PROBLEM STATEMENT

Problem Statement for Pixar Problem Statement for Disney

Should Pixar renegotiate deal with Disney? and if yes, how the Should Disney look for internal development or ally with
deal should be Pixar/another animation studio or acquire Pixar

New “distribution deal” Re-engineer Disney Animation

Do not renegotiate with companies like division
with Disney Sony, WB, 20th Century
Fox Studios
New “distribution deal” with
Pixar
Modify the contractual
Renegotiate with agreement in favourable
Disney New “distribution deal” with
economic terms for
another animation studio
Pixar

Acquire Pixar
ANIMATION MOVIE INDUSTRY

RESOURCES: SOURCES OF REVENUE: COMPETITORS: TARGET SEGMENTS:

Content Creators Box Office Collection Disney Children

Production Fund Home Video Pixar Adult
Animators Television Fox
Directors Licensing agreement Sony
Technology Merchandise and games Lucasfilm
Sequel DreamWorks
MGM
Universal
Paramount
VALUE CHAIN:

BOX OFFICE MARKET

Ideation Production Marketing Distribution
CAPITALIZATION:

$ 1456 millions
THE WALT DISNEY

COMPETITIVE ADVANTAGE:

• Economies of Scope – Theme Parks,

Merchandise etc.
• Ideation (till Katzenberg’s exit)
• Post exit, Disney had to rely on Pixar
for “Revenue” and “Characters”

VOID IN VALUE CHAIN:

Ideation
Production Marketing Distribution
?
PIXAR INC

COMPETITIVE ADVANTAGE: ENVIRONMENT:

• Creativity • Animators management

• Technology (in-house built) • Freedom to communicate
• “Blend” of Creativity and Technology • “Creative brain trust” group
• Mr. John Lasseter • “Dailies” review process
• Corporate Culture • Relation with academic community

VOID IN VALUE CHAIN:

Distribution
Ideation Production Marketing
?
 CO-PRODUCTION CONTRACT (1997 – 2006)
THE WALT DISNEY COMPANY
INCOMING
• Content Creation
• Production
• Technology cost benefits
Monetary:
• 50% Box office collections
• 12.5% Box office collections –
distribution fee
• 50% other revenue streams
• Other sources income:
Theme parks, cruise-ships,
location-based entertainment
Rights:
• Sequel
• Distribution (100%)
• Exploitation (100%)
• Release dates
OUTGOING
• Distribution network
• Brand image (initially)
• Animator and content
management/improvement
Monetary:
• 50% Production costs
• 50% over production costs
• Distribution expenditures
PIXAR Inc.
INCOMING
• Distribution network
• Brand image (initially)
• Animator and content
management/improvement
Monetary:
• 50% Box office collections
• 50% other revenue streams
Rights:
• Sequel (0%)
• Distribution (0%*)
• Exploitation (0%*)
• Production Control (100%)
* Need to pay licensing fee to
exercise the same
OUTGOING
• Content Creation
• Production
• Technology cost benefits
Monetary:
• 50% Production costs
• 50% over production costs
• Marketing Expenditures
• 12.5% Box office
collections – distribution
fee
ALLY OR ACQUIRE
FINANCIAL EVALUATION

New contract (100% revenue and cost by Pixar and

Current contract (50-50% revenue and cost sharing)
8% distribution fee to Disney)
Pixar Revenue 247 Pixar Revenue 676
Pixar Total Income 199 Pixar Total Income 438
As a % of total Income 39% As a % of total Income 85%
Disney Total Income 316 Disney Total Income 77
As a % of total Income 61% As a % of total Income 15%

Calculated value of Pixar: $5.26 Billion

Loss to Disney as per new contract for 12 years assuming 1 movie per year: $1.66 Billion

The amount Disney should pay to acquire Pixar: $6.92 Billion Worl dw id e Box Offi ce
Pi xar and Disne y Break Down usi ng esti mates of In credi bl es ($ m il li on)

Dom estic Box Office 250

Internati onal B ox Office 300
Tot al Theat rical Gross 550
Theatrical Net 263
Marketing and Dist ri bution Cost s 105
Di sney Di st ributi on F ee 21 8. 00%
Net Revenue to P art ners 137
Production Cost s (P ixar) 24
Profit to Part ners 113
Pi xar Revenue 137
Pi xar Tot al Theat rical Income 113
As % of Total Theat ri cal Revenue 82%
Di sney Tot al Theatrical Income 21
As% of Tot al Theatrical Revenue 15%

Worl d Wi de Home Entertai nm ent

Hom e V ideo Sales
Sales 551
Less Cost s 109
Gross Profits 442
Marketing and Dist ri bution Cost s 106
Di sney Di st ributi on F ee 44
Net Revenue to P art ners 292
Production Cost s (P ixar Only) 52
Partners I ncome 240
Pi xar Revenue 292
Pi xar Hom e Entert ainment I ncom e 240
Di sney Home Entert ainement Income 44

Worl dw id e P PV and Pay TV S ale s

Sales 33
Di sney Di st ributi on F ee 3
Net Revenue To Part ners 30
Production Cost s (shared equally) 5
Partners I ncome 25
Pi xar Revenue 30
Pi xar Income 25
Di sney Income 3

Worl d Wi de Free TV Sa les

Sales 29
Di sney Di st ibut ion fee 2
Net Revenue to P art ners 27
Production cost s (shared equally) 5
Partner Income 22
Pi xar Revenue 27
Pi xar Income 22
Di sney Income 2

Worl dw id e Merchandi si ng Royal ties

Revenue 55
Di sney Di st ributi on F ee 7
Net Revenue to P art ners 48
Production Cost s Shared E qually 10
Partner Income 38
Pi xar Revenue 48
Pi xar Income 38
Di sney Income 7

Total
Pi xar Revenue 676
Pi xar T otal I ncome 438
As a % of total Incom e 85%
Di sn ey Total Incom e 77
As a % of total Incom e 15%

Growth rate 16%

Di scount rate 12%
FINAL DECISION

Perspective of Disney:
• Pixar’s contribution came at around 60% of the operating income of Disney Studios between 1998 and 2004
• The characters of the animation feature films were integral to Disney’s brand recognition during new market
entry
• The other competing animation studios were still in their evolutionary stages and not as competitive as Pixar
• Considering the above points and the result of the Acquisition-Ally matrix, it is in the best interests of Disney
to acquire Pixar and retain it as an autonomous unit

Perspective of Pixar:
• Pixar was ambitious about animation feature films and hence should focus on enhancing their competency in the same
• The managerial resources should be allocated towards nurturing the culture that promoted innovation and quality
rather than on the marketing
• Along with this, competition in the CG space was getting fierce and animation projects involved high asset specificity,
• Hence, Pixar was better off having a dedicated partner to take care of brand building around the film characters and
sharing the risk so it can focus on its core activities
• Moreover, due to prolonged alliance with Pixar, Disney was knowledgeable about the internal creative development
practices at Pixar
• Hence it is in the best interest of Pixar to be acquired by Disney