Question:

      How did Paramount and Dreamworks make a windfall profit out of being on the losing side of the high-definition format war?

Answer:

      Paramount and Dreamworks had a win-win deal with Toshiba that assured a true Hollywood Ending. Here is what happened. In August 2007, in a last desperate effort to prevent its waning HD-DVD format from losing out to Sony’s Blu-ray format, Toshiba offered Paramount and Dreamworks (which Paramount distributes) $150 million to put out the high-definition versions of their movies exclusively as HD-DVD. It took the form of a so-called replication output deal. In these hoary deals, a DVD manufacturer pays a studio up front cash for the right to make its DVDs. It is an advance that the manufacturer eventually gets back from selling the DVDS back to the studio’s video division in much the same way a publisher earns back the advance it gives au author. So Toshiba paid Paramount and Dreamworks $150 million. Even though sales of HD-DVDs were so meager in 2007 that Toshiba was unlikely to ever earn back the entire advance, it imposed a condition: Paramount and Dreamworks could no longer release their movies in the rival Blu-ray format (as they had been doing).
For Paramount, it was a particularly sweet deal because the payment was booked as a “reduction in cost of goods” for its Home Video division,  which meant it did not have to allocate it to any of the titles released on DVD, or share it with writers, directors, stars other participants, or even equity partners. Then came the real windfall: In March 2008, Toshiba abandoned the HD-DVD format, so the studios got to keep almost all of the $150 million, and can now release their movies in the winning Blu-ray format.
Replication output deals, though seldom mentioned outside of a studio’s inner sanctum, go all the way back to the days of videos, when in 1981, Thomas McGrath, a Harvard MBA at Columbia, pioneered them. They rapidly became part of Hollywood’s invisible money-making apparatus. Paramount, for example, made a quarter of billion dollars from just 3 deals: $50 million dollars from Toshiba for agreeing to put out Titanic out on DVD in time for Christmas sales, $150 million from Panasonic for agreeing to allow them take over video replication from another manufacturer (Thompson), and $50 million from the law firm of Ziffrin, Brittenham and Circuit City stores for agreeing to support the DiVX format.  Since the DVIX format was never launched,  Paramount got to keep the money.

The $150 million Toshiba paid Paramount and Dreamworks not to release their titles on Blu-ray was a worthy continuation of this tradition. Such windfalls, even if not visible to the public, are what makes Hollywood profitable– even when its films fail at the box-office.