Pixar’s Flirtations Could Mean Trouble for Disney

Pixar Animation Studios may not be ready to divorce Walt Disney Co. But it’s been flirting with Disney’s rivals.

Steve Jobs, chief of the computer animation firm, has begun preliminary talks with executives from Hollywood studios interested in a partnership with Pixar should its shaky relationship with Disney break up.

Last week, Warner Bros. President Alan Horn and associates visited Pixar’s state-of-the-art animation campus in Emeryville, Calif., according to people familiar with the meeting. Executives from 20th Century Fox are scheduled for a similar “meet and greet” with Jobs this week, sources said.

Any studio that makes a deal with Pixar may instantly move to the front of the lucrative animation market. As the powerhouse behind Disney’s “Monsters, Inc.,” “A Bug’s Life” and two “Toy Story” films, Pixar has accounted for nearly a quarter of the animation box office in recent years.

Jobs, co-founder and chief executive of Apple Computer Inc., has said he preferred to continue distributing films through Disney when his current arrangement expires in coming years. But he has made no secret of his strained relations with Disney Chairman Michael Eisner or of his frustration with Pixar’s deal.

Executives at Warner and Fox declined to comment. Attempts to reach Jobs were unsuccessful.

Disney Studios Chairman Richard Cook -- who has a strong relationship with both Jobs and Pixar creative guru John Lasseter, a former Disney animator -- said he was aware that Jobs was feeling out competitors, but was hopeful that Disney and Pixar would remain partners.

“We all know that other studios have talked to them, but I’m quite sure they have not begun negotiating,” Cook said. Noting that Disney has yet to begin formal negotiations with Pixar, Cook added: “Our hope and desire [is] to continue forever what has been one of the most successful partnerships in motion picture history.”

Pixar’s talks with potential suitors have been described as “informal” and “not substantive.” Jobs gave the Warner team a tour of the facility, for instance, and introduced them to key executives, including Lasseter.

Pixar is contractually barred from making a deal with any studio until the company gives Disney its next movie, the underwater adventure “Finding Nemo,” this spring. The picture is set for release in theaters May 30.

Warner Bros., an AOL Time Warner Inc. unit, and Fox, a News Corp. unit, in the last few years ditched their own costly plans to build animation operations after piling up losses with such flops as Warner’s “Quest for Camelot” and Fox’s “Titan A.E.” Fox already owns boutique animation house Blue Sky Studios, which produced last year’s hit “Ice Age.”

Others, including Sony Corp.’s Sony Pictures Entertainment, have expressed interest in teaming with Pixar but haven’t held recent talks. Sony launched its own computer animation unit last year.

Pixar is an attractive partner thanks to its four-for-four record at the box office and its strong balance sheet. The company has close to $350 million in cash and no debt.

But Pixar still owes Disney three films under its present arrangement, which will run at least through 2005. And Jobs has made it clear that he prefers to remain with Disney, given its status as the premier family brand, with far-reaching marketing, distribution and licensing power bolstered by its own theme parks, retail stores and network and cable TV outlets.

Another binding tie is the Burbank company’s hold over sequels to Pixar hits. “That will play a role in these negotiations,” said Andrew Slabin, an analyst with Merrill Lynch & Co.

An impasse over the making of “Toy Story 3” remains a sore spot between Jobs and Eisner. The dispute stems from a clause in the Pixar-Disney contract stipulating that sequels don’t count toward films Pixar owes the studio. If Eisner wants another “Toy Story,” Jobs has contended, he should let it count.

Under the companies’ current deal, Pixar and Disney share all costs and profit associated with their films, which are produced by Pixar and marketed and distributed by Disney. But Disney actually gets more than a 50% share, because it also collects a distribution fee of about 12.5% of each film’s revenue.

Jobs has said he wanted an arrangement similar to producer-director George Lucas’ deal with 20th Century Fox. Pixar then would keep all profit and pay Disney a flat distribution fee.

That arrangement could mean a blow to Disney’s earnings, because Pixar movies accounted for an estimated 45% of its film unit’s operating income from 1998 to 2001.

During that period, Disney saw nearly $500 million in profit from Pixar’s movies, while its own animation division struggled with such box-office disappointments as “Atlantis: The Lost Empire” and “The Emperor’s New Groove.” Its only recent home-grown animated hit was “Lilo & Stitch,” which took in $145.8 million at the U.S. box office last year. But Disney’s last animated release, “Treasure Planet,” resulted in a $74-million write-down.

Disney’s animation unit has cut jobs and salaries in recent years and in January underwent a shake-up with the exit of animation chief Tom Schumacher. Disney TV animation President David Stainton succeeded Schumacher, and the feature animation division now reports to studio chief Cook.

Disney’s partnership with Pixar has taken on added importance with investors as Disney faces challenges at its ABC TV network and theme parks. Last week, Disney reported a 41% drop in profit for its first quarter.

Grilled by analysts about the status of the Pixar-Disney relationship, Eisner claimed to be “optimistic.” But, he added, “I can’t say it’s a slam-dunk.”

Pixar will announce fourth-quarter earnings Thursday.

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Cartoon power

Disney and Pixar controlled 52% of the U.S. box office for animation the last few years, but Pixar has the potential of making a leader out of any studio it teams with.

Animated film box-office share, 1998-2002*

Disney -- 28%

DreamWorks -- 25%

Pixar -- 24%

Paramount -- 12%

Fox -- 6%

Warner -- 5%

*Through August

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A profitable venture

1986: Apple Computer co-founder Steve Jobs buys Pixar from director George Lucas for $10 million. Pixar begins developing animation software with Disney.

1991: Disney agrees to finance and distribute Pixar’s animated feature films.

1995: Disney releases Pixar’s “Toy Story,” which becomes the highest-grossing film of the year, with $361.5 million in worldwide ticket sales. Pixar goes public.

1997: Disney and Pixar announce a deal to make five additional movies together, for Disney to buy 5% of Pixar and to share costs and profit equally.

1998: “A Bug’s Life” breaks box-office records.

1999: “Toy Story 2” sells $485 million in tickets worldwide.

2001: “Monsters, Inc.” takes in $530 million in worldwide box office. Disney and Pixar argue over making “Toy Story 3,” a project still in limbo.

2002: The two companies announce that they will make three new films by 2005.

Spring 2003: After delivering the first of those films, “Finding Nemo,” Pixar is free to forge a partnership with another studio if it wishes.

Sources: Prudential Securities, Times research