Thursday, February 06, 2003

This article in BusinessWeek (and this commentary on it from Harry Knowles on the deal between Pixar (makers of Toy Story and Monsters Inc. and Disney is quite interesting. Basically, Pixar's present contract requires them to make three more movies for Disney, and they will likely have finished this by 2005.

I mentioned the Pixar deal in passing when talking about animated movies the other week, but it is worth giving the whole story.

Pixar is a small company that once belonged to George Lucas, but was purchased from Lucas by Steve Jobs (of Apple Computer fame) when Lucas decided that it duplicated the function of one of his other divisions. In 1991, Disney signed a deal with Pixar to make and release three animated movies. They did this because they were interested in the idea of computer animation, and because they had been unable to lure John Lasseter, Pixar's top filmmaker, to come and work for Disney directly, despite several attempts. The deal involved Disney financing Pixar's movies, Pixar making the films, and then Disney taking more than 90% of the profits. This reflected the fact that Pixar needed Disney much more than Disney needed Pixar, and it gave Pixar a chance to get its movies made and into theatres. Pixar developed the movie Toy Story in 1995, and the movie turned out (somewhat unexpectedly) to be a major hit. At that point, the contract between Disney and Pixar became problematic. In order to properly motivate the filmmakers at Pixar, they needed to have a somewhat larger financial stake in their work, so for this reason the deal between Pixar and Disney was renegotiated. Pixar and Disney would split the cost of financing future films, and the income from the films would be split: Disney would first take a 12% distribution fee, and then the remainder would be split evenly. (A distribution fee is perfectly standard in the world of film. If a studio distributes a film it did not make, this is where it makes its profit. If it distributes a film it did make, this fee is taken by the studio prior to the calculation of profits out of which actors, directors, producers etc receive profit shares. In this case, it is one of many accounting tricks studios use to avoid giving money to other people. For a high profile film, 12% is about par for the course).

In return for this change of terms, the length of the contract was increased by three films, so that Pixar owed Disney another five films from that point onwards. There was also one other important detail in the contract, which was that in the advertising and promotion of future films, the Disney and Pixar names would have equal billing. If you look at a print of the original Toy Story , the Pixar logo is not seen until the very end of the closing credits, whereas the Disney name and logo are everywhere. If you look at subsequent Pixar films, the Pixar name and logo are very prominent as well. In addition to this, subsequent Pixar films have usually had a Pixar short shown before the features, which further emphasises the Pixar brand. This was all very deliberate, as Steve Jobs understood that he needed to raise the profile of Pixar's own brand if Pixar was going to become less dependent on Disney in the future.

In any event, Pixar got to work on its next film, A Bug's Life , and also got to work on a direct to video sequel to Toy Story . After some work on the Toy Story sequel, they realised that it was working too well to be wasted on direct to video. It was decided that it would be better to release the Toy Story sequel as a theatrical feature. However, the revised deal with Disney did not include sequels. Disney wanted to gain the full benefits of the merchandising of new characters from each film it got from Pixar (plus, at the time, theatrical releases of animated sequels was virtually unheard of), so at the time they had been excluded from the contract. Therefore, Steve Jobs and Disney boss Michael Eisner got together and did a one off deal for Toy Story 2 . The sequel would be made, and it would be made on the same terms as the other films in the revised contract, but it would not count as one of the five films covered by that contract. So, Pixar was up to making a total of seven films for Disney.

A Bug's Life was released in 1998, and was a huge hit, although not quite as huge as Toy Story . Toy Story 2 was released in 1999, and was an even bigger hit than the original. At this point, Eisner decided that Disney wanted Pixar to make Toy Story 3 , as the first two movies had been so profitable. The people at Pixar were more more interested in working on new material, but offered to make the movie if it counted as one of the four additional movies that Pixar owed Disney . (A sequel reuses the same characters as the original film, which have already been developed in the computer software, and so is easier to make than an all new film). Eisner would not play ball on this point: he wanted the sequel as another additional movie to those under contract. Pixar refused. In 2001, Pixar and Disney released Monsters Inc. , their biggest hit yet.

At this point, Pixar appeared very keen to gain control of their own destiny. They announced a fairly rapid schedule for the remaining three films under their contract with Disney: Finding Nemo , to be released in summer 2003, The Incredibles (directed by Brad Bird, director of the dramatically underappreciated The Iron Giant at Warner Brothers, and also the creator of the characters of Krusty the Clown and Sideshow Bob on The Simpsons ) in holiday season 2004, and Cars in holiday season 2005. At that point, Pixar would be free of Disney.

However, things had changed further at Disney. Disney's home grown animated films have been declining in grosses for some years, and whereas Disney had been extremely powerful in animation in the first half of the 1990s, in recent years the Pixar animated films had been their biggest hits. The BusinessWeek article suggests that more than a third of their profits from theatrical movies have come from the Pixar films in recent years. What is more, the audiences know this, too. Children are obssessive about things like this, for one thing, and children are a large portion of Pixar's audience. At this point, Pixar's brand is probably more valuable in animation that Disney's is. Whereas in 1991 Pixar needed Disney, Disney today needs Pixar.

So, what will Pixar do. There have been rumours going around for a while that Pixar were working on something really special to be their first movie after the deal with Disney expires. (This article gives some tantalising hints as to what it will be about. The fact that the main character will be a mouse suggests they are trying to make some kind of point). Pixar are going to make at most one film a year, which isn't enough material for them to need their own distribution arm. Therefore they are going to need some studio to distribute their films. I think that they are going to want all of the profits from their films (minus a distribution fee) and not just half of them in future. The type of deal where Disney puts up half the cost of the film and gets half the profits are going to be a think of the past. The question is whether the studio Pixar does the deal with needs to be Disney. The BusinessWeek article makes a comparison with George Lucas and Star Wars, and it is a good one.

In 1977, prior to the release of Star Wars, George Lucas did a deal with 20th Century Fox. He gave up his salary for directing the movie in return for personally taking control of the merchandising and sequal rights for the movie. This was possibly the best business deal in history, as he has made a few billion dollars from it. Lucas controls Star Wars completely. When it came to making the second Star Wars trilogy, he financed the movies himself, and simply needed a distributor for the movies. He shopped them around the various studios in order to pay the lowest distribution fee he could manage. A number of studios offered him 6%, which is much smaller than is usually paid. One of these was 20th Century Fox, who had financed and distributed the original Star Wars movies. Lucas went back to them, because it was simply easier to have all the Star Wars movies distributed by the same studio. In terms of releasing Box Sets of DVDs, and of having screenings of multiple movies together, and other issues to do with promoting the Star Wars universe as a whole, it was just simpler to have the movies all released by the same studio. So, 20th Century Fox have releasing the second Star Wars trilogy. However, they do not make much money on the movies. George Lucas negotiated too good a deal.

Something similar will likely happen with Pixar and Disney. Pixar will decide to finance their animated films completely, and they will take complete creative control over them. (At the moment Disney still have some rights to interfere, because they provide half the money). They will talk to various other studios, and the other studios will make them various offers as to what they will charge for distribution. They will drive the distribution fee downwards, perhaps not to the 6% that Lucas has for Star Wars , but something not too far from that. They will get Disney to offer something like that too, and they will take the money and have Disney distribute their films. The advantages of this are that Disney have been doing it all along, and they know how to distribute a Pixar movie. Another studio would need to be brought up to speed, although this isn't likely to be that hard.

There are two other factors suggesting that Pixar may stay with Disney in some form. The first is that Disney are able to make money through using the characters of Pixar's movies in their theme parks. This is quite a substantial source of revenue, and Disney are clearly the best at this. The other is that Disney share or will share the rights to Pixar's first six movies. Pixar cannot make sequels to those six movies anywhere other than at Disney. I think we shall see a third Toy Story movie at some point, but only after the present contract with Disney expires - perhaps in 2007 or 2008. A sequel to Monsters Inc. strikes me as fairly likely, too.

These reasons for Pixar staying at Disney are strong but not overwhelmingly so. If Steve Jobs and Michael Eisner have really reached the point where they can't work together any more, then Jobs could go somewhere else. Of course, if Eisner were to be replaced by someone else at Disney, then this might no longer be a problem. Eisner's position is not all that secure, and if his going was the difference between the renewal of the Pixar deal, or the loss of the Pixar deal, then conceivably the board might give him the shove.

Finally, there is the issue of what kind of a deal Pixar would want to sign with a studio. It could sign no long term contract at all, and then simply choose a distributor on a movie by movie basis. This way they probably couldn't negotiate quite as good a deal as if they agreed to use the same distributor for a number of movies, but this would give them the most complete freedom, and might be the best possible deal if they can continue turning out hit movies consistently.

For this is the other factor. Most of the above assumes that Pixar can continue producing movies as successful as the four it has produced so far. They have a reasonable amount of cash handy, but their pockets are not nearly as deep as Disney's, or those of any of the major Hollywood studios. If they were to produce a couple of movies that were failures, then they would have to get financing from someone else for subsequent movies. This would be more difficult after a couple of failures than it would be now. Now, they could sign a contract with a studio guaranteeing distribution for a few movies, and also guaranteeing Pixar a line of credit for the financing of future films if they need it. This would mean giving up a few more profit points in the near term, but would reduce their level of risk somewhat. Four huge hits out of four is impressive, but no other producer of motion pictures has been able to match this kind of record in the long term. (Steven Spielberg comes close, but even he has a misfire once in a while). It is worth observing that in 1994, Disney thought it could produce a hit along the lines of Aladdin or The Lion King every year. It couldn't, and this now looks like hubris. One of the things that hindered Disney was that they ramped up their production of animated films to a film (or even two) every year, and quality suffered as a consequence. Pixar is now upping production to a film a year. Their quality may not suffer. In John Lassetter and Brad Bird, they have in my mind two of the four best animated filmmakers in the world, which is encouraging. (The other two are Nick Park and Hayao Miyazaki, if you are wondering). However there must be some risk of this. This is possibly another reason for keeping a relationship with Disney. I would think that Pixar would be more inclined to make sequels in the event that some of their future original works are less successful, and staying with Disney keeps this option open.

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