With the blowout success of “Toy Story 2,” digital animation has become the hottest niche in Hollywood. But unlike other hot movie genres, which all the studios generally rush to exploit, the digital animation craze is a three-horse race and Walt Disney Co. has two of the horses. Under a 1997 deal, Disney is in line to distribute three more movies by “Toy Story” producer Pixar Inc., not counting additional sequels. The first of those movies, “Monsters Inc.,” is slated for release in 2001. Meanwhile, Disney, never shy about muscling into profitable niches, is beefing up its own in-house digital animation unit. Its first solo-effort digitally animated film, “Dinosaur,” is slated for release on the Memorial Day weekend in 2000. The third horse is the team of DreamWorks SKG and Palo Alto-based Pacific Data Images, which created 1998’s hit “Antz.” DreamWorks/PDI is now working on “Shrek,” which is slated for release in 2001. The popularity of digital animation couldn’t have come at a better time for Disney, whose stock has been on a rebound in recent weeks after months of negative publicity on various fronts. And while one successful movie is hardly the basis for a fundamental corporate rebound, the digital revolution creates several opportunities for the studio over the next few years. “Has Disney ever had an (animated) movie fail?” said David Leibowitz, an analyst with Burnham Securities in New York. “They are the natural.” To date, Disney’s success in digital animation has been tied to Pixar and a 1997 agreement is far more lucrative for Pixar than was the original deal inked in 1991. Given the success of “Toy Story 2,” any subsequent deal will likely be even more lucrative for Pixar than even the 1997 contract. But the production of “Dinosaur,” which is costing anywhere from $175 million to $200 million, shows that Disney does not want to be stuck in a digital animation rut if Pixar jumps ship as soon as its current contract is up. While Pixar officials declined to comment for this story, Disney officials confirmed that the studio wants to increase its control over the digital-animation process. “Obviously we are partners with Pixar, but we don’t have any investment in their technology,” said Robert Moore, executive vice president of operations and finance for Walt Disney Studios. “Disney has traditionally been on the cutting edge of technology. As a company, we had a belief that we need to continue to be on top of the digital-animation capability.” Meanwhile, the DreamWorks/PDI team is pinning its hopes on “Shrek,” a full-length digitally animated feature film based on the children’s book by William Steig. It follows a swamp ogre and his adventures in a fantasy kingdom, where he eventually falls in love with an equally ugly princess. While it’s still too early for any advance buzz, “Shrek” has a long way to go to match DreamWorks/PDI’s first completely digitally animated film, “Antz,” which generated $90.7 million at the box office. As for the next Disney/Pixar entry, “Monsters Inc.,” it’s a comedy that is “set in the realm of things that go bump in the night, where chaos breaks loose after a hapless monster accidentally lets a human child into the secret world,” according to a statement from Pixar. Regarding the effect that “Toy Story 2” or “Monsters Inc.” will have on earnings and stock price, Pixar likely will feel it more than Disney. “The stock will ebb and flow based on movie euphoria and the success of ‘Toy Story 2’ will have a much bigger impact on their bottom line,” said Jill Krutick, an analyst with Salomon Smith Barney Inc. “For Disney, ‘Toy Story 2’ is one piece of a very complex puzzle. They’re much more diversified.” More significant factors for a 10 percent rise in Disney stock include the agreement to open a theme park in Hong Kong, the decision to re-release several classic Disney movies on home video and DVD, and the success of “Who Wants to Be a Millionaire” on Disney-owned ABC. Nevertheless, some analysts estimate that Disney could wind up with profits of $500 million on “Toy Story 2,” not exactly inconsequential even for a company of Disney’s global proportions. “Disney is in a tremendous position given the success rate they’ve had with Pixar,” Krutick said. Disney’s partnership with Pixar dates back to 1991, when the two companies signed a three-picture deal. Pixar, seeking Disney’s distribution prowess and financial backing, successfully pitched the plot for what ultimately became the original “Toy Story.” Analysts estimate that under the original 1991 contract, Pixar received somewhere between 10 percent and 15 percent of the gross profits of the films. Giving Pixar clout in negotiating that 1997 five-picture deal was the success of “Toy Story” and Pixar’s barn-burning IPO the same year. Under terms of the 1997 deal, Disney and Pixar split the marketing and production costs for each film evenly. The two companies also split gross profits, after Disney takes a distribution fee off the top. Backing out that distribution fee, the profit split translates to about 68 percent for Disney and 32 percent for Pixar, industry sources said.
