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Pixar-Disney Partnership Talks Collapse

The collapse of talks between Pixar Animation Studios and The Walt Disney Co. (DIS) on a new deal pressures both companies to produce hit films at a time of growing competition among computer-animated filmmakers.

Pixar, with a string of computer-animated blockbusters to its credit, including "Monsters, Inc." and the "Toy Story" films, broke off negotiations Thursday to extend its partnership with Disney and said it would seek a more favorable deal with another studio.

"After 10 months of trying to strike a deal with Disney, we're moving on," Pixar chief Steve Jobs (search) said in a statement. "We've had a great run together — one of the most successful in Hollywood history — and it's a shame that Disney won't be participating in Pixar's future successes."

Pixar still owes Disney two movies under the current deal, "The Incredibles," which is scheduled to open in theaters in November, and "Cars," which is to be released next year.

The Emeryville, Calif.-based studio, which co-produced last year's top-box office draw, "Finding Nemo," has long chafed under its contract with Disney, which retains the right to make sequels to movies such as "Toy Story" and "Monsters, Inc."

The companies share box-office receipts and licensing revenues.

Disney chief financial officer Thomas Staggs (search) said the company rejected Pixar's "final offer" because it would have cost Disney hundreds of millions of dollars it is entitled to under its existing agreement "while not providing sufficient incremental returns on new collaborations to justify the changes to the existing deal."

A person familiar with the talks said negotiations broke down because Pixar wanted to reclaim the copyrights to the five films it has produced with Disney so far, plus the two left in the deal. Such an accommodation would have presumably revoked Disney's right to make sequels and potentially denied the company millions of dollars in future profits.

Pixar also wanted to pay Disney a flat distribution fee on all future films, including "The Incredibles" and "Cars." Disney was willing to adjust its compensation on the two remaining films, but would not agree to return the copyrights, said the source, speaking on condition of anonymity.

Analysts said that while Disney may have been wise not to agree to a deal at any cost, it now has two years to show it can make successful animated films without Pixar's help.

Disney has had mixed success over the past few years with its animated films, producing such box office disappointments as "Atlantis" and "Treasure Planet" and modest hits like "Lilo & Stitch" and "Brother Bear."

"I think that if Disney can move in that direction successfully, it's not going to be devastating," Janna Sampson, co-Manager of the AmSouth Select Equity Fund and director of Portfolio Management at Oakbrook Investments. "That's the wild card — can Disney get its animation studio to produce the kind of hits Disney used to produce without anybody's help?"

Disney recently closed its Orlando, Fla., animation studio and has pared its staff of animators to 600 from a peak of 2,200 employees in 1999. For the first time in years, it has no traditional hand-drawn films in production.

Disney plans to release its first in-house computer-animated film, "Chicken Little," in 2005, the year its current Pixar deal expires. Disney also is producing other computer-animated films, including "A Day With Wilbur Robinson," to be released in 2006.

On Thursday the company also announced plans for two new computer-animated films, including a long-awaited "Toy Story 3."

For Pixar, the break from Disney will allow it to keep more profit from future films while increasing the risks should those movies underperform.

"The risk is all theirs now," said Peter Mirsky, a financial analyst with Oppenheimer & Co. "They wanted it, they got it. Plus, they've added a competitor in Disney."

While Pixar has had major hits with all five of its films, including "A Bug's Life" and "Toy Story 2," it no longer has the field to itself.

This year alone, DreamWorks is releasing two computer-animated films: "Shrek 2" in May and "Shark Tales" in November. Warner Bros. will release the animated "Polar Express" in November, and Fox's Blue Sky Studios, which made the hit "Ice Age," is planning to release "Robot" next year.

Former Disney board members Roy E. Disney (search) and Stanley Gold (search) — who have been urging the company's chief executive, Michael Eisner (search), to step down — expressed concern when they quit the board last year that Disney was not properly managing its relationships with Pixar, Miramax and other companies.

In a statement Thursday, they blamed Eisner for the Pixar breakdown.

"While we expect that the tail of the relationship will continue to provide short-term earnings gains, the loss of this relationship, we believe, will result in the loss of long-term value for the company and its shareholders," the men said.

Analysts doubted the failure to reach a deal with Pixar would jeopardize Eisner's job.

"Roy's goal is to see Eisner out," Sampson said. "That doesn't make Eisner's job easier in the next couple of days as he tries to calm the concerns. But things are on the improvement side for Disney, and if that continues, I find it unlikely we'll see Eisner out of a job."

One certainty is that Pixar will have no problem cutting a more favorable deal with a new studio.

Thursday, Warner Bros., Fox and Sony all expressed interest in talking to Pixar. Fox distributes producer George Lucas's "Star Wars" films for a flat fee — terms similar to those Pixar wants.