Saturday, January 31, 2004

Disney ponders life after Pixar

Long negotiations made it obvious: Deal had no happily-ever-after

By Gary Gentile
The Associated Press

LOS ANGELES - Last summer, Walt Disney Co. chief executive Michael Eisner paid Pixar Animation Studios creative head John Lasseter the highest compliment for those involved in film animation - comparing him to Walt Disney.

"What Pixar has that we don't have is John Lasseter," Eisner said during an investment conference. "It's like Walt in a way. He has that quirky sense of humor and understanding. John is unique."

This week's announcement of the end of the wildly successful partnership between Disney and Pixar, which will run until 2005, gives Disney two years to nurture or hire its own version of Lasseter - himself a former Disney animator - to compete against future Pixar films.

Ten months of talks between Disney and Pixar collapsed Thursday after 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.

Pixar still has two movies to deliver under its current deal, including The Incredibles, due in theaters in November, and Cars, which will be released next year.

Shares of Disney fell 45 cents, or 1.8 percent, to close at $24 Friday on the New York Stock Exchange, while shares of Pixar rose $2.19, or 3.4 percent, to $66.39 on the Nasdaq Stock Market.

Analysts were split over the consequences of the breakup.

Disney's studio division contributed 19 percent of the company's overall operating income in 2003. During the past five years, Pixar contributed more than 50 percent of Disney's studio profits, according to Merrill Lynch analyst Jessica Reif Cohen.

Nevertheless, Cohen wrote Friday that Disney "acted prudently in the face of a lose-lose proposition."

If Disney had agreed to Pixar's terms, it would have forfeited millions of dollars in profits it is entitled to under the current deal. While Disney must now face Pixar as a competitor, it retains the rights to make video and theatrical sequels and TV shows to the movies covered by the current deal, Cohen wrote.

Other analysts said that while Disney retains the right to make sequels to Pixar films, it does not own the underlying technology and must re-create the millions of lines of computer code for each character.

One factor in Disney's favor might be that Disney's studio division has found increasing success with live-action films, such as Pirates of the Caribbean: The Curse of the Black Pearl. Strong box office returns in that area could reduce the company's reliance on Pixar profits.

Disney's theme parks, which contribute the bulk of the company's revenues, also have been recovering from several years of lower attendance.

Disney has said it will release its first-ever computer-animated film, Chicken Little, in 2005 and has several other computer and hand-drawn animated films in the works.

But the key challenge for Disney will be to fill the creative vacuum left by the loss of Pixar writers and animators such as Lasseter, Andrew Stanton, the director of Finding Nemo, and Lee Unkrich, co-director of Monsters Inc. and several other Pixar films.

Earlier this month, the company said it would close its Orlando, Fla., animation studio and cut more than 250 jobs. Computer-generated characters will largely replace hand-drawn ones.

Friday, the bond rating agency Fitch Ratings reinforced its negative outlook on Disney's bonds because of the uncertainty surrounding the company's ability to compete with Pixar in two years.

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