UPDATE: Desperation Move & Cash Grab? Or Bloodier Blu-ray/HD-DVD Format War?

MONDAY AM UPDATE: Here’s the official Hollywood announcement today. Note how there’s no mention of the money Paramount (I’m told $50 million) and DreamWorks Animation (I’m told $100 million) is receiving for “promotional consideration” from the HD DVD side to continue with what is widely recognized as the losing high-def format. Also note that Fox and MGM right afterwards announced today they were releasing even more Blu-ray titles. Also note that Steven Spielberg is still fence-sitting (although this fall Sony will release in Blu-ray its catalogue title Close Encounters Of The Third Kind, the first of Spielberg’s pictures to do so in either format). Sources are telling me these moves are “really out of desperation” by HD DVD and “a cash grab” by the studios. Hollywood was lopsided in favor of Blu-ray: until now, 7 of the 8 major movie studios (Disney, Fox, Warner, Paramount, Sony, Lionsgate and MGM) supported Blu-ray, and 5 of them (Disney, Fox, Sony, Lionsgate and MGM) release their movies exclusively in the Blu-ray format. Only Universal was exclusively HD-DVD. The $100 mil is a huge $$$ infusion for the Shrek-dependent public company DreamWorks Animation — especially curious because, earlier this year, Jeff Katzenberg told a Bank of America conference that he expected “neither” high-def DVD format to win the war “because they’re not going to become the next platform.” I have more analysis below:

“Paramount Pictures, a unit of Viacom Inc. and DreamWorks Animation SKG each announced today that they will exclusively support the next-generation HD DVD format on a worldwide basis. The exclusive HD DVD commitment will include all movies distributed by Paramount Pictures, DreamWorks Pictures, Paramount Vantage, Nickelodeon Movies and MTV Films, as well as movies from DreamWorks Animation, which are distributed exclusively by Paramount Home Entertainment. The companies each said that the decision to distribute exclusively in the HD DVD format resulted from an extensive evaluation of current market offerings, which confirmed the clear benefits of HD DVD, particularly its market-ready technology and lower manufacturing costs. Paramount Home Entertainment will launch its exclusive HD DVD program with the release of the blockbuster comedy hit Blades of Glory on August 28th and follow with two of the biggest grossing movies of the year Transformers and Shrek the Third. These three titles alone represent more than $1.5 billion in box office ticket sales worldwide.

‘The combination of Paramount and DreamWorks Animation brings a critical mass of current box office hits to consumers with a line-up of live action and animated films that are perfect for HD DVD,’ stated Brad Grey, Chairman and CEO of Paramount Pictures, which is currently the leading studio in domestic box office. ‘Part of our vision is to aggressively extend our movies beyond the theater, and deliver the quality and features that appeal to our audience. I believe HD DVD is not only the affordable high quality choice for consumers, but also the smart choice for Paramount.’

‘We decided to release Shrek the Third and other DreamWorks Animation titles exclusively on HD DVD because we believe it is the best format to bring high quality home entertainment to a key segment of our audience – families,’ stated DreamWorks Animation CEO, Jeffrey Katzenberg. ‘We believe the combination of this year’s low- priced HD DVD players and the commitment to release a significant number of hit titles in the fall makes HD DVD the best way to view movies at home.’

Paramount Home Entertainment will issue new releases day and date as well as catalog titles exclusively on HD DVD.  Today’s announcement does not include films directed by Steven Spielberg as his films are not exclusive to either format.”

SUNDAY PM: I’ve learned there will be two new developments announced later this week today in the ongoing Blu-ray vs HD-DVD format war: separate HD-DVD deals with Paramount and DreamWorks Animation that involve major millions of dollars. I’ve got a confidential report from Pali Research managing director Richard S. Greenfield, a media analyst for entertainment and cable, that discussed the deals (see below), spinning them as “the format war is now set to intensify”. But sources have given me updated details which show the HD-DVD side is paying through the nose — I’m told $50 million to Paramount, and $100 million to DreamWorks Animation — to try to show the strength of what we all know is a dying format. After all, the consumer is already making a decision between formats: even though Toshiba-backed and Microsoft-backed HD-DVD players are far cheaper right now, Sony-backed Blu-ray prices are rapidly coming down. After all, the consumer is already making a decision between formats: even though Toshiba-backed and Microsoft-backed HD-DVD players are far cheaper right now, Sony-backed Blu-ray prices are rapidly coming down. And Blu-ray high-def movie discs outsold films on rival HD-DVD 2-to-1 in the U.S. in the first half of 2007, Home Media Research said last week. Meanwhile, Blockbuster plans to line its shelves with Blu-ray DVDs which are “significantly outpacing” HD-DVD rentals. Here’s the Pali Research memo:

“Based on conversations with multiple sources, we believe that Paramount is set to make the vast majority of its catalog available exclusively in the HD-DVD format (unclear whether that includes titles from its sister studio DreamWorks).

While Paramount (owned by Viacom) has some on-going commitments to release new release titles in Blu-ray, it is unclear how long that commitment lasts and how comprehensive the agreement is.

Up until now, Paramount and DreamWorks (live action) were releasing in both Blu-ray and HD-DVD formats. The reason for shifting catalog exclusivity to HD-DVD would appear to be substantial upfront dollars. We expect these dollars could have a meaningfully positive impact on Viacom’s film profitability in 2H ’07 and full-year 2008.

Separately, it appears that DreamWorks Animation is set to announced that 3-5 key titles (some catalog, some new releases, but details are still fuzzy) over the next several years will be made available exclusively in HD-DVD.

While we are somewhat surprised to see DWA favor a format given its smaller number of releases in a year similar to Paramount, we suspect the driving force of the decision was upfront payments to increase their support of HD-DVD. Given DWA’s size, the financial impact on EPS in 2008-2010 could be a positive catalyst for the stock (we are still assuming that Shrek The Third is coming out in both formats in November 2007).

Prior to these revelations, we believe HD-DVD was essentially “dying a slow death,” as Universal was the only studio exclusive to HD-DVD (and its box office was not strong enough this year to make a difference), far outweighed by the Blu-ray only studios (Sony, Fox, Disney, MGM, and Lionsgate.) Even though Sony’s PS3 has been disappointing from a sales standpoint, Blu-ray DVD sales had begun to notably accelerate based on the content being made available. However, the Paramount/DWA moves alter the landscape meaningfully, as Paramount (Including DW/DWA titles) is the leading theatrical distributor year-to-date (enabling its catalog DVDs to “ride the coattails” of the success of successful theatrical films being released on DVD for the first time.)”