Even as the industry-wide DVD sales slump continues, Viacom-owned Paramount Pictures studio is considering merging some parts of its home entertainment division, and is in advanced talks with Sony Pictures and News Corp’s Fox studio for this, reports FT, citing sources. The story says this could unleash a spate of other similar mergers in Hollywood, as the DVD cash cow has been falling: just in the last year, DVD revenues have fallen 20 percent.

The merger talks have focused on combining DVD production, distribution and back-office functions. One proposal would see Paramount, the studio behind the blockbuster Transformers, begin using Sony’s DADC DVD production system rather than Technicolor’s system, which the studio currently uses, the story says. LAT reports that the talks could be expanded to other studios and with Universal being a leading candidate. Also, “people close to the talks stressed that any potential combination would be about saving costs, not about sharing revenue. The studios would not combine marketing or promotion of home entertainment.”

Paramount Home Entertainment handles DVD distribution for most of Viacom (NYSE: VIA) and CBS’s DVD releases, inlcuding movies and TV shows, among others. For more on PHE, see this Wikipedia entry on it. This comes as Paramount recently went through a change of guard at its film division.