Pixar wants monster's share of movie profits
By Claudia Eller and Richard Verrier
November 3, 2002
LOS ANGELES -- The banter was friendly, the mood jovial as Walt Disney Co. chief Michael Eisner and his guest, Pixar Animation Studios head Steve Jobs, sat side-by-side to watch Game 5 of the World Series from a luxury box at Pac Bell Park in San Francisco. For the moment, it seemed, both men were on the same team.
Behind the light-hearted 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.
During the past decade, Disney and Pixar have forged one of the movie 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 on the way under an agreement that gives both companies an even split of the profits.
The problem for Disney is that Pixar has gone from rookie to superstar.
With an impeccable track record and a glittering 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 only pay Disney 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 Disney Studios has become on Pixar in recent years.
Disney has reaped nearly a half-billion in profits from the Pixar movies between 1998 and 2001, accounting for an estimated 45 percent of the studio's operating income during that period, according to a recent report by Prudential Securities.
Box-office duds
During 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 a hit with 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 during the past two years. Disney stock closed Friday at $17.03 -- up 33 cents but $8.14 off its 52-week high -- on the New York Stock Exchange.
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 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 percent of a movie's revenue.
The Disney cachet
Still, Pixar needs Disney, analysts say. Pixar would be hard-pressed to find another partner with the brand name, the marketing muscle and the global reach in family entertainment that has made the Burbank, Calif., studio an industry leader in animation for decades. No other studio has 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. 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 suffered a fourth-quarter loss of $45 million because of 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 has 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 be flexible and let Toy Story 3 count as part of the five-picture deal. The dispute has left the project in limbo.
Tensions flared again this summer when Eisner offended Jobs over remarks he made in Washington, D.C., about digital piracy by suggesting Apple was promoting the illicit practice with its slogan: "Rip. Mix. Burn."
Although the tensions have since eased enough for Eisner to invite Jobs to the World Series, there has been no momentum on either side to negotiate a new deal, sources close to both executives say.
Posturing on both sides
Some analysts say Disney needs to step up to the plate to swat away potential competitors.
"You don't want to be in a position of countering someone else's offer," said Katherine Styponias, an analyst with Prudential Securities.
Merrill Lynch analyst Andrew Slabin said, "It's a question of who's going to blink first: Both parties feel as though they have leverage."
Jobs bought Pixar in 1986 for $10 million from director George Lucas, and is its biggest stockholder with a 60 percent stake. Disney has a minority interest, with less than 5 percent of the company's shares.
The two formed a movie-making partnership in 1991, one that has changed dramatically since then. On their first release, Toy Story, Pixar earned less than 15 percent of the profits. The 1995 hit comedy heralded its director, John Lasseter, as the next Walt Disney and established Pixar as the pioneer of the digital animation age.
Two years later, with its newly earned clout, Pixar negotiated its lucrative five-picture deal in which it became equal partners with Disney. The first film under the deal, A Bug's Life, brought in a total of $362 million worldwide, and the second, Monsters, Inc., $530 million.
Disney's profits could be greatly reduced if Jobs pursues a deal he favors, which is similar to the one Lucas has with 20th Century Fox. The filmmaker reaps all the profits from his lucrative Star Wars franchise and pays Fox an 8 percent to 10 percent distribution fee to release the movies.
Whatever happens, both sides are heavily posturing, making it known that success can also be found outside their partnership.
Eisner has sent mixed signals about whether he would be willing to allow Disney to be relegated to a distributor's role. At a Sept. 13 meeting with investors and analysts in New York, the Disney chief praised Pixar creative chief Lasseter and said that "a Lucas-type deal" was possible. On other occasions, however, Eisner has insisted that Disney would not be a studio for rent.
Suitors at the door
Eisner suggested he is prepared to develop Disney's own sequels to the Toy Story and Monsters hits if Pixar went its own way -- a scenario that even Disney executives say is improbable. Eisner has also touted Disney's recently struck deal with John Williams, one of the producers of Shrek, to make computer-animated movies, although no one is suggesting it's a replacement for Pixar.
"The intended message was 'if you think you've got us over a barrel, think again,' " Styponias said.
For his part, Jobs has already begun boasting to analysts that Pixar has many options when it comes to negotiating a future deal with another studio. Though he cannot begin negotiating with other studios until next spring, when Pixar delivers the undersea adventure Finding Nemo to Disney, he has let it be known that a number of suitors have expressed interest. Those include Sony Pictures and MGM Studios, sources said.
As Jobs pushes for a Lucas-type distribution deal, analysts caution that such an arrangement is not without risk for Pixar, since its movies cost about $125 million each to produce and an estimated $80 million to market worldwide. Just one flop could be devastating to a company like Pixar, which averages just one movie every 18 months and is not diversified like Disney.
"It's inevitable that Pixar is going to stub its toe," Slabin said.
That may be hard for Jobs to fathom, given that Pixar's four animated movies so far have totaled more than $2 billion in worldwide box-office receipts and hundreds of millions more in home video, DVD and merchandising sales.
Although the future of the partnership remains uncertain, it has not affected the day-to-day workings of the partnership. Indeed, Pixar creative guru Lasseter, a former Disney animator, has helped foster close ties between the studios' top creators.
"The working relationship has never been better," said Disney Studios Chairman Richard Cook. "We're committed to staying together."
For now, Cook said, the partners are focused on prepping their next release, Finding Nemo, due in theaters in May, and boosting sales of their recently released Monsters, Inc. DVD, which was heavily promoted during the World Series games.
In TV spots that aired between innings, Mike and Sully, the animated stars of Monsters, were featured playing baseball.
The big question is whether their corporate parents are willing to play ball as well.
By Claudia Eller and Richard Verrier
November 3, 2002
LOS ANGELES -- The banter was friendly, the mood jovial as Walt Disney Co. chief Michael Eisner and his guest, Pixar Animation Studios head Steve Jobs, sat side-by-side to watch Game 5 of the World Series from a luxury box at Pac Bell Park in San Francisco. For the moment, it seemed, both men were on the same team.
Behind the light-hearted 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.
During the past decade, Disney and Pixar have forged one of the movie 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 on the way under an agreement that gives both companies an even split of the profits.
The problem for Disney is that Pixar has gone from rookie to superstar.
With an impeccable track record and a glittering 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 only pay Disney 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 Disney Studios has become on Pixar in recent years.
Disney has reaped nearly a half-billion in profits from the Pixar movies between 1998 and 2001, accounting for an estimated 45 percent of the studio's operating income during that period, according to a recent report by Prudential Securities.
Box-office duds
During 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 a hit with 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 during the past two years. Disney stock closed Friday at $17.03 -- up 33 cents but $8.14 off its 52-week high -- on the New York Stock Exchange.
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 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 percent of a movie's revenue.
The Disney cachet
Still, Pixar needs Disney, analysts say. Pixar would be hard-pressed to find another partner with the brand name, the marketing muscle and the global reach in family entertainment that has made the Burbank, Calif., studio an industry leader in animation for decades. No other studio has 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. 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 suffered a fourth-quarter loss of $45 million because of 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 has 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 be flexible and let Toy Story 3 count as part of the five-picture deal. The dispute has left the project in limbo.
Tensions flared again this summer when Eisner offended Jobs over remarks he made in Washington, D.C., about digital piracy by suggesting Apple was promoting the illicit practice with its slogan: "Rip. Mix. Burn."
Although the tensions have since eased enough for Eisner to invite Jobs to the World Series, there has been no momentum on either side to negotiate a new deal, sources close to both executives say.
Posturing on both sides
Some analysts say Disney needs to step up to the plate to swat away potential competitors.
"You don't want to be in a position of countering someone else's offer," said Katherine Styponias, an analyst with Prudential Securities.
Merrill Lynch analyst Andrew Slabin said, "It's a question of who's going to blink first: Both parties feel as though they have leverage."
Jobs bought Pixar in 1986 for $10 million from director George Lucas, and is its biggest stockholder with a 60 percent stake. Disney has a minority interest, with less than 5 percent of the company's shares.
The two formed a movie-making partnership in 1991, one that has changed dramatically since then. On their first release, Toy Story, Pixar earned less than 15 percent of the profits. The 1995 hit comedy heralded its director, John Lasseter, as the next Walt Disney and established Pixar as the pioneer of the digital animation age.
Two years later, with its newly earned clout, Pixar negotiated its lucrative five-picture deal in which it became equal partners with Disney. The first film under the deal, A Bug's Life, brought in a total of $362 million worldwide, and the second, Monsters, Inc., $530 million.
Disney's profits could be greatly reduced if Jobs pursues a deal he favors, which is similar to the one Lucas has with 20th Century Fox. The filmmaker reaps all the profits from his lucrative Star Wars franchise and pays Fox an 8 percent to 10 percent distribution fee to release the movies.
Whatever happens, both sides are heavily posturing, making it known that success can also be found outside their partnership.
Eisner has sent mixed signals about whether he would be willing to allow Disney to be relegated to a distributor's role. At a Sept. 13 meeting with investors and analysts in New York, the Disney chief praised Pixar creative chief Lasseter and said that "a Lucas-type deal" was possible. On other occasions, however, Eisner has insisted that Disney would not be a studio for rent.
Suitors at the door
Eisner suggested he is prepared to develop Disney's own sequels to the Toy Story and Monsters hits if Pixar went its own way -- a scenario that even Disney executives say is improbable. Eisner has also touted Disney's recently struck deal with John Williams, one of the producers of Shrek, to make computer-animated movies, although no one is suggesting it's a replacement for Pixar.
"The intended message was 'if you think you've got us over a barrel, think again,' " Styponias said.
For his part, Jobs has already begun boasting to analysts that Pixar has many options when it comes to negotiating a future deal with another studio. Though he cannot begin negotiating with other studios until next spring, when Pixar delivers the undersea adventure Finding Nemo to Disney, he has let it be known that a number of suitors have expressed interest. Those include Sony Pictures and MGM Studios, sources said.
As Jobs pushes for a Lucas-type distribution deal, analysts caution that such an arrangement is not without risk for Pixar, since its movies cost about $125 million each to produce and an estimated $80 million to market worldwide. Just one flop could be devastating to a company like Pixar, which averages just one movie every 18 months and is not diversified like Disney.
"It's inevitable that Pixar is going to stub its toe," Slabin said.
That may be hard for Jobs to fathom, given that Pixar's four animated movies so far have totaled more than $2 billion in worldwide box-office receipts and hundreds of millions more in home video, DVD and merchandising sales.
Although the future of the partnership remains uncertain, it has not affected the day-to-day workings of the partnership. Indeed, Pixar creative guru Lasseter, a former Disney animator, has helped foster close ties between the studios' top creators.
"The working relationship has never been better," said Disney Studios Chairman Richard Cook. "We're committed to staying together."
For now, Cook said, the partners are focused on prepping their next release, Finding Nemo, due in theaters in May, and boosting sales of their recently released Monsters, Inc. DVD, which was heavily promoted during the World Series games.
In TV spots that aired between innings, Mike and Sully, the animated stars of Monsters, were featured playing baseball.
The big question is whether their corporate parents are willing to play ball as well.
