Where is the computer-rendered love?
Nine years ago, Disney (NYSE:DIS) and Pixar (NASDAQ:PIXR) were smitten. The theatrical lovebirds were just months away from revolutionizing feature animation with the breakthrough release of Toy Story. Pixar was a small, edgy studio -- in many ways, little more than a corporate afterthought exchanged between George Lucas and Apple's (NASDAQ:AAPL) Steve Jobs. Still, it was just tall enough to ride Disney's coattails. Pixar parlayed its meager financial stake in the first computer-animated, full-length feature into a successful storybook IPO.
It was the perfect marriage at the time. Disney's experience and financial might opened doors for Pixar, while Pixar, on scholarship, was padding its pocketbook and providing a tiring Disney empire with fresh characters and dynamic story lines.
But Pixar was the trophy wife that became too big for its trophy case. Disney became the aging movie-star husband, too lethargic to keep up the pace.
It's a sad divorce. Pixar can argue that it was an abusive relationship, and Disney can counter that it budged, but Pixar wanted too much in the end. Both companies wound up heartbroken. Pixar may take pride in pointing out that Disney is the emperor without clothes, but it had no problem hopping on those coattails when Disney was fully clothed.
Two tribes, two chieftains, one war
While these are two distinct companies, the truth is that the two leaders have far more in common than either one would care to admit. Pixar CEO Jobs and Disney CEO Michael Eisner are proud, pompous, and charismatic. They each faced dissension at the companies they helped grow to prominence -- and it didn't instill a trace of humility in either one. That's fine. Nobody looks up to the shoe gazer. Yet the difference here is that Jobs' smackdown at Apple happened decades ago, while Eisner's facing the battering-ram-lugging doubters right now.
Yet each CEO owes more to the other than either one realizes. Eisner's narrow victory to keep his seat on his company's board earlier this year wouldn't have stood a chance if the company didn't have Pixar's billions to pad its organic underperformance. Meanwhile, with Apple's share price fetching less than half of its all-time highs four years ago, Pixar is where Jobs has earned his bragging rights on this side of the millennium. And it couldn't have happened without the initial leg up, financial backing, and multiplex mentoring from Eisner's Disney.
Granted, the partnership wasn't a marriage made in heaven. Because Disney had all of the clout early on, the two have been in a state of perpetual renegotiation. When Pixar found itself flush with its IPO proceeds, it had no reason to rely on Disney to put up so much money if it meant that Pixar only got to keep 10% of the net profits. Realizing it struck gold, Disney went ahead and extended the deal with Pixar and sweetened the pot to an even split after Disney's take for distributing the films -- but only under the continued stipulation that Disney got to keep the character properties that were created.
It proved to be the one thing that Disney didn't want to relinquish -- and with good reason. Have you been to a Disney theme park lately? In Florida, you can ride Buzz Lightyear's Space Ranger Spin in the Magic Kingdom and eat Pizza Planet grub and play video games at Disney-MGM Studios. You can see Nemo and his oceanic pals at EPCOT's Living Seas and that iconic tree at Animal Kingdom, which houses an effects-laden 3D-film attraction based on Pixar's A Bug's Life. Over in California, A Bug's Life gets plenty of play at Disney's California Adventure between its kiddie fun fair area and a port of the Animal Kingdom show. Disneyland will get its own version of the Buzz Lightyear ride next year.
Two new films are left in the partnership under the existing agreement -- The Incredibles this year and Cars, due out over next year's holiday season. Pixar looks to play hardball with Disney by asking for more control of its final two projects -- if Disney wants to continue any type of relationship beyond 2005.
Saying "I due"
Pixar figured it had Disney over a barrel. However, it was the other way around. For a credibility-scuffed Disney -- begging for time to turn itself around -- caving in to Pixar's demands by giving up chunks of royalties and ownership rights would have meant the likelihood of near-term financial shortfalls. By staying put, Disney has bought itself until 2006 to right its ship. At that point, Disney might have no problem competing with rival studios to serve as Pixar's distributor if it doesn't succeed on its own, which may have been exactly where Disney would have been if it had yielded to Pixar's whims anyway.
Pixar is publicly announcing that it is talking to other film studios like Time Warner (NYSE:TWX) for its 2006 project, and Disney is threatening to produce sequels of the computer-animated films without Pixar's blessing (after Pixar had taken shots at the quality of Disney's recent in-house follow-ups). So let's forget about marriage counseling -- this couple belongs on the Jerry Springer Show. Pixar is seeing other people. Disney has unflattering pictures that Pixar would not like revealed to the public. It's anyone's guess as to who will walk away with the most sets of beads by the time this show is done.
What a bizarre turn of events, as both companies are often considered class acts. Pixar has even been singled out as a recommended stock in Motley Fool Stock Advisor. Still, how twisted is it when Disney, once the undisputed leader in feature animation, threatens to use its decaying craft as a weapon of mass destruction? It knows that a lame sequel will tarnish Pixar's brand. While Pixar still stands to collect a small cut of the action even if it isn't in on the process, the company's shiny reputation is worth far more than any pittance of a royalty check. Pixar needs Disney because it owns Pixar's past.
But let's kid ourselves into thinking that Disney is really in control. Pixar's first five films have averaged $239 million in domestic box-office receipts. Disney hasn't topped that mark with its own animated releases since the companies teamed up, while Dreamworks has lapped that sum twice with its two Shrek releases. So it's not as if Disney can make much of a case that it is the superior choice in feature-animation distribution. Between Disney shuttering its Disney Stores and its sluggish network ratings, it's not as if the company can promise merchandising or marketing acumen. That's why Disney still needs that trophy wife. It has teamed up with upstart computer animation specialists to try and fill the void, but it is highly unlikely that they will smile as pretty as Pixar. Disney needs Pixar because it owns Disney's future.
So it's a bit of a tearjerker to realize that not all marriages last forever. That not all ballplayers retire in their original uniforms. That not all partnered studios ride off together into the same sunset.
So where is the computer-rendered love? Not here. It all seems so far removed from this tale's storybook beginnings.
For a flashback that still rings true today, read Rick Munarriz's 10 Tips to Save Disney, parts 1 and 2.
Longtime Fool contributor Rick Munarriz would like to see the two companies stay together -- for the kids. He favors joint custody -- owning shares of both Disney and Pixar. You can view Rick's bio and profile. The Fool is investors writing for investors.
