A young, warm, no-nonsense producer named Darla Anderson ran the group. She was only too happy to share the ups and downs of producing computer-animated commercials. Darla was endearing, with an infectious smile and a quick wit. She came across as being in control, even in the midst of chaos around her. Darla educated me on the commercials business—how it was not only sporadic and difficult to predict but required almost impossibly tight budgets. A job for thirty seconds of animation might cost $125,000 and take a small team of three or four about three months to complete. That would be just enough to cover costs and would make a tiny profit. If the estimate was wrong, or if unforeseen problems cropped up, the profit was wiped out.
“Everyone I know in this business struggles to make ends meet,” Darla explained. “And many don’t make it. Clients trust Pixar because we have a great reputation and they love our work, but we’re also expensive. They like that we have the highest-quality animation, but our prices are often too high to win jobs.”
So higher prices were not in the offing, nor was a higher volume of work. It was a shame, Darla lamented.
“We do excellent work,” she said. “Everyone on the team puts their heart and soul in whatever we do. But the clients don’t always care about our quality.”
Pixar’s revenues from animated commercials were small, and profits almost nonexistent. The division would have to scale by a huge factor, and become much more profitable, to make a meaningful contribution to the company’s bottom line. Based on what I’d learned, this was all but impossible. Once again, Pixar was committing its talent to an endeavor that would never go anywhere. It might keep a small, talented group busy, but as a strategy for growing a company, animated commercials was another dead end. With little promise in RenderMan and animated commercials, the options for growing Pixar’s business were diminishing, and my level of worry was on the rise.
Next to probe: short films.
One of Pixar’s claims to fame was its beloved, award-winning short films. Known throughout the graphics and film industries as creatively and technically groundbreaking as well as brilliant, Pixar’s short films had literally ushered in the field of computer-animated entertainment. The first one produced at Pixar had been Luxo Jr., in 1986. I had first seen it during my interview with Ed.
Luxo Jr. is about two lamps, one small, one large. In the two-minute film, the small lamp is exuberantly playing with a ball that it accidentally deflates. Watching the film, it doesn’t take long to believe that the two computer-animated lamps represent a wise and knowing parent watching a gleeful child accidentally break his toy. In no time, we are in the world of both parent and child as they navigate the small disaster. The film had been nominated for an Academy Award for Best Animated Short Film.
“Luxo Jr. was the first time Pixar demonstrated how computer animation could successfully convey story, character, and emotion,” Ed told me. “It was a huge breakthrough, for Pixar and the industry, a jaw-dropping hit wherever we showed it.”
Luxo Jr. had been the first of a series of beloved Pixar short films. It had been followed by Red’s Dream in 1987, Tin Toy in 1988, and Knick Knack in 1989. Tin Toy won the Academy Award for Best Animated Short Film in what had been one of the high points of Pixar’s history to date.
There was just one problem: animated short films had no commercial value. They were either done purely as a labor of love, or in Pixar’s case as a way to test and develop its technologies and story development process. They were shown at trade shows, film festivals, and sometimes at the beginning of feature films in movie theaters, but they didn’t make a dime. And in fact, they were very expensive to make. I didn’t even need to analyze the economics of the animated short film market. There was no market.
It seemed that the more I looked for possible profit centers, the less I found. Sometimes a doctor has to give a patient a grievous diagnosis, but I didn’t think I had been hired to tell Steve Jobs that his company was a hopeless case. He wanted positive answers, and I wasn’t finding any.
“Pixar’s an enigma,” I shared with Hillary one night after dinner. “I don’t think I’ve ever seen so much talent under one roof. Their efforts have been nothing short of heroic, but every business it has tried has either failed or has such limited potential it’s hardly worth the effort. It’s just running in place.”
“If nothing’s worked, how did it survive this long?” Hillary wondered.
“I suppose it comes down to Steve’s stubbornness,” I replied. “I don’t know any other investor who’d have stuck it out this long. But I know even he’s had his doubts. He’s got nearly fifty million in Pixar and very little to show for it.”
“Have you looked at everything?”
“I’ve still got more to learn about Toy Story.”
“I’d keep going,” Hillary said, trying to be encouraging. “Maybe you’ll find better news there.”
But in my exploration of Planet Pixar, somehow I felt I was now about to enter its murkiest terrain.
4
Starving Artist
My previous experiences had prepared me for understanding the aspects of Pixar’s business that I had examined so far. Nothing I had done, however, prepared me for understanding Toy Story’s business potential. Getting my head around that was no small task. Pixar had never released a computer-animated feature film. No one had. There was no way to predict the market for it. No way to gauge the public’s taste for ninety minutes of computer animation. It didn’t help that I knew nothing about the film business.
The obvious place to start was Pixar’s original production agreement with Disney, signed almost four years earlier on September 6, 1991. The agreement would at least tell me what Pixar might earn on Toy Story, and the terms that would apply to future films that would fall under the same agreement.
The agreement itself was surprisingly short: only twelve and a half pages. I’d seen seventy-page agreements covering less complicated matters. Though brief, however, it was impenetrable, written in indecipherable Hollywood jargon. One clause said, “AGR shall be defined, computed, accounted for and paid in accordance with WDC’s Exhibits GRP and NP and the Riders attached thereto.” What did any of that mean?
To decipher the agreement, I contacted Sam Fischer, Pixar’s lawyer for negotiating that agreement. Sam was the newest partner in one of Hollywood’s elite entertainment law firms, Ziffren, Brittenham, Branca & Fischer. I visited Sam at his firm’s spacious and tasteful offices in an upscale Los Angeles business district not too far from Beverly Hills. Sam was sharply dressed, with a short beard and glasses. He was immediately warm, welcoming, and eager to help. He listened attentively and made me feel like what I said mattered. He came across as very natural and at ease in the arcane world of Hollywood and entertainment law.
Sam spent a couple of hours walking me through the details of the terms, exhibits, and riders of Pixar’s contract with Disney. We started with the agreement’s term. It was a three-picture agreement that would end six months after the release of the last of the three pictures. That sounded simple enough, but how long would it be exactly?
The first picture, Toy Story, was targeted for release in November 1995, just over four years after the agreement was signed. The second picture, as yet unnamed, had barely been started. It was ostensibly a story about bugs trying to save an ant colony. Everything I had learned so far about Pixar told me it would take at least the same amount of time to produce the second picture as it did to produce Toy Story. That meant the release of the second picture would be four years later, around 1999. The third picture would then take another four years after that because Pixar had the resources to work on only one film at a time. That would be November 2003. This meant that on our present track, the overall production agreement would end six months later, in May 2004. It was now May 1995. In sum, Pixar would potentially be living under the terms of this agreement for nine more years, a very, very long time in the world of start-ups. I started to grow nervous.
Ano
ther provision relating to the term of the agreement had also caught my eye. Tacked onto the end of a paragraph, it said that until the end of the agreement, Pixar would not submit to any other company any new film ideas it had presented to Disney, even if Disney had rejected these ideas.
“This can’t be right,” I suggested to Sam. “If Disney rejects Pixar’s film ideas in 1995 and doesn’t even have the slightest interest in those ideas, Pixar can’t even talk to another studio about them for ten years. But we have to share film ideas with potential distribution partners years before films based on those ideas are released. This means film ideas we might love are completely off the table just because Disney doesn’t like them.”
“That is exactly what it means,” Sam confirmed. “Disney wants Pixar focused on films for Disney, not other studios. That’s why it’s willing to put so much money into funding Pixar’s films.”
All right, I thought. The clause that prohibits Pixar from sharing ideas with other studios applied only to ideas Pixar presented to Disney and Disney rejected. But perhaps there was a loophole?
“That leaves us free to develop ideas that we don’t present to Disney, right? In that case the clause would not apply and Pixar would be free to discuss those ideas with another distribution partner whenever it wanted.”
“No, Pixar can’t do that either,” explained Sam.
He pointed to another paragraph called the “Exclusivity” clause. It said that the services of Pixar’s animation division, including Pixar’s key creative talent, would be exclusive to Disney during the term of the agreement.
I was aghast.
“This means John Lasseter and Pixar’s entire team of animation and story artists can work only for Disney for the next ten years. We can’t develop any film ideas, not one, for distribution by other studios.”
“That’s true,” Sam replied. “This kind of clause is standard for unproven talent.”
“But Pixar is not like a music group or TV actor; it’s an entire company,” I protested. “We could hire a thousand new people for our animation division and under this agreement they would have to spend all their time working for Disney. How can an entire company be tied up like that?”
“I hear where you’re coming from,” Sam said, “but look at it from Disney’s side. When they entered this agreement, Pixar had never made a film. This was a risky bet on a totally unproven type of animation and an unproven director. They wanted to make sure Pixar was strictly focused on the films Disney was funding.”
Sam felt Pixar had been fortunate to get a deal that funded all its production costs when Pixar had no track record, and that these exclusivity provisions were the price Pixar had to pay for Disney to take that risk.
But regardless of the reasons for these provisions, their combined effect was devastating. They meant that for the term of the agreement, which was likely to last from 1991 to 2004, Pixar could do film, TV, or video projects only for Disney and could not even discuss, think about, or work on projects with someone else. And since a film’s development time averaged four years, that meant Pixar wouldn’t be able to complete a fourth film under new terms until 2008, thirteen years in the future. I was stupefied at how long Pixar’s hands were shackled.
Okay, I thought to myself, perhaps these severe limitations might, just might, be palatable if Pixar stood to make a great financial return on its films.
The terms by which Disney compensated Pixar took me the longest to understand. They were steeped in the peculiar world of Hollywood accounting. They began by saying that Disney would pay the production costs of each film, up to certain limits. Pixar would then receive a percentage of the film’s revenues. Seven tiers of compensation were defined.
Sam slowly walked me through the provisions by which revenues from our films made their way to Pixar. As he did so, the nervousness I had felt before escalated into pure dread. Pixar did indeed have a share of the profits on its films, but by the time all the calculations were made, and Disney’s costs and fees taken off the top, Pixar’s ultimate share would be tiny, under 10 percent.
To help me understand the reality of these provisions, I decided to see how Pixar would have fared if we had produced one of Disney’s most recent film successes, the acclaimed Beauty and the Beast, released in 1991. Beauty and the Beast was the third-highest-grossing animated film of all time, behind two more recent Disney releases, Aladdin and The Lion King. The film had earned $146 million in the domestic box office, and $200 million in the foreign box office. This was at least three or four times the revenues of an average animated film.
Under Pixar’s agreement with Disney, I estimated that if we had made Beauty and the Beast for Disney, our share of the profits would have been around $17 million. Because it takes four years to make a film, this would amount to a little over $4 million of profits per year. I also guessed Disney would likely have made ten times that much. These were just educated guesses, because I didn’t have access to the details of Beauty and the Beast’s financial performance, but even if I was off by 50 percent, it wouldn’t change the impact on Pixar very much.
Four million dollars of profits per year may sound like a lot, but it really isn’t close to enough to build a growing company, especially when those profits require success at the almost impossibly high levels of Beauty and the Beast. If Pixar’s films earned $100 million in the domestic box office, a level still considered a smash hit but far less than Beauty and the Beast, Pixar’s share of the profits under the agreement would be all but nonexistent.
The impact of all these contractual provisions was crushing: until Pixar could release a film outside of the Disney contract, the most we could expect to earn from our first three films would be a few million dollars a year—and even then, only if those films ranked with Disney’s most profitable films ever. No one would invest in a company that had to perform at those levels in order to eke out a small profit.
“Sam, did no one at Pixar understand these calculations?”
“I’m quite sure Steve did,” Sam told me. “We walked him through all the terms and what they meant.”
I couldn’t wrap my head around it. If Steve understood what Sam was telling me, why didn’t he have someone run the numbers to see what it meant for Pixar as a company? Moreover, even if these profit provisions were standard for live-action film, Pixar was an animated filmmaker. It takes a year or two to make a live-action film, four or five to make an animated film. This meant that profits per year for an animated filmmaker would be much less. These numbers didn’t make sense for animation. I just didn’t understand why these differences were not taken into account.
As the reality of these provisions sank in, I began to feel a hopelessness I don’t think I’d felt anytime in my career. And even worse, I still didn’t fully understand the Disney contract. There were important provisions in the agreement covering sequels that I needed to dissect.
The agreement said that Pixar would have an option to make sequels of its own films only under limited conditions that included making the original film, on which the sequel would be based, within its agreed-upon budget, and agreeing on terms for the sequel that fit within Disney’s standard parameters. If these conditions were unmet, Disney was free to make sequels of Pixar’s films without any involvement by Pixar. Disney could literally take Woody and Buzz, characters lovingly crafted over years at Pixar, and make its own film with them. Once again, I asked Sam about these provisions.
“Sam,” I asserted, “the only reason Disney would want to make a sequel is if the original film is a hit. These provisions say that unless Pixar meets all the conditions specified, Disney could do whatever it wants with Pixar’s characters.”
“Yes, but that’s not unusual,” Sam explained. “Disney is investing tens of millions of dollars to create these characters. They want to make sure that investment will yield returns, including making sequels. I’m sure they would prefer Pixar to make the sequels, but they need to be able to move forward if Pixar cannot.
”
“So we’d have to go to John Lasseter, Toy Story’s director, for whom Woody and Buzz are like children, and tell him, ‘Thanks for the work; Disney will take over from here.’ ”
“I hope it wouldn’t come to that,” Sam replied. “Presumably Disney would prefer that John and his team make the sequels.”
Which might be fine, except for one other issue: sequels wouldn’t count as one of the three original films Pixar owed Disney under the agreement. If we made a sequel, it would be tacked onto the existing agreement, potentially extending it several more years.
“We lose either way,” I told Sam. “Either Disney makes the sequel and Pixar loses control over its creations, or Pixar makes the sequel and the terms of this agreement continue.”
I was left feeling very frustrated. I couldn’t blame Sam; he was simply educating me in the ways of Hollywood deal making. In that world, he felt Pixar had fared quite well in this negotiation, especially for a company with no track record. He told me it was rare for Disney to give any profit share at all in an animated film, and that it had done so only because Pixar had invested so much in technology. Nevertheless, the size of that profit share was small, too small for building a robust company, and Sam acknowledged that Steve had yielded on how that profit share was calculated in ways that favored Disney. All told, the overall impact on turning Pixar into a substantial business, which was my focus, was devastating.
I read and reread the provisions of the Disney agreement, looking, trying to find some gap, some loophole, something missing. There was nothing. Fifty years of Hollywood lawyering had made it all crystal clear: Pixar could work only for Disney. Disney had to approve the films Pixar made. It chose whether to make sequels of those films. It had creative control over the films. It prohibited Pixar from working with anyone else. It kept the lion’s share of the profits.
To Pixar and Beyond Page 5