The
Hollywood Economist
The numbers behind the industry.
After
Paramount spent $1.8 billion to get DreamWorks' present
and future movies, Disney further escalated the brain drain
and revealed how high 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 got 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% of Pixar's total revenue in 2005. (Pixar receives
50 percent of the take, after Disney deducts off the top
all its advertising, print, and logistical expenses, and
a 12.5% distribution fee.) Disney also owns one half of
Pixar's library of six feature movies, which consists of
Toy Story 1 &2 , A Bug's Life , Finding
Nemo , Monsters, Inc. , and The Incredibles
. It also takes in the lion's share of the money from
Pixar's healthy video, DVD and TV sales, a juicy cut ranging
between 87 percent for Toy Story to 56% of the
other co-productions. That's not all: Disney has the licensing
right to use Pixar characters in its theme parks without
paying Pixar anything at all.
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—codenamed Pixaren't—to
make the sequels to The Incredibles et al. using
Pixar's computer-generated characters, motion-capture techniques,
and story boards, 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's 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% financed by Disney and hewed closely
to the 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 ten-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 co-production 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 co-productions 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 about
$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 multi-billion dollar investment might
be, the deal carries some economic risks. Pixar 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 Expresss
), and Fox ( Ice Age )—have already shown
that they can make popular computer-animated features.
DreamWorks's
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.
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