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A Picture Deal's Life

The future of Disney's partnership with Pixar, which has yielded a string of animated hits and hundreds of millions in profits, remains uncertain.

November 03, 2002|Claudia Eller and Richard Verrier | Times Staff Writers

The mood was jovial as Walt Disney Co. chief Michael Eisner and his guest, Pixar Animation Studios head Steve Jobs, watched Game 5 of the World Series from a luxury box at Pac Bell Park in San Francisco. Sitting side by side, the two men laughed together, bantering and talking baseball.

For the moment, it seemed, both were on the same team.

But behind the lighthearted atmosphere, away from the playing field, the two industry titans are locked in their own kind of Hollywood gamesmanship, with hundreds of millions of dollars riding on the outcome.

"It's a question of who's going to blink first," said Merrill Lynch analyst Andrew Slabin.

During the last decade, Burbank-based Disney and Pixar have forged one of the industry's most successful partnerships. They have made a string of revolutionary computer-animated hits -- "Toy Story," "Toy Story 2," "A Bug's Life" and most recently "Monsters, Inc." Three more are coming under an agreement that gives both companies an even split of the profits.

The problem for Disney is that, along the way, Pixar has gone from rookie to superstar.

With an impeccable track record and a strong balance sheet of nearly $300 million in cash, Jobs has made it clear to Hollywood and Wall Street that he will begin entertaining offers from rival studios early next year and could potentially part ways with Disney. If he chooses to stay with Disney, he will push for a deal that would give Pixar all the profits and pay Disney only a distribution fee to release its movies, according to sources close to Jobs.

Either way, Disney's movie earnings could take a substantial hit, underscoring just how dependent the studio has become on Pixar in recent years.

Disney has reaped nearly $500 million in profits from the Pixar movies from 1998 to 2001, accounting for an estimated 45% of the studio's operating income in that period, according to a recent report by Prudential Securities. Over that same time, Disney's own animation unit produced such box-office disappointments as "Atlantis: The Lost Empire" and "The Emperor's New Groove" and retrenched by slashing hundreds of jobs and salaries. It was only this summer that Disney scored with its own hit, "Lilo & Stitch."

Disney's relationship with Pixar, which is uncertain beyond 2005, has attracted increasing scrutiny as investors grow impatient with Disney's financial struggles, particularly at its ABC television network and theme parks. Eisner has been under heavy pressure from powerful board members and shareholders to boost Disney's stock price, which has been pummeled in the last two years. Disney shares were up 33 cents at $17.03 in New York Stock Exchange trading on Friday.

No Discussions Yet

So far, Disney and Pixar are not negotiating, prompting some analysts to question whether Eisner is moving too slowly on an arrangement that is so vital to his company.

"To lose [Pixar] would be a huge strategic blow and a financial blow for Disney," said Paul Kim, an analyst with Kaufman Bros.

Pixar's enviable success streak appears to give it the upper hand in negotiating any new deal. Under the current contract, Pixar produces the movies and Disney markets and distributes them. The two evenly share costs and profits. In addition, Disney gets a distribution fee that averages 12.5% of a movie's revenue.

Still, Pixar needs Disney, analysts say. Pixar would be hard-pressed to find another partner with the brand name, marketing muscle and global reach in family entertainment that has made Disney an industry leader in animation for decades. Nor does any other studio have the marketing prowess to cross-promote family movies in its theme parks, retail stores and cable and network television outlets.

"If you go to another studio, you may not have those capabilities up and down the food chain," said Kim, of Kaufman Bros.

Pixar shareholders also may be cool to the idea of breaking up such a financially successful partnership. Emeryville, Calif.-based Pixar is expected to report strong third-quarter earnings Monday. The studio's success is even outshining Jobs' main business endeavor, Apple Computer Corp., which just posted a fiscal fourth-quarter loss of $45 million due to soured investments and a decline in shipments of its flagship Macintosh computers.

Despite Pixar's successful collaboration with Disney, their marriage has been clouded by an underlying friction that's existed for years between Eisner and Jobs, a factor that analysts suggest could complicate future negotiations. Both men declined to be interviewed.

The specter of divorce first emerged last year with a fight over the third installment of the lucrative "Toy Story" franchise. A clause in the contract says sequels don't count toward films Pixar must deliver, but Jobs has argued that Eisner should let "Toy Story 3" count as part of its five-picture deal. The dispute has left the project in limbo.

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