Five years agone, Larry Kasanoff corralled one of his colleagues, put him in his car, and said, "We're going to drive around Santa Monica until we come up upwardly with an idea for a pic."

Information technology turned out their inspiration was a supermarket. What if the products on the shelves all came live at night after the people had left the store? The consequence is Foodfight!, and if you have kids, it's a good bet you'll be watching it next summer. (Sneak preview: Charlie the Tuna, Mr. Clean, and a host of other Madison Avenue characters battle a mysterious interloper, Brand Ten. And yes, the product placements are bought and paid for. Welcome to the futurity.)

But the movie'south plot is less important than its business model. Threshold Entertainment, Kasanoff's shop, is just 1 of a agglomeration of aggressive new players trying to piggyback on the spectacular successes of Pixar and DreamWorks. They want to brand reckoner-animated feature films for family audiences, too, but they're looking to practice information technology on an entirely dissimilar scale: smaller, cheaper, faster.

In a way, like many savvy business types, they are opportunists. They saw a niche in the market, and they hopped in. The stop result, however, could be something considerably larger–and rather disturbing for the onetime baby-sit. "Contrary to what people think," says Kasanoff, "Hollywood is not an innovative place. It's the biggest sheep subcontract due east of Auckland."

The game has changed profoundly since Ralph Guggenheim, CEO of Alligator Planet, another small blitheness studio in San Francisco, produced Toy Story for Pixar in 1995. For 1 matter, the applied science for digital animation has gotten a lot cheaper–and better. A decade agone, Pixar had to hire techno-whizzes who wrote their ain software to create computer-generated images with an unprecedented 3-D await. Each animator worked at a $fifty,000 computer workstation. Today, anyone tin can purchase affordable 2-D and 3-D software packages such as Maya and

Softimage, which are taught to rising young talents in art schools everywhere. Guggenheim calls that off-the-shelf software the new "lingua franca" of blitheness. It'due south capable of creating the kind of visual effects that Pixar's brain trust could only dream of back in the early days–and it tin can do so on an Intel-Microsoft PC that goes for effectually $5,000 "and runs circles effectually what we had."

Every bit Kasanoff puts it, "Animation is the only part of film product where quality is going up while costs are going down." What's more than, kiddie cartoons are the sweetness spot of the industry. While the average feature film produces $33 million in U.Due south. box-office receipts, the average for family unit films is $ninety million. The effigy is an astonishing $225 million for digitally animated films.

Janet Healy bet her career on this trend. As an executive at Industrial Light & Magic, Disney, and DreamWorks, she has worked with such Hollywood legends as George Lucas, Jeffrey Katzenberg, and Steven Spielberg. Now she works for a guy named Howard Jonas. He made his money in the prepaid calling-bill of fare concern, and his company, IDT Entertainment, is in Newark, New Jersey, which sure ain't Beverly Hills.

It may not be glamorous, but at that place's i way to make upwards for that. "The gamble is low, and the upside is amazing," Healy says. Consider IDT's deal to produce four reckoner-animated features for distribution past Fox. The productions will price only $25 million to $50 million apiece, versus the $100 million or more for your traditional blithe blockbuster. "Even if a film does moderately well"–say, $50 meg to $60 one thousand thousand at the domestic box office–"that'due south still a huge win," she says. Especially since far more revenue, running into the hundreds of millions of dollars, tends to come from international rights, merchandise licensing, and DVD sales.

Another factor abetting the software revolution: a alluvion of cheap labor, which can be either assembled in one place on a per-project basis or networked via the Internet. "At that place's a growing puddle of loftier-quality animators around the globe," says Guggenheim. They're fluent in the same software their American counterparts are using, and producers can tap talent anywhere on earth. What's more than, many governments offering financial incentives for moving picture production, a form of cross-cultural competition that volition only lower production costs further.

While Pixar itself may yet evoke the onetime-fashioned notion of a pic studio–with hundreds of total-time staffers working together at its loftlike headquarters in Emeryville, California, near Berkeley–its successors function as temporary, global, virtual studios. Guggenheim will produce Alligator Planet's next film from his home in San Francisco; his director volition remain in his own native Australia; and they're trying to make up one's mind whether to rent an animation team in Mumbai, Toronto, or French republic.

This isn't the end of Hollywood, of course. IDT, for example, does its scripting and storyboarding in Los Angeles, which has an unmatched concentration of writing talent, then exports the laborious frame-by-frame execution of the animation itself. (IDT actually bought 2 studios in Canada, which offers big taxation benefits, to fill that role.)

Vanguard Animation took a similar approach for its animated feature, Valiant, about a pigeon in World War II. Vanguard did the early creative work in Fifty.A., then gathered 200 people from 17 countries in the U.k.. Wild Brain, which has a deal to produce feature films for distribution past Disney, has long tapped animators in China, India, Malaysia, and South korea for Higglytown Heroes, its series on the Disney Channel. And Threshold's Foodfight! was created past 100 animators working in Australia, Europe, and South Korea, along with ii dozen in L.A. "What do we care if a guy is in Van Nuys or India?" says Kasanoff.

"Everything in this globalized market place is nigh finding the all-time place to get things done at lower costs," says Guggenheim. "I can't tell you how many people have said to me, 'We want to build the next Pixar in . . . blank.' The studios nosotros deal with are like telephone call centers but with very talented artists. The side by side Pixar isn't going to be a big building in Emeryville. Information technology'south going to be groups around the globe, networked together."

Inexpensive software and cheap, interconnected labor make possible another radical assail on the status quo. By lowering the costs of production, they enable the little guys to hold on to their intellectual holding, rather than ceding it to the studios.

For decades, Disney, Fox, Universal, and the rest take played iii main roles: They financed the making of the films, got the movies into cinemas around the country, and paid to advertise and promote them. And fifty-fifty though they sometimes spread around pieces of the revenues, they tenaciously held on to copyright ownership. Those rights accumulated over the years into collections of intellectual property, libraries of hundreds of films, worth billions of dollars because of their licensing potential. So, substantially, the studios have served as bankers, marketers, and owners.

Then came Pixar and Steve Jobs. When Pixar made Toy Story, it received just 12.five% of the film'southward revenue. Emboldened by the film'due south success, Jobs subsequently renegotiated his deal and so that Pixar and Disney would divide the box-part receipts for Pixar's side by side five movies. But with the jaw-dropping performance of that 6-film run–and now that Pixar'south deal with Disney has run its form–Jobs is taking no prisoners. He has insisted that in whatsoever time to come deal, with Disney or any other studio, Pixar will finance the films and retain the copyright, while its partner would receive a mere single-digit pct of revenues as a distribution fee. In other words, now Pixar will exist the banker and owner; the studio, just a marketer.

Information technology was one thing for Jobs to need this kind of deal. Pixar may have toiled abroad invisibly for nine years before producing Toy Story, but the company now arguably has the best track tape in Hollywood's history, and its success allows it to underwrite a $100 million-plus production. But how can the largely unproven next generation come upwardly with the cash required to assert similar control?

Astonishingly, the low-risk, high-reward potential of digital animation has generated tremendous involvement in investors far from Hollywood. Phil Knight, cofounder of Nike, recently bought Will Vinton Studios, the animation house in Portland, Oregon, where his son worked. Knight renamed it Laika (later on the 1950s Soviet cosmo-dog) and bankrolled it to make animated feature films. And "there's an enormous amount of money in Asia to produce animated motility pictures in the $25 million to $50 one thousand thousand range," says Ellen Goldsmith-Vein, who runs the Gotham Group, a direction company for many of the top writers, directors, and producers of digital animation. Taiwan's Digimax, for instance, has committed financing for her low-budget animation flicks.

And then relatively depression costs and potentially huge payoffs are gradually readjusting the balance of power in intellectual property–at the expense of the big studios that have e'er been Hollywood's power brokers.

"It'south very important to us to own the negative," says Kasanoff. Threshold began financing Foodfight! with help from a South Korean investment consortium, the idea being that it would then find a Hollywood studio to serve equally distributor. "Many studios wanted the movie, merely they all insisted on owning it," Kasanoff says. Lions Gate ultimately signed on to distribute the film–and really agreed to let Threshold retain the copyright. How did Kasanoff pull it off? "Y'all make them such a good offer that they just take to practice it," he says. "So much potential money to make and so niggling run a risk." For one thing, Threshold is cutting Lions Gate in on the film's merchandising deals.

"Intellectual property rights–that, frankly, is the essence," says Vanguard's founder John Williams, who produced Shrek and Shrek 2, both owned by DreamWorks. For an upcoming animated film that Vanguard is producing, with Play a trick on distributing, Williams says, "We've held dorsum all the merchandising, licensing, and video-game rights. If and when we get a meaning franchise"–a motion-picture show with lucrative sequels, such as Shrek or Toy Story–"we'll own those rights. The intellectual-property rights are the treasure trove."

One large variable remains: Will these movies actually be worth watching? "In that location is a conventionalities that the quality of a $25 million or $50 million animated movie is going to exist as good as one that's $125 million or $150 million," says Gotham Grouping'southward Goldsmith-Vein. "Merely that remains to be seen." Say this, though: Mr. Clean and Charlie the Tuna are pros–and they don't haggle over residuals.

Alan Deutschman (adeutschman@fastcompany.com) is a Fast Company senior writer based in San Francisco.