When Woody Met Mickey

By Daren Fonda

Hollywood and Silicon Valley have never mixed well. You've got cineastes vs. nerds, celluloid vs. digital, silicone vs. silicon. Then there is Pixar, the delightfully confounding combination of the two: part high-tech shop, part movie studio. Headed by Apple Computer's Steve Jobs and run by John Lasseter, an animator hailed as the next Walt Disney, Pixar has made exactly six computer-animated features in its 20-year history, from Toy Story to The Incredibles. Every one was a smash. Every one was distributed by Disney, which also shared costs and profits.

So how much is the wonderful world of Pixar worth? More than a billion dollars a picture, or $6.3 billion? That's what Disney agreed to spend last week to bring Lasseter, Jobs and the Pixar supporting cast into the Magic Kingdom. "Clearly, it's a lot of money," Walt Disney Studios chairman Dick Cook told TIME, adding that "all the different scenarios had to be presented and analyzed" before the board would sign off. But Disney CEO Robert Iger, who took over from the controversial Michael Eisner in October, was determined to revive Disney animation, which has been starved for hits since Tarzan in 1999. He could have rebuilt the animation studio gradually and perhaps poached some Pixar creatives. But he didn't have time; he did have money.

Pixar, situated in Emeryville, Calif., north of Oakland, is a thriving playground of creativity where animators customize their workspaces to resemble tiki huts and castles, relax in secret rooms like the red-velvet Love Lounge or take a dip in the company pool. Lasseter is the ringleader, a man whose imagination fills every frame and inspires the troops. "He has a posse around him constantly," says a staff member who works closely with him. Other studio bosses are in awe of Pixar's six-for-six record. "Because of the pictures Pixar has made, the bar has been set incredibly high," says Yair Landau, vice chairman of Sony Pictures Entertainment.

Iger recognized his problem at the opening of Hong Kong Disneyland last fall, as he watched old Mickey, Goofy and Donald parade by and realized that if he wanted new characters--for video games, theme-park rides, live stage plays--he needed the whiz kids in Emeryville. "Animation films are such a driving part of our company," says Cook. "We just said, 'Wow, this is where it all starts, and this is what we've got do.' It hit home for Bob."

So did the prospect of losing Pixar, whose movies have grossed more than $3.2 billion at the box office worldwide. Its finance-and-distribution deal was set to expire after the release of Pixar's Cars this June. Even worse, the companies nearly split in a War of the Roses--style divorce as friction mounted between Jobs and Eisner over terms of a new partnership. That fracture helped ignite a shareholder revolt against Eisner. When Iger took over, one of his first calls was to Jobs.

Although Disney is buying Pixar's talents in digital animation, including proprietary software, the key asset is more prosaic: Pixar's superior skill at telling stories. "We won't let anything get ahead of the quality of the story," Pixar president Ed Catmull told TIME. "It's meant we have not increased production at the rate we have wanted to."

That's why Lasseter, Pixar's storyteller in chief, will become Disney's chief creative officer. Already he has suspended Disney's work on Toy Story 3. Before the deal, Disney owned the right to produce Pixar sequels without Pixar and was exercising it, to Lasseter's horror. A Disney animator back in the days of Tron, Lasseter is expected to revamp Toy Story 3 and other features in part by demanding that stories and characters drive the picture--not the visuals or bean counters. Catmull says creatives at Disney animation and Pixar will work more closely on story development too. At Pixar staff members hold councils in which they dissect plot lines and characters and share notes on one another's projects. Lasseter is expected to infuse more of that freewheeling style in Burbank.

Since Jobs owns about half of Pixar, worth $3.5 billion, he is set to become Disney's largest individual shareholder, with a 7% stake. He is also in line for a board seat, which could advance all sorts of deals with Apple. Downloads from Disney's ABC network are already available at the iTunes video store. Think ESPN podcasts to iPods via wireless. Or an Apple TV network featuring tech talk with Jobs. Ever coy, Jobs was vague about his plans, but he is expected to push Disney to leverage its vast library across more digital platforms. He could also prove nettlesome. Famously short fused, he has said he is not interested in running Disney. Yet he is bound to pressure Iger if he grows frustrated.

For Lasseter, reviving Disney animation while maintaining Pixar's excellence will be quite a feat. The Burbank shop is a husk of the studio that made The Lion King in 1994. Hundreds of animators lost their jobs in the wake of duds like Atlantis. Rival studios like DreamWorks, meanwhile, created hot characters such as Shrek, worth millions in licensing revenue. And Disney all but ignored digital animation until recently.

To make the deal work, the combined outfits need to step up production. The goal is to release two movies a year; Pixar has done one every 18 months. A steering committee is supposed to protect Pixar's culture, and Cook says Jobs agreed to sell only after getting a guarantee that Pixar wouldn't be Disneyfied. But the price is steep. SG Cowen analyst Lowell Singer estimates that if Pixar doesn't produce four films every three years, Disney's profits will take a hit. Says Singer: "Disney is paying a price for Pixar that requires flawless execution."

Lasseter is being richly rewarded to be Disney's reanimator. He will earn at least $2.5 million in salary, and he owns stock worth $25.4 million. Trouble is, he is one of those annoying people who don't seem to care much about more money. In 1998 he told TIME he was staying at Pixar because that was where his friends and toys were. Investors should hope he will find new friends and toys at Disneyland.

With reporting by Laura Locke/San Francisco, Jeffrey Ressner/Los Angeles, Richard Corliss/New York