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DECEMBER 9, 2004
By Ronald Grover

Steve Jobs's Sharp Turn with Cars
In delaying the animated film, is Pixar's chairman trying to maneuver Disney back into negotiating a new co-production deal?

Is Steve Jobs playing hardball with Disney (DIS )? That might explain why Jobs, who in addition to running Apple (AAPL ) is chairman of computer-animation powerhouse Pixar Animation Studios (PIXR ), decided on Dec. 7 to postpone the release of Cars.

The animated feature will be the last co-production between Disney and Pixar under their existing contract. The two announced that Cars would be delayed from late 2005 until the summer of 2006, only a few weeks after Jobs had said he figured Pixar's films would play better before larger summer audiences.

WHO NEEDS WHOM?  But is there more to the delay? Pixar has made no secret that it's shopping for a new, more favorable agreement with Disney. Technically, their 13-year deal expired last year, when Pixar delivered Finding Nemo. But Pixar can't make a film for anyone other than Disney until Cars is completed.

By agreeing to delay Cars, Disney is perhaps "trying to appease Pixar to strengthen its own position in the renegotiation," figures Fulcrum analyst Richard Greenfield. He's among those who believe that "Disney needs Pixar's content, given its difficulty in creating successful animated content on its own over the past several years." The six films that Disney and Pixar have done together have all been big hits, including Toy Story and Finding Nemo.

Disney has its own computer-animated film, Chicken Little, ready for release next summer, and Chief Executive Michael Eisner recently said the company is gearing up its post-Pixar era of computer-animation efforts.

ABANDONING THE KINGDOM?  "We have a very intensive creative group working on movies, from Chicken Little to Rapunzel Unbraided, to Wilbur Robinson, to a lot of movies," Eisner said at a recent Goldman Sachs (GS ) conference. "We did the Pixar deal because we are interested in their technology.... I don't think you will see the Disney Company disappear from the forefront of computer-generated imagery."

But will Pixar, which created the box-office hit The Incredibles under its co-production deal this year for Disney, disappear from the Mouse House landscape? Analysts figure Pixar stands to lose around $1 billion if it walks from Disney, which holds the rights to make sequels to the films that the two have made together. Already, Disney is planning to make two more Toy Story sequels, says Eisner.

By delaying the release of Cars, Pixar can put off discussions with another studio for six months, figures Prudential Equity Group analyst Katherine Styponias. That could be enough time for a new CEO to have succeeded Eisner, with whom Jobs has had a less-than-cordial relationship in recent years.

SPARRING OVER SEQUELS.  Still, Pixar has quietly been making the rounds to other studios and has talked with Warner Bros. (TWX ), Sony (SNE ), and Fox (FOX ) about a new deal that would scrap the 50-50 arrangement it has with Disney. Pixar now pays Disney a 12% distribution fee and gets about 38% of the revenue from its films. (Disney gets the other 50% for shouldering half of the production costs.) The deal that Jobs has been shopping would allow Pixar to put up all the production costs and take the lion's share of the revenue, other than a 6% to 8% fee it would pay a studio for distribution.

Disney has balked at extending its deal with Pixar under those terms, which would also give Pixar the right to make sequels to co-produced films. Jobs has said he wouldn't extend Pixar's contract with Disney unless Pixar got sole sequel rights and that he expects Pixar will leave the Mouse House. However, Disney President Robert Iger says he doesn't think the Cars delay will affect the discussions. He has also termed prospects for Pixar's return a long shot.

Pixar's decision to put off Cars had only a minor effect on its stock price, which has been soaring following the release of The Incredibles in early November. The day after the announcement, Pixar's share price fell 4.7%, or $4.29, to $86.77 -- still 7.5% above where it was just before The Incredibles release.

PLOT TWISTS.  Without Cars, Merrill Lynch's Jessica Reif Cohen figures Pixar's 2005 revenues will be cut to $208 million from $253 million. Earnings per share are projected to drop 17%, to $1.63. Operating earnings would go to $145 million from $180 million, she estimates. On the up side, she thinks a summer release for Cars could mean $50 million more in revenues.

So, maybe Jobs was thinking about the bottom line when he made the decision. Then again, he may be thinking about forcing a post-Eisner Disney back to the bargaining table. After all, Pixar's computer-wielding artists aren't the only ones who can create interesting scenarios.

Grover is BusinessWeek's Los Angeles bureau chief
Edited by Patricia O'Connell

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