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Pixar Ends Filmmaking Partnership With Disney

Times Staff Writers

One of the most lucrative marriages in movie history apparently ended Thursday as Pixar Animation Studios abruptly halted talks to extend its nearly 13-year partnership with Walt Disney Co.

“After 10 months of trying to strike a deal with Disney, we’re moving on,” said Pixar Chief Executive Steve Jobs. “We’ve had a great run together ... and it’s a shame that Disney won’t be participating in Pixar’s future successes.”

Pixar’s move stunned Disney executives and Wall Street analysts who believed a deal eventually would be hammered out. The collapse of the talks came as particularly bad news for Disney Chairman Michael Eisner. He has been under intense pressure from investors to shore up Disney’s fortunes and continue the partnership with the animation company behind last year’s biggest hit, “Finding Nemo.”

The breakup also is certain to fuel the feud between Eisner and former Disney board member Roy Disney, who resigned last month and called for the chairman’s ouster. Among other things, Disney said Eisner was bungling the Pixar negotiations. Industry insiders said Eisner was turning them into a war of egos with Pixar’s equally strong-willed CEO.

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During the talks, the Burbank-based company rebuffed Pixar’s final offer and recently countered with one of its own. Frustrated by the protracted negotiations, Jobs decided to pull the plug. Disney said Pixar’s proposal would have cost the company “hundreds of millions” in potential profits from upcoming movies.

“Although we would have enjoyed continuing our successful collaboration under mutually acceptable terms,” Disney said in a statement, “Pixar understandably has chosen to go its own way to grow as an independent company.”

Neither Eisner nor Jobs was available for comment.

During the last decade, Disney and Pixar have had a perfect track record with a string of revolutionary computer-animated hits, including “Finding Nemo,” the most successful animated movie of all time, as well as “Toy Story,” “Toy Story 2,” “A Bug’s Life” and “Monsters, Inc.”

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Pixar’s creative and financial contributions have propped up Disney’s own bedrock animation business, which has stumbled with such box-office misses as “Treasure Planet” and “Atlantis: The Lost Empire.”

Pixar films have accounted for as much as half of the studio’s operating income in recent years. “Nemo,” which amassed more than $800 million in worldwide ticket sales, is expected to net a profit of more than half a billion dollars, according to industry analysts.

Under the current contract, Pixar has two remaining films with Disney. The first of those, “The Incredibles” is due in theaters this fall. The second, “Cars,” is set for release in 2005.

At the heart of the negotiations was Pixar’s demand for a vastly bigger cut of the profits now that it has become an established entertainment power in its own right. Under the existing deal, reached in 1997, Pixar and Disney split profits and costs evenly, with Disney taking an additional fee to distribute the films. Jobs wanted a deal that would give Pixar all profits and pay Disney a distribution fee of about 10%.

The parting of the companies could have far-reaching consequences for both sides.

Despite the hardball negotiations, most media analysts thought Disney would find a way to compromise with its longtime partner. “Now everything is up for grabs,” said John Tinker, research analyst for Blaylock & Partners.

Disney management concluded that Pixar’s proposed deal would ultimately be bad for shareholders.

Pixar was insisting that both “Incredibles” and “Cars” would be folded into the new deal, thereby undercutting Disney’s potential profit.

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“By giving up ownership of those two films, we were going to reduce our operating income dramatically,” Disney President Bob Iger said. “We were perilously close to a situation where we’d be giving up more value in the long run than what we would gain.”

For Pixar, leaving Disney would give the Northern California company an opportunity to capitalize on its own name, which has become synonymous with family entertainment. Pixar is prepared to fund its own movies and collect all the benefits.

But there are risks. Pixar would be giving up a partner with a legendary reputation, huge global marketing expertise and distribution clout. Disney, an industry leader in animation for decades, has the ability to cross-promote family movies across its theme parks, retail stores and television outlets.

What’s more, Pixar would face a formidable rival. “If Disney is not a partner, then Disney is the competition,” said analyst Jordan Rohan at Schwab Soundview Capital Markets. There are six major studios and plenty of distribution, but there is only one Disney.”

And Disney would have a fight on its hands too.

One key battleground between the two would be in determining release dates for their movies. In the past, Disney decided when Pixar movies would be shown in theaters so as not to undercut the audience for its own family fare. All that would change with the breakup.

Jobs is willing to take the risk, knowing there are plenty of other suitors who could go toe-to-toe with the legendary Disney. He has met with Time Warner’s Warner Bros. studio, Sony Pictures and News Corp.'s 20th Century Fox to discuss a possible distribution deal.

The seeds of the Disney-Pixar partnership were planted in 1986, when Jobs bought Pixar for $10 million from “Star Wars” director George Lucas.

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The companies’ first release was “Toy Story” in 1995. Pixar earned less than 15% of the profits. The movie brought fame to director John Lasseter, who was dubbed the next Walt Disney.

Two years later, with its newly earned clout, Pixar negotiated its current five-picture deal in which it became equal partners with Disney. The first film under the deal, “A Bug’s Life,” brought in ticket sales of $362 million worldwide.

As Pixar’s success grew, so too did its ambitions for a bigger slice of the pie.

Jobs began telling investors about his desire to have a deal modeled on the one Lucas has with 20th Century Fox. Lucas, who owns the movies, reaps all the profits from his lucrative “Star Wars” franchise and pays Fox a low distribution fee.

Eisner initially balked at the idea. He said his company was “not for rent.”

During the next few years, that kind of remark would represent the tenor of the relationship between Eisner and Jobs.

The bad blood thickened in the summer of 2002. Eisner suggested that Jobs was encouraging piracy with the Apple slogan “Rip. Mix. Burn.”

Meanwhile, Disney began to lessen its dependence on Pixar by beefing up its own digital animation capabilities.

To handle the difficult negotiations with Pixar, Eisner tapped the studio’s affable chairman, Dick Cook. Not even he could bridge the gulf.

“We took one step forward and two steps backwards,” Cook said.

The talks came to a head two weeks ago when Pixar presented its final offer. Among other things, Pixar said Disney could distribute each of its films for five years. After that, the rights would revert to Pixar. Disney believed the terms were far too restrictive; distribution deals can often reach beyond 20 years. In addition, Pixar wanted Disney to relinquish its co-ownership of their past movies.

No matter what happens, Disney said in its statement that it can develop sequels to the films that have been produced by the two companies -- with or without Pixar’s help. Disney said Thursday that it planned to make “Toy Story 3.” .

For some in the Pixar family, a split with Disney would have significance beyond dollars and cents. Pixar’s creative guru, director John Lasseter, is a former Disney animator.

Roy Disney said it was Lasseter who told him about the collapse of negotiations during a phone call Thursday from Pixar’s headquarters.

“He feels as awful as I do about this,” Disney said. “He said he’s a Disney man, as are so many of the guys up there. Disney blood flows through their veins.”

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Times staff writers Meg James and James Bates contributed to this report.


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