June 20th, 2011

Disney's 'Cars 2' Fuels Product-Sales Formula

The Wall Street Journal

As Walt Disney Co. prepares for this week’s release of “Cars 2,” the entertainment giant is betting the movie’s main character, Lightning McQueen, can race for years into the play rooms, lunch boxes and even the bathtubs of young boys around the world.

Disney says “Cars 2” is on track to sell more tie-in goods than any single previous film, surpassing by a wide margin the current record holder, “Toy Story 3,” which last year sold $2.8 billion of merchandise. That’s on top of the average $2 billion of “Cars” merchandise sold annually since 2006. Both “Cars” and “Toy Story” are products of Disney’s Pixar Animation Studios.

As the production cost of big movies skyrockets and DVD sales plunge, Hollywood studios want to spread their risk by focusing on those films with the potential to generate sequels and spin offs, as well as consumer products, games and theme-park attractions.

Disney has been especially aggressive, and this year is allocating 80% of its production budget to such films, up from 40% in 2010. The strategy has found its fullest expression yet in the sequel to 2006’s “Cars,” due this Friday.

“It has been a companywide initiative,” said Disney Chief Executive Robert Iger. “Everyone recognizes the value here.”

In recent months, Disney and its licensees have packed the shelves of Target Corp., Wal-Mart Stores Inc. and Toy R Us Inc. with “Cars” Kleenex, shampoo, juice boxes, sleeping bags, kids’ furniture and a half-size acoustic guitar emblazoned with the image of Lightning McQueen, a red race car with a friendly smile.

Beyond that, Disney Interactive Studios on Tuesday is releasing “Cars 2: the Videogame,” for major console systems, including a 3-D version for PlayStation 3.

The company next year will open a 12-acre “Cars” area of its California Adventure theme park. Cars Land is to be the centerpiece of a $1 billion expansion designed to enhance the appeal of Disneyland’s less-known neighbor.

Disney doesn’t disclose the royalties charged for use of its characters. The average royalty rate for all products licensed from entertainment properties last year was 9.4%, according to the Licensing Letter, a trade publication. Licensing Letter publisher Ira Mayer said that a successful film like “Cars” commands two or three percentage points more than an average movie or TV show.

The most technically ambitious Pixar production yet, “Cars 2” is estimated to have cost slightly less than the $200 million production cost of “Toy Story 3.”

Among other challenges, “Cars 2” features numerous, highly complex settings, including several foreign cities and offshore oil rigs, set on a backdrop of roiling ocean waves. On top of that Mr. Lasseter took over as director only last year, far along in the making of the movie, and reworked major elements of the plot and characters.

“They’re not getting easier to make,” said Pixar’s president and cofounder, Ed Catmull, adding that the visuals in “Cars 2” involved “far greater complexity than anything we’ve done before.”

To achieve better than break-even results on its massively expensive productions, Pixar counts on a sizable share of its films to generate merchandise tie-in, Mr. Catmull said.

To be sure, not every promotional effort succeeds. “World of Cars Online,” an online role-playing game that launched last year, has yielded mixed results. Mr. Iger said it needs “retooling.”

Disney Consumer Products Chairman Andy Mooney said his division approached “Cars” as a “lifestyle brand for young boys"—the male answer to the Disney Princess marketing push that highlighted characters including Snow White and Ariel, the mermaid.

Disney executives believe “Cars,” set in a world populated by anthropomorphic vehicles, is an especially powerful brand because it combines two elements that separately tend to drive sales: toy vehicles and beloved movie characters.

“It is very, very potent in terms of its appeal to kids,” Mr. Iger said.

Mr. Mooney said that after asking themselves what everyday products for boys could be “Cars” branded, Disney executives concluded the answer was: “All of them.”

Disney’s financial structure encourages such cross-division collaboration. When Disney’s toy division makes money from a product derived from a particular film, the movie studio books a percentage of that revenue. Executives’ bonuses are tied to the performance of their own operating divisions and of the company overall, giving them a personal incentive to cooperate with other units.

Executives at Disney and Pixar acknowledge that the commercial power of “Cars” helped convince them to make the forthcoming sequel, though they stress that it was far from the only consideration.

“The decision about making the sequel was very much an extension of the franchise discussion,” Mr. Iger said. “But it wasn’t mandating a sequel to be made.”

“We only do sequels at Pixar if we’ve come up with a story that’s as good or better than the original,” said Chief Creative Officer John Lasseter, who directed both “Cars” movies.

The animation studio’s first 15 years saw just one sequel, 1999’s “Toy Story 2.” That was in part because of the terms of Pixar’s distribution agreement with Disney, which changed when Disney bought the studio in 2006. Today, in addition to last year’s “Toy Story 3” and “Cars 2,” Pixar is readying a “Monsters Inc.” prequel for 2013.

The company doesn’t have a policy on how many of its movies need to have consumer-products potential, but Mr. Catmull said it works out to around one in three.

Some other Pixar titles have had little merchandise-spinoff potential. Those include “Up,” about a dyspeptic retired balloon vendor, and “Ratatouille,” about a rodent haute-cuisine chef.

The DisneyToon animation studio, which makes direct-to-DVD films, is at work on a “Cars” spinoff, “Planes,” due for release in 2013.

Mr. Lasseter, who also oversees DisneyToon, said that if “Planes” is successful, he may build additional titles around boats, trains and other vehicles.

“It’s a bigger idea that can be expanded,” he said.

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