Case Analysis

The Walt Disney Company and Pixer Inc: Presented By: Group 3
1. Himshikha Suhag- PGP/01/22

To Acquire or Not to Acquire?

2. Pramita Wankhede PGP/01/35
3. Tushar Pantawane PGP/01/44
4. Ronak Vankawala PGP/01/46
 Current Situation
• Disney currently faces difficult decision regarding its relationship with
Pixar.
• Although previous collaborations with Pixar have brought immense
success for Disney in terms of revenue and recognition, Pixar’s CEO Steve
Jobs has been trying to negotiate a fairer deal with no success.
• Disney wishes to stay with previous negotiation terms, as it is more
favourable for Disney.
 The Walt Disney Company
• Founder: Walt Disney and Roy Disney
• The official Walt Disney Company was created in 1923, when
Walt Disney signed a contract with M. J. Winkler.
• 51 animated 2D films in total
• Not strong in 3D animation
• American diversified multinational mass media and
entertainment conglomerate 
 Pixar
• Pixar originally began as a tech-company named Lucasfilm’s Computer
Division.
• Steve Jobs saw potential in its technology and purchased the company for
$10 million, renaming it “Pixar.”
• The company enjoyed its many successes, including the release of the
highest grossing animated film of all time, Toy Story 3.
 Capabilities with Pixar
Pixar Walt Disney
Area Short films and commercials Animation movie
Asset CG and Story telling Creativity Movie Industry know how
Distribution N/A Movie, TV, DVD
Channel
Culture Bottom Up Top Down
Free-spirited creativity Managers establish and reinforce
Perfectionism culture
Egalitarian Collaboration
Operation Small Staff, Less Budget, Less time, Large Stff, Large Budget, Lots of
cost Toy story was made with 110 staff time
 Capabilities with Pixar
Pixar Walt Disney
Animation 3D: Leading Computer animation technology Traditional 2D
Software • 10 years of proprietary software system N/A
1. Renderman 2. Marinonette 3. Ringmaster
Skill Most tech employees held PhDs Lack of CG skill
 Previous Relationship
• CAPS: Relationship began in 1986 when two studios collaborated on the
development of CAPS (Computer Animation Production Systems)
• Feature film Agreement: Disney and Pixar Signed a deal in 1991 to produce 3
full-length 3D CG animated movies.
– Terms: Disney would fully fund production cost of the movie and will own movie rights and
Pixar would be paid participation fee to the basis of total revenue. Tot Story was part of this
agreement.
• Co-production Agreement:
– Terms: Pixar would exclusively produce for disney at least 5 original full length animated films.
Production costs would be shared. Disney would fund all marketing expenditure and would
receive distribution fee for the same. In total Disney would receive around 60% of the profit
and pixar would receive 40%
 Conflict
• Renegotiation of distribution-only deal: Since 2002, Steve Jobs had been
trying to broker a deal with Disney whereby Pixar would fund the
production costs in returns of 100% ownership of the films and leaving
Disney with just a fixed distribution fee.
• Relations between Jobs and Eisner were rocky.
 Options with Disney
• Strategic Alliance with Pixar:
– Renegotiation of co-production agreement
• Strategic Alliance with other animation Studios
– It is hard to build new relationships and to find a new partner
• Merger and Acquisition
– Elimination of competition
– Access to technology and human capital
• Internal development
– Developing 3D technology internally
– Too much development cost and fierce competition
 Five Forces Analysis of Film Distribution Industry
Threat of Substitutes: Other channels of
entertainment, including television, theatre, and
YouTube. Other Channels were growing in
popularity, they were not strong enough to match
and compete with the current success and
popularity of movies in our society. Film
distributors, such as Disney, also carry a wide fan-
base and strong brand recognition, meaning
customers are willing to go out of their way to see a
movie distributed by these companies.
Bargaining Power of Buyers: The buyers in the film
Rivalry: Competition is fierce. Many of distribution industry refer to theatres and retailers
Bargaining Power of Suppliers: Film Creator large firms share similar market share. that carry films through showings, DVDs, Blu-ray, etc.
The bargaining power is low since they require a There is a tendency for firms to acquire Due to the distributor’s size, brand recognition, high
lot of capital support from distributors. other studios in order to reduce customer loyalty, bargaining power for retailers and
Marketing and distribution are essential for the competitive pressure. theatres are moderate. Customer’s willingness to
success of a film, so gaining support and Each distributor wants to partner with spend on movies and merchandise is high, which also
partnership from large distributors are very the best filmmakers, making it a blood works in favor for distributors in terms of bargaining
important to film creators battle between big players to get their power.
hands on the next top film.

Threat of new Entrant: Threat of new entries is low due

to the high entry barriers. Currently, there are few big
players that dominate the industry, making it difficult
for new start-up companies to match existing companies
in size and success. Film distribution requires high
capital investments, which makes it hard for anyone to
enter. Success depends on the number of distribution
channels and partnerships, which is much easier for
bigger and well established brands.
 Options with Pixar
• Renegotiation of existing Co-production agreement with Walt Disney Co.
• Negotiating a new distribution deal with another studio and paying only
distribution fee to them.
• Merging with Disney
 Five Forces Analysis of Filmmaker Industry
Threat of Substitutes:
Substitutes for animation filmmakers includes other
types of films such as comedy, action, etc. Although
the other types of movies are popular and “classic”,
animated films are extremely popular among children
and adults alike. The “lovable, relatable characters”
from CG feature films tend to create a large buzz and
fan bases around the world. For this reason, threat of
substitutes is considered moderate in this industry.

Bargaining Power of Suppliers: Rivalry: Bargaining Power of Buyers:

Suppliers in the filmmaker industry refer to
resources needed to create a film. This might
include technology suppliers, equipment
manufacturers, and artistic talent. The shift from
hand drawing to CG/outsourcing increases the
suppliers needed. However, Bargaining power for
these suppliers are moderate in that although it is
important and sometimes difficult to recruit the best
resources, there are many options available for
filmmakers to choose from.
Rivalry for this industry is high due to the large
amount of competition coming from both start-up
companies as well as larger, well-established
entities. As access to technology grew, more startup
companies joined the industry with hopes of
becoming the “next Pixar”. At the same time, there
are many other big players in the industry, such as
DreamWorks and Katzenburg’s Studio, to name a
few. With competition coming from both sides of
the spectrum, rivalry is high and growing.
Buyers for the filmmaker industry refer to movie
distributors such as Disney. For this industry, the
bargaining power of buyers is high due to the high
number of movies available for distributors to choose
from. Since distribution and marketing is critical for a
film’s success, all filmmakers in the industry hope to
partner up with strong distributors to get their films out
in the market. There is zero switching cost for buyers, as
distributors can choose among filmmakers and movies to
partner with at their leisure.

Threat of new Entrant: Due to the growth of access

to technology, threat of new entries is high since
barriers to entry are lowering. Numerous start-up
companies are beginning 6 to enter the industry,
bringing fresh talent and new ideas to the game. They
are each introducing creative storylines and lovable
characters with hopes to becoming “the next Pixar”,
which is potentially threatening to all players in the
industry, including big and well-established firms.
 Why Acquire?
• “Disney and Pixar can now collaborate without the barriers that come
from two different companies with two different sets of shareholders,"
said Jobs in a statement.
• “You can accomplish a lot more as one company than you can as part of a
joint venture. It makes a big difference when everyone is working for the
same set of shareholders”- Bob Iger, Disney CEO
 When to Ally and When to Acquire?
Factor
Types of Synergies
Nature of Resources(Relative
value of soft to hard resources)
Extent of Redundant Resource
Degree of market Uncertainty
Level of competition (Degree of
competition for resources)
Disney and Pixar Fit (and Justification) Strategy
Reciprocal ( Executing tasks through the interactive Acquisition
knowledge sharing process, Co-production
agreement was already at place)
Medium (Pixar had CG technology(hard resource) and Acquisition
storytelling creativity(soft resource))
Medium to High (They could eliminate redundant Equity or
resource across value chain) Acquisition
Medium Acquisition
High (Fox, Sony, DreamWorks, MGM, Universal, Acquisition
Paramount, Warner Brothers. Pixar talked to other
studios and was sure to get the deal they want )
 Culture Difference
• Pixar : Bottom up
– Free Spirited Creativity, Egalitarian
Collaboration, Perfectionism
– Policy against employment
contracts, no cheapquels
• Three basic principles
– Freedom to communicate
– It must be safe for everyone to offer
ideas
– Stay close to innovations happening
in academic community
• Disney: Top Down
– Managers establish and reinforce
culture
– Big Company ,Big bureaucracy
– Focus on profitability. Cheapquels
(princess stories series)
– Executives are the ones making
creative decisions
– Films on a tight schedule
 Stock Dilution
• Transaction could be too expensive for Disney, considering its current net
income of $2.5 billion. The stock split could dilute Disney’s earnings per
share excessively.
• The market reaction has been that if Disney has to take a little dilution to
buy Pixar then take it. The issues for Disney are they have to fix animation
and they have to understand how to use technology with new media
products -- with Steve Jobs you get the solution.
 What’s in store for Disney?
• The addition of Pixar will significantly enhance Disney animation, which is a
critical creative engine for driving growth across our businesses
• The question isn't if Disney is paying too much but how expensive would it be
for Disney if Pixar fall into someone else's hands
• Disney views animation as a key core competency and vital to its future. We
believe Pixar's track record suggests that it has arguably become the
preeminent name in animation
• Access to valuable resource, technology and human capital of Pixar including
Steve Jobs
• Elimination of Potential Competition
 What’s in store for Pixar?
• Pixar could focus on its core strengths in producing computer animated films,
without worry of increased investment costs for making and marketing
merchandise and home entertainment
• Disney already has various lines to produce merchandise products, and has
distribution channels to place them. Pixar would be able to utilize those resources
to produce merchandise such as apparel and toys
• The acquisition would also allow Pixar to have a quick access to funding for new
ideas and projects, as Disney’s size benefits comes with larger budgets.
• The merger would also benefit Steve Jobs with his company Apple, since there
would be an increased amount of content that could be released through the
itunes store.
 What’s in store for Steve Jobs?
• Will Gain a much more influence in the multimedia field
• His roughly 50% ownership of Pixar is worth over $3.5 billion, which would
be more than enough to turn him into Disney's largest individual
shareholder should he accept a stock swap.

acquired
Jobs became the
Walt Disney Co. Pixar
largest shareholder in
$7.4 billion Disney

Jobs being the

CEO of Pixar
 What actually happened?
• Disney decided to acquire Steve Jobs' Pixar for $6.3 billion in stock plus
$1.1 billion of the company's cash
• Disney tightened its link with Apple Computer.
• Since January 24, 2006, when Disney acquired Pixar, Pixar executives have
been in charge of the joint animation group.
How Stock Market reacted to the
Acquisition?
 Reference
• http://money.cnn.com/2006/01/24/news/companies/disney_pixar_deal/
• http://www.slideshare.net/ericmoon/the-walt-disney-company-and-pixar-inc-to-acquire-or-no
t-to-acquire
• http://www.nytimes.com/2008/06/01/business/media/01pixar.html?_r=0