Pixar and Disney

1. Introduction

      I think that the Walt Disney should acquire Pixar Inc. Though there were challenges to organize the two entities, if Disney bought Pixar, Disney must get capabilities to overcome their challenge. I would like to discuss 1) why the two companies should do acquisition, 2) how to govern their new structure.

1. A new contract? Or is common ownership required?

     Assuming Pixar and Disney are more valuable in an exclusive relationship, I believe an acquisition is a better way for both of them, especially Disney side, considering their current business situation.

     First, looking at recent animated film performance, it is clear that Pixar’s capability exceeded Disney Studio. In 2000s, the difference became drastic. Therefore, while Pixar had kept a contract with Disney, it seems Pixar already regarded Disney as just a distributor. Though Disney supported Pixar enormously in early phase, the power balance changed completely. Therefore, if Disney choose to make a new contract, the contractual term should be tough for Disney, like that Pixar will get all commercial rights of their movies while Disney just have exclusive distribution.

     Second, I think Disney needed to improve their production process. The case showed the case of American Dog and Rapunzel Unbraided didn’t work well, even though Disney re-organized its structure.^[1] Looking at financial performance, even though net profit margin improves significantly, their gross profit margin decreases. Composition of studio also declined. (Exhibit 1) The case explains Pixar impacted on 60% of Disney’s operation income, it means Disney relied their performance on Pixar.^[2] Without getting Pixar’s capability, Disney would face with decreasing of their profitability and productivity.

      I showed a comparison matrix: Pros/Cons of each option in Exhibit 2. This chart shows both companies can enjoy the merits with relatively small demerits. Reviewing the factors, we should pay attention to short-term and long-term perspective. In the short-term, it seems more beneficial for Pixar to choose a new contract, since they will get ownership and revenue/profit. However, Pixar does not necessarily succeed in their future. Therefore, Disney’s huge assets would be useful for Pixar. On the other hand, Disney would face difficulty that they have to manage Pixar well if they choose co-ownership. However, instead of it, Disney will get Pixar’s innovative experience and methodology. From above the reasons, I think common ownership is a better option for both of them.

1. If Disney does acquire Pixar, how should Bob Iger and his team organize

     The most challenging issue for Bob is twofold. 1) How to manage competition between Disney Studio and Pixar, 2) how to keep Pixar’s creative capability.

     First, even if Disney bought Pixar, Pixar would be still a competitor of Disney Studio as far as Disney doesn’t merge the two companies. Therefore, as Pixar continues to grow and get more market share, Disney studio may face severe competition. Second, since Pixar and Disney have different culture, it is difficult for them to integrate each other seamlessly. I think if Disney enforces Pixar to follow Disney way, as a shareholder, many of Pixar creators will leave. In this industry, human resource is the critical differentiation factor. Disney has to manage Pixar’s innovative resource with losing their creativity.