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Will Pixar move in with the Mouse?

Any deal between Pixar Animation Studios and Walt Disney Co. would underscore the importance of new digital technologies in a rapidly changing media landscape. It also would inject Steve Jobs' vision into the Disney animation empire.
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He created a hip alternative to the once-mighty IBM desktop. He launched a pocket digital music phenomenon. He set the standard for computer-generated animated films.

Now Steve Jobs may be poised to bring his tech savvy to the Magic Kingdom.

Jobs's filmmaking company, Pixar Animation Studios, is discussing a possible merger with Walt Disney Co., according to a source with knowledge of the talks who spoke on condition of anonymity because the negotiations are confidential. A deal, which could energize Disney's animation unit, would underscore the importance of new digital technologies in a rapidly changing media landscape. It also would inject Jobs's vision into the Disney animation empire.

On the rise again
A charismatic leader renowned for big risks and big stumbles, Jobs is on the rise again. His Apple Computer Inc. reported record revenue in the latest quarter as sales of Mac computers rose and, more importantly, consumers snatched up 14 million iPods over the three months. Jobs's innovative digital music player expanded into video last year, helping spur a surge in mobile viewing, and customers have begun ordering the first Apple computers with Intel chips. All of Pixar's films -- including "Toy Story," "Finding Nemo," "The Incredibles" and "Monsters, Inc." -- were monster hits, making the studio the undisputed leader in cutting-edge animation.

"To me, the deal has the smell of inevitability to it," said Paul Saffo, an analyst with the Silicon Valley think tank Institute for the Future. "If it doesn't happen, for whatever reason, it would be a lost opportunity for both companies. The long-term trajectory of both these companies without each other is downwards."

The discussions, reported yesterday by the Wall Street Journal, became serious only after a leadership change at Disney last year that lifted Robert A. Iger to chief executive. Pixar has had a partnership with Disney under which the media giant distributed and helped finance Pixar's films. With the arrangement scheduled to end this year, Jobs had signaled that he would look elsewhere for a distributor, driven in part by an unsatisfactory relationship with Michael D. Eisner, the previous Disney chief executive.

"Even a cursory examination shows that the change in leadership at Disney has made a significant difference in the relationship between Pixar and Disney," said Josh Bernoff, an entertainment and television analyst at Forrester Research Inc. "I doubt that Jobs would have been happy as an element of an Eisner-run corporation. It would have been pretty difficult."

Far from assured
A Disney-Pixar deal is far from assured: Any number of hurdles could derail the discussions. Other suitors could emerge, and a run-up in Pixar's stock could price the company out of reach. Officials at both companies declined to comment.

Some analysts believe that both sides are closely watching the stock prices to gauge investors' sentiment toward a deal. Prudential Equity Group LLC predicted that a merger could drag on Disney stock in the short term but ultimately benefit the company.

"Strategically, we think the deal would make sense since Disney views animation as a key core competency and vital to its future," Katherine Styponias, a Prudential analyst, wrote in a report yesterday. "We believe that Pixar's track record suggests that it has arguably become the pre-eminent name in animation."

Disney's share price rose 4 percent, while Pixar was up 2.8 percent yesterday.

Grabbing a position of prominence at an iconic company like Disney would be a resounding triumph for Jobs, a prickly character whose fortunes have soared and crashed. After creating Apple in the early 1980s, he was booted from the company in 1985 in a board upheaval. He then created another computer company called Next, an ill-fated venture.

He eventually returned to Apple and introduced the stylish iMac in the late 1990s, riding its popularity back into the limelight as other ventures also began to catch on. Pixar, which he created and ran separately from Apple, has turned out one smash hit after another. Jobs's launch of the iPod stirred a sensation, drawing millions of consumers to Apple's iTunes Web site to download music and video. Nielsen-NetRatings reported yesterday that iTunes traffic soared 241 percent in December 2005 compared with the previous December, to 20.7 million unique visitors, or almost 14 percent of the active Internet population.

Jobs could have profound influence
Jobs's comeback has now attracted a potential suitor in Disney. Iger has shown a willingness to embrace new media and the latest technologies at the company that owns the ABC television network, ESPN and theme parks. Last year, he struck a deal to allow episodes of ABC's "Desperate Housewives" and "Lost" to be downloaded to iPods from iTunes.

Iger's challenge in bringing Pixar under the Disney wing would be to ensure creative freedom for Pixar's talent, analysts said.

"The corporate cultures are extremely different," Marla Backer, media and entertainment analyst at Research Associates-Soleil Securities, said in a report yesterday. "Pixar's is creative, campus-like, versus more bureaucratic Disney. . . . Despite potential promises of independence, there are always subtle changes when one company acquires another, which could dilute Pixar's creativeness."

Still, Jobs's influence on Disney could be profound. A deal could leave him as Disney's largest individual shareholder and land him a seat on the board of directors, according to the source familiar with the talks. Placing Pixar in the hands of a giant parent would give the animation studio a solid distribution network and deep pockets to offset potential stumbles. In the increasingly competitive entertainment industry, independent studios are finding security in mergers with larger companies. In December, the studio operated by Steven Spielberg, David Geffen and Jeffrey Katzenberg, DreamWorks SKG Inc., was gobbled up by Paramount Pictures.

As a medium-size studio, Pixar gets squeezed in several ways, Saffo said.

"They are nipped on the lower end because it's always getting easier for small groups of talented people to make movies on their own," he said. "Meanwhile, they are squeezed on the higher end because they don't have their own distribution channels."

Tim Bajarin, president of technology research firm Creative Strategies Inc., said he is more enthusiastic about Pixar scoring a solid distribution deal with Disney than he would be about the studio becoming part of Disney.

A prominent role for Jobs on the Disney board could adversely affect Apple, Bajarin said. The strong position of Apple as a seller of digital content on the Web is founded partly on its position as a neutral dealer in the market, he said.

"If Jobs is only a shareholder in Disney, I think the perspective of neutrality could be managed, but if he became a member of the board, that is where I think it gets dicey," Bajarin said.

For Jobs, however, a prominent role at Disney could satisfy some of his ambitions, analysts said. Adam C. Engst, publisher of influential Mac news site TidBits, said he could understand how access to Disney, one of the top brands on the globe, would appeal to Jobs.

"Jobs is out to change the world -- it's not about money for him," Engst said. "The computer is not necessarily the means to change the world anymore . . . popular culture is how you change the world."

Staff writer Frank Ahrens contributed to this report.