Paramount talks to rivals on combining DVD operations: source

By Gina Keating

LOS ANGELES (Reuters) - Viacom Inc's (VIAb.N) Paramount Studios is considering combining its DVD manufacturing and distribution operations with those of a rival studio to cut costs, a source close to talks said on Tuesday.

Paramount was in preliminary talks with several studios, including News Corp's (NWSA.O) Fox and Sony Corp's (6758.T) Sony Pictures, the source said.

The goal would be to cut costs by combining some back office operations, including production and distribution, in a sort of joint venture, a second source familiar with the talks said.

Hollywood studios are cutting expenses to cope with the global economic crisis, stagnant video sales and up-and-coming technology that is steering consumers away from traditional home entertainment formats. Paramount's move also may have been prompted by its relatively

Paramount is contemplating keeping its DVD marketing operations in house and trying to achieve economies of scale by combining other operations with those of another studio, the first source said.

No deal is imminent and Paramount has not identified a savings target it wants to reach, the first source said.

A Paramount spokeswoman would not confirm the talks. Neither Sony, Fox nor Lions Gate (LGF.N) Entertainment Corp would comment whether it was talking to Paramount. A Walt Disney Co (DIS.N) spokesman said the studio is not involved in the Paramount negotiations.

DVD sales, while still a moneymaker for the studios, flattened starting in 2005, leading executives to consider how to scale down home entertainment operations that once supported much higher sales volumes.

The talks between Paramount and the other studios on ways to make long-term cost-cuts could signal that entertainment companies have adjusted expectations for a boost in DVD sales from the high-definition format, including Sony's Blu-Ray format.

Larry Haverty, portfolio manager of the Global Multimedia Trust for GAMCO Investors, called Paramount's move "a monumentally sensible thing to do."

"The principal buyers are Wal-Mart (WMT.N) and Amazon (AMZN.O) and two next in line are Target (TGT.N) and Best Buy (BBY.N). You don't need a massive organization to deal with four buyers," Haverty said.

"The DVD distribution used to be a massive business ... but as retail has consolidated very significantly, the market has matured and more or less stopped growing."

Haverty predicted that the studios' DVD operations would eventually boil down to two or three competing DVD distributors that probably would take the form of joint ventures.

(Reporting by Gina Keating; Editing by Phil Berlowitz, Steve Orlofsky, Gary Hill)