pictures studio is seeking to merge its home entertainment division with a rival and is in advanced talks with Sony Pictures and News Corporation’s Fox studio, signalling that Hollywood could soon see a wave of consolidation.

The negotiations follow an industry-wide slump in DVD sales, the entertainment sector’s most profitable revenue stream. Sales have fallen by as much as 20 per cent in the past year, forcing studios to cut costs in order to maintain profit margins.

Paramount, the studio behind the blockbuster Transformers sequel, initiated the merger discussions, according to several people familiar with the situation. It is unclear which of the two companies will strike a deal with Paramount, which declined to comment. Sony and Fox also declined to comment.

However, people familiar with the situation said the discussions were going well and would result in considerable savings for Paramount if an agreement were struck.

The talks have focused on combining DVD production, distribution and back-office functions. One proposal would see Paramount begin using Sony’s DADC DVD production system rather than Technicolor’s system, which the studio currently uses.

Following the merger, Paramount and its partner would outwardly continue to operate as separate entities. The two studios would also keep their own marketing and sales operations.

But in joining forces behind the scenes, the studios are likely to generate considerable savings at a time when their parent companies are reluctant to commit too much capital to film production.

The slump in DVD sales has coincided with a drying up of third-party money from private equity groups and hedge funds. Meanwhile, marketing and production costs have spiralled, with studios spending an average of $100m for each film they release.

Across Hollywood, belts are being tightened. Time Warner, which owns Warner Brothers, has trimmed the number of films it releases each year from more than 40 to about 20.

Walt Disney has also moved to cut costs at its studio, with Bob Iger, chief executive, saying during a recent earnings call that the cost of “distributing and marketing DVDs needs to be addressed”.