Is Steve Jobs About to Move His Cheese?

Pixar's chief could shop for a new deal soon--leaving Disney minus an asset it sorely needs

What's the best way to tick off Walt Disney Co. (DIS )? Make an animated movie with a mouse as the lead character. That's exactly what Disney's partner, Pixar Animated Studios (PIXR ), is doing. The movie, which doesn't yet have a name, is about a little critter who lives in an upscale restaurant. And, at least for now, Disney has no rights to it at all.

Pixar's planned mouse tale is the latest jab in a year-long sparring match between Pixar CEO Steven P. Jobs, also head of Apple Computer Inc. (AAPL ), and Disney CEO Michael D. Eisner. The fight is over--what else?--money. Jobs wants more of it, especially after Pixar's run of blockbuster animated films for Disney, including Toy Story, A Bug's Life, and Monsters Inc. Without a new and better deal, Jobs could take his hit-making animators to another studio in 2006.

The timing couldn't be worse for Eisner, who is under pressure to rev up Disney's sputtering empire. Pixar lets Disney leverage characters such as Buzz Lightyear (Toy Story) and Flik (A Bug's Life) by using them in theme parks or selling them as toys. Disney hasn't had Pixar-level megahits since its Beauty and the Beast and Lion King days. Can you name any characters from Atlantis: The Lost Empire or Treasure Planet?

Disney's 12-year-old deal with Pixar requires Jobs's outfit to deliver three more films, taking it to 2005. But Jobs has the right to start shopping for a new deal after he delivers his next film, Finding Nemo, an underwater comedy, in mid-February. Already, honchos from Warner Bros. and Sony Pictures Entertainment have made the trek to Pixar's Emeryville (Calif.) digs to schmooze Jobs and John Lasseter, his top creative exec. Says Sony Vice-Chairman Yair Landau: "Sony would clearly love to be in business with Pixar."

That's why Disney may have to keep Jobs happy. Since 1999, Pixar has contributed $682 million in operating income, or 35% of Disney's studio profits, says a Merrill Lynch & Co. report. Under its current deal, Pixar and Disney evenly share the $100 million or more it costs to make most of Pixar's films. Disney takes 12% of a film's gross to distribute, and the companies split the rest.

Disney officials have privately dismissed Jobs's meetings with other studios as typical Hollywood posturing. But Pixar's chairman seems intent, at least, on cutting a deal like the one filmmaker George W. Lucas has with Twentieth Century Fox. Lucas pays the entire cost to make Star Wars films, and Fox gets only a 6% distribution fee. With $340 million in cash, Pixar could easily finance its own works, though it is riskier. Pixar made profits of $235 million from its 2002 hit Monsters Inc. but might have posted more than $500 million if it hadn't had to share, says Jeffrey B. Logsdon, managing director of Gerard Klauer Mattison.

In a sign of diplomacy, Eisner has said a Lucas-style deal is "possible." Still, Disney and Pixar have been stubborn in previous fights. In 2001, the two squared off over whether a third Toy Story installment would count against the five films required in Pixar's current contract, as Jobs wanted. Disney claimed that as a sequel it didn't count, effectively delaying the end of Pixar's contract. The film never got made. The companies declined comment for this story.

Eisner fired a salvo two years back, when, during congressional testimony about Internet piracy, he singled out Apple's "Rip, Mix, Burn" ad campaign, infuriating Jobs. Eisner has since apologized, but Jobs now deals mostly with Disney's more easygoing studio chief, Richard W. Cook. Still, the studios continue to maneuver. To keep Lasseter onboard, Jobs extended his contract and gave him a $1.25 million bonus. Disney signed Shrek producer John H. Williams to make three computer-generated films.

Some in Hollywood figure Pixar won't dump Disney. "Each side has something to offer to the other," says Dreamworks SKG's Jeffrey Katzenberg. That makes sense. But when Hollywood and big egos are involved, it's not that simple.

By Ronald Grover in Los Angeles, with Peter Burrows in San Mateo, Calif.


— With assistance by Peter Burrows

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