Pixar to Find Its Own Way as Disney Partnership Ends

Ben Affleck and Jennifer Lopez are no longer the most talked about bust-up in Hollywood.

Pixar Animation Studios walked away from talks Thursday to extend its partnership agreement with the Walt Disney Company, leaving both companies in unsettled situations. Disney, which has relied on films from Pixar for a significant portion of its movie profits in recent years, now must prove that it can remain a powerhouse in animation on its own, analysts and Hollywood executives said. And Pixar, which might not find another studio willing to give it the favorable terms it seeks for distributing its wares, has to show that the success of movies like last summer's blockbuster ''Finding Nemo'' is not too closely tied to the Disney distribution and marketing machine.

But what has left many people in Hollywood scratching their heads is whether personal or professional reasons led Steven P. Jobs, the chief executive of Pixar, to end his working relationship with Michael D. Eisner, the chief executive of Disney, and walk away from one of the most lucrative film partnerships in recent history.

Executives from Disney and Pixar have declined to elaborate on what went wrong. But several people involved in the talks, who insisted on anonymity, said a deal could have been reached if each side had been willing to compromise a little more. But the residue of several years of testy relations, and Mr. Jobs's distaste for the way Mr. Eisner conducted business with Pixar, may have amplified the typical problems of partnerships into irreconcilable differences.

Disney's task of remaining a leader in animation will not be an easy one. As little as six years ago, Disney had no significant competitors in animation and an eager partner in Pixar. But now Disney is facing two formidable foes, not only Pixar but DreamWorks SKG, both led by executives who dislike Mr. Eisner. (Like Mr. Jobs, Jeffrey Katzenberg of Dreamworks, a former Walt Disney Studios chief, clashed with Mr. Eisner over how much authority he was allowed.)

Movies produced by Pixar contribute as much as half of Disney's operating income in filmed entertainment, according to stock analysts. Disney currently distributes all of Pixar's films in exchange for 12.5 percent of the box-office revenue, and the two companies split the profits. In addition Disney owns the rights to all movies made by Pixar, including the coming ''Cars'' and ''The Incredibles.''

That bonanza was going to end by 2005, when the Disney-Pixar deal was set to expire, because few people on Wall Street expected Disney to retain such favorable terms. Yet most analysts counted on Disney's keeping a substantial revenue stream from distribution, if not from profit sharing. According to a report released yesterday by Richard A. Bilotti, an analyst at Morgan Stanley, Disney's annual profit starting in 2007 could drop by $30 million to $40 million without a distribution-only agreement.

Disney will also face increased competition for the animated-film audience. Despite the recent success of animated movies like ''Lilo & Stitch'' in 2002, Disney has not been able to replicate the success it had in the early 1990's. In the last several years, the animation unit at Disney has had a revolving door of executives in charge of the division while it eliminated nearly 1,000 jobs and closed its Florida operations. Disney and Pixar had been working on the agreement for nearly a year. While much of a framework for a distribution deal had been agreed to by December, there were still two sticking points Pixar and Disney had to resolve, two people involved in the talks said. For one, Mr. Jobs wanted sole ownership of ''The Incredibles'' and ''Cars,'' two movies that Pixar had already agreed to make under the old contract. Mr. Jobs also wanted to limit the time that Disney had sole authority to distribute Pixar movies to five years, much shorter than a typical deal of 20 years.

Those demands posed problems for Disney, the two people said. For one, Disney already owned ''The Incredibles'' and ''Cars.'' In addition, in the event that Disney invested in a theme park attraction based on a Pixar movie, it did not want to be in the position of not having the right to distribute the movie.

Still, executives at the two companies expected that some sort of compromise could be reached, the two people said, and the sides went away for Christmas vacation pledging to continue talks when they returned.

During the week of Jan. 12, Disney proposed a compromise that Mr. Jobs rejected, one of several he turned down in the last 10 months. ''Steve was frustrated,'' said one of the people involved. ''He was not any closer to getting a deal done than he was a month earlier.''

It was an experience he had had before. After Pixar's ''Toy Story'' was a hit in 1995, Mr. Jobs successfully renegotiated his deal with Disney which gave Pixar a 50-50 split of all profits, but not without Mr. Jobs first threatening to end the relationship with Disney after several months of talks, according to a former Disney executive.

Later, when Mr. Jobs approached Mr. Eisner about adding sequels to the original deal, the Disney chief balked. That angered Pixar executives, particularly the creative director John Lasseter, who wanted to make ''Toy Story 3,'' but could not because Disney owned the rights, the former executive said.

''I just think the overall feeling was Steve did not want to be in business with Michael,'' one person involved said. By Tuesday, Mr. Jobs decided to end the partnership talks and told the Walt Disney Studios chairman, Richard Cook, on Thursday afternoon.

Investors in Pixar, which is expected to announce earnings in the next week, responded positively to the news that the company walked away. Its share price increased $2.19, to close at $66.39. By contrast, shares of Disney fell 45 cents, to $24.

''The small studio will now go out and swim among the other Hollywood sharks for a while,'' said Tom Wolzien, a media analyst for Sanford C. Bernstein, referring to Pixar. ''We don't know the final outcome, but somehow, it doesn't feel like this is over.''