Question 1 Why does the Disney-Pixar relationship make strategic sense?

Question 1: Why does the Disney-Pixar relationship make strategicsense? Describe what each organization brings to the economicrelationship.

There is no doubt that acquisition of Pixar by Disney is one of themost important strategic moves in the entertainment industry. Thereare numerous changes in the modern world of entertainment mainly dueto the influence of technology. Each of the two companies is a leaderin the entertainment industry. A strategic merger between the twocompanies will strengthen their control of the entertainment market.The main reason for the decision by Disney to acquire Pixar is therole of animation in the modern and future of the entertainmentindustry. Thus, animation is one of the most important corporatestrategies at Disney. This is because of the ability of animatedfilms and characters to increase retail sales especially in theconsumer product and theme park divisions. Disney enjoys asignificant share of the entertainment market. The strong brand namewill be very critical if the company merges with another company suchas Pixar. Additionally, Disney was by far the most successful companyin the production and distribution of movies, especially familyfriendly movies. On the other hand, Pixar had a track record in theanimated 3D films. While other companies, including Disney have notbeen very successful in the animations, Pixar record in smash hit hasnot been matched by any other company. Therefore, “this is the kindof synergy that makes a good deal of sense”. Additionally, theacquisition with benefit from the services of one of the mostcelebrated gurus in the technology industry, Jobs. Although therewere other companies in the entertainment industry that Disney couldhave approached, the special characteristics of both Disney and Pixarmake the acquisition the best possible partnership. Disney has ahistory of animation dating back to the 1930s. However, their 3Danimations have fallen below expectation. On the other hand, Pixarhas flourished in 3D animations due to their computer generatedmodels which are easy to manipulate and produce “lifelike 3D imagesand backgrounds”. Additionally the two companies have workedtogether, which makes the acquisition easer and beneficial to allparties.

Question 2: Can Pixar create assets (e.g., movies and moviecharacters) that are specific to their relationship with Disney (andless so to other distributors)?

In the deal between Pixar and Disney, Pixar could produce movies andcharacters that are specific to their relationship with Disney.Basically, the contract between Disney and Pixar was that Pixar couldproduced computer generated animated films on behalf of Disney, whileDisney concentrated on distribution and marketing. Although Pixarcreated Disney’s characters and films, they would compete withtheir own in the market. For example, in 1995, Pixar created thecharacters and film, Toy Story, which became a hit with recordsale of video and box office sale of over 350 million dollars. Additionally, in the second deal signed in 1997, Pixar was given theexclusive right to produce at least five fill length animated movieson behalf of Disney. This gave Pixar the authority to createcharacters and films on behalf of Disney.

Question 3: Describe the contractual relationship between Disneyand Pixar. What are some of the important terms that the two partiesdisagree on, in addition to price?

The first contract between Disney and Pixar was in the Lasseter’sproposal in 1991 when the produced the first 3D computer generatedanimated movie together. In the contract, Disney was to finance theproduction budget, which was not disclosed, while Pixar was to bepaid participation fees based in the revenue generated from themovie. However, if the budget exceeded an agreed limit, Pixar wasexpected to fund the overage and recover the fund from the profits.The scheduling and release of the movie was the right of Disney.After the successful contract which led to the release of toystory in 1995, the two companies opted for a coproductionagreement in 1997. In 1997, Disney made an agreement with Pixar whereDisney bought five percent of Pixar. This was part of a 10 yearscontractual agreement where Pixar would produce at least fiveoriginal animated films for Disney. While the production cost wouldbe shared equality between the two companies, Disney would fund thedistribution and marketing costs, although it will be recovered fromthe profits. While Pixar controlled the production process, Disneyhad full control over marketing and distribution, including settingrelease dates. In 2002, Steve Jobs sought to renegotiate thecontract between Pixar and Disney, where he sought a better deal forhis company. The new negotiations were faced by numerous challenges.This is because Disney wanted to maintain the previous contractualagreement because it was more beneficial. Pixar gave the final offerin 2004 where Disney was expected to retain distribution right forfive years, after which Pixar will own the films. When Disneyrejected that offer, Pixar sought for other suitors in the filmindustries. Although jobs were confident that Pixar would get a moredesirable suitor although an agreement with Disney would have beenbetter.

Question 4: What are the cost associated with Disney and Pixarcontinuing to write long term contracts with one another?

The main challenge associated with the long term contract betweenthe two companies is the lack of sustainability. The contracts weredependent on the ability of each of the partners to deliver on itskey aspect of the contractual agreement. That is, the contract reliedon the ability of Disney to maintain a huge control over thedistribution of family based field in the market. On the other hand,the technological resource and expertise at Pixar had to remainunmatched in the market if the contract had to remain viable. Withthe changes in the film market, the ability of other companies in thefilm industry to match these characteristics would risk therelationship. Additionally, although there are possibilities of longterm contracts, it is difficult to enter in major deals compared towhen there is a lifetime commitment to working together. For example,the sustainability of a contract where Pixar could only earnparticipation fee is in question. This is because according to thecontracts, the role of Pixar was only in production. This explainswhy the contracts were characterized with mistrust. For example, itis evident that by early 2000s, Pixar could not rely on thepartnership. The strained relationship was the main reasons some ofthe contract talks collapsed forcing Pixar to think about alternativepartners.

Question 5: Should Disney acquire Pixar? What are the advantagesand disadvantages of having Disney do so?

The acquisition of Pixar by Disney is a good idea due to the manyadvantages of the venture. The acquisition will enable Disney acquirethe strengths of Pixar in the 3D computer generated animations. WhileDisney is struggling to establish itself in the production ofanimation films, Pixar is flourishing in the industry. Already, thecompany has made billions from six animated films. The acquisitionwill enable Disney access the huge production technology owed byPixar. Another advantage of the acquisition is the resultant increasein revenue. The acquisition will bring together capital and humanresources from both companies, which will led to increased customersand sales from the merchandise and park tickers. Additionally, itwill eliminate the unnecessary but expensive competition between thetwo companies. A merge between the two companies will also bebeneficial to Pixar. This is because it will concentrate in its corestrengths in the animated films while enjoying the strong marketingpower of Disney. The new ideas from the giant Disney will also bebeneficial to Pixar.

However, there are also some challenges that are associated with theacquisition. The main challenge to the deal is the fact that themerger will be very expensive for Disney. This is when the currentnet income is compared to the agreed price. This has the likelihoodof dilution of the company’s earning due to the splitting ofstocks. The different organizational structures and cultures wouldalso be a huge challenge. A major disadvantage to Disney is the factthat after the acquisition, the ownership of the company would shiftsince Steve Jobs will become the largest shareholder.

References

Alcacer, Juan, Collis, David &amp Furey, Mary. “Walt Disney andPixar: To acquire or not to acquire?” Harvard Business School,9-709-462, January 2010.