To Infinity and Beyond

Special acknowledgements to Walter Issacson the author of "Steve Jobs". The facts and events in the blog are based on the biography of Steve Jobs written by Walter Issacson. The book is highly recommended to know more about Steve Jobs. We are highly indebted to the author for the valuable information that he has published in the book, without which the blog would not have taken shape.

When I was 12, I watched Toy Story for the first time. Despite not understanding English, the movie's animations conveyed its message. Now, at 22, Toy Story remains a cherished part of my childhood. Somehow, I find myself watching the movie every six months.

Curiosity about the Pixar logo alongside Disney's led us to research Pixar. We discovered that Steve Jobs played a key role in managing Pixar and, in 2006, became Disney's largest shareholder, earning billions despite being ousted from Apple.

Our research revealed Jobs as both an innovator and a masterful dealmaker. We hope you enjoy the insights we've gathered about Pixar.

Just before being ousted from Apple, Steve Jobs met Ed Catmull, who was running the computer division of George Lucas's film studio. This division specialized in hardware and software for rendering digital images and had a group of animators led by the talented executive John Lasseter, who was passionate about cartoons.

Steve Jobs was amazed by the division's operations and learned that George Lucas intended to sell it. Fascinated by computer graphics, Jobs decided to buy the division. In January 1986, he offered George Lucas $5 million and was prepared to invest another $5 million to capitalize the division as a standalone company. Jobs would own 70% of the company, with the remaining stock distributed among Ed Catmull and the thirty-eight other founding employees, including the receptionist. The division’s most important piece of hardware was the Pixar Image Computer, and this name was adopted for the new company: Pixar.

The digital animation business at Pixar, led by John Lasseter, initially focused on creating short animated films to showcase the company's hardware and software. When Steve Jobs joined the scene, he and Lasseter bonded over their shared passion for graphic design.

In 1988, when Pixar was running low on cash, Lasseter and his animation team approached Jobs for $300,000 to produce another short animated film. The story, inspired by Lasseter's love of classic toys, centered on a toy one-man band named Tinny who meets a baby that both charms and terrifies him. After escaping under the couch, Tinny encounters other frightened toys, but when the baby cries after hitting his head, Tinny bravely returns to cheer him up. This animated film was titled Tin Toy.

Convinced by Lasseter's passionate presentation, Jobs agreed to fund the project out of his own pocket. Tin Toy went on to win the 1988 Oscar Award for Best Animated Short Film, becoming the first computer-generated film to achieve this honor. This success marked a significant milestone for Pixar in the field of animation.

The film division team and the CEO at Disney were impressed by Tin Toy and saw potential in creating animated stories about toys that come alive and exhibit human emotions. They decided to try to poach John Lasseter to join Disney.

However, Lasseter, grateful for Steve Jobs' faith in him, believed that Pixar was the only place where he could revolutionize computer-generated animation. He expressed his loyalty, saying, “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.

Recognizing that they couldn’t beat Pixar, Disney decided to join forces with them. They sought ways to collaborate with Pixar to create a film about toys. The negotiations between Pixar and Disney took months.

Pixar, on the brink of bankruptcy, needed a deal with Disney far more than Disney needed one with Pixar. Steve Jobs knew Disney could finance the entire project, whereas Pixar could not. Burned by his past experience at Apple, Jobs was cautious and determined not to let the deal be one-sided in Disney's favor.

Disney insisted on acquiring the rights to Pixar’s proprietary 3D animation technology. Jobs refused and demanded that Pixar have part ownership of the film and its characters, along with shared control over video rights and sequels.

In May 1991, a deal was struck: Disney would own the picture and its characters outright, maintain creative control, and pay Pixar about 12.5% of the ticket revenues. Disney also had the option, but not the obligation, to work with Pixar on the next two films and the right to make sequels using the characters from the film, with or without Pixar’s involvement. Disney could also terminate the deal at any time by paying 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”.

Despite his great taste for design, Jobs did not interfere much with the creative process, allowing Lasseter and the other artists at Pixar to do their work. He focused on managing Pixar's relationship 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.

click to enlarge

The success of Toy Story raised important questions: Was it a Disney or a Pixar movie? Was Pixar merely an animation contractor helping Disney make movies, or was Disney merely a distributor and marketer helping Pixar roll out its films? The answer lay 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.

Steve Jobs understood that to negotiate with Disney on equal footing, Pixar needed financial strength, which an Initial Public Offering (IPO) could provide. Pixar's IPO took place a week after Toy Story's release and exceeded expectations, with the stock soaring from $14 to $45 and settling at $39. Jobs retained 80% of Pixar, valuing his shares at $1.2 billion.

This financial success meant Pixar no longer depended on Disney for movie financing, giving Jobs leverage. He demanded that Pixar co-brand with Disney and split the profits and costs equally. Disney and Pixar had a three-picture deal, with Toy Story being the first. Jobs threatened to find another studio if Disney disagreed.

After extensive negotiations, a new deal was reached in early 1997 for five films over ten years, with both companies sharing costs and profits equally. Jobs's primary role became deal-making, where his intensity was beneficial.

Pixar's next films under the new deal were highly successful:

A Bug’s Life (November 25, 1998) grossed $163 million domestically and $363 million worldwide.

Toy Story 2 (November 24, 1999) grossed $485 million worldwide.

Monsters, Inc. (November 2, 2001) grossed $525 million worldwide.

Finding Nemo (May 30, 2003) completed the five-film deal, with a total gross surpassing previous films.

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: 

1. The email was leaked to the Los Angeles Times and circulated online, this provoked Jobs to go ballistic
2. The assessment of Finding Nemo by the executives at Disney turned out to be wrong, very wrong.

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 were in the pipeline when Steve Jobs made Disney an offer designed to be rejected. Instead of the existing 50-50 revenue split, Jobs proposed that Pixar would own the films it made and the characters in them, merely paying Disney a 7.5% distribution fee. He also suggested shifting The Incredibles and Cars to this new distribution deal.

Disney held a significant advantage: even if Pixar didn’t renew the deal, Disney retained the rights to make sequels of Toy Story and other Pixar films, and it owned all the characters, from Woody to Nemo, just as it owned Mickey Mouse and Donald Duck.

Pixar had declined to make Toy Story 3 under the existing agreement, prompting Disney to plan and threaten to produce the sequel with its own animation studio.

Seven months after the release of Finding Nemo, Jobs publicly announced in January 2004 that he was cutting off negotiations with Disney. The announcement caused public outrage against Disney and internal conflict among Disney's top management.

Disney's animation division was in disarray, and their recent films, Treasure Planet and Brother Bear, had failed to uphold the Disney legacy or improve its financial standing.

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 CEO and immediately stepped in to do damage control. Iger, advocating the principle of “Make love not war,” acknowledged that Disney had been in conflict with Pixar and aimed to fix it, catching Steve Jobs' attention.

Iger conducted a financial analysis and discovered that Disney's animation division had lost money in the past decade before Pixar's involvement. He presented this analysis to the board of directors, along with the improved performance of the animation division with Pixar's support.

He explained that a hit animated film is a big wave for Disney, creating ripples across all its other businesses—from parade characters to music, parks, video games, TV, the Internet, and consumer products.

Iger presented the board with options: stick with the current animation management, which was not generating cash inflow; replace the management with new hires, despite not knowing whom to hire; or buy out Pixar. The challenge was that Iger didn’t know if Steve Jobs was willing to sell Pixar or what price he would ask.

The board authorized Iger to explore the possibility of buying Pixar, recognizing the potential decline of their animation division despite restructuring efforts.

Iger quickly approached Jobs and laid out all the options. Initially, they discussed a new distribution deal where Pixar would regain the rights to its films and characters in exchange for Disney getting an equity stake in Pixar, with Pixar paying Disney a distribution fee for future movies.

However, Iger realized this deal would make Pixar a competitor, even with Disney holding equity. So, he hinted at a bigger idea, saying, “I want you to know that I am really thinking out of the box on this,” leading to discussions about a potential acquisition.

Iger knew he needed the confidence of not only Jobs but also John Lasseter and Ed Catmull. He built rapport by visiting Lasseter’s house for dinner, staying past midnight talking, and taking Catmull out to dinner. He also visited Pixar Studios alone, meeting everyone one-on-one and discussing the pipeline of movies in production, such as Cars, Ratatouille, and WALL-E, which helped him envision Disney's success by acquiring Pixar.

The proposed deal was for Disney to purchase Pixar for $7.4 billion in stock, making Jobs Disney’s largest shareholder with approximately 7% of the company's stock.

According to the terms, Disney Animation would be placed under Pixar, with Lasseter and Catmull running the combined unit. Pixar would retain its independent identity, with its studio and headquarters remaining as they were.

Ed Catmull, Steve Jobs and John Lasseter
(from left to right)

Iger flew to Pixar’s headquarters to meet with Jobs and jointly announce the deal to the Pixar employees. Before the announcement, Jobs sat down alone with John Lasseter and Ed Catmull to ensure they truly accepted the deal. When both affirmed their support, the three hugged, and Jobs wept.

Everyone then gathered in the atrium, where Jobs announced, “Disney is buying Pixar.” As the deal was explained, the staff began to realize that, in many ways, it was a reverse acquisition. Catmull would become the head of Disney animation, and Lasseter would be its chief creative officer. Jobs then invited Iger to the center stage. The crowd broke into applause as Iger spoke about Pixar's unique culture and how crucial it was for Disney to nurture 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.

Dear audience, do you think we would have received such great animated movies if Steve Jobs hadn't been ousted from Apple and subsequently invested in Pixar, supporting its animation team? Share your thoughts in the comments below.

Thank You,

Happy Reading