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|  | JANUARY 30, 2004
By Ronald Grover Pixar Twists the Mouse's Tail Steve Jobs says his animation studio's alliance with Disney is over. Is a new partner waiting in the wings -- or is he just bluffing? It's a script that might have been written by Roy Disney, who quit the Walt Disney board just after Thanksgiving. Blasting Chairman Michael Eisner in his farewell letter, Disney accused him of creating a "rapacious" and "soulless" company, cited the exodus of creative talent, and urged the Disney honcho to step down. With the announcement on Jan. 29 that Pixar Animation Studios (PIXR ) is breaking off talks to extend its contract with Eisner's media giant, Roy Disney is looking downright prescient. Yet more is going on here than Pixar -- the computer-animation studio controlled by Apple (AAPL ) Chairman Steve Jobs -- seemingly walking away from Disney (DIS ) in a huff. Indeed, as folks close to the negotiations say, it has more to do with Jobs attempting to rewrite the rules of Pixar's contract and reclaim movies that Disney helped to finance. Such a move is a no-no in Hollywood and, as Disney put it in a press statement, would cost the studio "hundreds of millions of dollars it already is entitled to under the existing contract." INALIENABLE RIGHTS? The Disney-Pixar relationship has been remarkably lucrative, generating a string of megahits like Toy Story, Monsters, Inc., and most recently, Finding Nemo, and producing revenues north of $3 billion. Disney and Pixar shared the cost of making films, with Disney footing the bill for marketing and distribution in return for roughly 62% of the profits (including its distribution fee). By some analysts' estimates, the partnership last year contributed some 25% of Disney profits. It seems Jobs wanted to turn that deal on its head, pushing for an agreement like the one his friend George Lucas enjoys with Fox (NWS ) for his Star Wars franchise. Lucas pays most of the costs of making films, and Fox gets about a 12% franchise fee. Disney, according to sources, was mulling a similar deal with Pixar when Jobs came up with some new demands: namely, that Disney return to Pixar the rights to a pair of films it has yet to deliver -- The Incredibles, due later this year, and Cars in 2005. Such an arrangement would have cut Disney out of any sequels to the two films, which it has already helped to pay for. On top of that, Jobs is said to have insisted that Disney's rights to the next four films be limited to five years. This would mean Disney could put them out on DVD and on its Disney Channel but, again, have no right to make sequels. Even George Lucas doesn't have it so good. SWARM OF SUITORS. Is this wrangle all a show? Perhaps Jobs simply intends to pressure Eisner, and do so at a time when the Disney chief is perceived to be vulnerable. Hollywood history is marked with failed negotiations that, all of a sudden, witnessed dramatic turnarounds as hardened dealmakers found common ground. So anything is possible. In this case, however, the complication may be that bad blood already exists between these two outfits. Even Dick Cook, Disney's studio chief and the "good guy" executive who enjoyed a stronger rapport with Jobs than Eisner did, was caught off guard by Pixar's announcement. No phone call. No heads-up. Like everyone in Hollywood, Disney execs learned about Pixar's surprise move from the press release. Cook, who called Jobs after hearing the news, is said to believe that Pixar is heading toward a deal with someone else. Warner Brothers (TWX ) announced almost immediately that it was willing to negotiate. Others outfits, including Sony (SNE ) and probably Fox, are likely to follow suit. Whether any potential suitors would accept the same conditions that Jobs has demanded of Disney seems unlikely, however. TOLD YOU SO. Then again, Jobs may simply be trying to yank Eisner's chain. Disney's annual meeting is coming up in early March, and the chairman is the ongoing target of Roy Disney's campaign to remove him. (Roy Disney issued a statement on Jan. 29 saying, "We warned the Disney board that Michael Eisner was mismanaging the Pixar relationship.") Eisner is on record as saying he wouldn't make a deal that would harm Disney shareholders, and by his reckoning, Jobs's offer would have done just that. Jobs isn't talking, but his press release seems to leave little wiggle room for further talks. "After 10 months of trying to strike a deal with Disney, we're moving on," Jobs said. "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." Wall Street reacted by hiking Pixar stock by 5% in after-hours trading, while Disney fell about the same amount. Yet Pixar likely wouldn't come out better if it follows through and severs ties to the Magic Kingdom. Disney's marketing muscle, which includes its mammoth theme parks, the Disney Channel, and radio and TV stations, can't easily be duplicated, even by Warner. That's yet another reason why Jobs may be following Roy Disney's script -- but planning a surprise ending.  Grover is BusinessWeek's Los Angeles bureau chief Edited by Beth Belton
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