Caitlin Payne

From “Memo Advising Entertainment Merger”

Written November 2013

Background:

CEO of the Walt Disney Company, Robert Iger, announced on January 24, 2006

that a $7.4 billion deal was reached with Pixar Studios to acquire the company into

Disney’s Studio Entertainment division (The Walt Disney Company, 2006). The

companies have been working closely together for several years, with Disney responsible

for distribution of Pixar films but the decision will result in a permanent and complete

combination of the creative and business aspects of each company.

Alternatives:

1) The Department of Justice can allow the acquisition.

2) The Department of Justice can deny the acquisition.

3) The Department of Justice can allow the acquisition with the condition that

Pixar maintains an independent facility and management structure.

Allow:

Even though Disney is a huge company with many interests, it is not the largest

media entertainment conglomerate. Time Warner is the largest and News Corporation

and Viacom are both nearly comparable to Disney’s size and Blue Sky Studio, Sony

(Columbia Pictures), Seagram (Universal Films Studio), and Dreamworks make up a

substantial contribution of market share. Of the top four companies, Disney has the

lowest annual growth rate of only 2.2 percent compared to Time Warner’s 32.1 percent,

News Corp’s 19.7 percent, and Viacom’s 9.9 percent growth rates (Szewczyk). Pixar is a

small company in comparison, only producing six films in its existence.

Disney and Pixar already have a standing co-production agreement where Pixar

develops and directs films but Disney distributes, advertises, and co produces. The

arrangement gives 50 percent ownership all productions to both Pixar and Disney so a

full acquisition would do little to disturb the current industry balance (Gadkari, 2013).

Because of its dependency on Disney for advertising and distribution, Pixar has never

developed its own means of distribution and instead put its resources toward creative

technology. The lack of post-production structure means that without at least partial

Disney ownership, Pixar will need to partner with one of the top companies if it is to

survive. Disney is already well established in animated entertainment and the addition of

Pixar adds only a small additional capacity for production (Gadkari, 2013). While Pixar

is dependent on Disney for distribution, Disney also needs Pixar as the company attempts

to pull itself out of a long run of unsuccessful movies. Dreamworks, Universal, and Blue

Sky Studios have been producing popular, high grossing films with new technology that

Disney can not currently match. Pixar provides the creative and innovative aspects of the

business that Disney needs to refresh its image and become relevant and competitive

again (La Monica, 2006).

Deny:

While it might not be the largest entertainment company, Disney is one of the

main players, especially in animation. Dreamworks and Blue Sky Studios are both well

established and consistently put out blockbusters and Disney’s acquisition of Pixar will

likely pose little threat to their popularity, it may provide Disney with enough power to

keep Time Warner or Viacom out of the animation sector, making entry difficult because

they lack the creative personnel necessary to compete with Disney’s marketing and

reputation in conjunction with Pixar’s innovation and novelty (Shah, 2009).

There is also concern over whether Disney’s strong emphasis on profit

maximization will stifle the imaginations or risk taking of Pixar creators or spark tensions

between the proposed new mixture of executives. Such tensions could make the

acquisition less successful by reducing the value of Pixar while not enhancing Disney’s

quality, in which case the outcome of the merger would be less than the two separate

parts. Internal tensions could result in inefficiencies in production, lowering public utility

from the newly merged entities (ICMR, 2013).

Allow Conditionally:

The acquisition of Pixar by Disney would allow Disney to reassert itself as viable

competition to the current industry leaders Blue Sky Studios, Universal Studios, and

Dreamworks but only if there is some reassurance that the acquisition will not result in a

loss of quality for consumers. Adding the condition that Pixar maintains its independent

facility and management structure should help to ensure that the innovative spirit of Pixar

is not dampened by the more conservative, business minded Disney Company, resulting

in a synergy that increases efficiency and quality for the consumer (La Monica, 2006).

Recommendation:

I recommend that the Department of Justice allows the acquisition of Pixar by

Disney. Both companies gain from the current partnership and a full acquisition should

magnify the benefits that consumers receive. Consumers will have a better quality movie

experience while facing few negative consequences.

Pixar does not have the structure to adequately distribute and advertise their films

independently and rely on bigger firms for crucial support; Disney can provide these

services at a lower cost due to their economies of scale and large networks. If Disney was

not providing support, Pixar would need to find another big company to fill the role.

Disney is a better option than other big companies because Disney already has a foothold

in animation that will not be dramatically impacted by the acquisition, but will instead

stabilize a floundering competitor against industry leaders such as Dreamworks. This

provides for the smallest change in market share because Disney will be gaining only the

second half of a company they already works with in a sector they are already a player in.

If a non-animation oriented company, like Time Warner, got control of Pixar, it would

gain an entire new company and would spread its horizontal reach and dominating size

into a new sector and crowd the small fringe out.

This acquisition would benefit consumers as well as the companies. Consumers

will be able to watch and experience Pixar innovation through efficient Disney

distribution as well as in person at the Disney theme parks. The consumer incurs few

negative consequences because there are several large firms that compete with each other

and the acquisition of Pixar by Disney will only strengthen the competition by reasserting

Disney as a key player, keeping costs the same while expanding and increasing quality.

There is the risk that the acquisition will result in inefficiencies or a dampening of

creativity which would mean a loss for consumers but the success of the current

agreement and cooperation between Pixar and Disney suggests that a full merger would

accentuate the synergy between the firms and result in a net gain for consumers and the

industry.