Wade Armstrong

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Disney-Pixar: Why Did The Mouse Buy The Lamp?

Posted Sunday January 29, 2006 in Business

Last week brought big entertainment news, especially Disney’s purchase of Pixar. The Disney-Pixar deal is being lauded as a great deal, but Disney paid a lot, compared to some other recent studio deals, for what is effectively Steve Jobs’s side project. Why would Disney have shelled out all of that hard-earned money for Pixar, and what does this transaction tell us about Disney’s immediate future?

Is Disney Overpaying?

There is no such thing as a hard-and-fast value a company is worth; instead, there are many good guesses as to how much a company might be worth. One of those guesses is embodied in the stock market, and is the total value of all of the stock out there at the current market price. Other guesses are usually sales, multiplied by some amount, or profits, multiplied by some amount; the multipliers in these cases depend on how sustainable the sales or profits are, into the future, how much of them there have been in the past, and how hard they are for a brand-new company to steal away, or even interest rates or overall perceptions of how risky the industry in which the company operates is. Some values include a prediction of what the company will do in the future, and how much that is worth — but of course nobody ever agrees on what a company will do in the future, much less how much any given course of action would be worth. Most companies are bought and sold for values based on some combination of the preceding guesses.

So what’s Disney paying? Well, they’re shelling out a bit more than the total value of Pixar’s stock in the market for the company, which is not that much of a premium to actually own the whole thing outright. But they’re paying more than four and a half times as much for Pixar as Paramount recently did for Dreamworks SKG. Dreamworks made about twice as much as Pixar last year, in case you’re figuring the value of a company based on profits. Pixar is riskier, in that they release about one movie a year while Dreamworks has a larger slate of releases, so a misstep by Dreamworks is potentially less disastrous, for those whose multipliers are based on risk (lower risk usually leads to higher multipliers). However, Pixar’s bets have paid off, and that company’s last five years of earnings are, together, about twice Dreamworks’ cumulative earnings over that same period — again important, depending on how one counts value.

Sure, all of Pixar’s productions have been franchise pictures, so far, but why pay four times a much for Pixar as for Dreamworks, a company with connections to some strong franchises and a great set of founders (who wouldn’t pay extra to get Spielberg)? In short, it doesn’t make sense that Pixar would be valued at a multiple so much larger than Dreamworks. There must be some special sauce involved; there are two candidates for Pixar’s secret blend of herbs and spices — John Lasseter and the infamous Steve Jobs.

Is Disney Buying Computer Animation?

Not if you buy that they’re investing in Lasseter. Sure, digital is the way of the future, but there really aren’t that many people out there that say “hey, let’s see a digitally-animated movie today!” Most consumers of motion pictures are interested in plot and character and dialog, and Lasseter has delivered these in his leadership of all of Pixar’s pictures. In contrast, Disney’s animated product has been weakly-reviewed in these areas for years now, while productions like Treasure Planet show off its growing strength in digital animation. Even hits like Chicken Little have been light on well-defined characters and sustained snappy dialog. Disney’s buying quality, at the whole-movie level, not technical skill (although I’m sure they don’t mind getting the people behind the unique look of all of the Pixar films).

Are They Buying Jobs?

Disney must be buying Steve Jobs, because he’s shown no inclination to leave Pixar and work exclusively at Apple, and his preferences in this area must have come up during the negotiations to buy the company. What do they want out of Jobs?

At least part of it must be new ideas. Eisner was kicked out because he had no idea how to deal with the shocks that economic and technological changes have dealt to the context within which Disney does business. New boss Bob Iger has been specifically charged with charting a new course for Disney, and it seems reasonable that he would appreciate having one of technology’s visionaries at his side.

What’s the other part? Well, I’ll get to that in a bit. But first: television!

Are They Buying TV?

Disney’s shot at TV with ABC Kids was a bust, leaving what should be that company’s strongest area to Nickelodeon and Fox Kids (which, ironically, used to be the unsuccessful ABC Kids before Disney sold it to Fox). It would make sense to compete with these media outlets for the tremendously valuable complete attention of the audience of kids who will buy branded toys, and owning the Pixar franchises, and all possible rights that attach to them, would certainly make it easier to compete in that way.

But Disney got punished in cable once, and I’d be surprised if they again try to leverage ESPN and ABC to keep a kids’ network running. Steve Jobs, on the other hand, understands digital media and distribution, and appears to have put together, in iTunes and FairPlay, a model that minimizes piracy. Apple is the only company currently enjoying much success at digital media distribution, and Disney wants to find a model that works for it. They’re not buying TV, they’re buying the vision to create and exploit an entirely new and unknown distribution channel.

So is Disney Buying a New CEO?

This is part two of what Disney wants Jobs for. It’s easy to congratulate Iger for picking a successor who has already shown vision and the ability to turn a company around, but ol’ Bob’s been in charge of Disney for barely any time at all. Why would he already be worrying about who will follow him?

No, it’s not about what Steve Jobs will do in a few years, it’s about what he can do now. Having Jobs on the board is politically savvy. Iger was, at least indirectly, brought in by dissident shareholders Roy Disney and Stan Gold, both of whom thought the company needed to replace long-time leader and reputed egomaniac Michael Eisner with new, creative leadership. But Eisner had lined his pockets with gobs of Disney stock, and will be, until the Pixar acquisition is complete, the single largest stockholder for the company; it would naturally seem that having a disgruntled ex-CEO with a different vision as the #1 shareholder might be an inconvenience to Eisner.

A natural response would be to create a shareholder owning more of Disney stock than Eisner, with a strategic vision that matches more to Iger’s, Gold’s, and Roy Disney’s than to Eisner’s. Jobs would provide just such a larger shareholder, and wrap that up in a media-savvy and exciting package. So, the simpler explanation is that this acquisition is not buying a CEO but buying a power center on the board that will help Iger to achieve his strategic goals without Eisner’s interference.

(Although, we should remember that the last time a much larger company bought Jobs’s company, he ended up running the whole megillah, whether or not that had been what the acquiring CEO planned.)

The acquisition of Pixar marks a serious change in strategic direction for Disney. Iger clearly has big plans for the mouse, and he’s unafraid to take real risks to gain the skills and political resources to move forward in a new century with a new operating and cultural environment.