Disney and Pixar: Partnership Agreement

Disney and Pixar Partnership Agreement psychiatric hospitalIn January 2006, the US based media and entertainment keep company Walt Disney announced that it would acquire its life force dampner Pixar for US$ 7.4 billion in stock. The batch was expected to be finalized by mid-2006. Disney had already been in partnership for producing and distri yeting spirit blasts with Pixar since 1991. However, in January 2004, owing to differences with Disneys w consequently chief operating social occasionr Michael Eisner, Pixar had announced that it would partner with an otherwise dispersion company in 2006. But Robert Iger, who took e rattlingplace from Eisner on September 30, 2005, revived talks with Pixar and fin eachy succeeded in acquiring it.Our bring on will examine the partnership agreement among Disney and Pixar and the incidents that led to the break-up of ties. We will discuss how the new CEO Robert Iger, who succeeded Michael Eisner, went on to re-establish ties with Pixar and Steve Jobs, who held 50.6% equity stake in Pixar. The questions we seek to answer through this case ar1. Is there a synergy amidst Disney and Pixar?2. Did Disney pay too much to acquire Pixar?3. Is the Pixar acquisition in the silk hat interest of Disneys shareholders?4. Will the difference in corporate culture allow Disney and Pixar to work effectively unneurotic?5. Will this acquisition be conquestful?Hi spirit levelThe Disney StoryWalt Disney Animation Studios is the subsidiary of The Walt Disney Company. It was founded in 1934 when Walt Disney initiated the handicraft of Snow W take a crape and the S purge Dwarfs, which was Walt Disneys prototypal feature length spirit deal. The move however started in 1937, when selected animators from the shorts division were moved into the features division.Snow White was an unprecedented success when it was released in February 1938. It moved critics and audiences equal and is considered unrivalled of the true animation cla ssics of all times. After, the viability of feature length animation was firmly ceremonious with the success of Snow White, WDAS would go on to make a series of criti countery acclaimed and successful exalt features same Dumbo, Cinderella. They would too expand into new surgical incisions like live action features, television and theme parks.Since its founders death in 1966, The Walt Disney Company had narrowly survived takeover attempts by corporate raiders. Its shareholders Sid Bass and Roy E. Disney brought on Michael Eisner and former Warner Brothers chief plain-spoken Wells to replace Ron W. Miller in 1984 and turn the company around.During the second half of the 1980s and wee 1990s, Disney revitalized. Beginning with The Little Mermaid (1989), its flagship animation studio enjoyed a series of commercial and critical successes that helped reinvigorate the American animation industry. Disney also broadened its adult offerings in film when then Disney Studio head Jeffrey Katzenberg acquired Miramax Films in 1993. Disney acquired umteen other media sources, including ABC and ESPN.However, by this time, the competitive scenario changed again. Many new studios had stand upn up and were producing high reference animated features. to a fault there was strong tiredness and indifference from the audience who had had enough of Disneys storytelling and animation styles. The elevation of new studios also increased demand for artists and stencillers, driving salaries up, causing the budgets of hand drawn animation features to inflate. The rise of Computer Generated Imagery (CGI) was also eating into Disneys market share.Starting from 2000 onwards, massive layoffs had reduced staff to 600. Also the Studio decided to focus on CGI animation for future releases instead of the traditional animation methods to make do with Pixar, Dreamworks and Blue Sky Studios. This led to the shut garbage down of the Paris Studio in 2003 and the conversion of the Orlando Stu dio into a theme park attraction in 2004.Michael Eisner StoryIn 1976, the Chairman of Paramount Pictures, recruited Michael Eisner from ABC and make him president and CEO of the motion picture studio. During his tenure at Paramount, the studio turned let out such hit films as Saturday Night Fever, Grease, the Star Trek film franchise, and Beverly Hills Cop, and hit TV shows such as quick-witted Days, Laverne Shirley, Cheers and Family Ties.Diller, the Chairman of Paramount, left in 1984, and Eisner expected to assume Dillers position as studio chief. But he was passed over. Eisner then lobbied for the position of CEO of The Walt Disney Company.Michael Eisner took over as CEO of the Walt Disney Company in 1984 and turned it into a media giant whose interests included photographs, sports franchises, theme parks and television ne twainrks.During the early part of the 1990s, Eisner and his partners dress up out to broadcast The Disney Decade which was to feature new parks around the world, animated park expansions, new films, and new media investments. period some of the proposals did follow through, around did not. These included the Euro Disney Resort (now Disneyland Paris), Disney-MGM Studios (now Disneys Hollywood Studios), Disneys California Adventure Park, Disney-MGM Studios Paris (eventually assailable in 2002 as Walt Disney Studios Park), and various film projectsFrank Wells, COO of Walt Disney. died in a helicopter fragmentize in 1994. When Jeffery Katzenberg was passed over for Wells post, he resigned and formed Dreamworks SKG with partners Steven Spielberg and David Geffen. Dreamworks would go on to become wholeness of the high-riskgest and most successful movie studios of all time and a big competitor to Disneys animation features. Instead, Eisner appointed Michael Ovitz, one of the founders of the Creative Artists Agency, to be President, with minimal involvement from Disneys table of directors, which included many influential and respec ted members. Ovitz lasted altogether 14 months and left Disney in December 1996 via a no fault termination with a faulting package of $38 million in cash and 3 million stock options worth rough $100 million at the time of Ovitzs departure. The Ovitz episode left a bad taste in the mouth and hatful were very disappointed with Eisners high handedness and autocratic style of working.By 2003, Disneys fortunes had flagged and Roy E. Disney, the news of Disney co-founder Roy O. Disney and nephew of Walt Disney, resigned from his positions as Disney vice chairman and chairman of Walt Disney skylark Animation, accusing Eisner of micromanagement, flops with the ABC television network, timidity in the theme park employment, turning the Walt Disney Company into a rapacious, soul-less company, and refusing to establish a clear succession plan, as well as a string of box-office movie flops starting in the year 2000.On swear out 3, 2004, at Disneys annual shareholders meeting, a surprisin g and unprecedented 43% of Disneys shareholders, predominantly rallied by former board members Roy Disney and Stanley Gold, withheld their proxies to re-elect Eisner to the board. This effectively ended Eisners stint at Disney.On March 13, 2005, Eisner announced that he would step down as CEO one year before his contract expired. Eisners replacement was his longtime assistant, Robert Iger.The Pixar StoryPixar started in 1979 as the Graphics Group, a part of the Computer Division of Lucasfilm.It is based in Emeryville, California. It was launched with the hiring of Dr. Ed Catmull from the natural York Institute of Technology (NYIT), where he was in charge of the Computer Graphics Lab (CGL).. The team at Pixar under Dr. Catmull worked on creating Motion Doctor, which allowed traditional cel animators to use figurer animation with minimal training.Initially, Pixar started off as a computer hardware company whose core product was the Pixar Image Computer, a system in the first place s old to government agencies and the medical community. One of Pixar Image Computers biggest customers was Disney Studios. However, The Image Computer never sold well. In a bid to drive sales of the system, Pixar employee arse Lasseterwho had long been creating short demonstration animations, such as Luxo Jr., to show off the devices capabilitiespremiered his creations at SIGGRAPH, the computer graphics industrys galacticst convention, to great fanfare. This would begin Pixars journey into the world of animated feature films.Poor sales of Pixars computers baneened to bankrupt the company, And Lasseters animation section began producing computer-animated commercials for removed companies to bring in much needed revenue. Early successes included campaigns for Tropicana, Listerine, and LifeSavers.The team began working on film sequences produced by their parent, Lucasfilm or worked collectively with Industrial Light and Magic, ILM is another Lucasfilm company, on special set up. In 1986, Steve Jobs purchased Pixar from Lucas Films shortly after he left Apple Computer. Jobs paid $10 million as capital into the company. The newly independent company had 45 employees and was headed by Dr. Edwin Catmull, President, and Dr. Alvy Ray Smith, executive director Vice President and Director. Jobs served as Chairman and Chief Executive Officer of Pixar.Pixar has made 10 feature films beginning with gyp Story in 1995 and each one has achieved critical and commercial success. Pixar followed meet Story with A Bugs Life in 1998, Toy Story 2 in 1999, Monsters, Inc. in 2001, Finding Nemo in 2003 (which is, to date, the most commercially successful Pixar film, grossing over $800 million worldwide), The Incredibles in 2004, Cars in 2006, Ratatouille in 2007, WALL-E in 2008, and Up in 2009 (the first Pixar film presented in Disney Digital 3-D).John Lasseter StoryLasseter was born in Hollywood, California. When he was in college., he heard of a new plan at California Institut e of the Arts and decided to leave his current college to follow his dream of suitable an animator.. Lasseter was taught by trio members of Disneys Nine Old Men Eric Larson, Frank Thomas and Ollie Johnston.On graduation in 1978 , Lasseter joined The Walt Disney Company, as a Jungle Cruise skipper at Disneyland in Anaheim. He posterior obtained a job as an animator at Walt Disney Feature Animation, Since the release of 101 Dalmatians in 1961, Lasseter mat WDFA had hit its creative peak and there was no innovation coming through in all(prenominal) the animation or the storytelling. In 1980 or 1981 he came across some video tapes from one of the then new computer-graphics conferences, and he experienced as a revelation.He saw the huge potential of this new applied science in revitalizing the creative juices at WDFA. Lasseter realized that computers could be used to make movies with three dimensional backgrounds where traditionally animated characters could interact to add a new, visually stunning depth that had not been conceived before.During this time, Lasseter attempt to sell his ideas to Disneys slip away bosses and he got the approval to do a short test film on the famous story Where the Wild things are. However,he un get laidingly stepped on some of their direct superiors toes by circumventing them in their ebullience to get the project into motion. One of them, the animation administrator Ed Hansen disliked it so much that when Lasseter and Wilhite tried and true to sell the idea to him and Ron Miller, which they at that time were already aware of, they turned it down. A few minutes after the meeting, Lasseter was summoned by Hansen to his office, where John was told that his employment in the Walt Disney Studios had been terminated. period putting together a ring for the planned feature for Disney, he had made some contacts in the computer industry, among them Alvy Ray Smith and Ed Catmull at Lucasfilm Computer Graphics Group. After being fire d, Lasseter visited a computer graphics conference at the Queen Mary in Long Beach, where he met and talked to Catmull again. Before the day was over, Lasseter had made a deal to work as an interface designer with Catmull and his colleagues on a project that resulted in their first computer animated short The Adventures of Andr and Wally B.Lasseter oversaw all of Pixars films and associated projects as executive producer. He also personally directed Toy Story, A Bugs Life, Toy Story 2, and Cars.Lasseter has won two Academy Awards, for Animated Short Film (Tin Toy), as well as a particular(prenominal) Achievement Award (Toy Story). He was also nominated on four other occasions in the household of Animated Feature, for twain Cars (2006) and Monsters, Inc. (2001), in the Original Screenplay category for Toy Story (1995) and in the Animated Short category for Luxo, Jr. (1986), while the short Knick bent (1989) was selected by Director Terry Gilliam as one of the ten scoop out anim ated films of all time. corporate Culture at PixarAt most studios, a specialized development department generated new movie ideas. Pixar assembles cross-company teams for this purpose. Teams comprise directors, writers, artists and storyboard the great unwashed who originate and refine ideas until they switch the potential to become great films. Pixar believes in finding volume who will work effectively together and ensures a healthy social dynamics in the team and this, they believe helps the team solve problems.Another important tenet in Pixar is the creation of a peer culture, where employees encourage people throughout the company to help each other produce their best work. At Pixar, daily animation work is shown in an incomplete state to the whole crew. This process helps people get over any embarrassment about sharing unfinished work, so they become even more than creative. It enables creative leads to communicate important points to the entire crew at once. And sometimes a groundbreaking piece of animation sparks others to raise their game.At Pixar, the belief is that, the most efficient way to resolve the numerous problems that arise in any complex project is to trust people to address difficulties directly, without having to get permission. So, everyone is attached permission to communicate to anyone. Within Pixar, members of any department can approach anyone in another department to solve problems without having to go through proper channels. Managers understand they dont always have to be the first to know about something going on in their realm, and that its okay to walk into a meeting and be surprised.Special attention is given to craft a learning environment, this reinforces the mindset that everyone is learning and that its fun to learn together. Pixar University trains people in multiple skills as they advance in their careers. It also offers optional courses (screenplay writing, drawing, sculpting) so people from dissimilar disciplines can interact and appreciate what each other does.While many people dislike Post-Mortems of projects as they would rather discuss what went right than what went wrong and after investing extensive time on a project, theyd like to move on. So post-mortems at Pixar are structured to stimulate discussion. Pixar asks post mortem participants to list the top five things theyd do again and the top five things they wouldnt do. The positive-negative balance makes it a safer environment to explore every aspect of the project. Participants also bring in lots of performance data including metrics such as how often something had to be reworked. Data further stimulates discussions and challenges assumptions based on subjective impressions.Corporate Culture at DisneyUnder autocratic former CEO Michael Eisner, control rather than collaboration was the norm and unit heads became aquaphobic or unable to make decisions. With Disney vying for a share of digital market, the timing of the upheaval cou ld hardly have been worse.Fortunately, new chief executive phellem Iger is a whole different animal to Eisner and immediately set out to restore harmony. Achieving this involved transforming the culture rules almost beyond recognition. Unlike his predecessor, Iger* Rules by consensus* Shows faith in his subordinates* And is willing to keep a low profile and let others take the plaudits.No endless confine by central control, key players in the organization now enjoy greater freedom to call the shots. And while Eisner overtly pooh-poohed any ideas he did not like, Iger evaluates and encourages the contributions of others. Consequently, during weekly meetings the dialogue no longer flows just one way.The CEO visits rank and file to show them that their efforts are appreciated and has made his office a more welcoming place. This might seems as trivial gestures to some but the effect on morale can be priceless.But perhaps Igers most significant attribute is the trust he places in hi s people to get the job done. In contrast, Eisner cramped the style of others by insisting on being involved in anything and everything. In time, Disney gained a reputation of being slow to react. But Iger tells his people to go for it and will only get involved when it is absolutely necessary.Igers back seat style of lead has allowed scriptwriters more freedom and the studio chief greater decision devising power.Disney and Pixar The PartnershipDuring the 90s there was an explosive growth in the use of CGI in animation and live action feature films. Soon CGI animation came to dominate special effects in both kinds of features. The barrier between animation and special effects were shattered and the enhancement of Hollywood films using CGI became second nature and often went unnoticed.In 1991, due to losses suffered from their computer hardware business, there was serious financial strife at Pixar. This resulted in substantial layoffs in their computer department. Pixar made a $2 6 million deal with Disney to produce three computer-animated feature films, the first of which was Toy Story. Despite this, the company was losing money and Steve Jobs was thinking about divesting his shares in Pixar. Only after corroboratory that Disney would distribute Toy Story for the 1995 holiday season did he decide to give it another chance. The film went on to gross more than $350 million worldwide.Disagreements started to crop up between Disney and Pixar from their next project together, Toy Story 2. Originally intended as a straight-to-video release (and thus not part of Pixars three-picture deal), the film was eventually upgraded to a theatrical release during production. Disney refused to consider this feature film as part of the three picture deal as demanded by Pixar. Pixars first five feature films have collectively grossed more than $2.5 billion, equivalent to the highest per-film average gross in the industry. Though profitable for both, Pixar later complained tha t the arrangement was not equitable. While Pixar was created and produced, and Disney only handled marketing and distribution, Profits and production costs were being split 50-50, and not only that, Disney entirely owned all story and sequel rights and also collected a distribution fee. The lack of story and sequel rights was perhaps the most onerous aspect to Pixar and set the stage for a contentious relationship.The two companies attempted to reach a new agreement in early 2004. The new deal would be only for distribution, as Pixar intended to control production and own the resulting film properties themselves. The company also cute to finance their films on their own and collect 100 percent of the profits, paying Disney only the 10 to 15 percent distribution fee. More importantly, as part of any distribution agreement with Disney, Pixar demanded control over films already in production under their old agreement, including The Incredibles and Cars. Disney considered these condit ions unacceptable, but Pixar would not concede.Disagreements between Steve Jobs and then Disney Chairman and CEO Michael Eisner made the negotiations more difficult than they otherwise might have been. They broke down completely in mid-2004, with Jobs declaring that Pixar was actively seeking partners other than Disney. Pixar did not enter negotiations with other distributors. After a extended hiatus, negotiations between the two companies resumed following the departure of Eisner from Disney in September 2005. In preparation for potential radioactive dust between Pixar and Disney, Jobs announced in late 2004 that Pixar would no longer release movies at the Disney-dictated November time frame, but during the more lucrative early summer months. This would also allow Pixar to release DVDs for their major releases during the Christmas shopping season. An added make headway of delaying Cars was to extend the time frame remaining on the Pixar-Disney contract to see how things would pl ay out between the two companies.Acquisition by DisneyDisney announced on January 24, 2006 that it had agreed to buy Pixar for approximately $7.4 billion in an all-stock deal. Following Pixar shareholder approval, the acquisition was completed May 5, 2006. The transaction catapulted Steve Jobs, who was the majority shareholder of Pixar with 50.1%, to Disneys largest individual shareholder with 7% and a new seat on its board of directors. Jobs new Disney holdings cash in ones chips holdings belonging to ex-CEO Michael Eisner, the anterior top shareholder, who still held 1.7% and Disney Director Emeritus Roy E. Disney, who held almost 1% of the corporations shares.As part of the deal, Pixar co-founder John Lasseter, by then Executive Vice President, became Chief Creative Officer (reporting to President and CEO Robert Iger and consulting with Disney Director Roy Disney) of both Pixar and the Walt Disney Animation Studios, as well as the Principal Creative Adviser at Walt Disney Imagi neering, which designs and builds the companys theme parks. Catmull contain his position as President of Pixar, while also becoming President of Walt Disney Animation Studios, reporting to Bob Iger and Dick Cook, chairman of Walt Disney Studio Entertainment. Steve Jobs position as Pixars Chairman and Chief Executive Officer was also removed, and instead he took a place on the Disney board of directors.Lasseter and Catmulls oversight of both the Disney and Pixar studios did not dream up that the two studios were merging, however. In fact, additional conditions were laid out as part of the deal to ensure that Pixar remained a separate entity, a concern that analysts had had about the Disney deal.Some of those conditions were that Pixar HR policies would remain intact, including the lack of employment contracts. Also, the Pixar name was guaranteed to continue, and the studio would remain in its current Emeryville, California location with the Pixar sign. Finally, branding of films ma de post-merger would be DisneyPixar (beginning with Cars).EXHIBITSName of Feature FilmStudioTotal Gross1The Lion King(1994)Disney$783,841,7762Finding Nemo(2004)Disney/Pixar$864,625,9783Shrek(2001)Dreamworks$484,409,2184Monsters Inc(2001)Disney/Pixar$525,366,5975Toy Story 2(1999)Disney/Pixar$485,752,1796Aladdin(1992)Disney$504,050,2197Snow White(1937)Disney$184,925,4868Ice Age(2002)20th coke Fox$383,257,1369Incredibles(2004)Pixar$631,442,09210The Little Mermaid(1989)Disney$183,355,863Exhibit 1 Top Grossing Animated Feature FilmsDIS 1-yr graphExhibit 2 Disney Stock Price from Aug 06 to Jun 07We start off our analysis using Porters Five Forces of contestation to understand Disneys situation in the industry and the rationale behind its actions.* Threat of New Entrants* talk terms queen of Suppliers* Bargaining violence of Buyers* Threat of Substitutes* Rivalry among competing firmsThreat of new entrants CGI animation movie industry is a robust industry which is urdergoing a period of phenomenal growth. This is an attractive segment for movie studios to venture into as revenues from live action movies are falling while their budget rises ever higher. CGI animation movies are an interest option for many movie studio to increase their toplines without hurting their bottomlines. In this regard, we have seen many established movie studios partner with independent animation studios from inwardly and outside the United States in creating CGI animation movies. While, these movies have not been able to garner the critical or commercial acclaim of that of Pixar, the quality and quantity of such outsourced CGI animation movies are increasing YoY and represent a significant threat to the market pull of existing players in the segment. So we would rate the threat of new entrants as high.Bargaining Power of Suppliers Resources needed for making CGI animation are the technology behind the animation, the story and the animators. Pixar has been a pioneer in creating the tec hnology for animation and with its acquisition, Disney has backward integrated with its supplier, hence reducing the uncertainty in its environment. Both Disney and Pixar have a large team of dedicated scriptwriters and animators, all of whom work under short or long term employment contracts, the loss of a few of the talent will not reduce the quality of the output of either Studios. However, scriptwriters in US are unionized and have in the past gone on bump into against major studios to renegotiate revenue sharing agreements from movie revenue. The strike cost studios hundreds of millions of dollars in lost opportunities, movie shooting delays and cost overruns. So the employees cannot be taken for granted and Disney will have to strike a fine balancing act to please both it employees and shareholders if it wants to get the best work of the employees. We would rate the negotiate power of suppliers as medium.Bargaining Power of Buyers While in the past, almost the entire revenu e tax income from movies came from the theatergoing public within the US, due to the effects of globalization and technology diffusion, the receipts can now be classified on basis of geography and the mode of delivery of content.Worldwide movie market outside United States have become big movie spinners for Hollywood movies, sometimes receipts from offshore markets exceed that of the US market. The important markets outside of US for Hollywood movies are* Japan* United Kingdom* mainland China* EuropeStudios sells distribution rights of their movie to other studios, who are often better placed to reach out to these markets. Since Disney and Pixar have a large brand following and pull, they are better placed that most other studios to negotiate for more favourable distribution contracts. Since all movies made by Pixar till now have been movie spinners for everyone associated with it, Disney has considerable clout in negotiating for contracts.The mode of delivery of movie content can be classified into* Theatrical retail store* DVD Release* Internet Release* Satellite TV ReleaseOther than a theatrical release, the release of DVDs and the Satellite TV rights of the movie are a significant revenue stream. The reasons stated earlier regarding Disney and Pixars unique brand placement help them negotiate the best contracts in both types of releases. Internet release is a new phenomenon and is not a significant enough part of the revenue to affect the dynamics.Overall, we would rate the bargaining power of buyers to be low.Threat of Substitute Products A big threat facing movie studios in general is movie piracy. plagiarism is causing a meltdown in both movie and the music industry causing many studios to fail and others to change their business model. Piracy initially started off with CDs and DVDs, but with the advent and diffusion of broadband internet, online piracy is on the rise. Piracy since the 80s has been the biggest threat to the survival of movie studios as they lose billions of dollars worth of revenue receipts because of it.Since CGI movies appeal to all demographics, live action as well as traditional animated movies can be notion of as substitute products. However, historical data suggests that there is considerable cross selling between these genres and it is flimsy that somebodys interest in a different genre is going to prevent him from watching CGI movies.Overall, We would rate the threat of substitute products as medium.Intensity of Competition among existing players The existing players in the segment are very aggressive and spend a lot on advertising and media to promote their movies. Further consolidation within the industry looks unlikely in the short term future as most studios in the segment have backers with deep pockets.Looking into the future as the frequency of CGI movie releases by major studios increases, the volume of competition and one upmanship between studios will rise inflating budgets and reducing mar gins.So, we would rate the intensity of competition between existing players as high.We will summarize the competitive scenario in this grid.Threat of New EntrantsHighBargaining Power of SuppliersMediumBargaining Power of BuyersLowThreat of SubstitutesMediumRivalry among competing firmsHighAs you can see, Disney is functioning within a dynamic environment with a fairly high stage of uncertainty.We have tried to analyze the reasons behind Disneys acquisition by breaking down the reasons of why companies go for MA. Given below is a pictorial representation of the same,Reason 1 To Increase Market PowerWhen a firms size, resources and capabilities increase, it increases its ability to compete. With the acquisition of Pixar, Disney gains access to Pixars pool of talented artists and creative and technical teams. These artists and content developers are big assets in this industry as good talent is hard to find and harder to replace. With the increase in resources, Disney Pixar combine can create more movies per year potentially resulting in a significant value addition to Disney.Reason 2 Horizontal AcquisitionCompanies go in for acquisitions of firms competing in the same marketspace for obtaining* greet Based Synergies* Revenue Based SynergiesThis is an obvious case of the latter. Pixars last six movies have reportedly get more than $ 2.5/3.2 billion in total whereas Disneys last movie Chicken Little was only a moderate success. Disney plans to exploit Pixars creative and technical teams in combination with its well established and huge distribution system to increase its revenue. Disney in recent years have been unable to connect with its audience and hence create movies that ha