To Infinity and Beyond
Just before
being ousted out of Apple, Steve Jobs happened to meet Ed Catamull who was
running the computer division of George Lucas’s film studio.
The Lucas
film computer division made hardware and software for rendering digital images,
and it also had a group of computer animators making shorts, which was led by a
talented cartoon-loving executive named Jhon Laseeter.
Steve Jobs
was blown away looking at how the computer division operated and learnt that
George Lucas intended to sell of the division. Steve Jobs was into computer
graphics and decided to buyout the division.
In January 1986, Steve Jobs offered to pay
George Lucas $5 million and was ready to invest another $5 million to
capitalize the film computer division as a stand-alone company. Steve Jobs
would own 70% of the company, with the rest of the stock distributed to Ed
Catmull and the thirty-eight other founding employees, down to the
receptionist. The division’s most
important piece of hardware was called the Pixar Image Computer, and from it
the new company took its name – Pixar.
The digital
animation business at Pixar made little animated films and its main purpose was
to show off the hardware and software of the company. It was run by John
Lasseter. After Jobs came onto the
scene, he and Lasseter began to share their passion for graphic design.
During 1988, when cash was running short at Pixar, Lasseter and his animation group approached Jobs for authorizing $300,000 to produce another short-animated film.
The story
was about Lasseter’s love – classic toys. It was told from the perspective of a
toy one-man band named Tinny, who meets a baby that charms and terrorized him.
Escaping under the couch, Tinny finds other frightened toys, but when the baby
hits his head and cries, Tinny goes back out to cheer him up. The animated film
was titled Tin Toy.
Jobs was
convinced and was willing to shell out the required budget out from his own
pocket wen Lasseter started his show displaying boards, doing the voices,
showing his passion for his product.
Tin Toy went on to win the 1988 Oscar Award for
animated short films, the first computer-generated film to do so.
The film
division team and the CEO at Disney liked Tin
Toy and they thought something could be done with animated stories of toys
that come alive and have human emotions. They decided to poach Lasseter to
Disney.
However,
Lasseter was grateful for Job’s faith in him and felt Pixar was the only place
where he could create a new world of computer-generated animation, he told, “I
can go to Disney and be a director, or I can stay here and make history.”
If you can’t beat them, join them.
Disney decided
to look for ways though which they could join up with Pixar and have them make
a film about toys for Disney. The negotiations between Pixar and Disney took
months.
Pixar was
on the verge of bankruptcy and needed a deal with Disney far more then Disney
needed a deal with Pixar. Steve Jobs was well aware that Disney could afford to
finance the whole enterprise and Pixar couldn’t.
Steve Jobs was
now once bitten and twice shy with his experience at Apple. He was not letting
to go few important things which would make the deal one sided where Disney
would get benefitted the most.
The team at
Disney insisted that Disney be given the rights to Pixar’s proprietary
technology for making 3D animation. Jobs refused and demanded Pixar would have
part ownership of the film and its characters, sharing control of both video
rights and sequels.
A deal was struck
in May 1991, by which Disney would own the picture and its characters outright,
have creative control, and pay Pixar about 12.5% of the ticket revenues. Disney
had the option but not the obligation to do Pixar’s next two films and the
right to make with or without Pixar sequels using the characters in the film.
Disney could also walk out of the deal any time by paying a a small penalty.
The idea
that John Lasseter pitched was called “Toy Story”. It sprang from a belief,
which he and Jobs shared, that products have an essence to them, a purpose for
which they were made. If the object were to have feelings, these would be based
on its desire to fulfill its essence. The purpose of a glass for example, is to
hold water; if it had feelings, it would be happy when full and sad when empty.
As for toys,
their purpose is to be played with by kids, and thus their existential fear is
of being discarded or upstaged by newer toys. So, a buddy movie pairing an old
favorite toy with a shiny new one would have an essential drama to it,
especially when the action revolved around the toys’ being separated from their
kid.
The two main character went through many iterations before they ended up as Buzz Lightyear and Woddy. The title of the animated movie was decided as “Toy Story”.
Jobs did
not poke his nose much into the creative process even if he had great taste for
design. He let Lasseter and the other artists at Pixar to do their tasks. He focused on managing the relationship of Pixar with Disney.
Toy Story
was released on November 22, 1995 and opened to block buster commercial and
critical success. It recouped its cost the first weekend, with a domestic
opening of $30 million, and went on to become the top-grossing film of the year
beating Batman Forever and Apollo 13, with $192 million in receipts
domestically and a total of $362 million worldwide. According to the review
aggregator Rotten Tomatoes, 100% of the seventy-three critics surveyed gave it
a positive review.
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Few important questions surfaced. Was Toy Story a Disney or a Pixar movie? Was Pixar merely an animation contractor helping Disney make movies? Or was Disney merely a distributor and marketer heling Pixar roll out its movies? The answer was somewhere in between.
Jobs concluded
that the fundamental issue of whose movie was it would have to be settled
contractually rather than war of words. After the success of Toy Story, Jobs with the vision of
building a new studio and not just be a work-for-hire place, decided to cut a
new deal with Disney.
Jobs was
well aware that in order to sit down with Disney on an equal basis, Pixar had
to bring money to the table and that required Initial Public Offering (IPO) of
Pixar.
The IPO of
Pixar occurred exactly one week after Toy
Story’s opening. The IPO was even beyond his wildest hopes as in the first
half hour of listing, the stock offered at about $14, shot up to $45 and went
further to $49 before settling back to close the day at $39. Jobs had retained
80% of the company and this valued his shares $1.2 Billion.
The
successful IPO meant that Pixar would no longer have to be dependent on Disney
to finance it s movies. That was just the leverage Jobs wanted. Jobs knew that
along with co-branding where the movies were to be Pixar as well as Disney, Pixar
could demand half the profits as they could now fund half the cost of the
movies.
Disney and
Pixar had a three-picture deal, Pixar had made only one. Jobs told Disney if
they were to disagree to the deal then Pixar would go out and have deal with
another studio once the three-picture deal was done.
They
hammered out a new arrangement. Disney agreed to let Pixar put up half the
money for future films and in return take half of the profits and also agreed
on co-branding, though that took a lot of haggling to define. Negotiations
started how big the letters ‘Disney’ are going to be, how big is ‘Pixar’ going
to be, just like four-year olds.
By the
beginning of 1997 a deal for five films over the course of ten years was inked.
Jobs’s main role at Pixar as of now was deal making, in which is natural
intensity was an asset.
A Bug’s Life was released on November 25,1998 exactly three
years after Toy Story. Based on the
tale of “The Ant and the Grasshopper” plus a greater technical virtuosity
allowing startling details as the view of grass from a bug’s vantage point
allowed the move to gross $163 million domestically and $363 million worldwide.
Toy Story 2 released on November 24, 1999 exactly four
years after Toy Story was even bigger
with a $485 million gross worldwide.
As part of
the deal with Disney, Pixer released its fourth movie Monsters, Inc on November 2, 2001 which turned out to be the most
successful of them all, with $525 million in worldwide gross.
The fifth
movie, Finding Nemo was released on
May 30,2003 and completed the deal of five films over the course of ten years.
The deal between Disney and Pixar was now up for renwal.
An email was sent out to the executives at Disney stating they were confident that Pixar would eventually renew its deal partly because Disney had rights to the Pixar movies and characters that has been made thus far and they believed themselves to be in a better position in the negotiation because the executives at Disney felt that Finding Nemo was okay but nowhere near as good as their previous films.
There came two major problems with this email:
- The email was leaked to the Los Angeles Times and circulated online, this provoked Jobs to go ballistic
- The assessment of Finding Nemo by the executives at Disney turned out to be wrong, very worng.
Finding Nemo became Pixar’s (and Disney’s) biggest hit thus
far. It easily beat out The Lion King
to become, for the time being, the most successful animated movie in history.
It grossed $340 million domestically and $868 million worldwide. Until 2010 it
was also the most popular DVD of all time, with 40 million copies sold, and
spawned some of the most popular rides at Disney theme parks.
In addition,
it won the Oscar for best animated feature. Its success added $183 million to
Pixar’s cash reserves. Now, Pixar had a hefty war chest of $521 million at the time
of renewal of the contract with Disney.
The films The Incredibles and Cars was in the pipeline. Jobs made Disney an offer that was so
one-sided it was clearly meant to be rejected. Instead of a 50-50 split on
revenues, as in the existing deal, Jobs proposed a new arrangement in which
Pixar would own outright the films it made and the characters in them, and it
would merely pay Disney a 7.5% fee to distribute the movies. Plus, the films The Incredibles and Cars which are in the pipeline would shift to the new distribution deal.
Disney held
one powerful trump card. Even if Pixar didn’t renew the deal, Disney had the
right to make sequels of Toy Story and
the other movies that Pixar had made, and it owned all the characters, from
Woody to Nemo, just as it owned Mickey Mouse and Donald Duck.
Pixar had declined
to do Toy Story 3 under the existing
deal and Disney was already planning and threatening to have their own
animation studio do Toy Story 3.
7 months later the release of Finding Nemo, Jobs in January, 2004 publicly
announced that he was cutting off negotiations with Disney. The damage had been
done and there was public outrage against Disney and there was bickering between
the top management of Disney regarding the decision making.
The
animation division of Disney was messed up and their recent two movies Treasure Planet and Brother Bear did no honor tot the Disney Legacy, or to its balance
sheets.
Bob Iger, Disney’s chief operating officer, knew hit animation movies were the lifeblood of the company as they spawned theme park rides, toys and television shows.
Toy Story has led to –
- a movie sequel,
- a Toy Story Musical performed on Disney cruise ships
- a direct-to-video film featuring Buzz Lightyear
- a computer storybook
- two video games
- a dozen action toys that sold 75 million units
- a clothing line
- nine different attractions at Disney theme parks
Whereas in
the case of Treasure Planet, Disney
suffered losses.
Due to Bob
Iger’s excellent management in other divisions of Disney he was soon appointed
as the CEO of Disney and in the next moment he stepped in to do damage control.
Iger advocated the principle of “Make love not war”. He acknowledged that
Disney had been in war with Pixar and he wanted to fix it. This soon caught the
attention of Steve Jobs.
Iger did
some financial analysis and discovered that in the past decade prior to the
support of Pixar, the animation division at Disney has lost money and presented
the analysis along with the performance of the animation division with Pixar to
the board of directors.
For Disney,
a hit animated film is a big wave, and ripples go down to every part of their
other businesses – from characters in a parade, to music, to parks, to video
games, TV, Internet, consumer products.
He presented choices to the board of directors. Disney could stick with the current animation management, which is not generating cash inflow or replace the current animation management with new hires. Even if they decide to do new hires, they don't know whom they would hire.
The another choice was they could buyout Pixar. The
problem is, Iger neither knew whether Steve Jobs would be ready to sell the
company Pixar to Disney nor the ask price Steve Jobs would quote to sell the
company Pixar to Disney.
The board
of directors authorized Iger to explore the deal of buying out Pixar because they
knew what would be the ultimate ending of their own animation division despite efforts to
restructure it.
Iger did
not waste much time and approached Jobs and immediately threw all the cards on
the table.
At first,
they came up with a plan for a new distribution deal: Pixar would get back from Disney all the rights to the movies
and characters it had already produced as consideration for Disney getting an
equity stake in Pixar and Pixar would pay Disney a simple fee to distribute its
future movies.
This
worried Iger as such a deal would simply set Pixar up as a competitor to Disney
and would be bad even if Disney had an equity stake in Pixar.
So, Iger began
to hint that maybe they should actually do something bigger. Iger told Jobs, “I
want you to know that I am really thinking out of the box on this” and this
made both of them clear that this discussion might lead to an acquisition discussion.
Iger knew
not only Jobs but also Jhon Lasseter and Ed Catmull need to be brought into
confidence and so he rolled the ball towards building the confidence. He visited
Lasseter’s house for dinner and stayed up well past midnight talking. He also
took Catmull out to dinner. He visited Pixar Studios alone without any entourage of being the CEO of Disney and met all of them one
on one. The pipeline of movies in production – Cars, Ratatouille, WALL-E was also discussed and this made Iger to visualize
the success Disney would have by buying out Pixar.
The deal they
proposed was that Disney would purchase Pixar for $7.4 billion in stock i.e.
shares of Disney would be issued to the shareholders of Pixar. By virtue of this,
Jobs would become Disney’s largest shareholder, with approximately owning 7% of the company’s stock.
According
to the terms of the deal, Disney Animation would be put under Pixar, with
Lasseter and Catmull running the combined unit. Pixar would retain its
independent identity, its studio and headquarters would remain as it is.
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| Ed Catmull, Steve Jobs and John Lasseter (from left to right) |
Everyone then gathered in the atrium. Jobs announced, “Disney is buying Pixar”. As the deal was explained, the staffers began to realize that in some ways it was a reverse acquisition. Catmull would be the head of Disney animation, Lasseter its cheif creative officer. Jobs invited Iger to the center stage and the crowd broke into applause when Iger talked about the special culture of Pixar and how badly Disney need to nurture it and learn from it.
Steve Jobs later commented later commented on the acquisition “My goal has always been not only to make great products, but to build great companies, Walt Disney did that and the way we did the merger, we kept Pixar as a great company and helped Disney remain one as well”.
Thus, Steve Jobs became the single largest shareholder of Disney
because of Pixar and minted billions despite being ousted from Apple. When Steve Jobs passed away on October 5, 2011, 80% of his stock portfolio was concentrated on a single stock - Disney.
Thank you,
Pixar, for entertaining us with animations such as Toy Story, Cars, Finding Nemo, The Incredibles and Up.
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