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Pixar ends negotiations with Disney

Pixar Animation Studios Inc. said Thursday it had broken off talks with Walt Disney Co. to extend their lucrative movie distribution deal that has resulted in such blockbusters as “Toy Story,” “Monsters Inc.” and “Finding Nemo.”
/ Source: Reuters

Pixar Animation Studios Inc. Thursday ended talks with Walt Disney Co.  to renew a lucrative movie distribution deal that has resulted in such blockbusters as “Toy Story” and “Finding Nemo.”

Pixar, the pioneering computer animation house founded by Apple Computer Inc.’s Steve Jobs, said it would look for another studio partner to distribute its films starting in 2006, when its current deal with Disney expires.

Shares of both companies fell 6 percent after hours. Many observers had expected Pixar and Disney to eventually renew a partnership whose five movies since 1995 have earned more than $2.5 billion at the global box office.

The Pixar movies have accounted for a large share of Disney Studios’ operating profit in recent years. But Disney said Pixar’s final offer would have cost it hundreds of millions of dollars from its current deal which includes two more films in production — “The Incredibles,” set for release in November and “Cars,” due out in 2005.

The move was an unexpected blow to Disney, and chief executive, Michael Eisner, already under fire from an heir of founder Walt Disney. Disney’s nephew, Roy Disney, accuses Eisner of mismanaging the company that pioneered feature animation.

Analysts and investors said Pixar could be using its announcement as a negotiating tactic and observers did not rule out a resumption of talks.

‘We're moving on’
“After 10 months of trying to strike a deal with Disney, we’re moving on,” said Jobs, Pixar’s chief executive.

“We’ve had a great run together — one of the most successful in Hollywood history — and it’s a shame that Disney won’t be participating in Pixar’s future successes.”

Disney Chief Executive Michael Eisner issued a statement wishing Pixar success.

“Disney management could not accept Pixar’s final offer because it would have cost Disney hundreds of millions of dollars ... under the existing agreement” without giving Disney enough return on new collaborations, the company said.

Pixar had been expected to close a new deal by the middle of this year but had said it would prefer to renew with Disney.

It makes it look like Eisner did something wrong again, but we shouldn’t jump to conclusions. This could be a negotiating tactic by Pixar as well,” said Patrick McKeigue, an analyst at Independence Investment, which holds Disney shares.

“It’s not a happy thing when two long-time partners break apart and Disney, of course, will survive. However, psychologically, the market was hoping there would be an agreement shortly,” said Hal Vogel, a New York-based media analyst who runs Vogel Capital Management.

Other studios seen as contenders for a Pixar deal included Warner Bros., a unit of Time Warner Inc , Sony Corp , and 20th Century Fox, a unit of Fox Entertainment Group Inc.

A spokeswoman for Warner Bros. said the studio would welcome a deal with Pixar but there had been no formal talks.

‘If I didn't have you’
Banc of America Securities analyst Michael Savner noted that by leaving Disney, Pixar would effectively give up rights to make sequels to its previous hits such as “Toy Story.”

The San Francisco Bay-area studio also runs the risk of setting itself up to compete directly at the box office with Disney’s future family-friendly offerings, Savner said.

“Disney could put out its movies at the same time as Pixar,” he said. Many investors had already assumed Pixar would get a much-improved deal, including on the two pictures in production, he added.

Staffing at Disney’s animation department has shrunk by more than 70 percent since 1997. The studio remains a major force in family entertainment and has charged into the field of computer animation on its own.

Pixar had complained that the terms of the distribution deal were tilted too heavily in Disney’s favor. Under the deal, Pixar was responsible for content, while Disney handled distribution and marketing.

In exchange, Pixar has split profits with Disney and pays the studio a distribution fee of between 10 percent to 15 percent of revenue.

Based on its blockbuster success, Pixar has argued that it should keep the profit itself and cut the fees its studio partner charges.