Universal Pictures andParamount Pictures' announcement on Tuesday night that they are restructuringtheir joint international distribution venture, United International Pictures(UIP), comes as little surprise given the growing importance of the internationalmarket.

The deal sees UIP continuingto work on international releases for Paramount and Universal until the end of2006, at which point UIP will be scaled back to handle 20 territories (downfrom the current 35). Universal and Paramount will then carve out their ownseparate international distribution operations in major territories such as theUK, Germany and Spain.

"I think we're later to theparty than the other studios but I think we're not too late. If we're late it'sbecause UIP has worked so well," Universal Pictures vice chairman Marc Shmugertold ScreenDaily.com.

Indeed, UIP is the marketleader in 2005 so far in UK, France, and Germany with hits including War ofthe Worlds, Meet the Fockers, and Madagascar.

Stewart Till, chairman andCEO of UIP, said he found out about the restructuring plan on Tuesday whenUniversal's Shmuger and Paramount's president of worldwide marketing anddistribution Rob Moore informed Till of the details.

"My understanding is thatbecause the international marketplace is growing so significantly and willcontinue to grow, that they want to have closer control of their own destiny,"Till said.

With speculation about theUIP restructure growing in the media in recent weeks, Till said theannouncement "came as a disappointment but not as a shock."

UIP's 650-person workforcewill not be affected in the short-term, Till said. "I think in the short-term,my job is to make sure is that [the restructuring] doesn't distract them. Weare enjoying an exceptional year and we've got a number of very important filmson the horizon - Pride and Prejudice, King Kong, Jarhead, Wallace &Gromit -- so my short termresponsibility is to make sure we stay focused."

After the end of 2006, whenParamount and Universal start their own distribution in 15 countries, UIPoperations will be more heavily impacted.

"From 2007 on, obviouslyeveryone's job [at UIP] will change in some shape or form," Till said. He notedthat some current UIP staffers are likely to join the separate operations of Universalor Paramount. Till emphasized that after 2007, he still plans for UIP to beheadquartered in London, although he wouldn't speculate on the number of staffmembers that would be needed by the company at that point.

Paramount, Universal, MGM,and United Artists formed UIP as a joint venture in 1981; MGM and UA exited in2000 leaving Paramount and Universal as the sole partners. There had beenspeculation each company would take its international distribution internalsince then, with rumours growing under Paramount's recent regime change.

Shmuger of Universal notedthe restructuring was announced at this particular time because UIP's governingagreement was up for renewal or cancellation at the end of October.

Both parties said theimpetus for the change was to have greater control over international markets."I think many years back it was typical of the studios in general and ourstudio in particular to think of the international box office as an ancillarypart of the business - but it is our core business," Shmuger said. "It is theonly way that the economics of our business make sense."

For Paramount, the movecomes after Brad Grey took the helm and parent company Viacom planned tocombine Paramount and Viacom's cable TV channels into one entity.

"As Viacom splits andParamount becomes part of a new company, one of the real focus areas of thecompany becomes developing the MTV and Nickelodeon brands both domestically andinternationally," Paramount's Rob Moore explained to ScreenDaily.com. He noted that development of internationally viableprojects would also be a priority - an area where Paramount's relationshipswith superstars such as Tom Cruise and Brad Pitt will be helpful.

Tim Bevan, co-chairman ofLondon-based production company Working Title Films (which has Universal as aparent company), said the news wasn't surprising. "I think it's a great thing.Both companies realise that the room for growth is in foreign markets. With somany films going through UIP, for dating and the rest of it, there was thebeginning of standing on each other's toes. So it's a good solution to thewhole thing in my opinion."

The transition period overthe next 16 months "gives both partners sufficient time to set up their ownoperations if that is their choosing" in the various countries, Shmuger said.

Paramount and Universaldivvied up the 15 countries through a draft process, which the parties declinedto describe in detail. In each country, the current UIP operations (andstaffers) will become part of the respective company in 2007 - for instance, Paramount will get theoffices in seven countries including France, Australia, and the UK; Universalwill get eight countries including Russia, Spain, and Germany. But during 2007and 2008, Paramount and Universal each has the option to use the othercompany's office as its distribution hub in that country.

Moore says "there is a highdegree of probability" that Paramount may need to take advantage of thoseformer UIP-Universal offices if it doesn't have its own operations in a givencountry by January 2007. Creating a wealth of new foreign offices within 16months could prove financially difficult as well: "There's definitely amoderate financial impact in the short term, where we're building up anorganization while UIP is still in place," Moore said.

Till said the lengthytransition period would "give UIP executives time to adjust to the future."From 2007, UIP will still handle 20 of the 35 international territories that itcurrently serves. They include two large markets - Japan and Korea - andsmaller markets including Colombia, Denmark, Singapore, Taiwan, and Turkey.

Till said that Japan andKorea "are complicated markets -- Japan because there is a huge gap betweensuccess and failure, Korea because the local films are so strong. Universal andParamount think those are marketplaces best addressed working together, it's astrategic issue." (Those are also two markets in which DreamWorks releases arenot currently handled through UIP.)

With the other 18 territories,he said it was a matter of economics as they are areas where it's notcost-effective for either Universal or Paramount to have a stand-aloneoperation.

Till said that the newsdidn't signal any major problems with current UIP operations or any big riftsbetween Paramount and Universal. "I think the new Paramount management -including Brad Grey and Rob Moore -- and the existing Universal management ofMarc Shmuger are exceptionally compatible in the way they see internationalreleases."

Till also disputed thenotion that there was a prohibitively large amount of Universal and Paramountreleases crowding UIP's plate. "That was one of the great urban myths, when Iarrived here [at the start of 2003] there was that perception. But look at thissummer, we had War of the Worldsand Madagascar, there's notanother distributor that could have handled both." Till also pointed to theinternational success of more specialised films such as Lost in Translation and 21 Grams. "I can't think of any film that's been neglected," he said.

Universal's Shmuger agreedthat this was a proactive plan to grow future business, not a reflection on anycurrent or past troubles. Paramount's Moore did acknowledge that a jointventure was inherently not as ideal as internal development. "There areprobably opportunities that have been missed, and the brands may not havedeveloped as much as they may have if we actually had an organisation dedicatedto Paramount," he said. Although he did go on to offer high praise to UIP'swork on Paramount titles in the past.

Bevan noted that WorkingTitle hadn't experienced problems working in the current UIP framework but hedid note that "there are an awful lot of films" under the umbrella and that itwas a fight to secure and keep a prime release date.

Till didn't speculate on hispersonal prospects with UIP or the other companies, other than to say that he's"under contract for a reasonable period of time" with UIP. Universal's Shmugersaid that David Kosse, current head of Universal's London office, "has been akey part of making these decisions and he'll continue to run our operation" asthey transition to growing a larger international office in London.

Moore noted that Paramount'sinternational arm would be based in Los Angeles, but that the company wouldopen a European operations headquarters in London. He said there was no wordyet who would be in charge of the international operations in Los Angeles or inLondon.

He added that theinternational HQ would be based in the United States because it would integratethe foreign opportunities into the everyday life of the Paramount: "We needemployees who are integrated in the organisation, familiar with the brand, andpart of the process in terms of decision making, and that's in the L.A. office."He said that in this way, international staffers can be involved in such earlydecisions as casting, offering opinions about which actors travel well orpoorly overseas.

Because of the way thetransition is structured, Bevan doesn't expect problems with upcoming WorkingTitle releases through UIP (including Pride and Prejudice) because of the way the future of the companies ismapped out. "I think it will be very smooth. It's not in anyone's interestto create chaos," Bevan said. "All their futures are involved in one or theother. It's not the Armageddon scenario -- everybody's got a future with UIP,Universal, or Paramount."

Also, both companies arelikely to expand their international presence by acquiring more local films."In the future, Universal will be an even more significant presence with morelocal filmmakers," Shmuger said. "That's in terms of making movies,distributing movies, and acquiring films for home video and theatricalreleases."

Paramount sees similar newopportunities. Moore said, "Whenyou're in a joint venture, you don't have that mandate [for financingacquisitions]. Now havingParamount senior executives in the marketplace, we can identify potentialacquisitions and the potential for local productions, that's one of the areasthat we can now explore that we couldn't in the past."

Working Title's Bevan seesthe restructuring as a benefit to a range of producers - not only for WorkingTitle which will get more individual attention from Universal. "We'll obviously be an important partof Universal, and we'll be a bigger important part in their foreigndistribution. I see this as an opportunity for British producers, because eachcompany will have fewer films internationally and should be acquiring aswell."

UIP did not handle homevideo releases for Paramount and Universal, creating one area where there hadlikely been conflicts about timing of releases with each company's home videoarms and the UIP theatrical business. While the home video aspect of thebusiness didn't drive this restructuring, the synergies there were considered.Moore notes that Paramount has television properties to also consider in thehome video and theatrical mix, so it's crucial that they can now work moreseamlessly together. Shmuger added, "It's a great advantage to have thetheatrical operators and the home video operators in a room together discussingthe windows for releases, the promotional opportunities, the targetmarkets."