Why Pixar can't leave Disney.

Why Pixar can't leave Disney.

Why Pixar can't leave Disney.

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Oct. 3 2005 11:48 AM

Breaking Up Is Hard To Do

Why Pixar can't leave Disney.

Illustration by Mark Alan Stamaty. Click image to expand.

Hollywood's El Dorado is a concept or character that can be spun into sequels—or, as in the case of Star Wars, prequels—and serve as an expanding platform for DVDs, television, games, and other licensing rights. Although successful franchises, such as MGM/UA's James Bond, Sony's Spider-Man, Warner Bros.'Harry Potter, Paramount's Star Trek, New Line's Lord of the Rings, DreamWorks'Shrek, and Universal's Jurassic Park, are few and far between, Steve Jobs, as head of Pixar Animation Studios, has handed Disney four of the potentially richest mother lodes in the history of filmdom. Namely, the sequel rights to Toy Story; Finding Nemo; Monsters, Inc.; and The Incredibles. These franchises are particularly lucrative because they have no stars, directors, or other gross players entitled to a share of the take. Disney also has the exclusive rights to use all of the Pixar characters in its theme parks.

How did Disney wind up with four Pixar-created franchises? After Steve Jobs bought George Lucas' computer-animation division in 1986, he needed the muscle of a Hollywood studio to get this new form of 3-D animation into theaters worldwide. Disney, with its Disney Channel, theme parks, and family-friendly Walt Disney brand, was a natural ally. So, in 1991, Jobs entered into a deal with Michael Eisner to co-produce its first animated feature, Toy Story. Disney agreed to finance the movie completely, while Pixar's creative guru John Lasseter would develop and direct. Disney would then get the lion's share of the proceeds—87 percent, including its distributing fee. Though it took almost three years to complete, Toy Story proved to be not only an immense box office success but the most lucrative toy-licensing platform in Disney's history.

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Jobs negotiated a better deal in 1997 with Eisner for five more animated features. Pixar again assumed full creative control of the movies while Disney was in charge of the distribution, marketing, exploitation, and licensing. In this deal, Pixar paid half the cost of developing and producing the movies and shared 50-50 the money that flowed in from all sources, after Disney deducted its advertising, print, and out-of-pocket expenses and took its 12.5 percent distribution fee. The only revenue Pixar was not entitled to was that which was earned from Disney's theme parks. When it came to the sequels, Eisner insisted that Disney have the rights to make an unlimited number of sequels with the characters and computerized algorithms from the originals. Pixar had the option to buy into the sequels by putting up half the financing, but it would get only 35 percent of the proceeds that remained after Disney repaid itself its expenses and took its 12.5 percent fee. Since this was a deal-breaker, Jobs handed over the sequel rights, but he was not happy about it.

After fruitlessly attempting to renegotiate the sequel option with Eisner in 2003, Jobs announced in January 2004 that after Pixar completed its contract by delivering its fifth and final movie, Cars, it would terminate its arrangement with Disney and not participate in any of the sequels, leaving Disney with four franchises. All that Pixar would get would be a small royalty (3.5 percent of the proceeds until each movie reaches cash break-even and 7.5 percent afterward).

Even with Pixar's incredible track record, Jobs has found that getting a new partner is easier said than done. Since Universal and Paramount have decided to disband their international distribution arm, UIP, Jobs has only three choices if he wants a distributor with the global clout that comes close to Disney's—Sony Pictures, 20th Century Fox, and Warner Bros. But in the 20 months that have elapsed since he fired his parting shot at Eisner, Jobs has not been able to make a suitable deal with any of these studios. The reason is not that the studios lack appreciation for the creative genius of Pixar and its pioneering work in computer graphics, but that any new Pixar films would face a potentially awesome competitor: Pixar sequels. For example, a new Pixar film might find itself competing for summer play dates with The Incredibles 2, backed by a Disney juggernaut of merchandising tie-ins with fast-food restaurants, toy licenses, informational shows on the Disney Channel and overseas channels, and its proven Pied Piper effectiveness in recruiting children's audiences.

Simply put, it would be Pixar vs. Pixar. Ironically, the only studio that can release a Pixar movie without the threat of such competition is Disney. Just as second chances with happy endings are a formula for success in children's movies, Jobs may prudently decide, especially now that Eisner is gone, that breaking up with Disney is not worth the effort.