Detailed Case Analysis – Disney & Pixar Strategic Merger And Acquisition
Pixar and Disney working together
Pixar’s core competencies reside in its 3D animation technology skills. Pixar was a thought leader in this field from the start, having created its own capabilities, providing other leading production companies with its products. However, with competition getting fiercer in this segment, Pixar would have to set itself apart and stay ahead of rivals who are aspiring to be just like Pixar. Disney’s core competency lies in its superior marketing platforms with its wide distribution channels. These span from movies, television and DVDs with multiple sources of revenue, coming from theme parks to merchandise. This allows Disney to invest large sums in new projects and cover production costs. With these and its status as a family brand, it already has a large fan base and established networks ready to be utilised.
Disney and Pixar are both giants in their own field but form different parts of the value chain. Pixar is a supplier as it produces the films, whereas Disney belongs in the distributor industry. Disney and Pixar working together would result in revenue synergies. Disney had consecutive underperforming movies before its partnership with Pixar. After the release of Lion King, its box office performance went through a steep decline. But ever since its partnership with Pixar, it has been performing well. Disney had greatly benefited from its partnership with Pixar over the feature film agreement and co-production agreement. Pixar too has gained from revenue generated in box office sales, by gaining 50% post distribution fee payment and marketing cost coverage. This might not be as big an increase as that faced by Disney, but it allowed Pixar to focus on producing the movies with the actual production cost and distribution cost out of mind. Disney bore the risk.
An acquisition will prevent disagreements between Pixar and Disney on who has ownership over the movie rights. Pixar has played an integral in creating and building these characters and an acquisition will allow Pixar to continue its legacy and prevent cheap sequels from tarnishing them. Disney’s theme parks and merchandise will ensure the continuity of these characters, prolonging the lifetime of the character. This will compliment Pixar’s efforts in creating sequels for every 1 in 2 movies produced.
However, Disney stands to gain more than Pixar from an alliance. Based on the past negotiated agreements, it is obvious that Disney was aware of the multi-fold profits that Pixar’s movies would bring in and was not willing to negotiate for any less. By holding on to the exclusive distribution and exploitation rights to all Pixar feature films produced under this deal, it could ensure all future post-feature revenue goes into its account. It has been known that Disney lacks the technical know-how on producing animated feature films. With Disney producing sequels, Pixar’s reputation will be damaged as it was the pioneer of the iconic characters. Regardless of the new producer, the consumers watching the movie would associate it with Pixar. This is the main factor that reduces the value of Pixar working separately with Disney. Pixar is short-changed of its benefits as Disney wants to get the most out of this deal as well. Working together with a giant, will prevent Pixar from having to compete or hedge itself against Disney. Nonetheless working with Disney, leaves Pixar in a ‘better-off’ situation as compared to working alone or with a lesser off partner. From Disney’s perspective, Pixar has been the most profitable alliance and hence it is highly valuable for Disney to sustain it.
Pixar and Disney working separately
No doubt, Pixar has had an established brand name after producing multiple box office hits under its partnership agreement with Disney. This halo effect in addition to its movie success rate will come in handy. Not to mention, Pixar’s leadership under Lasseter has allowed it to prosper. Equipped with capable technical employees and a standard for excellence, it has established a branding for itself. Working separately would mean that it can protect the system and process it already has in place, as this might be jeopardised in the event of an acquisition where there could be aa culture clash between Disney and Pixar. However, Pixar never had to focus on distribution thus far, hence it does not have any existing partnerships with box offices. Furthermore, working alone would mean that it must fund its own marketing and distribution costs which using the Incredibles example, can amount up to $210 million for Worldwide box office and Home entertainment. In the same year, 2004, Pixar’s total operating expenses was only $34. 9 million. With marketing and distribution costs amounting to more than 600% of operating expenses, it makes us question if this is an amount Pixar is willing to pay compared to the free marketing it received under its alliance with Disney. Moreover, Pixar does not have extravagant platforms like Disney theme parks, hence it will be harder for Pixar to continue the legacy of its movie characters. Having never had to worry about marketing and distribution, this could pose as a new challenge.
Additionally, working separately would mean that Pixar will not get priority over movie release dates. With Disney still being a dominant player in the industry and its existing wide network, Pixar would have to work around Disney’s release dates to ensure that its own movie’s success is not cannibalised. Disney however has relied heavily on movies produced by Pixar and that has led to the rise of Disney once again. While Disney has its own capabilities, records have shown that it is not as adept in creating its own 3D CG films. Either the movies were not as profitable or, there was high cost involved in developing the skills necessary. Both companies stand to lose if they were to work separately.
Pixar working with companies other than Disney
With Pixar’s expertise and know-how in producing animation films, it requires capabilities in promoting and distributing this film so that it reaches viewers. Pixar’s main rivals are Fox Sony, Lucasfilm, Dreamworks, MGM, Universal, Paramount. An ideal alliance would be for Pixar to work with a company that has an established brand name without much of a foothold in the animation industry. A company that offers similar theme parks to Disney, would be Time Warner. It’s Six Flags Theme Park is cheaper and more accessible compared to Disneyworld and Disneyland. This means that there is more regular foot traffic in Six Flags Theme Park. Time Warner’s existing characters, Looney Tunes is not as popular or profitable as Disney’s. Hence, Time Warner will be able to promote Pixar’s characters and gain more traction. However, the main consideration lies in the stake Time Warner will demand, for promoting Pixar’s very profitable movies. Time Warner also has a comic book line, DC Comics which can be leveraged on, to produce successful Pixar movies in comic books and continue a series from there. Or the comic books can be used as a testing ground to see how receptive consumers are. To find avenues to promote Pixar movie character merchandise, it would need an alternative to McDonalds (Disney’s partner).
However, transaction costs will be high in negotiating favourable terms for this contract, choosing and consulting a good legal and finance team. There will only be value in this model if it has better terms than its deal with Disney. That is a greater cut of profits and having ownership or co-ownership of the movies produced. Nonetheless, an alliance with another distributor would position Pixar better against Disney. This will be especially helpful when competitors release movies in the same time frame.
How feasible is it for Disney to re-negotiate the contract?
Re-negotiating the distribution deal, though a cheaper option, is not a viable one. Both companies would be trying to get the most out of the deal and hence not tapping on their synergies. Pixar mainly wants final ownership of its films; however Disney is not willing to give it up. This would mean that it can not maintain exclusivity to the film and Pixar could move on to work with any other film studio, leaving Disney behind. This is where both companies differ because Disney wants exclusive rights to Pixar’s creations and to tap on its resources, however Pixar does not want to be tied down to Disney and it wants control over its own creations. Given its better financial status, Pixar can afford to fund the full production costs of producing a film hence it does not need to be backed up by Disney. It is difficult for both Disney and Pixar to come to a compromise and run through every aspect of the production.
Nonetheless, Disney is in greater need of Pixar’s competencies than Pixar is of Disney. Unfortunately, the terms Pixar requests for which is full-ownership of the film, does not leave Disney with much to gain. It will only get a distribution fee from Pixar. An acquisition is a better option. Disney can ensure Pixar’s talent and creation stay within the company, preventing Pixar from working with any other film studio. This will also relieve Pixar of its worries of Disney potentially tarnishing its image through the creation of cheaper sequels. Revenue generated will go back to Disney, which will be beneficial for Pixar too. However, the acquisition should be done on Pixar’s terms to ensure that it is a peaceful acquisition to ensure smooth transition and cooperation.
