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Okay. So MAYBE the sky isn't falling after all.

Okay. So MAYBE the sky isn't falling after all.

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It is kind of ironic that Disney's first fully CG animated feature is entitled "Chicken Little." Why For? Because -- for the last few days -- I've been doing the Internet equivalent of running around and shouting "The sky is falling! The sky is falling."

Don't get me wrong, folks. I still think that Michael Eisner's decision to pay hardball with Steve Jobs during Pixar's contract extension talks is going to cost Disney's CEO big-time. Maybe not today and maybe not tomorrow. But soon.

But -- at the same time -- I recognize that not everyone out there thinks like me. More importantly, that -- in the past -- I have been wrong about things.

Which is why I think that it's always important to listen to the opposing view. Hear what the other side is saying, so to speak.

And one of the more eloquent people who have written to me over the past couple of days is JHM reader Don Jones. Since this past Friday, Don's tossed a couple of well-written, well-thought-out e-mails that do a great job of arguing the point that Pixar walking away isn't necessarily a bad thing for Disney.

As Jones said in one of his letters to me this past Saturday:

"I think it's regrettable that so many Disney fans are (so) quick to dump on Mike E. over this Pixar deal, when in fact he may have done the right thing in the long term. I'm betting that, given the same circumstances, Walt would've walked away, too."

Kind of an extraordinary statement, don't you think? I know that this is probably not the sort of thing that you'd expect to read here at JimHillMedia.com. Well ... I want to make sure that JHM readers hear both sides of the story. Not just my yammering.

Which is why -- this morning -- I'm going to yield the floor to Don Jones. To see if he can actually prove his case that Disney's losing Pixar isn't really as big a mistake as I've been making it out to be.

Take it away, Don!


 

OK, Pixar and Disney are through. Maybe. And that's a horrible thing, right? What was Eisner thinking, anyway? Disney doesn't have any hits of its own-its major blockbusters-to the tune of 2.5 billion in box office revenue alone-has come from their five Pixar movies. What was Disney thinking?

They were thinking smart. Let's examine some of the details of Disney's current Pixar deal, as described by SFGate.com (article). It's actually a simple deal: Take the profits from a Pixar movie, subtract Disney's marketing and distribution costs, and the two companies split what's left. Disney gets eternal rights to the movie, including sequels of any kind, as well as the characters. Pixar gets first right of refusal on any sequels, said sequels to fall under the terms of the original contract. Any non-Pixar-made sequels still deliver an 8% royalty to Pixar, forever and ever.

It wasn't a bad deal for either company. They both made a lot of cash, and without Disney's mega-marketing machine, nobody ever would have heard of Pixar to begin with. Disney's ability to create synergy-theme park attractions, characters, and their enormous merchandising channel, including their merchandise tie-in deal with McDonald's-is just as responsible for Pixar's successes as Pixar's creative team was.

So why'd the new deal fall through? Understand that what Pixar was asking for wasn't even remotely close to the original deal. First of all, they wanted to bring their remaining two Disney movies-The Incredibles and Cars-under the new contract, along with several new movies. They also wanted to pay Disney a flat percentage for distribution, and that's it. It's a deal similar to what Lucas has with Fox: A flat 7.5% distribution fee. But Lucas has a merchandising channel, marketing team, and other necessary bits, so he only needs Fox for distribution. Pixar also wanted to limit the amount of time Disney could utilize Pixar creations. That, folks, means Disney wouldn't be launching any new Pixar-based attractions, because they wouldn't retain the rights to the characters long enough. In other words, Disney would get nothing from deal except some cash.

Under the current deal, Disney gets two Pixar movies, which can be expected to gross half a billion dollars total. Plus, Disney's already working on Toy Story 3, which will be worth a couple hundred mil. They've also got the ability to create sequels and TV shows from Monsters, Inc., Finding Nemo, Cars, and The Incredibles-all valuable properties. So Disney, but walking away from the table, protected a 3- to 5-year revenue stream that could easily beat what they've already made off of Pixar films. They also retain the rights to create them park attractions on The Incredibles and Cars (a re-themed Autopia?) and exercise their usual synergy tricks with those two films.

Pixar isn't guaranteed a deal with another studio, either. None of the three interested parties-Warner Brothers, Fox, and Sony-have a sterling record for animated hits. And Pixar isn't going to offer them anything that they didn't offer Disney, so these studios will have to be willing to do it for about twenty million bucks in distribution fees per film. Sure, the folks at Pixar would be rich, with an expected average of $230 million per film, but why should that make Fox or Sony all happy? It's possible that Pixar might not want to put enough on the table for these studios to be interested, either-we won't know until talks progress for a while. It's going to be tough for these studios to sign a seven-film contract potentially worth a measly couple of hundred million, when at the same time Disney could still be raking in a couple of billion from Pixar films-all because Disney said "no, thanks."

All is not what it seems to be in the world of movie finances, so let's give the Mouse the benefit of the doubt on this one. It's possible that, by walking away, Disney will be able to leverage the rest of the Pixar contract to jump-start their own computer animation division, produce a half-dozen major new theme park attractions, create some nice direct-to-video features for the kids, pump out a couple more animated television series, and more. Sometimes, walking away is the best thing you can do in a negotiation.

 


So whaddaya think, folks? Did Mr. Jones prove his case?

Either way, I think the above was a snazzy piece of writing. And I'd like to thank Don for taking the time to share his thoughts with us this morning.

So now ... what are YOUR thoughts about this article?

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