Ed almost never seemed ruffled. But he was miffed over this. The issue of brand credit had become a matter of principle.
“If the next two films succeed, Disney takes the credit,” I said. “If they don’t, Eisner blames Pixar and cuts us loose.”
“Why can’t they just do what is right?” John said. “We’re creating these stories and characters here, in this building. Not down there. All we want is the credit for doing that. Why would they want to take that from us?”
For John this was fully emotional, and it was easy to see why. He had spent years developing these characters. They were like children. Pixar’s children. I was quite sure he didn’t feel like seeing another poster that said “Disney’s Toy Story” with Pixar in small print.
“Let’s consider the other side of this,” I said. “If we walk away, we give up a fifty-fifty profit share on our next two films. If those films are blockbusters, that could be worth fifty million dollars for each of them.”
The new agreement would supersede the old one, giving the next two films the benefit of all the new terms.
“But what’s it worth to turn Pixar into a brand?” Steve asked. “That could be worth as much or more later, when we are free of Disney and own all the rights to our films. Look how audiences trust the Disney brand. They go to films and theme parks on the strength of it. If Pixar had a brand like that, we might make a lot more later than we give up now.”
“But we’d be stuck with the old agreement in the short term,” I said.
“Don’t you think that’s worth it for the long term?” Steve asked.
“I’m not certain,” I said. “We’d be betting on ourselves, that’s for sure, but the short-term price is very high.”
“They’ve known about this from the very beginning of the negotiation,” Steve added. “If this was such a problem, they should have told us long ago. We make these stories and characters. They’re ours. How can we let anyone else take credit?”
Emotions were really running high over this. There was no spirit of compromise in the room.
“Our only move is to end the negotiation,” I said. “We’d have to walk away. No going back.”
“I don’t want to force the decision,” Steve said, “but I don’t think we’ll feel good about ourselves if we yield on this. We’ll be miserable when we see Disney taking the brand credit all over again. We’ll have our self-respect if we walk away, and I think we’ll get better terms later anyway.”
“I’m in too,” John said. “We’ll get through the next two films, and then we’ll have all the flexibility we want.”
“Me too,” Ed said. “We’ve been through a lot to get here. We’ll make it work.”
Coming into this meeting, I had been on the fence on this issue. I knew this was one of our walk-away issues, but I needed to feel sure that we weren’t allowing our pride to stand in the way. Principles were important, but we couldn’t afford to be cavalier. After all, Pixar had exactly one film to its name. We had secured all the economic terms we had wanted from Disney, and we would be walking away merely because Disney, the only company in two generations of animated entertainment to become a household brand, didn’t want to share the billing equally. I also wasn’t sure Pixar’s stockholders would care about the branding if Pixar quadrupled its share of film profits.
But there are moments when principle matters, and this was looking like one of them. There was no way we were going to feel great if we ceded to Disney on the branding issue. And at Pixar it was vital to feel really good about what we were doing. It went to the core of our culture. How could we make great films while seething over someone else taking too much credit? It wouldn’t work.
“I’m on board,” I said. “We have to live with our choices, not just profit from them.”
We were unanimous. We had decided to walk away.
I felt really proud of our decision. Steve was on his soapbox, defending Pixar’s rights, willing to stake it all on what he thought was right. John, Ed, and I were right behind him. If Pixar was going to take a fall on this, we were going to do it together.
I called Rob Moore and told him the deal was off. I don’t think he was altogether surprised. He and I had discussed the branding provision extensively. He knew how important it was to us. Rob took this kind of outcome in his stride. Some deals made it. Some didn’t. I was quite sure he would quickly move on to another Disney matter.
For me, though, there was a bigger letdown. After the call with Rob, I felt deflated. It was really over. As I did sometimes when I needed a break, I took a walk around Point Richmond. There was a quiet park not too far from Pixar’s office, with great views of San Francisco Bay. I well understood the risks of trying to craft a deal as complicated as this one. I’d been doing it my entire career. I agreed with Steve that we would still have our chance, after we finished the next two pictures. But this put even more pressure on those pictures being hits. And we were walking away from what would have been a sweet deal for Pixar. Very sweet. We had gotten so close.
Now we had to wrap our heads around a future that looked less and less likely to include Disney. Once again, we were rolling the dice.
21
The Last 20 Percent
Following the breakoff of the Disney negotiation, John and Ed were quickly engulfed in the creative and production challenges posed by A Bug’s Life and Toy Story 2 while, back in Palo Alto, Steve spent a quiet Christmas holiday with his family. I returned to the task of building Pixar’s infrastructure. My team was responsible for meeting Pixar’s growing computer, facility, and human resource needs, as well as all the financial planning aspects of expanding the studio. The computing needs alone were staggering. As the technical sophistication of the films increased, so did the computing power required to generate the images. Fortunately, we had hired Greg Brandeau, a brilliant computer systems expert, to head up that effort.
As we were wrestling with the challenges of growing the studio, it came as more than a little surprise when, a couple of weeks into 1997, while I was sitting in my office, Steve called to share some news.
“Eisner called,” Steve said. “He wants to resume talks.”
“What?” I exclaimed incredulously. “You’re kidding!”
“He has an idea to break the logjam,” Steve went on. “I said I was open to talking, but I didn’t want to waste time. We aren’t going to change our position. He asked for a day or two and he would be back to me.”
“We’ve heard that before,” I said a little skeptically. “He did reach out, though. Unusual for him.”
We waited patiently, wondering what Eisner had in mind. Two days later, he called Steve again.
“He wants to finish the deal,” Steve reported. “As soon as possible. He’ll give us equal branding.”
“Wow,” I said, almost in disbelief. “That’s a big, big turnaround. What was his idea to move things forward?”
I was quite sure there would be a price to pay if Eisner was willing to give us the branding.
“He wants rights to buy stock in Pixar,” Steve went on. “He feels that if Disney is going to help build Pixar’s brand, it ought to have the right to benefit from it. By owning a piece of Pixar, he can justify yielding on the branding.”
“This is fantastic!” I said immediately.
It was brilliant. Eisner did care about animation. He did care about Pixar, enough to want to buy a piece of the company. This was huge.
“Did he say anything else about the investment in Pixar?” I asked.
Steve explained that Eisner hadn’t spelled out any details. He had said Disney didn’t need to own a large percentage of Pixar. He didn’t want to compromise our independence, just participate in the company’s success. Again, this was perfect. But Steve was cagey.
“We need to think about this,” he said. “We don’t want to open a back door for Disney to control Pixar through owning our stock or a board seat or something.”
“We can structure a deal to prote
ct us from that,” I said. “Larry Sonsini will know how to do it. Eisner didn’t say he was looking for control or a board seat. I’d take him at face value.”
Steve said we could explore it. If our lawyers could guarantee a way for Disney to invest passively, we would consider it. I jumped on it immediately. I called Larry, who said he would make sure all of Steve’s concerns were alleviated.
Larry and his team structured the investment to address our concerns, and Eisner remained true to his word. The door was open to accomplish everything we wanted, now, before our next film, years before I thought it would be possible. We mustered all our resources, and in early February I all but moved to LA to work in Disney’s offices where Rob Moore and our respective teams would finalize the details of the deal.
In contract negotiations, as in many other endeavors, the last 20 percent can take 80 percent of the effort. It is in the last 20 percent that the precise details are spelled out. One challenge is the inordinate amount of time spent on drafting contingencies that will likely never occur. For example, if an earthquake strikes Point Richmond and delays Pixar’s completion of a film, should Pixar be in breach of contract for delivering a film late? To what degree should Pixar be expected to protect against the risk of an earthquake? It’s actually not an unreasonable question, especially when making a film on the edge of the infamous San Andreas Fault.
Or, if Disney and Pixar share the costs for buying computers to make films under the agreement, can Pixar use those computers for other, non-Disney projects? If so, should it reimburse Disney for that usage? Because it is possible to conjure up a virtually endless list of risks and contingencies, one of the marks of a good negotiator is knowing where to draw the line so that things can move forward. In negotiation, there is a constant tension between momentum and fear. It comes down to an exercise in risk management.
One illustration of this idea came early in the draft agreement in a clause called “Treatments.” This provision said, simply, that for each picture under the new agreement Pixar would submit to Disney one or more film ideas in the form of a treatment. But what would constitute a treatment? Could it be one line on an index card: “A father goes on an adventure to find his son; oh, and they’re both fish”? That probably wouldn’t make the cut. So the agreement spells out the details: a written treatment less than three pages that can be the basis for a screenplay.
But Pixar often presented its treatments orally, using sketches and short storyboards. What if that was the preferred method? The agreement needed to cover that possibility too. And Disney wanted to make sure that the treatments were for original stories, not sequels or prequels, so all that had to be defined.
Once Pixar delivered a treatment to Disney, what happens next? Can Disney take as much time as it wants to respond? Three months (too long for Pixar); two weeks (too short for Disney)? What if Disney doesn’t respond at all? It’s off doing better things; it’s bored with Pixar films; the treatment slips to the bottom of someone’s inbox. That’s a hard one. Can Pixar just go ahead and do whatever it wants? After all, Disney had its chance to review the treatments. It’s not Pixar’s fault if Disney doesn’t respond. Then again, if Disney fails to respond and Pixar does proceed without Disney’s blessing, is it reasonable to demand that Disney will put its full brand and distribution muscle behind a film it never approved?
Most of these contingencies would, of course, never happen. In the real world, the most likely scenario was that Pixar’s story team would have a collaborative working relationship with Disney and they would review and work out the proposed film treatments in a harmonious way, without once resorting to the contract. Most disputes in life don’t depend on a contract for resolution. But once you commit things to a written contract, it needs to cover the risks in a reasonable way so that if things do go wrong, you know where you stand.
The clauses covering treatments were just one provision. Multiply this by a hundred and you have the scope of complexity in this negotiation: What were Disney’s rights to oversee production at Pixar? How much access would Disney have to Pixar’s technology? Would Pixar have a say in the marketing of the films? How would film production budgets be set? What about approvals for budget increases? What were Disney’s rights to use characters from Pixar’s films in its theme parks? How about its new line of cruise ships? Should Pixar be paid for that?
One clause dealt with a category of products called “derivative works.” These are new products based on the original movie, like sequels, prequels, TV shows, video games, ice shows, Broadway musicals, and theme park rides. Would Pixar have a right to produce those itself? If so, how would the costs and profits be shared, and what were Disney’s obligations to distribute them? If Pixar did not produce the derivative works and Disney did, should Pixar be paid? How much?
As complex as all these provisions were, they paled in comparison to the provisions that spelled out how film profits would be calculated and shared. Those, literally, required a degree in accounting to understand.
It fell to Rob Moore and me to wrestle each one of these provisions to the ground, and for our team of lawyers to draft and negotiate the contract language that would spell them out. Moore and I were like two sparring partners, back and forth, and back and forth again as we crafted solutions to every detail of Pixar’s future relationship with Disney. We quickly fell into a working relationship that often felt like we were on the same team, working to address a seemingly endless list of challenges. We presented solutions to Steve and Eisner, and if they didn’t like them, we went at it some more. Piece by piece the agreement finally came together. By the time we were finished, the four central issues that had been put on the table way back with Steve’s first call to Eisner were resolved.
On the matter of creative control, the agreement said that in any picture directed by John Lasseter, Pixar would have final creative control; in any picture directed by someone who had previously directed or co-directed an animated feature film that did better than $100 million in the US box office, Pixar would have final creative control; and in any other circumstances, Pixar and Disney would have joint final creative control. This meant that even first-time directors, like Andrew Stanton or Pete Docter, could have creative control if they had previously directed a successful film with John Lasseter, which is exactly what was happening with Andrew on A Bug’s Life.
On the matter of release windows, Disney agreed to release Pixar’s films in the optimal summer or holiday period release times and to give those films enough time to succeed. They agreed, in essence, to treat Pixar’s films like their own.
With respect to dividing the profits on the films, we agreed on a true 50/50 split. After paying Disney a standard fee for use of its film distribution network, and after recovering the marketing costs for the film, profits were to be divided equally between Disney and Pixar. The agreement included detailed provisions for calculating profits; to our knowledge, that was the first time these provisions had ever been written in this way.
Finally, with respect to branding, the agreement included provisions that I was also quite certain had never been done before. It stated that the Pixar brand would be established as a coequal brand in connection with the films, and that the Pixar logo would be used in a manner that was “perceptually equal” to the Disney logo. Even if the style of each logo was different, or one logo was in capital letters and the other used lower case, they still had to appear to be the same size. This also meant that from this point on, Pixar’s films would be marketed under the banner “Disney • Pixar,” not “Walt Disney Pictures presents . . .” In short, Pixar would share the brand on everything associated with our films equally with Disney. Never again would we be seen as inferior to Disney for the work that we did.
“Pixar’s gonna be a brand,” Steve said to me after we had finalized the terms of this provision. “Everyone will know we made these films.”
“That’s right,” I said. “All the way down to the Buzz Lightyear action figures an
d T-shirts. We did it.”
On February 24, 1997, Rob Moore and I sat in a conference room at Walt Disney’s headquarters in Burbank. Before us were final copies of the new Co-Production Agreement between the Walt Disney Company and Pixar Animation Studios. Each of us took a pen, and Moore on behalf of Disney and I on behalf of Pixar signed the agreement. It was done. We had completed the final two pillars of Pixar’s business plan—a 50 percent share of profits on our films and Pixar’s brand recognized the world over.
Of all the deals I had ever completed, I don’t think I ever felt more elated.
The next day the New York Times reported:
The Walt Disney Company announced an unusual 10-year partnership yesterday with Pixar Animation Studios to jointly make five films in a deal that reflects the value Hollywood increasingly places on the lucrative field of animated movies.
Disney and the fledgling studio will equally share the costs, profits and logo credit on the five films. The studios will essentially be sharing a brand, as the movies will be called Disney-Pixar productions.8
Yes, indeed, the press had picked up on the part of the deal for which we had been willing to risk it all: the vaunted Disney had agreed to share top billing with Pixar.
For a long time afterward, whenever Steve and I passed a Disney store we would run in to examine the Buzz and Woody dolls and other merchandise from Pixar films. We would look at the tags so we could see the Disney • Pixar logos equally displayed on the back.
I am quite certain there were no others in the store who were smiling so gleefully at the tiny logos on the back side of the labels.
22
A Little Credit
Pixar’s IPO, the Disney renegotiation, our decisions over creative control, building the studio, and many other mission-critical initiatives had filled our plates during my first two years at Pixar. Not every issue that came along served some major strategic initiative, however. One small matter in particular had caught my attention and ignited my fervor.
To Pixar and Beyond Page 20