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When Quality Mattered

Why can't they both win?

As a shareholder of both Disney (NYSE: DIS  ) and Pixar (Nasdaq: PIXR  ) , it's a question I ask myself often because a lot has been made of the two companies going their separate ways come 2006.

While the latest sticking point has been Disney's decision to move forward with Toy Story 3 -- with or without Pixar's blessing -- why is it that two companies that have done nothing but win together in going 6 for 6 in theatrical animation can't continue on the noble path victorious once they reach the fork?

I'll tell you why people are concerned. They think Disney's lost its touch. Whether the Mickey Mouse company decides to hand off the next Toy Story flick to one of the computer animation studios that it is mentoring or simply tackle the creative process in-house, if Pixar doesn't play an active role, there are some who feel that the franchise will be ruined.

I've received a bit of email about this recently, and the odd thing is that whether they find themselves in the Disney camp or in the Pixar camp, not a single person has suggested that Toy Story 3 may top its two predecessors.

I mean, the dynamics are certainly in place. You have a proven franchise of endearing characters that have stood the test of time, and you have higher ticket prices and more screens at the local multiplex. Why can't the movie work? Pixar stands to collect passive royalties even if it passes on the project, so it's not as if it will be necessarily rooting against something that isn't its own handiwork.

So even if you're a cynical pessimist and figure that Disney will go cheap and make the film with only half of the original's budget and be lucky to bring in half of the proceeds, isn't that pretty much where Disney was with its revised pact with Pixar? And there's no sense in crying for Pixar because it too will be in fine shape as it works on its upcoming releases while taking time off to cash Disney's royalty checks.

But there's a flaw in that argument. Maybe you don't see it just yet. Just pray that when your time is up and your life is flashing before your eyes that you have Robin Williams -- not Dan Castellaneta -- as your narrator.

See, that was the beginning of the end when it came to Disney's reputation for putting out quality family entertainment. Back in 1994, Disney released The Return of Jafar. It was the sequel to the studio's hit, Aladdin. When its star, Robin Williams, had a falling-out with Disney, the company went ahead with the direct-to-video production by casting Castellaneta as the quick-witted Genie. Going from Mork to Homer Simpson may not seem like much of a cinematic stretch. It certainly didn't hurt that Castellaneta was -- and still is -- an incredible voice actor with a dynamic range. Yet by going cheap in not coming to terms with Williams, only to be rewarded by a surge in video sales to the point where the movie was more profitable for Disney than its hit comedy Pretty Woman, it lulled Disney into thinking that quality didn't have to reign paramount.

The assembly line of homogeneity got cranked up. The same company that was so protective of its characters that it would lock up its classics from the home video market only to release them for a few months every seven years went ahead and toilet-papered its own vault.

Closed-end Disney classics like Cinderella, Peter Pan, and The Jungle Book suddenly had unnecessary sequels. Whether the follow-ups went right into retail distribution or had an unheralded run at the multiplex, the point was that Disney was able to turn an easy profit on these releases by keeping costs down. Whether they were subject to lavish storyboards stateside or simply outsourced overseas, the end result couldn't even kid a kid.

While Motley Fool Stock Advisor pick Pixar clearly put enough effort into Toy Story 2 so that it would trump its predecessor, Disney's sequels suffered from pitch-tent distribution and sandwich-board marketing. Folks just weren't buying it. They were burned once and that was plenty.

That is why I believe Disney had such a precipitous falling-out in theatrical animation. You'll see shysters setting up stands peddling overpriced flu shots these days. You'll see them demanding a ransom for power generators after extensive storm outages. Yet they do this because they sense the near-term profit opportunity and care little about establishing a long-term relationship.

Disney had no right to take a fly-by-night approach when its brand's integrity was at stake. Jafar's offspring hurt in two ways. First, consumers eventually gave up on viewing Disney as a marquee name in animation. The big box-office draws went to the upstart studios like Pixar and DreamWorks Animation (NYSE: DWA  ) . Even when Disney got it right -- as it did with Lilo & Stitch in 2002 -- that year's highest-grossing drawn flick was Fox's (NYSE: FOX  ) Ice Age.

The Disney name became a liability. Parents felt ripped off after buying a direct-to-video release at retail prices only to find a poor 70-minute stint of mediocrity that failed to interest their kids. They swore off the brand in so many damaging ways. The company had a laundry list of reasons as to why its theme parks weren't performing as well as its regional amusement park rivals or why its Disney Store chain wasn't producing the same-store sales growth as its neighboring mall stores. I never heard the company blame brand desecration. After all, that would be admitting that its problems were its own handiwork, and that would be heresy.

Yet lowering its standards proved contagious, and that was the second major casualty of Jafar's wrath. The same company that could do no wrong through most of the 1990s found itself putting out unacceptable inked celluloid like Home on the Range and Atlantis.

That disease doesn't stand still. That same short-term mindset found the company dumping ordinary carnival attractions into its theme parks and loading up its prime-time schedule on ABC with as many episodes of Who Wants to Be a Millionaire? as the public could stomach.

Complacency kills. It's not just because envelopes have defined edges just begging to be pushed. It's because when you're on top of the world, it's dangerous to admire the view and pat yourself on the back for a job well done. Look down. They're all trying to climb up to where you are. While one can fault market munchers like Microsoft (Nasdaq: MSFT  ) or Intel (Nasdaq: INTC  ) for a variety of reasons, at least they understand that stagnancy is a malady.

Disney did far worse. It betrayed that trust. That's why CEO Michael Eisner was on the hot seat earlier this year. Waving your corporate banner is a proud feat only if it's not loaded with patchwork.

Yet soiled brands can also be resurrected. Disney is now taking steps in that direction. It's a humbling walk in that Disney had to hand over its Disney Stores to Children's Place (Nasdaq: PLCE  ) in a silent admission that there are far better retailers out there. Thankfully, it's not handing over its theme parks. Instead, Disney is in the process of beefing up its iconic destinations with signature attractions. ABC matters again, and you just know that it won't resort to wallpapering its lineup with nightly showings of Lost and Desperate Housewives.

That leaves theatrical animation. The company's in-house studio is a shell of what it used to be. Disney is mentoring other young computer animation outfits in hopes of catching lightning in a bottle again. While it may seem ironic that Disney's original stronghold is now the weakest cog in its engine, it's also why Disney realizes that Toy Story 3 means everything.

Success in theatrical animation leads to merchandising success. Along the way, folks getting excited about the Disney brand again fills up cruise-ship berths and theme park resorts and helps rekindle the flame throughout the conglomerate's subsidiaries that anything short of excellent is unacceptable.

So what are the chances of Disney letting the next Toy Story installment fail? With or without Pixar, Disney will do everything possible to make it a winner. Consumers need to see that. Mentored studios need to see that. If Pixar passes on taking an active role in its development, it will be busy on its next batch of original characters while a hungry Disney and a hot Toy Story 3 will send Pixar its piece of the action.

As a member of the Rule Breakers newsletter team, seeking out tomorrow's great growth stocks a day early, I have come to respect the penchant for quality early in a company's life as an indicator of success in the future. Disney may be too seasoned to make the cut, but I am starting to see a company willing to admit that you can't cheat quality.

So why can't both Disney and Pixar win in this custody battle? I think there's a better question worth pondering.

How can either one lose?

Longtime Fool contributor Rick Munarriz would like to see the two companies stay together -- for the kids -- but he realizes the benefit of each party going its own way. His two-parter entitled 10 Tips to Save Disney was written two years ago, yet it still rings true today. He favors joint custody -- owning shares of both Disney and Pixar. He is a member of theRule Breakersanalytical team, seeking out tomorrow's great growth stocks today. The Motley Fool is investors writing for investors.

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