The difficult bargaining, which has been underway for the last two weeks, finds Burbank-based Disney and its key animation supplier far apart on key issues, according to people familiar with the talks.
Open points include financial terms, whether productions underway would be swept into the new agreement and how Disney would coordinate the release of its own animated films with Pixar-supplied movies in which Disney would no longer have ownership, the people said.
The stakes are unusually high: Five Pixar-produced films, including "Monsters, Inc." and this year's "Finding Nemo," have generated more than $1 billion in total profit for the partners and accounted for about half of Disney Studios' operating profit in recent years.
Eisner hopes to get his board, which is scheduled to meet Sept. 23, to approve a new financial arrangement that would continue his company's 12-year alliance with Emeryville, Calif.-based Pixar -- or to endorse a break-off that would leave Pixar and its chairman, Steve Jobs, free to find a new Hollywood partner.
Representatives of both companies declined to comment on the discussions.
But Disney insiders have made clear that their willingness to concede ground has limits -- notwithstanding Pixar's extraordinary string of five consecutive hits, beginning with the release of "Toy Story" in 1995. "We're not going to do a deal that's bad for this company," said one top Disney executive.
A Disney source said negotiations probably would stretch beyond the scheduled board meeting, despite Eisner's eagerness to present a plan. The chairman doesn't need the board's approval but wants its blessing for a decision that appears crucial for the company.
The talks were triggered when Pixar last month presented Disney with an aggressive proposal that would extend the companies' five-film deal but only if the Burbank company would agree to a radical change in their relationship.
Under the proposal, Disney would give up its 50% ownership in Pixar-produced films, agreeing instead to distribute the pictures, possibly for a fee of 10% or less, sources have said. A major sticking point is Pixar's demand that even upcoming films "The Incredibles" and "Cars," both due under the current contract, be subject to the more Pixar-friendly terms of the proposed deal.
Pixar has extraordinary leverage in the talks, because competing studios such as AOL Time Warner Inc.'s Warner Bros., News Corp.'s 20th Century Fox and Sony Corp.'s Columbia Pictures have made clear their willingness to enter negotiations with the computer animation powerhouse. Jobs, who successfully squeezed Disney to renegotiate his original 1991 contract after "Toy Story" turned into a runaway hit, has been further emboldened by a belief that Pixar's brand name now rivals Disney's among filmgoers, according to sources.
Disney puts up half the production cost of Pixar films in return for 50% ownership but also collects a distribution fee of 12.5%, giving it more than half the profit from each film.
The studio is said to be balking not only at Pixar's new financial demands but also at contractual terms that might limit its ability to position its in-house animated films.
The studio is wary, for instance, of ceding too much space on its release schedule for Pixar films that it would no longer own -- a condition that might prove particularly galling to Disney studio chief Dick Cook, a longtime film distribution executive who is conducting the day-to-day negotiations.
Despite the tough bargaining, Disney and Pixar have good reason to find common ground. The Burbank company's global marketing and distribution strength has been a strong complement to the animation firm's expertise with technology and story development.
And Pixar might find a new marriage awkward in one key regard: Disney would continue to hold lucrative sequel rights in all of its existing films.
Eisner and Jobs have long been at odds over the business of sequels. The Disney chief has insisted on enforcing contractual terms under which they don't count toward the films Pixar owes Disney, while the Pixar CEO has argued that they should count. The standoff has stalled the production of a third installment of the "Toy Story" series.
After delivering "Finding Nemo" to Disney this spring, Jobs was contractually free to enter into a new distribution arrangement with another studio, although any new deal wouldn't take effect until after the release of "Cars" in 2005. The huge success of "Nemo" -- it has taken in $334 million at the U.S. box office to become the highest-grossing animated film in history -- only boosted a bargaining position that was already strong.
Flush with cash, Pixar in February approved production on a what is intended to become the first movie outside the existing Disney deal. Jobs has tried to keep details of this so-called Project 2006 under wraps, though details have leaked in various news reports. The new film is said to be about a rat named Ratatouille who lives in a fancy Paris restaurant. The picture is being directed by Jan Pinkava, who made Pixar's Oscar-winning short "Geri's Game" in 1997.
Pixar will be sole owner of Ratatouille -- and which studio serves it to the marketplace remains to be seen.