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Disney, Pixar will part ways

Pixar Animation Studios, which produced last summer's best-selling Finding Nemo, said Thursday it was ending talks on continuing its 12-year partnership with the Walt Disney Co. and would seek another studio to distribute its films after 2006.

The announcement surprised both Hollywood and Wall Street because many people expected Steve Jobs, the mercurial chief executive of Pixar, and Disney's chief executive, Michael Eisner, would resolve their personal and professional differences to continue what has been a lucrative partnership for both companies.

Under their current arrangement, Disney distributes all of Pixar's films in exchange for 12.5 percent of the box office revenue, and the two companies split the profits. In addition, Disney owns the rights to all movies made by Pixar, which lacks its own distribution arm. As part of that deal, Disney will distribute Pixar's two coming films The Incredibles, scheduled to be released later this year, and Cars, due out next year.

"After 10 months of trying to strike a deal with Disney, we're moving on," Jobs said in a statement. "We've had a great run together _ one of the most successful in Hollywood history _ and it's a shame that Disney won't be participating in Pixar's future success."

Since the release of the Academy Award-winning Toy Story, Pixar films have earned more than $2.5-billion at the worldwide box office and sold more than 150-million DVDs and videos, making it one of the most successful animation companies today. Just this week, Finding Nemo was nominated for an Academy Award for best animated feature. But over the years, Jobs and Eisner have sparred publicly over how much control and money Pixar was allowed in the partnership.

The timing of Pixar's announcement creates a public relations crisis for Eisner, who has been under pressure to turn around Disney's fortunes. Two former directors _ Stanley Gold and Roy Disney, nephew of Walt Disney _ have called on shareholders to oust Eisner at its annual meeting in March. Gold and Roy Disney complain that Walt Disney Co.'s once-renowned animation division has faltered under Eisner. They said Thursday that Eisner had mismanaged the relationship with Pixar.

News of the talks' failure created a flurry of interest from competitors, including Warner Brothers Studios, which said it would be interested in distributing Pixar films.

Robert Iger, the president of Disney, said Pixar's latest offer would have cost Disney hundreds of millions of dollars that the company was already entitled to under the existing agreement and that the terms sought by Jobs for future projects did not justify a deal.

"The debate we had was how much value could we afford to give up?" he said in an interview. "At some point we had to say it was not good for shareholders."

Disney studio executives were surprised by the failed talks. Richard Cook, chairman of Walt Disney Studios, who had been negotiating directly with Jobs, received a call from Jobs while he was out for lunch, according to a person involved in the negotiations. When he returned and called Jobs, the person said, he was told the talks were off.

Several theories emerged rapidly about why Jobs, who did not return two phone calls seeking comment, sought to terminate the partnership now. Wall Street analysts are set to meet with Disney executives in Florida in two weeks, when Eisner will face tough questions about Disney's future in animation. Its own films have not had nearly the success of those produced by Pixar, and Disney has effectively closed its Florida film animation operations.

One film executive suggested that Jobs could now be considered a candidate to run Disney if indeed Eisner ever left.

The collapsed talks, too, will likely put pressure on Eisner to shore up his relationship with other partners, including cable companies that are warring with Disney over rates charged for its programming, and with Harvey Weinstein of Miramax Films, who has been dueling with Eisner over his division's profits.

"It is impossible to know how bad this is for Disney," said Richard Greenfield, a managing director at Fulcrum Global Partners, which recommends selling Disney stock. But given Pixar's success, it will hurt Disney. "You have to venture a guess from a creative standpoint the company is at risk," he said.