To Pixar and Beyond

by Lawrence Levy

  “No luck,” Sarah replied. “I’ve talked to my old accounting firm, who checked in with their offices in LA, but they don’t have one.”

  Another dead end. All we needed was a chart of numbers that all the studios had, and we couldn’t get it.

  “I have one more idea,” I said. “How about calling Sam Fischer, our Hollywood lawyer? Ask if he knows where we can get this.”

  A couple of hours later, Sarah came over to my office.

  “Good news, and not so good,” she said. “I talked to Sam. Believe it or not, they have a film model. Only they don’t give it out. They use it only internally, to advise their clients. He said they’d be happy to run the numbers for us but can’t give us the model itself.”

  “Wow!” I thought to myself. “These financial models must be etched in gold plate. Why are they so secret?”

  “That’s not going to do it,” I said. “We need our own model. Let me give Sam a try.”

  Sam explained that his firm’s film projection model was confidential because it helped them counsel their clients and they didn’t want others to have access to it. He also said that his model was only for live-action film and that animation would be different.

  “I totally understand why you don’t give out your model,” I said, almost pleading, “but I’m really hitting a wall on this one. Every place I turn all I hear is that these film models are confidential, but Pixar has to have its own in order to move forward.”

  “I’m sympathetic,” said Sam, “but we’ve never shared the information in our model.”

  But the truth was, I didn’t want that particular information for live-action films. I wanted to build a model for animation, which would be different. I just needed a start.

  I had an idea.

  “Sam, you mentioned your model is only for live action. How about if Pixar agrees to use it only for animation? We’ll evolve it. We won’t need to use your original data because we’ll tailor it to animation. Then we’ll share the results with you and in the end, you’ll have an animation model if you need it.”

  “Where will you get the data for animation?” Sam asked.

  “Disney said they would help us; they just can’t give us their model. With your model and their help, I think we can do it.”

  Sam thought for a moment.

  “You know, I can go along with that,” he said.

  I felt like jumping through the phone and giving him a hug. I never thought I would be so thrilled over a spreadsheet. Sam’s reticence to share the model was well founded. He had stretched himself to help us out. I felt truly grateful.

  Sam’s firm sent up the numbers. It was our first glimpse at the way films made money. At last, we could see how much studios kept from the box office revenues; what were reasonable assumptions for film marketing costs; when films were released in video, TV, and other markets; how much they made; the impact on profits of film production budgets and profit-sharing arrangements; as well as other details without which we’d never fully understand the business. To tailor the model to animation, we took up Disney’s offer to answer our questions about how the business of animated feature films worked.

  Before long we cobbled together our first model of how an animated feature film performed financially. It was rough and crude, at best. But it was ours. Over time we would learn how to perfect it. Right now, it was good enough to give us a start. Sarah and I were elated. It was one of those small, quiet victories that gave us far more satisfaction than one might expect. It may have seemed trivial to others, but it made us feel we could finally start talking the talk of the film business. There was a chance that one day we might even seem like we knew what we were doing.

  As the numbers crystallized, however, I began to see why Hal Vogel had characterized raising capital through the stock markets as a torturous obstacle course for a film company. It was virtually impossible to make the numbers work in a way that generated the kind of smooth, even profit growth that investors liked. Worse, the numbers had tremendous risk in them. Just a small change in box office performance could wipe out the entire profitability of a film. There was also another issue that was unique to animation, a pesky detail that went under the title of “carrying costs.”

  Carrying costs are the costs of paying employees when they are not working on films. When animation finished on Toy Story, for example, Pixar still had to pay its animators even if it had nothing for them to do. I was learning that carrying costs could drain a little company like Pixar of all profitability. It was a problem that had dated all the way back to the time of Walt Disney, and one of the reasons it was so difficult to go into animation. This problem did not exist in live-action film because the crew making the film, from the producer and director to the film’s stars, to the cameramen, extras, and everyone else, comes together for the sole purpose of making the film. They are paid only during the time they are involved. As soon as that ends, they all disperse and there is no further obligation to pay them.

  Animation studios don’t work this way. The artists and filmmakers are studio employees. They remain at the studio often for their entire careers. They are paid whether they are making a film or not. The cost of continuing to pay studio employees when the studio is not in the heat of producing a film could grow enormous. If Pixar didn’t have well-planned solutions to keeping its people productive between films, even a hit film could be drained of its profits by the overall carrying costs.

  “Steve,” I said one night when we were on the phone, “I am worried about this carrying cost issue. The more we grow Pixar, the higher the carrying cost if we’re not working on a film. We could literally have dozens of people sitting around with nothing to do and we’d still have to pay them.”

  “It’s a pipeline issue,” Steve said. “We have to have enough work in the pipeline to keep people busy.”

  “That isn’t easy,” I said. “It depends on story development, which is notoriously unpredictable. It would be better if we had more options than just a story pipeline.”

  We took it up with Ed.

  “It’s a big concern, I agree,” Ed said. “But I think there are things we can do. We always have technical challenges to work on, problems like animated skin, water, wind, hair, human beings. We can move small teams of people to work on these. We also want to continue to make short films, as a way to develop talent, especially directors.”

  “So when film production is quiet, we basically do more research and development so that our future films are better?” said Steve.

  “Yes,” Ed said. “We obviously have to try to time our film production pipeline so that our employees remain busy. That’s the main goal. But we have other options if that doesn’t work.”

  “But that’ll mess up our business plan,” I said. “We still have to pay everyone. We’re shifting the cost from filmmaking to research and development, but we’re still incurring the cost. It would be much better if we could put people to work on products that could generate revenues.”

  “Pam’s been thinking about video games,” Ed said. “We have some people here interested in making games based on our films. We might be able to shift some people to that.”

  There were, at least, some options, but this carrying cost issue had the potential to be the Achilles heel that, even if our films did well, could eat away at Pixar’s business viability.

  It was now approaching the end of June 1995. The release of Toy Story was a few months off. I finally understood the business possibilities in animation. But even if I could make a case that an independent animated feature film company could work in theory, in Pixar’s case we would remain for years under the vise grip of the Disney agreement, which gave Disney most of the profits. We also had to deal with the carrying cost issue.

  My instincts said that animation as a stand-alone business, without anything to diversify its risks, was going to be very, very difficult to make stick with investors. Many would see it as a fool’s errand. How could an upstart company with no
experience in Hollywood credibly claim it would build an animated feature film studio that would rival Disney’s? No studio had pulled it off in two generations, and Disney had long ago diversified.

  Yet the pressure on me from Steve continued to intensify. He wanted to know when we’d take Pixar public. It felt like he thought going public was the endgame, that all would be magically okay if only we could do it. I didn’t see it that way. The pressures that Pixar would feel once we went public would be monumental. The whole world would be watching for every single slip-up. Every misstep would be magnified. It could just as easily backfire as it could launch Pixar into a better future.

  Moreover, if Pixar raised its flag as an entertainment company, we would take steps that would be hard to reverse. Things like: stop selling RenderMan software; shut down the commercials group; announce to the world, and particularly to Wall Street, that we were an entertainment company; assign more and more resources to filmmaking. Once we stepped into that world, there would be no turning back. No second chance. Pixar had to be ready for it, financially, strategically, psychologically. With the pressures of trying to finish Toy Story, I was not sure we were.

  But I had examined this from every angle I could imagine. Fully committing Pixar to becoming an entertainment company focused on animated feature films was our only shot. Steve, Ed, and I were all on board with it. This was our mountain to climb, no matter how steep or far away the summit. With much weighing on my mind, it was time to begin the ascent.

  7

  Few Options

  My long daily commutes to and from Pixar were worse than I’d imagined. The section on Interstate 80 between the 580 turnoff to Point Richmond and the Bay Bridge, which runs past Berkeley toward the east, was one of the worst traffic corridors in the area, maybe even in the country. The traffic backed up for miles every day as commuters, visitors, and tourists all drove to and from the Bay Bridge. On a good day the drive one way took me an hour and a quarter. On a bad day, almost two hours.

  I often sat in that traffic and thought to myself how this landscape must have looked before we covered it with concrete. Spectacular, was my conclusion. I imagined the first humans to set eyes on this terrain, surely among the most beautiful and fertile on the planet.

  To the east of Interstate 80 were the wooded, grass-filled, low peaks of the Berkeley Hills, exquisite rolling hills that spread for miles and enjoyed an almost perfectly temperate climate. To the west, and the view from those Berkeley Hills, was the San Francisco Bay, that spectacular body of water formed by two peninsulas, one from the north, ending at Sausalito and the Golden Gate National Recreation Area, the other from the south, ending in San Francisco. Between those two peninsulas was a small channel that linked the San Francisco Bay and the Pacific Ocean. The only way across that body of rough and frigid water was a boat or, for the past sixty years, the Golden Gate Bridge.

  I imagined what life in this vicinity must have been like long before the area became a bastion for higher learning and innovation. The Ohlone Tribe had lived in these regions for several thousand years. They had subsisted largely through hunting and gathering, building villages along the shores of the bay, traveling and fishing along the shallow waters in hand-crafted canoes, and moving inland in the spring to gather newly growing plants, nuts, and other edibles. The natural richness of the area must have been stunning to behold: tall grasses in tree-dotted meadows, herds of elk and antelope grazing, bald eagles overhead, abundant marshes and sea life near the shores of the bay. Ironically, like Pixar, story also mattered to the Ohlone. They lived by a rich mythology, full of spirit guides and shamanic rituals. Men spoke to the rising sun each morning; women sang in unison as they ground acorns and crafted exquisite baskets.3

  I wondered whether, for all our modern conveniences, we really had it better than the Ohlone. We had done more to uproot the land in two hundred years than the Ohlone did in two thousand, decimating a way of life that seemed to have plenty going for it. Were we better off now, alone in our cars, waiting for the red brake lights of the car in front of us to turn off so we could edge a few feet forward?

  Ever since modern man uprooted the Ohlone, we had been on an unrelenting march of technological progress, led in large measure by the start-ups that now occupied this terrain. The traditions that sustained a culture for two thousand years had been replaced by the relentless pace of innovation. Innovation had become our railroad into the future, ushering in sweeping changes to how and where we lived, what we did, and what we thought. Any company that could not keep up with the pace of change quickly became an artifact.

  I had long been fascinated by why Silicon Valley existed at all. My work with new businesses left me mystified as to why giant companies with enormous resources and seasoned management teams allowed tiny start-ups to eat into their markets. Why hadn’t IBM, which led the computing world for decades, or Xerox, which invented the graphical user interface, not themselves become Microsoft and Apple? Years earlier, why hadn’t the railroads become airlines? More important to my present task, today, why wouldn’t Disney become Pixar? If Pixar succeeded at all, wouldn’t Disney, the king of the animation hill for more than two generations, want to claim computer animation for itself? The answer was that it definitely would. What would stop it?

  The answer, I believed, had to do with one thing: culture.

  Culture is the invisible force on which innovation depends. We like to pin the mantle of invention on individuals, not circumstances. We anoint heroes and tell their stories. Yet innovation is a collective undertaking. It is as much the product of circumstance as of genius. There is a spirit to it. Preserving that culture and spirit at Pixar was very, very important.

  Indeed, I had been brought into Pixar as a change agent. My job was to shake up the company and usher it into an era of commercial success and viability that it had never experienced. How could I know that the changes I was sent to make wouldn’t end up destroying the culture on which Pixar depended to innovate?

  Pixar was innovating on not just one but two fronts: storytelling and computer animation. The culture on which this work depended was very delicate. The storytelling part of that culture seemed especially fickle. In contrast, with engineering projects, you could set a goal and you were likely to see some result, a prototype, a beta, an early version that you could look at and iterate. That didn’t make engineering easy, but at least a good engineering manager could find the road map. Storytelling was different. There was no road map. I was learning how it involved much more groping in the dark. The culture had to allow for that exploration. As we laid out a plan for Pixar to grow, we couldn’t include in it a line that said, “Make three great stories a year.” We had to preserve whatever it was about Pixar that enabled great stories to happen.

  Corporations are a lot like living creatures. They have personalities, emotions, and habits. The person at the top might seem to be calling all the shots but is often imprisoned in a culture he or she can do little to change. As corporations succeed, they generally become more conservative. The flames of creativity on which a company is built can easily cool as pressures to perform mount. Success brings something to defend, something to lose. Fear can easily trump courage.

  In my days as a lawyer representing start-ups doing deals with large corporations, I had observed how the giant East Coast technology companies like IBM and Digital Equipment Corporation that once ruled the high-tech world had evolved into hierarchical, formal cultures. Orders came from the top. Lines of communication were rigid. Coloring outside the lines was shunned. Their organizations became politicized. The most progressive, innovative contributors did not necessarily rise to the top. Excessive hierarchy and bureaucracy were like a death blow to innovation. I knew that at Pixar, we had to avoid this.

  Now I was being exposed for the first time to Hollywood culture. In our efforts to understand the entertainment industry, I had visited executives at Disney, Universal Studios, and other film companies; talked to Hollywood agents,
lawyers, and accountants; and read as much as I could on the field. What I found surprised me. I had expected to see the creative, trend-setting, glamorous veneer that defined the image of Hollywood. Instead, I found that Hollywood could be even more defensive and fearful over changing the status quo than the huge tech companies with which I was familiar. Fear and power politics seemed to have a strong grip on Hollywood. The studios wanted to own things: artists, movies, TV, music, whatever it may be. Their instinct was to tie them up, to control them. I had seen this firsthand as I came to understand the terms of Pixar’s 1991 deal with Disney.

  What this indicated, surprisingly to me, was that the hotbed of creativity that was the supposed hallmark of Hollywood was not all it was cracked up to be. It was much harder than I thought for the studios to take big risks and to innovate. They seemed to trade more on certainty and copycatting than risk. This meant that if Pixar were to raise its flag as an entertainment company, it would have to avoid the Hollywood habits that stifled innovation. If Pixar traded its familial and informal culture for one based on control and celebrity, it could lose the freshness and spirit on which it depended. Maybe my grumbling about Pixar’s lonely outpost in Point Richmond, California, was misplaced. Perhaps it was a good thing, making it easier for Pixar to forge its own way.

  I could see many challenges to preserving Pixar’s culture. But there was one challenge that was rearing its head above all the others. It struck at the heart of Silicon Valley’s innovation culture, and it was a festering wound at Pixar that was in danger of becoming life-threatening. As I pulled into Pixar’s parking lot after that long commute through the Bay Area and Berkeley, this problem was rarely far from my mind. It involved a little device that had become the glue that held Silicon Valley together: the stock option.

  Start-ups were bound together by the opportunity for their founders and employees to share the spoils of success. This was one of the main incentives for joining a high-risk venture versus a more established company. The vehicle for participating in a start-up’s success was the stock option, a paper promise that had become the currency of Silicon Valley. Stock options turned Silicon Valley into the modern-day equivalent of the gold rush.