To Pixar and Beyond

by Lawrence Levy

  But taking a company public was a gargantuan task, exceedingly difficult to pull off. Most start-ups just ran out of money before they ever got to it. Steve’s willingness to fund Pixar for close to ten years went beyond all the norms for keeping a start-up alive. By Silicon Valley standards, Pixar should have closed its doors years earlier. Now Steve was envisioning an endpoint, and he couldn’t get there fast enough. Rushing wouldn’t help us, though. We needed a crystal-clear vision for what Pixar was. That vision was not just important to taking Pixar public; it was the strategic direction that would guide the company for years. But so far, we didn’t have one.

  One of our challenges in developing that vision was that we were looking at a business Steve and I knew nothing about. We had no experience in the entertainment field. We had to learn it. On this front, Steve was all in. He may have been impatient about beginning the process of taking Pixar public, but he knew we had a lot to figure out first. We quickly threw ourselves into the challenge of learning the entertainment business, sharing what we learned, and piece by piece putting together a picture of what it was all about.

  I began with reading all I could about the Disney company. Some of the parallels between Disney and Pixar were striking.

  Walt Disney had long had an interest in newspaper cartoons. After returning from service as an ambulance driver in France in World War I, he encountered animated cartoons for the first time and quickly fell in love with the field. Ironically, he feared that he had entered the field too late, that there was no growth opportunity left in it. He ended up creating that opportunity by pushing the field into new territory, both creatively and technologically, just as Pixar was doing now.

  In 1928 Disney released a short black-and-white cartoon that changed the course of animation. Called Steamboat Willie, it ushered in breakthroughs on two fronts. It introduced the world to the most fully formed cartoon personality audiences had ever seen: Mickey Mouse. It was also the first cartoon to use synchronized sound, meaning that the sounds were timed to the action, making the overall audience experience far more immersive than ever before.

  After the success of Mickey Mouse, Disney set his sights on the first animated feature film. It took him until 1937 to release Snow White and the Seven Dwarfs, a virtuoso accomplishment that ushered in many more breakthroughs in story, character, color, sound, and the way animation displayed depth. The film also introduced the world to the Seven Dwarfs and quickly sealed their place as icons of American culture.

  Other parallels between Disney and Pixar were less inspiring. Like Pixar, Disney had struggled financially for years. Walt Disney had bet it all on Snow White and the Seven Dwarfs, including mortgaging his house and a risky bank loan. The success of the film paid off financially, but it wasn’t long before Disney was struggling once again. Animation was proving to be a very fickle business, and soon Disney was diversifying.

  In 1953, he started a film distribution company, Buena Vista Distribution; in 1954, he went into television, with the acclaimed Disneyland television show that first appeared on ABC; in 1955, he opened Disneyland, a daring adventure to re-envision the theme park experience; he also went into live-action films, culminating with the breakthrough Mary Poppins in 1964. The enormous degree to which Disney had diversified made the idea of a pure animation company seem even more doubtful. If the undisputed king of the animation world hadn’t pulled it off, what was the likelihood that anyone else could?

  Maybe the answer was for Pixar to diversify as well, just in the way Disney had. But two of Disney’s businesses seemed out of the question for Pixar right off the bat. It would cost billions to open a theme park, and Disney had the rights to use Pixar’s characters in its parks, so we wouldn’t even be able to use our own characters. A film distribution business was also out of the question. Film distribution had been locked up by the major studios for decades, and we didn’t even have the rights to distribute our own films. But what about live-action film? That might be worth exploring. Which is what led Steve and me to a meeting in the offices of Joe Roth one day.

  Joe Roth was an A-list Hollywood executive and film producer. He had been chairman of 20th Century Fox and a year earlier had become chairman of Walt Disney Studios. All of Disney’s live-action film business went through him. Steve and I felt fortunate to arrange a meeting with him. Our goal was to understand the business of live-action film so we could determine if Pixar should go into it.

  Arriving at Joe Roth’s office felt like we were entering the inner sanctum of Temple Hollywood. It was located at the Team Disney corporate headquarters in Burbank, California, built just a few years earlier, an imposing building on Disney’s Hollywood lot. Towering above us on the building’s facade were giant statues of the Seven Dwarfs. We stopped and ogled them on our way into the building, like kids going to Disneyland.

  Beyond the giant dwarfs, the building emanated a quiet somberness. Few people were around; security guards kept a close watch. We were directed to Joe’s office, in the executive suite. His office was large, plush, and imposing, a beautiful wooden desk on one end, by the window, with a couch at the opposite end where he invited us to sit.

  Joe was immediately warm and friendly. He was a few years our senior, soft-spoken, casually but well dressed, with a warm and gracious smile and graying hair. We began by describing what we were up to at Pixar. After a few minutes, a phone rang in the corner of the room behind Joe’s desk.

  “Excuse me,” Joe said, “I’m terribly sorry. I need to take that call, but it won’t take long. Please stay and be comfortable here.”

  Joe spent a few minutes on the phone by the window at the other end of his office. Then he returned to us.

  “So sorry to have to take that call,” he said. “It was Robert Redford. He’s not easy to reach. There won’t be any more interruptions.”

  As soon as we left the building, Steve and I tried to keep our cool, but we both had one thing on our minds.

  “Robert Redford!” Steve exclaimed. “Butch Cassidy! The Sting! I wouldn’t have kept him waiting either. Wow!”

  “I know,” I said. “That’s about all I could think about the rest of the meeting!”

  “Me too,” said Steve.

  We were starstruck! It would be a few years yet before Steve had access to every celebrity in the world, but in this moment, we were more like teenagers glimpsing stars on the red carpet.

  In that meeting we had also received our first lesson on live-action filmmaking.

  “Think of it as a portfolio business,” Joe had explained. “Each year a studio earmarks funds for a slate of films: low budget, medium budget, and big budget. Then we do the same with marketing, allocating amounts to market each film. We release the slate, hoping that we create enough hits to make up for the ones that don’t perform.”

  “How many films are in the slate?” Steve asked.

  “It depends,” Joe said. “There’s no magic number. It could be as few as a half a dozen, as many as fifteen or twenty. It depends on the year, the size of the studio, the sources of financing, and other factors.”

  “How do you know which might be the big films?” Steve asked.

  “We don’t know,” Joe confessed. “We like to think we do but we really don’t. It’s hard to predict the films that will break out. Sometimes you know a big star will assure a big opening, but even that doesn’t tell you how the film will ultimately perform.”

  “So it’s as much a financing strategy as a creative strategy?” I asked.

  “That’s right,” Joe said. “Of course, we try to make the best films we can creatively, but it’s all about assembling the right slate.”

  This was all new to us. Disney and the other studios were spreading money across a slate of films, hoping that some would break out and become hits, to make up for the ones that didn’t.

  “Filmmaking is not a great business,” Joe went on. “It’s hard to succeed by releasing new films. The value often comes in the library.”

  �
�How does that work?” Steve asked.

  “Once a film has enjoyed its theatrical run, both here and abroad, it becomes part of a studio’s film library. If it’s a good film, it stands to be watched again and again over the years. New technologies like home video make that even more likely. The major studios have built up enormous film libraries that continue to provide value to their film businesses.”

  Another revelation for us. I wanted to know how studios valued those libraries.

  “It’s not an exact science,” Joe explained, “but look at the value of the major Hollywood studios and you’ll see their library of films is really significant.”

  Steve and I continued the discussion on the way home. Steve had rented a private plane to fly us to Los Angeles and back. It was a small jet that could seat around six people in comfortable leather seats. We had flown commercial before but Steve didn’t like the airport hassle. We sat across from each other, my first time in a private jet. Joe had been immensely open and helpful, so much so that our meeting turned out to be the start of a relationship that would culminate a few years later with him joining Pixar’s board of directors.

  “The big studios are really about providing capital and distribution,” Steve said. “They don’t focus on making one single great product. It’s a different business model completely.”

  “In that model,” I added, “even if a film does just okay in its theatrical release, it may have value for years in a film library. That’s the opposite of tech products that become obsolete quickly.

  “It means that if we go into live-action film,” I went on, “we can’t do it a little. We’d have to make a slate of films every year, hope for some hits, and build a library.”

  “But animation is different,” Steve added. “Even Disney makes only one or two animated films a year. Why couldn’t we apply the same model to animation? If Pixar pours itself into making one animated film a hit, couldn’t we do the same for a live-action film?”

  The discussion continued as we contemplated how Pixar might enter the live-action film business, whether it would be able to attract the right talent for filmmaking, need an office in Hollywood, and other details. As we considered it, I couldn’t help but think that there I was on a private jet, talking with Steve Jobs about whether Pixar ought to go into the live-action film business. For a brief moment, I felt like a Hollywood mogul. We were not studio executives yet, but we were having fun learning about it.

  A few days later, we took the topic up with Ed. We sat in his office and discussed whether we could make live-action films the same way we made animated films.

  “It’s about the way the films are made,” Ed said. “In animation there is much more control. We iterate on the story over and over again, through storyboards, character modeling, animation tests, and other processes. If the story or a character isn’t working, we can change it. Live action doesn’t offer that flexibility. Once the film has been shot, you’re locked into using the footage you have.

  “This is why so many films don’t quite hit the mark,” Ed went on. “It’s not that the filmmakers want to make films that fall short; it’s that they have to make the film from the footage they shot, and sometimes it’s not what they need.”

  “Wouldn’t Pixar’s approach to storyboarding help with making a live-action film?” Steve asked.

  “It would help,” said Ed, “but it wouldn’t be a guarantee. In animation we still have the chance to iterate on a story even when we’re into production of a film. That’s a lot harder in live action when all the sets have been dismantled and the cast and crew have moved on.”

  On our way home, in Steve’s car, we continued the discussion.

  “I’m not sure if going into live-action film gives us any advantages,” I said. “In animation we put all our eggs in one basket, and we watch it very closely. In live action we spread out the eggs over many baskets, hoping a few of them will hatch. Both businesses are risky. I’m not sure one balances or helps the other.”

  “It might even be the opposite,” Steve said. “If we have to release a slate of live-action films, what’s to stop the ones that flop from damaging our reputation in animation?”

  “That’s true,” I agreed. “Walt Disney only went into live-action film after he was established in animation.”

  “I hate the idea of Pixar releasing products that might not be great,” Steve added emphatically.

  I felt the same way. Silicon Valley was built around changing the world with breakthrough products. It wasn’t that releasing a slate of live-action films was a bad strategy; it just was not the way we thought about things. And besides, it looked like both animated films and live-action films were very risky businesses. One would not offset the risk of the other.

  From that point on, it felt like we were talking ourselves out of going into live-action film rather than evaluating it as a serious option. There was no part of Steve that bought into the idea of making products that might not all have a shot at greatness. Live-action film was quickly losing lift as the risk-reducing strategy we had hoped it would be.

  More and more, committing Pixar to animated entertainment alone was looming as Pixar’s only option. I’d been fighting it ever since I’d come to Pixar because every stone I had turned over revealed just how hard that path would be. I’d thought it when I’d learned how onerous the Disney agreement was, and then again when I learned the risks of releasing blockbuster films, and then again when I learned there had pretty much never been an independent, animated feature film company without other businesses to diversify the risks.

  I had never had the notion that I was being hired to build a pure entertainment company. But it was becoming clearer that I needed to understand what that meant. Steve was keeping up the pressure on taking Pixar public, and I didn’t have the numbers to support it. That would take more than a few meetings in Hollywood. If this were to be a serious strategy, I would have to understand the economics of the business in detail. Where should I begin?

  I started at the library.

  At the Mitchell Park Library in Palo Alto, I discovered a book on the entertainment industry, Hal Vogel’s Entertainment Industry Economics. First published in 1986, this book had become somewhat of an industry reference, cataloging in detail all the financial and economic principles driving the entertainment business. It was a dry read, populated with charts, formulas, and dense economic analysis. I read it cover to cover, and many sections I read repeatedly.

  The book’s section on filmed entertainment began with this ominous assessment:

  Many people imagine that nothing could be more fun and potentially more lucrative than making movies. After all, in its first four years, Star Wars returned profits of over $150 million on an initial investment of $11 million. Nonetheless, ego gratification rather than money may often be the only return on an investment in film. As in other endeavors, what you see is not always what you get. In fact, of any ten major theatrical films produced, on the average, six or seven may be broadly characterized as unprofitable and one might break even.1

  Ouch! Ego gratification the only return on investment? Two out of ten films profitable? This was worse than baseball batting averages. Vogel’s analysis made it clear that the likelihood of a hit was small, the likelihood of a blockbuster tiny.

  It got worse.

  Later, in the book’s discussion of filmed entertainment, Vogel became even more foreboding:

  As historical experience has shown, common stock–based offerings do not, on the average, stand out as a particularly easy method of raising production money for movies. Unless speculative fervor in the stock market is running high, movie-company start-ups usually encounter a long, torturous, and expensive obstacle course. . . .

  Strictly from the stock market investor’s viewpoint, experience has shown that most of the small initial common-stock movie offerings have provided at least as many investment nightmares as tangible returns.2

  Vogel was talking about taking a film com
pany public, exactly what we were hoping to accomplish. A “long, torturous, and expensive obstacle course” and “investment nightmares” were not the ideal scenario, to put it mildly. Steve was pressing for a public offering, and here Vogel was holding up a big, bright, neon warning sign. Now I worried even more if this was the right direction for Pixar, especially when we were struggling to finish our first film. I understood that a public offering was the path, and probably the only one, to raise the funds we would need to build Pixar. But a failed public offering would be a gigantic, possibly even fatal, blow for the company. I was caught between Steve’s drive to go public and business realities that looked awful.

  Vogel’s book gave me a tremendous overview of the industry. I still needed something more granular, however, something that would show me the blow-by-blow detail of where every dollar went that was associated with Pixar’s films. We were still missing a detailed financial projection of how our films would make money. Without that information, we could not make headway in understanding and plotting the real business possibilities. It was like looking for buried treasure without a map.

  By now it was June of 1995; Toy Story was coming out in November, Steve was antsy to start thinking about a public offering, and I still didn’t have the basic information I needed to develop the numbers.

  By this time, I had hired a new controller for Pixar, Sarah Staff. It was Sarah who so kindly picked me up on her way back and forth to Pixar while my leg was healing. She was my right-hand person in all the accounting and financial planning aspects of Pixar’s business. Sarah was smart, thoughtful, and endearingly humble. She was polished and poised, tall, with straight blond hair, and consummately professional. Her office was in a corner of Pixar reserved for finance and administration. I was over there often.

  “Sarah,” I asked her one morning, “have you had any luck finding a film model we can use to build our projections?”