Walt Disney announced yesterday that it is acquiring Pixar, the animated film studio that has made such hits as The Incredibles, Finding Nemo and Toy Story. As part of the $7.4 billion deal, Pixar’s founder, Steve Jobs, will become a Disney board member and also its biggest shareholder. In an audio-only interview, Wharton marketing professor Peter Fader speaks with Mukul Pandya, editor-in-chief of Knowledge at Wharton, and Robbie Shell, editorial director, about the implications of this deal, not just for the two companies involved but for the whole media and entertainment industry.

Why the Pixar Deal Is Strategic for Disney

After listening to the audio discussion of the Disney-Pixar deal, Nelson Gayton, an adjunct professor at Wharton who teaches undergraduate and MBA courses in media and entertainment, sent the following comment to Knowledge at Wharton. He is part of the leadership team that is developing Wharton’s Media and Entertainment Initiative. In addition, Gayton is a partner with Crayon Venture Partners, a venture management firm with interests in education, technology and entertainment.

The commentary on the Disney acquisition of Pixar being overhyped makes sense given Disney’s long relationship with Pixar, but the strategic importance of the Pixar acquisition cannot be underestimated (as the word “overhyped” suggests).

Frankly, I believe that the acquisition of Pixar was of utmost strategic importance to Disney, not only because of where Disney’s previous distribution relationship with Pixar seemed headed, but also because of Pixar’s potential value to Disney’s “family entertainment” brand and assets, like theme parks and television, that feed off this brand.

Disney’s previous relationship with Pixar represented a production-distribution arrangement that yielded production capital to Pixar and attractive distribution fees to Disney. The relationship may have seemed beneficial to Pixar when it needed capital to build its film library, but it became less so when the distribution arrangement expired and Pixar, on the success of its animated films, was able to source production and distribution capital more cost efficiently from other competing studios. The possibility of Pixar establishing a more cost efficient distribution arrangement with a competing studio seemed a risk too great for Disney to take, even if a “new” distribution arrangement with Pixar would have yielded competitive yet much lower distribution fees to Disney.

To appreciate the strategic significance of the Pixar relationship to the Disney “family entertainment” brand, it is important to recognize the storied role animation has played in the building of the Disney brand and its core assets, but also to understand where Disney’s animation operations seemed headed upon the exit of Jeffrey Katzenberg, the former head of Disney’s motion picture operations and arguably the studio’s animation czar.

Disney’s history is riddled with success stories in animation and with examples of the role Disney animation has played in the building of the company’s “family entertainment” brand and core assets. In fact, for a long time and probably until Disney’s acquisition of Miramax, the value of much of the company’s motion picture assets was regarded as one that was largely built upon the company’s success in animation, much of which was attributed to Katzenberg. Although Disney maintained motion picture labels, like Touchstone and Hollywood Films, that were geared toward live-action filmed entertainment, any success that these labels achieved was often overwhelmed by Disney’s animation business — a business that seemed significantly threatened upon the departure of Katzenberg to form DreamWorks. Needless to say, the impact of this development was significant since so much of Disney’s core business and its “family entertainment” brand were originated or repurposed from animation content.

By many accounts, Pixar came to be regarded as a “white knight” to Disney’s animation business, filling its production pipeline but doing so with the same success that Disney’s traditional animation business attained under Katzenberg. In addition, Pixar films were digitally created, not cell animated, like most of Disney’s older animated films. Beyond reinvigorating the animation genre with a “new” visual style, these films may have also allowed for more cost efficient and easy repurposing of digital content. But most importantly, Pixar’s films were born of great story-telling, the foundation of Disney’s long-held dominance in animation. Moreover, Pixar’s films were “family” films to be enjoyed by all audiences in the U.S. and other countries. Needless to say, Disney must have seen maintaining a relationship with such a supplier of content to be of paramount strategic importance to its brand, especially after Katzenberg’s departure and given the risk that Pixar might give up its relationship with Disney and align itself with a competing studio.

Any premium that Disney might have paid for the Pixar acquisition must also be evaluated in light of the nature of the animation content that Pixar produces and the distribution possibilities it offers via new technologies. As animated, family-oriented content, Pixar films are also known to maintain action, comedy and music elements, segments of which can be repurposed into short-form programming which, like music, is easily downloadable and attractive for a variety of consumer electronic devices, including mobile ones, such as Apple’s new iPod Video. If the success of iPod with music is a barometer for the success of iPod video with any video content — especially short-form content, like comedy, music and sports — Disney’s acquisition of Pixar offers tremendous commercial opportunities for Disney in the new media and entertainment landscape.

These opportunities are likely to create strategic advantages for Disney, especially as it moves forward in using the new media and entertainment landscape to expand Disney and its related brands. Last but not least, the acquisition of Pixar and the resulting inclusion of Steve Jobs on the Disney board may also provide Disney with significant competitive advantages. This development, along with Jobs now being the majority shareholder in Disney, has infused the company with one of the most creative and visionary leaders in the media and entertainment industry to date. This is especially interesting given that Disney, under the leadership of Michael Eisner, seemed to shy away from entering the emerging distribution markets that Jobs has long been credited for creating, instead favoring more traditional and ubiquitous ones, like network and cable television.

While it remains unclear if, or exactly how, Jobs will exert his leadership upon Disney vis-à-vis existing management, it is clear that Jobs’ stake in Disney is likely to raise many eyebrows in the industry, especially those of Disney’s chief competitors. In an industry often characterized as “reactionary,” this raising of eyebrows may be enough for many to consider the Disney deal to acquire Pixar as something more than “hype.” In sum, the Disney acquisition of Pixar seems to represent a strategic “must” for the company.

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