To Pixar and Beyond

by Lawrence Levy

  I could also sense something else at work. Our search for a creative leader was lackluster, and it wasn’t just because we couldn’t find anyone. John’s pleas had struck a chord.

  Steve and I had a chance to talk it over one weekend.

  “Isn’t that the way we should be making great films?” Steve said. “From the heart of the filmmakers? Why would we want anyone else to interfere with that? The focus should be on creative vision, not deadlines and budgets.”

  “Disney’s made some great films with executive oversight,” I pointed out. “We all love Aladdin and The Lion King.”

  “But did they have a John Lasseter?” Steve mused.

  This was a great question. Disney certainly had animation directors with stellar reputations, but John and his young team seemed to be cut from different cloth. They were virtually inventing how to tell stories in the entirely new medium of computer animation.

  “And we’re aiming for something different,” Steve added. “Truly original films. Stories that have never been seen or heard of before.”

  At this point, my job as chief financial officer should have been to remind Steve about the huge risks of cost overruns, to cite cases of films notorious for budget excesses and box office disappointments, and to recount the dangers of creative teams running amok. By this time I was aware of examples of all of them. I didn’t bring them up, though. That wasn’t why I came to Pixar. I came because I had believed in Ed, John, and Pixar’s team. Now, I found myself surprised to find Hollywood so risk averse. I loved the idea that filmmaking could use a dose of Silicon Valley bravado.

  Moreover, John was not saying, “Bet on me.” He was saying, “Bet on our team; bet on our process.” He would be the first to say how much that process relied on the relentless critique of each other’s work and the willingness to put aside ego just enough to hear that critique. When I added it all up, every start-up impulse within me said this was the time to bet on our team. That would be the Silicon Valley way of filmmaking. No hedging. Bet on innovation. Bet on greatness. Take the shot to change the world.

  “We don’t have to do this the Hollywood way,” I said. “I’m completely on board with that.”

  Ceding creative control to John and the story team wasn’t the rational decision, though. A more traditional approach would be to say, “Don’t break the mold; don’t be so naive that you think you can do things better than they’re done in Hollywood.” I also wondered what Wall Street would think when we told them the three members of Pixar’s Office of the President would have no say over creative decisions.

  The next week, when Steve was at Pixar, he grabbed Ed and me to discuss it all one last time. From my conversations with Ed, I knew he was behind this approach already.

  “So we trust John and the team,” Steve said. “We bet on them.”

  “Yes,” said Ed.

  “It’s the right call,” I added.

  This decision meant that from that point on, all creative decisions for Pixar’s films would be made by John, Andrew, Pete, Joe, and their growing team. Steve, Ed, and I would have no input into the content of Pixar’s films, no approvals over the creative process. If John and his team wanted to make a silent film about a robot falling in love, we would not interfere. If they wanted to change the main character of a film halfway into production, we would support it. We would sit on the sidelines and watch Pixar’s creative team work, helping them, supporting them, nurturing them in whatever ways we could, but not intervening with their creative choices.

  Although I was fully behind the decision, as chief financial officer I still took a big gulp. It was a very risky move because it meant we could lose control over our production budgets and deadlines. In effect, we were valuing the upside of creative freedom over the downside of budgets and deadlines running off the rails due to creative mistakes.

  Now, some might say it was easy to cede creative control when you have someone like John Lasseter on your team. But in my experience it is never easy. And it was certainly never easy for Pixar. Every one of Pixar’s films went through a series of hair-raising creative crises that repeatedly tested our decision. Creative excellence is a dance on the precipice of failure, a battle against the allure of safety. There are no shortcuts, no formulas, no well-worn paths to victory. It tests you constantly.

  But I felt really proud of our decision. We had chosen to truly empower talent, to send a signal to Pixar’s creative leaders that we trusted them. I cannot say this approach would be right for every company. But I can say that whether you’re making bottled water, mobile games, or computer chips, the decision of who has control over the creative elements is among the most important any team will make. Fear and ego conspire to rein in creativity, and it is easy to allow creative inspiration to take a back seat to safety. It is one thing to cite the adage “Story is king.” It is another thing entirely to live by it.

  19

  Anatomy of a Deal

  As the calendar turned to 1996, Pixar had organized itself for not one but two productions. A Bug’s Life was in full production, and work had begun on Toy Story 2, a sequel to Toy Story that was slated to bypass theatrical release and go directly to the home video market. Disney had enjoyed great success in recent years with direct-to-home-video releases like The Return of Jafar, a sequel to Aladdin. Because these sequels would not have the benefit of widespread theatrical distribution, they had to be made at far less cost than the original film in order to make financial sense.

  I was on record as being skeptical about Pixar’s ability to reduce its film production costs enough to justify a direct-to-video release. We were running into similar challenges trying our hand at producing a Toy Story video game. The game was great, but the production costs were prohibitively high. Disney had honed ways to make less expensive sequels in traditional animation, but Pixar did not have a method to make lower-cost computer animation.

  Another problem with Toy Story 2 was that it would extend the Disney contract because it would not count as one of the three original films we had to deliver under that contract. Here I had been looking for every angle to get out of that agreement, and this was going to make it last longer. There was a lot of momentum to make a sequel, however. Pixar’s creative and production teams thought they could find ways to make it quicker and at less cost than a theatrical release, and it would at least have the benefit of helping with the carrying cost issue—paying for production employees who would otherwise have no film to work on. On the theory that it would take much less time than a theatrical film, we decided to go for it.

  At the same time, Steve and I were turning our sights toward another of our plan’s four pillars: increasing our share of film profits. This hinged on the terms of our film distribution agreement, presently with Disney but in the future potentially with any of the major studios: Disney, Universal, Fox, Paramount, Warner Brothers, or Columbia.

  For two generations, these studios controlled the business of film distribution. Through their extensive networks, only they could deliver films into movie theaters in every corner of the world. In the United States alone a big movie would open in 2,500 to 3,000 theaters. For this kind of reach, Pixar would have to strike an agreement with one of the major studios, and that agreement would spell out Pixar’s share of the profits. It would also describe the terms for one of our other pillars: branding. If our films were to be distributed under the Pixar brand, whatever studio was distributing our films would have to agree.

  Our choices were: either we rode out our existing contract with Disney and then entered a new contract with Disney or any of the other major studios, or we renegotiated our contract with Disney now. If we rode out the existing contract, we would have maximum flexibility at its conclusion, but that could take up to eight years. In short, it all came down to evaluating which option was better for Pixar: renegotiating now with Disney, if that was even an option, or entering a new agreement later with Disney or another studio. Much like the IPO, this topic began to occupy
a lot of my time with Steve.

  “If we’re going to make a move to renegotiate with Disney,” I suggested one night in early January 1996, “we should start thinking seriously about it right away, while Toy Story’s success is still fresh.”

  “Or maybe we’re better off waiting,” Steve said, “until we’re free to negotiate with other studios and have more flexibility to pick our best distribution partner.”

  Neither of us was sure whether or when to approach Disney to try to change our deal. We understood that if we did it now, we might get better terms even for our next two films, but if we waited, we might get even better terms later, when we were free of that agreement. We went back and forth, often switching sides in the discussion. Making the move now made sense only if we thought we could negotiate a deal that would be strong enough to justify giving up our options in the future. But how would we know?

  There is no formula for easily making this type of assessment. In business relationships, or virtually in any relationships for that matter, there are two factors that determine one’s capacity to effect change: leverage and negotiation.

  Leverage means bargaining power. It is the muscle you have to bring about change in your favor. The more leverage, the better your chances to get what you want. In poker, leverage would be the equivalent of the actual strength of your hand. Negotiation, in contrast, describes the tactics you employ to extract the best terms you can, given your leverage. It is about how you play the hand. Courage, fear, tenacity, trustworthiness, creativity, calm, the willingness to walk away, to behave irrationally—these all play into negotiation. Leverage is an assessment of bargaining strength; negotiation is how you put that bargaining strength to work for you. A good negotiator can make more out of the same leverage than a not-so-good one.

  In Pixar’s first agreement with Disney, Pixar had fared poorly in terms of both leverage and negotiation. Pixar had not had much leverage because it had just closed down its hardware business, was struggling to remain afloat, and had never made a feature film. In terms of negotiation, I felt Steve had been caught in a rare weak moment. This was more than four years ago, though. Steve liked to cite the adage “Fool me once, shame on you; fool me twice, shame on me.” What had occurred four years earlier was not going to happen again.

  We needed to understand how much leverage we had in order to negotiate a good deal with Disney now. If we approached Disney and didn’t have the muscle to back us up, we would be politely, or maybe not so politely, dismissed out of hand.

  One Friday in late January 1996, when Steve was at Pixar, we stepped into the small, windowless conference room near my office to discuss where we thought Pixar stood in relation to Disney. As we often did, we wrote down the main points of discussion on a whiteboard. There was one in the front of the room, with a wooden casing around it. We had discussed all of these points before, but it was helpful to see them in one place. Steve took a whiteboard pen and made two columns: Disney and Pixar. Under the Disney column, he would write the points that gave Disney leverage. Under the Pixar column, he would write the points that favored Pixar.

  Point one for Disney: NO OBLIGATION TO CHANGE CONTRACT

  “We know there’s nothing that can force Disney to negotiate with us,” Steve said. “They have a three-picture deal and they can stick to that contract simply because they want to.”

  “They have us tied up for two more films,” I added. “They keep most of the profits, and we can’t talk to any other studios until we’re done. It’s a great deal for them. Why would they change it?”

  Steve added a second point in the Disney column: CAN INVEST IN COMPUTER ANIMATION THEMSELVES

  The impact of Toy Story had made Disney examine its own potential in computer animation. They might easily assume that they could hire the best talent they could find and build up their own capability.

  “If Disney makes a substantial investment in computer animation,” Steve said, “they may have no interest in extending their agreement with us.”

  “Disney has plenty of resources to do it,” I added. “Plus they also have time on their side. Their deal with us could buoy them for a few years while they build up their own capacity in computer animation. We’re basically giving them the lead time they need.”

  This was a potentially perfect strategy for Disney. They could use Pixar to tide them over until they no longer needed us, reaping most of the profits along the way. Then they’d have their own computer animation capability ready to go and could easily jettison Pixar.

  “Another point for the Disney column,” I added, “is that Disney will undoubtedly think it offers Pixar more than any other studio can offer, given its expertise in animated films.”

  Steve wrote in the Disney column: OTHER PIXAR OPTIONS INFERIOR

  Disney was clearly better at distributing animated feature films than anyone else. It had extraordinary merchandising capability for churning out toys, clothes, and other branded items; it had the very best theme parks for showcasing the films and their characters; and the imprint of the Disney brand on an animated film gave it a cachet that no other studio could provide. Where else could Pixar find that kind of distribution clout? Disney might well conclude that Pixar needed Disney far more than Disney needed Pixar, and they might be right. It would certainly diminish our leverage with them.

  Next Steve added to the Disney column: PIXAR ONLY ONE HIT

  “We’ve had only one hit,” Steve said. “Before we prove we can repeat it, Disney might be reluctant to change our deal.”

  This was the one-hit-wonder problem. One hit did not make for a track record.

  “Anything else in Disney’s favor?” Steve asked.

  “We’ve talked about this,” I said, “but maybe Eisner’s interest in animation is waning. He just bet big by buying ABC, which includes ESPN. Animation could be on its way to becoming a sideshow for him.”

  Michael Eisner was Disney’s CEO. He had a reputation for being mercurial and hard to read. The notion that he might not care all that much about animation seemed a bit far-fetched, but it was possible he was more interested in television and other media outlets than animation. He had just spent $19 billion to buy ABC. Maybe it spelled a new direction for Disney.

  Steve wrote in the Disney column: ANIMATION MIGHT BE LOSING PRIORITY

  The Disney column now read:

  DISNEY

  NO OBLIGATION TO CHANGE CONTRACT

  CAN INVEST IN COMPUTER ANIMATION THEMSELVES

  OTHER PIXAR OPTIONS INFERIOR

  PIXAR ONLY ONE HIT

  ANIMATION MIGHT BE LOSING PRIORITY

  Any one of these factors wouldn’t bode all that well for Pixar. Collectively, they added up to a bleak outlook for Pixar’s leverage. Some might say Disney had all the bargaining power, that Pixar was just a fly on the side of the elephant. Disney could let us hang around for as long as we were useful, then swat us away in an instant.

  There was another column, though.

  The first thing Steve wrote in the Pixar column was: IPO $ TO PAY FOR PRODUCTIONS

  “We can now pay for our own productions,” Steve said. “Disney doesn’t have to pay for all the costs.”

  This was why we had done the IPO. If money talked, we now had quite a bit of it. We anticipated that production costs for Pixar’s next film might approach $50 million, and production costs for future films more still. If we offered to put up half of it, this would surely get Disney’s attention.

  Then I added a second point: TOY STORY SUCCESS

  Steve wrote it in the Pixar column.

  “No one expected Toy Story to be so successful,” I said. “Least of all Disney.”

  Toy Story was still playing in theaters and had surpassed $170 million in the domestic box office, vastly exceeding Disney’s expectations. Much to their surprise, the quaint experiment in computer animation had gone mainstream. The world might not know that Pixar made the entire film, but Disney knew, and it would make it harder for them to brush off Pixar an
d computer animation as a sideshow.

  “By itself it doesn’t compel Disney to renegotiate,” I added, “but it would make them more inclined to keep Pixar happy.”

  Skip Brittenham, the Hollywood super-lawyer now on Pixar’s board of directors, had told us how success talks in Hollywood. If that was true, Pixar’s star was shining a lot brighter these days. That would surely give us some leverage.

  “There’s also the DreamWorks factor,” I added.

  DreamWorks was founded in 1994 after Jeffrey Katzenberg’s well-publicized resignation from the Walt Disney Company over CEO Michael Eisner’s decision not to promote him to president of the company. As chairman of the Walt Disney Studios division, Katzenberg had overseen the revival of its animation business. Together with its two other founders, Steven Spielberg and David Geffen, DreamWorks’s vision was to produce live-action films and a brand-new animation studio that would compete directly with Disney.

  The implications of DreamWorks for Pixar were twofold. First, DreamWorks Animation was a potential competitor to Pixar. Second, and more important to this discussion, DreamWorks’s competitive threat to Disney might make Disney less willing to alienate Pixar. Better for Disney to keep Pixar in its camp than risk not one but two serious competitors in animation when, for the preceding sixty years, it had none.

  “Katzenberg would like nothing more than to trump Disney in animation,” Steve said. “He’s a thorn in Disney’s side. If Eisner loses Pixar to another studio, and DreamWorks succeeds in animation, Eisner could go down as the Disney CEO who lost animation.”

  Steve wrote in the Pixar column: DREAMWORKS THREAT TO DISNEY