The Hollywood Economist

The $6 Billion Man

Why Disney paid a premium for Pixar’s creative guru.

Worth it?

After Paramount spent $1.8 billion to get DreamWorks’ present and future movies, Disney further escalated Hollywood’s brain drain and revealed how highly it values OPT (other people’s talent) by agreeing to pay $7.7 billion in stock for Pixar Animation Studios (counting the 16.7 million Pixar options outstanding). Is this a good deal? When Sony bought Columbia Tristar in 1989, it acquired not only a full-fledged Hollywood studio and a global film, video, and TV distribution arm, but also a film library that contained over 25,000 licensable hours of movies and television programs. In the case of Pixar, Disney gets none of the above.

Disney itself is the distribution arm for all of Pixar’s feature-length movies. In fact, Disney’s distribution payments accounted for about 95 percent of Pixar’s total revenue in 2005. (Pixar receives 50 percent of the take, after Disney deducts off the top all of its advertising, print, and logistical expenses, and a 12.5 percent distribution fee.) Disney also owns half of Pixar’s library of six feature movies, which consists of Toy Story and Toy Story 2; A Bug’s Life; Finding Nemo; Monsters, Inc.; and The Incredibles. It also takes the lion’s share of the money from Pixar’s healthy video, DVD, and TV sales, a juicy cut ranging from 87 percent for Toy Story to 56 percent of the other coproductions. That’s not all: Disney has the licensing right to use Pixar characters in its theme parks without paying Pixar a penny.

As for the extremely valuable sequel rights, Disney already owns them for all five movies (as well as for the next Pixar movie, Cars, which will be released in 2006). Disney even formed a computer-animation unit—code-named Pixaren’t—to make the sequels to The Incredibles et al., using Pixar’s computer-generated characters, motion-capture techniques, and storyboards, but without any participation from Pixar talent.

What’s the additional asset that Disney gets for its $7.7 billion? Human capital in the person of John Lasseter, Pixar’s creative guru. Ironically, Lasseter, after completing a course in animation in 1982, went to work as an animator for Disney, where, for a 30-second demonstration, he experimented with combining hand-drawn and computer-generated animation. He then went to work for George Lucas’ computer-animation division, which Steve Jobs bought in 1986 for $10 million and renamed Pixar Animation Studios. Lasseter, as Pixar’s executive vice president, spent three years making Hollywood’s first computer-animated full-length feature, Toy Story. The movie was 100 percent financed by Disney and hewed closely to Disney’s time-tested formula in which a hero, who is separated from his home, learns through trials and tribulations that the key to his own survival is to unselfishly focus on the well-being of others. Disney also marketed the film, using, among its resources: its 10-year merchandising tie-in with McDonald’s, its Disney Channel, its theme parks, and its licensing deals with toy manufacturers. After Toy Story proved to be an enormous success, Lasseter, backed by a 50-50 coproduction deal with Disney, demonstrated the effectiveness of this survival formula with four more computer-animated hits, and, in doing so, forever transformed the landscape of children’s movies.

Disney executives are assuming that Disney will get back $1 billion from Pixar’s cash and investment portfolio and recoup another $700 million from what Pixar will earn from its share in the past coproductions and from future video, pay-TV, and television sales. If so, the net cost of acquiring John Lasseter’s talents—and employment contract—will be just over $6 billion. The deal memo in fact specifies that Disney can pull out of the acquisition if Lasseter does not agree to provide his services.

As appealing as such a multibillion-dollar investment might be, the deal carries some economic risks. Pixar’s next original film will not be released until 2008 at the earliest, and, in the rapidly evolving entertainment economy, past successes don’t necessarily translate into future ones, especially since Pixar can no longer count on a computer-drawn animation monopoly. Its potential competitors—DreamWorks Animation (Shrek), Warner Bros. (The Polar Express), and Fox (Ice Age)—have already shown that they can make popular computer-animated features.

DreamWorks’ Shrek 2, for example, earned more in both box-office and DVD revenue than any Pixar film except Finding Nemo. Pixar itself acknowledged the competition in its latest SEC 10-K filing, noting, “There can be no assurance that we will be able to compete successfully against current or future competitors. Such competition could materially adversely affect our business, operating results or financial condition.”

But money is not everything in the new Hollywood. There is also, as I point out in my book, a social logic. “Most of the time that [Disney Chairman] Bob [Iger] and I have spent talking about this hasn’t been about economics,” Pixar chairman Steve Jobs told the Wall Street Journal. “It’s been about preserving the Pixar culture.” Of course, Jobs can afford to focus on cultural affairs—he will make $3.7 billion on his original investment of $10 million. Iger, on the other hand, might find that this multibillion-dollar brain drain, even if undertaken with the best of cultural reasons, will prove to be a risky business.