To Pixar and Beyond

by Lawrence Levy

  Then Steve made another entry in the Pixar column: BETTER DEAL IF WAIT

  “If we don’t do a deal with Disney now,” Steve said, “we’ll get a better deal later when this contract is over. We’ll then have multiple studios bidding for Pixar’s business. We might even be able to keep eighty or even ninety percent of the profits, much more than we’re likely to get from Disney now.”

  “We can’t count on that,” I countered. “If our next films underperform, maybe we get worse terms later. This point can cut for or against us. Also, if we renegotiate with Disney now, we might get better terms right now, even for A Bug’s Life.”

  “But I think there’s a premium we have to pay for a partnership with Disney,” Steve added, “because of their experience in animation compared to the other major studios. If we go with another studio later, we can get even better terms.”

  I agreed that Pixar would pay a premium to be in business with Disney, probably in the form of Disney keeping more of the profits than we might have to relinquish to another studio. I also felt that any deal with another studio would depend on our track record then. There was no need to press the point now, though.

  The chart now looked like this:

  DISNEY

  PIXAR

  NO OBLIGATION TO CHANGE CONTRACT

  IPO $ TO PAY FOR PRODUCTIONS

  CAN INVEST IN COMPUTER ANIMATION THEMSELVES

  TOY STORY SUCCESS

  OTHER PIXAR OPTIONS INFERIOR

  DREAMWORKS THREAT TO DISNEY

  PIXAR ONLY ONE HIT

  BETTER DEAL IF WAIT

  ANIMATION MIGHT BE LOSING PRIORITY

  It was difficult to assess how this would shake out. Both of us had leverage. But did Pixar have enough to force a negotiation now, and on favorable terms? I felt we had enough to find out. Just one of our points might be sufficient to bring Disney to the negotiation table. And we were not afraid to wait if it didn’t materialize now.

  “I think we should go for it,” I said to Steve.

  “It would be better if Disney approached us,” Steve replied. “We just had this huge hit. Wouldn’t Eisner want to keep us happy?”

  Steve was right. It would be much better if Disney made the first move. We didn’t want to appear weak, or needy. I was nervous about Pixar making the first move too.

  “It would be better,” I agreed. “But everything we’ve learned suggests that’s not how Eisner works. He keeps things close to the vest. Even if Disney did want to sweeten the deal for Pixar, there’s nothing compelling them to do it now. Maybe we make the move while the glow of Toy Story still shines brightly.”

  “But if they say no,” Steve added, “it might poison the relationship, making the next two films harder to make.”

  “I hope it wouldn’t affect the film productions,” I said. “We have to keep the business and creative relationships separate.”

  “Let’s look at what we want if we do approach them,” Steve continued.

  This was another topic Steve and I discussed a lot. If we approached Disney to renegotiate our deal, we had to be crystal-clear about what we wanted. This was about our negotiating strategy.

  The natural tendency in negotiations is to engage in positional bargaining. This means taking a position knowing that it is not a final position, and holding in reserve a backup position. The danger of positional bargaining is that it forces you to think about backup positions, which weakens your conviction in your original position. It’s like negotiating against yourself. Plan A may be your optimal outcome, but inwardly you have already convinced yourself to settle on Plan B.

  Both Steve and I had a strong distaste for approaching negotiation this way. We preferred to develop our positions without thinking through a backup. Once Steve decided what he wanted in a negotiation, he developed something akin to a religious conviction about it. In his mind, if he didn’t get what he wanted, nothing else would take its place, so he’d walk away. This made Steve an incredibly strong negotiator. He would dig into his positions with a fierce, almost unbreakable grip. The risk, however, was in so overreaching that we would end up with nothing. If we were not going to have a backup plan, we had to be very careful about knowing what we wanted.

  Steve changed the whiteboard pen for a new color, and in a different part of the board he wrote: NEW DEAL

  Below that he wrote: 1. CREATIVE CONTROL

  “We need control over our creative destiny,” Steve asserted. “We’ve proven we can make a great film. We can’t go on indefinitely beholden to Disney to approve our creative choices.”

  Unless you were Steven Spielberg, Ron Howard, or another celebrity director, it was almost unheard of for an independent production company whose films were being funded by someone else to have creative control. That usually belonged to whoever was putting up the money. We had already decided that John and his team would have creative control within Pixar. Now we wanted to diminish any outside influence over them.

  “It will help that we are willing to fund our films,” I added, “but Disney will be nervous about this so long as they’re putting up even some of the money.”

  Nevertheless, we both agreed that creative control was essential to Pixar’s future.

  “Another must-have is favorable release windows,” I said.

  It mattered a lot when films were released, especially big-budget family films. There were two optimal dates: early summer and Thanksgiving, which runs into Christmas. No other time periods came close in terms of box office opportunity. Any contract we entered, with Disney or anyone else, would have to guarantee that Pixar films enjoyed optimal film release windows. Steve wrote on the whiteboard: 2. FAVORABLE RELEASE WINDOWS

  “Disney has to treat Pixar film releases like its own,” Steve added to emphasize that point.

  Then he wrote: 3. TRUE 50/50 PROFIT SHARE

  This was a big one. All of our financial projections told us that we had to keep at least 50 percent of the profits from our films.

  “A true fifty-fifty,” Steve said. “Calculated fairly.”

  “Not using ancient Hollywood accounting terms that favor the studios,” I added.

  “That leaves the branding issue,” I went on. “Pixar’s films under Pixar’s name.”

  We had discussed this endlessly. Steve wrote: 4. PIXAR BRAND

  “We made the films,” Steve said. “The world needs to know that.”

  That was the fourth pillar of Pixar’s business plan.

  “Anything else?” Steve asked.

  “Of the big issues, no,” I said. “These are the ones we stick to, no matter what.”

  Now the whiteboard had a column that said:

  NEW DEAL

  CREATIVE CONTROL

  FAVORABLE RELEASE WINDOWS

  TRUE 50/50 PROFIT SHARE

  PIXAR BRAND

  We understood there would be many other issues in any renegotiation, but on these four matters our plan was to hold firm. If we gave up on any of these, Pixar’s future would be jeopardized too much. These were our deal breakers.

  “I think we’re ready,” I said.

  “I’ll call Eisner,” Steve replied. “I’ll tell him what we have in mind.”

  I felt sure this was the right move. It was a little scary, though. If Eisner shut the door on us because he thought we were overreaching, our chances of improving our financial situation in the near or even the medium term would evaporate. But we had thought this through every which way. It was time to set in motion a renegotiation with Disney. We could not predict what would happen next, but one thing was clear: when Steve picked up the phone to call Eisner, there was a lot at stake for Pixar.

  20

  Poker Time

  Steve called Eisner in early February 1996 to open talks for a possible renegotiation with Disney. He explained that we were willing to use our newly raised funds to pay for all or part of the production costs of our films, and he summarized the four provisions that meant the most to us. Eisner responded by saying he wa
s interested in the discussion. He said he was open to those four provisions, and that he would want to extend our existing agreement by adding more films to it, which we had expected. The conversation had gone well. Eisner said he would get back to us soon.

  We then organized ourselves for a negotiation with Disney. I was to oversee all the details and the contract drafting, much as I had done with Pixar’s IPO, while Steve would interface with Eisner to resolve the impasses. We assembled a team to make sure we left nothing to chance. We wanted to draft the contract ourselves, and we retained Gary Moore to do it. Gary had done work for Steve at NeXT and represented Pixar in our patent licensing deals with Microsoft and Silicon Graphics. Although, like us, Gary had no experience in entertainment law, he was a superb lawyer and an expert draftsman.

  For coverage on the entertainment side, we had Sam Fischer, our entertainment lawyer. Sam and I had forged a great relationship, and I saw him as a trusted partner as we navigated the world of Hollywood. We added a couple of Hollywood experts to help us with the accounting provisions we would have to draft to give us a true share of the profits. We also had Skip Brittenham, who was on Pixar’s board of directors. He would help with the big issues and could step in with Michael Eisner if we needed it. This was the A-team of Hollywood contract negotiations. We were not going to falter for lack of legal muscle.

  What happened next, however, surprised us. In a word, it was—nothing.

  After Steve’s initial call with Michael Eisner, we expected some sort of rapid follow-up. Someone from Disney to call Steve, or me, to get the ball rolling. But no one did. It was as if the conversation never happened. A couple of weeks went by, and Steve placed a call to Eisner to follow up on their conversation. Eisner repeated his interest in a deal and said he would get things going. More weeks went by. Still nothing.

  This pattern repeated one more time, after which Steve began to feel frustrated. He felt Eisner was toying with him, saying one thing on the phone but doing nothing in actuality. We understood that for Disney, this was one deal among many, maybe not even a very important one, but that didn’t explain why Disney’s actions belied what Eisner had told Steve on the phone. Eventually, Steve began to take it personally.

  “Maybe Eisner just doesn’t like me,” he said one day in the spring of 1996. “He tells me one thing and never follows through. I don’t get it.”

  Steve’s reputation preceded him, and maybe Eisner didn’t trust him. They were both accustomed to being in control. Maybe they rubbed each other the wrong way. But I wasn’t convinced that was the reason Disney was failing to follow up. I had checked with Sam Fischer, who also reminded me that Eisner had a lot on his plate with integrating ABC into Disney. That merger, which had been completed just a couple of months earlier, had been the second-largest merger in US history, after the $25 billion acquisition of RJR Nabisco Inc. by the private equity firm Kohlberg Kravis Roberts in 1989. Sam thought it was a bit odd that nothing had come out of Eisner’s office, but he didn’t feel it was due to friction between Eisner and Jobs.

  “I’m not sure it’s personal,” I told Steve. “We’re asking a lot of Disney here, terms they’ve probably never given anyone. I doubt anyone’s got a fifty-fifty profit share, especially in animation, and certainly not the branding arrangement we’re asking for. There are many reasons why Eisner might be taking his time, not the least of which is the recent ABC acquisition.”

  I felt patience was the key. Disney hadn’t said no. But Steve was not accustomed to being brushed off, and he didn’t like it. The more time went by, the more his frustration grew.

  Finally, one day in exasperation, he exclaimed to me, “I don’t know if I can work like this!”

  For a potential deal to fall through because the leaders on either side could not get along would not be unprecedented, but I didn’t think this was the time to call off our effort to initiate a negotiation, at least not yet. I had met Eisner briefly myself a few months earlier, before Toy Story came out. In one of my trips to Hollywood with Steve, we stopped by to say hello. The meeting had been a friendly visit to touch base on the upcoming release. I had been quite impressed with Eisner. He was tall and slender, in his mid-fifties. He wore a suit that seemed to fit a bit large and entered the room with a casual lope. He came across like a favorite uncle, engaging and charismatic. We had chatted casually about the film business and the marketing for Toy Story’s release.

  Remembering that meeting, I said to Steve, “Everyone we know has said the same thing about Eisner. He keeps his cards very close to the chest. There’s no evidence that this is personal.”

  Skip Brittenham had offered to intervene a number of times, although we hadn’t taken him up because we didn’t want to appear desperate. But now, enough time had passed.

  “How about taking up Skip’s offer?” I said. “He could find out what’s going on, with a light touch. Why not give him a call?”

  Steve spoke to Skip, who said he would float some feelers and see what he could learn. He wouldn’t make a call exclusively for this purpose but would wait until he had some other business at Disney that gave him a natural opening.

  Skip came back to us a couple of weeks later, now around May. Steve and I talked to him on a conference call.

  “I think they’re interested in talking,” Skip said. “They do want a partnership with Pixar. They just want to get their head around the terms. We’re asking for a lot. We just have to be patient.”

  Skip was right. A short while after that call we heard the first signal that Disney finally wanted to talk. Eisner called Steve and told him he wanted to move things forward. He wasn’t prepared to say he agreed with all the points Steve had asked for, but he remained open to them. Eisner proposed moving the negotiation along to see where they stood on all the details. He had assigned a young executive by the name of Rob Moore to oversee the process. Moore was executive vice president and CFO of Walt Disney Pictures and Television.

  But Steve remained skeptical.

  “Maybe we shouldn’t proceed without final agreement on the main issues,” he complained.

  I didn’t disagree with that. Sometimes it’s better to have clarity up-front. But I felt it was important to maintain the momentum.

  “Eisner knows where you stand,” I suggested. “And we’ll be sure to reiterate that with Moore. I think we should let this move forward to see where it goes.”

  Steve agreed but wanted to be sure we didn’t take our eyes off the main issues.

  When I first spoke to Rob Moore over the phone, my expectations were not all that high. Disney’s contract negotiators had a reputation for being unyielding. They were seen in the industry as deal killers more than deal makers. I assumed Moore would be one of them.

  But Moore was nothing like what I expected. He was engaging, up-front, and had a good sense of humor. He had an ease about him that I liked; it almost caught me off guard. It did not take long for us to plunge into the details of the deal. We spelled it all out, first in summaries and then in actual contract drafts. Moore proved to be immensely constructive. In a company that was known for being ruled directly from the top, he was not afraid to think for himself, and he was willing to take chances to get things done.

  This deal was immensely complicated, requiring a whole slew of provisions on Hollywood accounting, film release windows, merchandising, production approvals, and many others. There were many places it could go wrong.

  And sure enough, in November of 1996, after six months of effort, we hit a wall.

  On the issue of branding, we had requested that Pixar have equal billing to Disney. We knew that Disney would never allow Pixar to have 100 percent of the brand credit. And in truth, of all the studios, we didn’t mind co-branding with Disney because they brought enormous credibility to animation. But we insisted that it be exactly equal billing.

  Eisner was balking because he felt Disney would be doing too much to build Pixar into an entertainment powerhouse and that one day the deal would end
and Disney might have created its worst enemy. In his view, it was enough for Pixar to receive credit for producing the film, but no equal billing with Disney and no branding on the toys and merchandise. That was his line in the sand.

  I could see Eisner’s concern. If computer animation took off, little Pixar might actually become a threat to Disney one day. But we had no backup position for this point. We had to decide whether to walk away from the deal or to accept something less on the branding issue. Disney had agreed in principle to all our other demands, with details that still needed to be worked out. On this one issue, Pixar’s fate hung in the balance.

  If we walked away now, we would give up all our other gains and suffer under the terms of the existing agreement for years, taking our chances that we could enter a better deal with Disney or another studio later. If we went forward with the deal, our profits would quadruple now, but we wouldn’t have the brand credit we wanted. Everyone needed to weigh in: Steve, Ed, John, and me. Whatever we did, we had to do it together. We met one day in our usual conference room at Pixar.

  John had been completely immersed in making A Bug’s Life and supervising Toy Story 2. A meeting like this was rare. He well understood that if we wanted him there, something big was afoot.

  “I’ve spoken to each of you,” Steve began. “The negotiation with Disney has not been easy. We’ve made a lot of progress, but we’ve hit the wall on the branding issue. I’m not happy about it. Pixar needs to be a brand. These are our films. We deserve full credit for making them.”

  Steve had not the slightest air of conciliation. He spoke like this was an affront.

  “Why won’t they let us do it?” John asked.

  “Eisner’s afraid of building Pixar into the next great brand in animation,” I chimed in.

  “The principle just isn’t fair,” Ed said. “We make the films and they get the credit.”