Pixar and Disney Part Company

question 93

Essay

Pixar and Disney Part Company
The announcement on February 5, 2004, of the end of the wildly successful partnership between Walt Disney Company ("Disney") and Pixar Animation Studios ("Pixar") rocked the investment and entertainment world. While the partnership continued until the end of 2005, the split-up underscores the nature of the rifts that can develop in business alliances of all types. The dissolution of the partnership ends a relationship in existence since 1995 in which Disney produced and distributed the highly popular films created by Pixar. Under the terms of the original partnership agreement, the two firms cofinanced each film and split the profits evenly. Moreover, Disney received 12.5 percent of film revenues for distributing the films. Negotiations to renew the partnership after 2005 foundered on Pixar's desire to get a greater share of the partnership's profits. Disney CEO Michael Eisner refused to accept a significant reduction in distribution fees and film royalties; while Steve Jobs, Pixar's CEO, criticized Disney's creative capabilities and noted that marketing alone does not make a poor film successful.
After 10 months of talks between Disney and Pixar, Disney rejected a deal that would have required it to earn substantially less from future Pixar releases. Disney also would have had to relinquish potentially lucrative copyrights to existing films such as Toy Story and Finding Nemo. Disney shares immediately fell by almost 2 percent on the news of the announcement, while Pixar's shares skyrocketed almost 4 percent by the end of the day. Pixar contributed more than 50 percent of Disney Studio's operating profits, and Disney Studios accounted for about one fourth of Disney's total operating profits. While Disney now faces Pixar as a competitor, it retains the rights to make video and theatrical sequels and TV shows to the movies covered by the current partnership agreement. However, while Disney does retain the right to make sequels to Pixar films, it does not own the underlying technology and must recreate the millions of lines of computer code for each character.
The key challenge for Disney will be to fill the creative vacuum left by the loss of Pixar writers and animators. Disney is particularly vulnerable in that it has severely cut back its own feature animation department and stumbled in recent years with a variety of box office duds (e.g., Treasure Planet). Reflecting concern that Disney would not be able to compete with Pixar, bond-rating service, Fitch Ratings suggested a possible downgrade of Disney debt. Pixar announced that it was seeking another production studio. Immediately following this announcement, Sony and others approached Pixar with proposals to collaborate in making animated films.
Epilogue
In early 2006, Pixar agreed to be acquired by Disney.
-What happened since 1995 that might have contributed to the break-up? (Hint: Consider partner
objectives, perceived relative contribution and in-house capabilities.)

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