Mouse, Pixar stuck

Both risk big coin but still no pact in sight

After months of haggling, Disney and Pixar remain at loggerheads in talks to extend the companies’ current film co-production agreement — even though both have compelling reasons to get past negotiating impasses.

The arguments for an extension are simply put:

  • By leaving the Mouse House, Pixar would relinquish rights to hundreds of millions of dollars in potential box office from new sequels to previously released Disney-Pixar pics.

  • Should Pixar bolt, Disney would not only lose a valuable creative partner but could fall prey to the perception it’s slipped from animation king to toon pic also-ran.

“Disney used to have a monopoly in the marketplace on animation,” observed David Davis, senior veep at Los Angeles investment firm Houlihan, Lokey, Howard & Zukin. “But if Pixar were to leave Disney, it would mean that Disney could find itself in a position where it would be No. 3 in animation.”

Of course, the harsh analysis assumes Pixar and its prospective new distribution partner would prosper in the marketplace. It also presupposes future toon success at DreamWorks, which more often than not remains an animation Avis to Mouse’s Hertz — the boffo success of 2001’s “Shrek” notwithstanding.

Mouse motivation

But even the prospect of such a scenario coming to pass would seem ample motivation for head Mouseketeer Michael Eisner and his negotiators to find some way of securing an extension to Disney’s current agreement with Pixar. And over at Pixar, chief creative exec John Lasseter has already penned a “Toy Story 3” script that will never be lensed if the animation studio parts ways with the Mouse — a seemingly persuasive argument for the parties working things out.

Yet sources close to the talks say that time and again, execs have taken one step forward toward an agreement only to hit an impediment that knocks negotiators two steps backward.

The huge success of “Finding Nemo” this summer proved one such roadblock. Pixar execs were emboldened by pic’s achievement, perhaps to unreasonable lengths.

More recently, a Disney insider grumbled over a Pixar tendency to “negotiate in the press.” Fairly or not, the mere perception of such tactics has plainly been counterproductive to negotiations.

New terms certain

Meanwhile, a Disney board source said directors back Eisner’s tough stance in the negotiations. But it’s also clear Eisner now accepts that Disney can’t maintain anything remotely like its current co-production terms with Pixar.

The partners currently split movie box office evenly, but the Mouse may have to forego any B.O. split on future releases, or at best maintain a nominal 10% participation. Negotiations thus involve intensive discussion of other aspects of the deal, such as Disney’s distribution fee, revenue from TV and other ancillaries, theme-park rights and even the length of any contract extension.

Disney currently gets a 12.5% distribution fee, in addition to its 50% B.O. split. Some have speculated that Mouse could have to take a fee of less than 10% — much like 20th Century Fox is reputed to get for its handling of George Lucas’ “Star Wars” pics, albeit on a sliding scale accounting for variations in gross totals.

But a well-placed source suggested the distribution fee hasn’t been a particularly contentious issue in the Disney-Pixar talks. More difficult has been the question of what terms to apply to two still-unreleased pics covered under the existing pact: “The Incredibles,” skedded for Nov. 5, 2004, and “The Cars,” an unslotted 2005 title.

Pixar wants the pics folded into terms of any contract extension, which is what happened to unreleased inventory when the partners last rejiggered co-prod terms in 1997. The Mouse is holding out for a compromise position, covering the next two releases with terms less remunerative than under the current agreement but sweeter than what Disney will enjoy in the next batch of co-productions.

Another sticking point is the question of how many future pics will be included in the co-production extension. But what lawyers on both sides of the negotiating table find most troubling are the terms for dividing myriad ancillary revenue streams including TV, home and theme parks.

One well-placed source said such seemingly arcane questions rep multiple potential deal-breakers.

“When there is so much at stake, even the corollaries to an agreement are extremely important,” the industryite said. “You don’t want to wake up three years from now and say, ‘Why didn’t I think of that?’ ”

Stocks could fall

Still, observers say it’s clear the parties feel pressure to find their way through the thicket of issues. They note both parties are high-profile, publicly traded companies whose stock could take a significant hit should talks fall apart irreparably.

Pixar would likely take a hit on its stock price due to the uncertainty of a new distribution relationship, even as word circulates on Wall Street that its shares are already overvalued. Analysts long have bemoaned Pixar’s revenue volatility — caused by insufficient product output — and Morgan Stanley’s Rich Bilotti recently suggested that Pixar’s recent share-price climb north to $70 overvalues the stock by some 35%.

Similarly, analysts could review Disney stock ratings and earnings forecasts in light of Mouse’s failure to reach a satisfactory conclusion to the negotiations.

“We continue to believe Disney’s profits will suffer as it renegotiates (or possibly loses) its distribution arrangement with Pixar,” Fulcrum Global’s Richard Greenfield wrote recently.

Most depressing of all to anyone hoping for an imminent resolution to the Disney-Pixar standoff: There’s no deadline to the talks whatsoever. Pixar was free under terms of the current co-production pact to talk to other potential distribution partners once it delivered “Nemo” to Disney, but the partners are also free to haggle forever.

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