Walt Disney-Pixar Merger

Brief Industry Analysis

Because of the technology nowadays, one successful film can be distributed
all over the world, which is in a form of motion pictures or DVD. Animation is one
media that is spread all over the world; push it to be one of fastest growing industry.
The demand for the animation is increasing from the emerging number of cables and
satellite TV and the popularity of The Internet. In addition, in the past, the target
market of the animation industry was just kids, but now, it expands market to cover
all ages of customers. The companies can be range from a big company such as Walt
Disney to an individual artist with a PC.
The trend of the industry has changed from drawing and photographs, which is
labor-intensive, to using computer technology in order to create the realistic and
higher quality pictures. However, producing the animation is still labor intensive and
take a long time, this push the cost of production to be high. Therefore, now we see
the trend of outsourcing the production from North America to Asia Pacific area,
which has a lower cost, high quality computer animation production, and lower cost.

Walt Disney Company Overview

Walt Disney is one of the leading companies in the world that provides
entertainment experience since its founding in 1923. Walt Disney Company and its
subsidiaries and affiliates have four business segments, which are media networks,
parks and resorts, studio entertainment, and consumer products.
The Walt Disney studio, which is the first segment of Walt Disney since its
foundation, produces animated features and live-action motion pictures. The Walt
Disney studio is not only produces motion pictures, but also distributes Disney and
other films to the rental and home entertainment markets around the world. It is also
one of the largest producers of Broadway musicals, included Disney on Ice and
Disney Live Entertainment. Moreover, it has the music group under Walt Disney
studio produces original music and motion picture soundtracks.
Another segment is Parks and resorts. The first park established is in 1952,
when Walt Disney constructed the Disneyland Park in Anaheim, California. Since
then, Walt Disney expands its Parks and Resorts around the world. This includes
Disney Cruise Line, eight Disney Vacation Club resorts. Walt Disney also has five
resort locations, which composed with 11 theme parks on three continents.
The third segment is Disney consumer products. The Walt Disney product first
occurred in 1929, when one businessman approached Walt Disney in order to put the
Mickey Mouse logo on the cover of children’s writing tablet. Disney Consumer
Product (DCP) produces various kinds of products such as toy, apparel, home
decoration, books and magazines, interactive games, foods and beverages, stationary,
electronics, and fine arts. To be able to produce all of this, DCP has various lines to
produce the products. In addition, Walt Disney owns the largest publisher of children
books and magazines, which distributed into 75 countries. Walt Disney also provides
the website for shopping portal and Disney stores retail chain. However, the Disney
store retail chain is owned by the other party in Japan, under the license agreement
with the Walt Disney Company.
The last segment is Media networks. They present the wide array of
broadcasting, cable, radio, publishing and Internet businesses. They owned two well-
known television groups, which are ABC and ESPN.
The Disney-ABC Television group broadcast all of Walt Disney
entertainments and news television properties. The customer target markets are
focusing on Children and family. Moreover, Walt Disney also own ESPN, which is
one of the leading channel in sport entertainments.

Pixar Company Overview

Pixar is an Academy Award-winning computer animation (CG animation)
studio with technical, creative, and production capabilities to make a new generation
of movies, merchandises, and other products.
Starting from Lucasfilm Ltd, founded by George Lucas, had invited Ed
Catmull and John Lasseter who left his job at Disney to work with. The company was
about the film and entertainment. On February 3rd, 1986, Steve Jobs purchased the
computer graphics unit of Lucasfilm, Ltd for $10 million to establish as independent
company, Pixar. Moreover, Ed Catmull who had worked with Lucasfilm was co-
founder and chief technical officer of Pixar. The company’s objective is to develop
computer animated feature films that make all types of audiences memorable with
characters and stories by using technology and creative talent. Therefore, Pixar's team
came up with several software innovations, which were used to create numerous of
products.
In 1987, The Pixar short was introduced, Red’s Dream. This short film
received the Golden Gate Award for Best of Category, Computer-Generated Imagery
at the San Francisco International Film Festival, and also won a Golden Nicas at the
Prix Ars Electonica Festival in Austria.
In 1988, Tin Toy won an Academy Award for Best Animated Short film. It
got the first prize for computer-assisted animation at the Third Los Angeles
International Animation Celebration and also the Blue Ribbon Award from the
American Film and Video Association.
In 1989, Knick Knack and RenderMan were launched, and the first
commercial was made. Furthermore, in July, CEO of Pixar, Steve Jobs wanted to
increase the company’s capabilities, so he collaborated with the San Francisco-based
Colossal Pictures who experience in broadcast media in order to broker Pixar for
television commercials and promotional films. The alliance was very successful.
In 1990, the company office was moved to a one-story building in Point
Richmond, California. And, it created five new commercials.
In May 1991, the organization entered into the Feature Film Agreement with
Walt Disney Pictures for the development and production of three computer animated
feature films to be marketed and distributed by Disney. Then, the alliance was begun.

The Motives and Fits between the partners of the alliance

The alliance between Disney and Pixar will yield great benefit to both parties.
The motives for each partner can be identified as the followings.
Disney
 Disney can acquire core strengths of Pixar in producing computer motion
pictures that appeals to the customers worldwide. As Disney started
developing its computer animation later than the other competitors in the
animation industry. At the time when Pixar generated more than 30 billion
dollars from its 6 animation motion pictures, Disney struggle with its
production. For example, Chicken Little, though perform better than its other
movies, it is still not be able to compete with Pixar animation.
  The decrease in competition is another motive for Disney. Because both are
different entity, the competition in the market becomes high. Especially,
Disney cannot compete in term of producing the animations that attract
customers as much as Pixar. Pixar is the large player in the industry. It is
possible of collaboration between Pixar and another big studio. And that will
be expensive if Pixar had fallen into other’s hands. Therefore, merging with
Pixar will gain benefits to Disney greatly.
 Disney can also increase its revenue by merging with Pixar. Disney has been
declined in the recent years. The investors begin shifting their interest in more
rapid growth in the media industry. Merging with Pixar will help them gain
more stock price. Disney can also get more profit from merchandise, theme
park using the characters from Pixar’s animation.
 Disney access to technology because traditionally, Disney still uses hand-
drawn animation which was no longer successful. However, Pixar was
involved in developing computer generated imaging technology.
Pixar
 Pixar can focus on its core strengths in producing the computer animation and
don't have to invest in production line for making merchandise and home
entertainment. When both can concentrate on their strengths, they can increase
the productivity and in turn generate more sales.
 Pixar also gain the benefit of being able to produce the other lines of products
such as apparels, toys, and so on. Because, Disney has the various lines to
produce these merchandises and have a place to distribute, Pixar will also gain
from that point.

What’s in it for the stakeholders?

This alliance will enable Both Disney and Pixar to collaborate without the
barriers that comes from producing the product from two different companies with
different shareholders and management teams.
In term of the revenue, stockholders get the higher share price from merging
between two parties. For example, shares of Pixar gain nearly 3% from after-hours
trading and Disney’s stock gained about 1.8% in regular trading.
 In term of human resource, the team up of two big animation production
companies will enables in better human resource. They can exchange the valuable
human resource between Disney and Pixar, which enables them to better, produced
even top hit motion pictures.

Alliance Structure and Management

1991: Pixar entered in to Feature Film Agreement with Walt Disney for Development
and Production of three computer animated films. Disney is to do marketing and
distribution of the products.

1995: Toy Story launched and in the market and was successful in term of creativity
and technical.

1997: Pixar entered into Co-Production Agreement which replaced the former
agreement, which was Feature Film Agreement, with Disney reference to which Pixar,
on exclusive basis, agreed to produce five animations for distribution by Disney.
There are A Bug’s Life, Monsters, Inc., Finding Nemo, The Incredibles, and Cars.
There is a disagreement occurred when Toy Story2 would be launched
because originally they decided that Toy Story2 will be launched as video and it is not
part of a deal. When Toy Story2 became film, Pixar also require this film to be
counted as one of the five animated films deal, but Disney refused.

2004: Both of companies attempted to reach new agreement. Pixar negotiated for
Disney to only do distribution, and Pixar would control the entire products and get the
ownership over the films and also the films in production under their old agreement.
They also wanted financial freedom, which means that they would finance the films
on their own and collect all profits. Disney would get only 10 to 15 percent from
distribution fee. Pixar stated that it did not receive the fair share of films’ revenues,
and it tried to cut short deal with Disney. Therefore, both companies would not
concede to the agreement and the alliance failed.
2006: Disney bought Pixar and merged two companies worth $ 7.4 million in all
stock deal. Pixar Executive Vice President, John Lasseter, would become Chief
Creative Officer of the combined Disney-Pixar animation studios as well as the
Principal Creative Advisor at Walt Disney Imagineering, which designs and builds
company’s theme parks in order to help the design for new attractions at Disney
theme parks. Current Pixar President, Ed Catmull, would become President of new
combined Disney-Pixar animation studios.

Type of Alliance
 Sales alliance: the agreement of the two companies would be categorized as
to increase sales. Both parties can market its production together and get more
profit.
 Investment alliance: The motion pictures within the contract will be invested
by both Disney and Pixar. They will split the cost equally and share 50/50
profit, made from the broadcasting of the movies.

Main Issues between Pixar and Disney

Since the partnership agreement in the year 1997, with the good partnership
between Steve Jobs and Eisner, they created a long term relationship in producing 5
blockbuster movies. The movies of the movies will be share 50% to each partner. This
partnership built huge profits for both companies; the box-office revenue is more than
$3 billion.
However, the issues occurred among the parties. Disney aborted the contracts
in launching the Toy Story 2, which is not included the 5 movies in the Co-production
agreement. Disney ignored Pixar’s request in launching Toy Story 2 in form of Home
entertainment, DVDs instead of motion pictures. Pixar demanded Toy Story2 to be
included within the 5 movies ranges, but Disney refused.
With the argument happened, it created the scar on the alliance. Pixar believed
that they don’t get fair returns, and require that most of the profit should fall to Pixar
instead.
As a result, Jobs wanted to negotiate for a new contract with the Walt Disney
Pictures, but Eisner quit his position in 2004, and Robert Iger became the Disney boss
in replacement. Pixar ended the discussions with Disney after striking a deal for ten
months as the Disney seems not to participate in the future success of its alliance
partner. Pixar then began talks with other companies, for example, Twentieth Century
Fox and Warner Brothers. In early 2006, the Walt Disney company agreed to acquire
the Pixar Animation Studios with 2.3 Disney shares issued for each Pixar share. The
15-year partnership between Pixar and Disney ended with an acquisition by following
possible issues.
First of all, Pixar thought it was not getting mutual benefits. Under the
previous agreement, they agreed to perform different jobs on production. Pixar would
develop the films’ content and Disney would take care of marketing and distribution.
However, the profit from the box office, DVDs, dolls and VDO games would be split
after Disney had recovered the costs on marketing and distribution, which caused a
lack of mutuality in the alliance. This can be a main issue that led Jobs tend to charge
the high share price because he has felt that he was not getting fair share of profits
from Disney.
Second, Pixar can be successful without Disney. Once Pixar can stand alone in
the industry, it does not need the partner who’d share profits or spread out the costs.
With the issue of profit-sharing, Pixar as the computer animation leader may find
other partners to make a new contract bout film production instead of Disney which
seemed to lack of movement and willingness to extend the agreement between them.
Moreover, Pixar has technological skills and innovation in the company to produce
profit-generating films as they did in the past.
The Latest Situation
Recently, the combined Disney-Pixar company is operated by Ed Catmull as
the President of the company, and John Lesseter as the Chief Creative Officer. The
acquisition results in the future growth of Disney’s businesses as Pixar offers
innovation and technological resources to the Walt Disney Pictures. The 15-year
partnership has created a good collaboration between Pixar and Disney teams. Pixar
team will improve the animation in Disney and also provides expertise in design for
Disney theme park around the world. Furthermore, the acquisition led the
collaboration without barriers from different companies with different sets of
shareholders. The combined one can now focus on the same goal that is to delight the
millions of people worldwide especially family audience with creative stories,
characters, and films. In addition, Disney will have an ability to fully capitalize Pixar-
created characters and other platforms such as broadband and wireless. It could also
develop on traditional media outlets like consumer products and live stage plays.
Most importantly, Disney-Pixar can develop its strategic priorities which are about
being the first to deliver high-quality compelling creative content to consumers, apply
the new technology, expand globally, and increase long-term share value.

The Key Success Factors of the Alliance

In order for the alliance to have a long term successful, both parties must
recognize the factors that enable alliance to be succeeded.
Both Disney and Pixar offer each of their core strengths to the alliance, which
compliment one another. However, the alliance will never be successful if both of
them cannot trust in sharing the information to another party. In this case, Pixar has to
share its know-how in producing the animation and human resources to Disney and
vice versa.
Another factor is tolerance. Because Disney is a big company with a lot of
capital, Pixar may have to keep in mind that Disney can take over Pixar at any time.
Nevertheless, if they cannot tolerate their partners, the alliance will apparently fail.

Lesson Learnt from the Alliance

From what we learned in class, we would see that even though the alliance
that had been established for a long time still fail when the issues of both parties were
not met.
Culture is obviously affected along the range of merger. The differences in
cultures may lead to the alliance break down. Both companies have its distinct culture
within the organizations.
Pixar
 Pixar has been famous for its human resource management in providing the
friendly working environment. Pixar’s work office is not a cubicle, but rather a
habitat that the employees can decorated their workplace. Pixar also provides
an opened space, lounges, and game areas. Clearly, Pixar design the working
environment that helps encourage the creativity of the employees.
 The second main culture is egalitarianism, which is the emphasis on teamwork.
Pixar focus on how to integrate the idea of all levels of the company in order
to produce the quality animation. The top management also encourages the
 employees by cultivating an open communication. Moreover, the issue of trust
plays a big role within the company. The creation of the animation is solely by
artists not engineers or top management, so that they can the real creative
work.
 The company aims on getting the talent people within the company, so that
they can also create the more creative, entertain motion pictures.
Disney
 Disney, as the big company that corporate for a long time, has a hierarchy
management style. Or it can be identified as Power Distance. With the distant
top management, the burden is fall on the middle managers and lower levels.
 Disney, comparing with Pixar, also aims more on making the profit instead of
providing the quality animation. For example, the sequel of the classic
animations, which the story lines and computer graphic used are poor.
Now, there is concern over how Pixar will cope with protecting its corporate
culture against Disney. They should put some measures in protecting their culture and
provide the quality product without Disney’s influence.