Hello DreamWorks, Goodbye Pixar?

With Michael Eisner out of the picture, Disney has more options

The 40 Walt Disney Corp. production staffers working in a low-slung building in Glendale, Calif. were Michael Eisner's answer to his Pixar Animation Studios problem. Pixar makes hit films like Finding Nemo and The Incredibles for Disney. And its chairman, Steve Jobs, has been pushing Disney for more lucrative terms when the two sides try to renegotiate a new contract later this year. But just in case that falls through, the Glendale crew is already hard at work on Toy Story 3, the sequel to Pixar's 1995 and 1999 blockbusters that Disney intends to make with or without Pixar. Now, with the Mar. 13 board selection of President Robert A. Iger as Disney's next CEO, the story may have an entirely new ending.

Disney board members are urging Iger to put the Pixar situation at the top of his to-do list, says a source close to the board. He may already have an opening for a deal. Jobs, who clearly disliked Eisner, was among the first to send a congratulatory e-mail to Iger.

But Iger has other options. Some studio insiders say he may make a bid for DreamWorks Animation SKG, the studio started by David Geffen, Steven Spielberg, and former Disney studio chief and longtime Eisner foe Jeffrey Katzenberg. DreamWorks produced edgy hits like the two Shrek blockbusters and last year's Shark Tale.

Despite Katzenberg's courtroom battles with Eisner over his compensation, a deal with DreamWorks might not be as unlikely as it seems. As president of ABC prior to its 1996 acquisition by Disney, Iger bought a 1% stake in the upstart DreamWorks studio and ordered two TV shows for the network. When Iger married TV reporter Willow Bay in 1995, Katzenberg was front and center. "They have a good relationship," says a friend of both. The deal could be structured as a stand-alone unit, similar to Disney's 1993 arrangement with Miramax, which was negotiated by Katzenberg. But it would still face hurdles, including a hefty price tag and DreamWorks' existing distribution deal with NBC Universal. Neither Disney nor DreamWorks would comment.

And even as Jobs makes friendly gestures to Iger, he is taking elsewhere business that might otherwise have gone to Disney. In August, Pixar negotiated a licensing deal for its video games with THQ Inc. and is looking at potential partners for its merchandise. More of a stumbling block, Jobs wants to cut in half the 12.5% fee that Disney now gets for marketing Pixar films. And he wants full control of all Pixar films, which are now controlled by Disney.

Still, both sides have a lot to gain by working out a deal. Clearly, Iger's first choice is to stay with Pixar, which contributes about 50% of Disney studio profits, figures Merrill Lynch analyst Jessica Reif Cohen. Iger, who has years of experience repairing egos bruised by the abrasive Eisner, will have his hands full with Jobs. But in any tough negotiation, it's always good to have options.

By Ronald Grover in Los Angeles

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