Business Brilliant

by Lewis Schiff

  What is missing from this timeline is the fact that when Pixar was founded, it was never meant to be a movie studio. Until 1991, Pixar was a computer hardware company that built huge, expensive 3-D imaging machines and marketed them with their special software to government, big business, and the healthcare and education industries. Feature film production came to Pixar by accident. Prior to 1988, the sole reason the company even employed an animation staff was to produce short promotional films that would help sell more computers.

  Steve Jobs, the legendary cofounder of Apple Computer, had just been fired from Apple’s CEO job in 1984 when he bought Pixar for $5 million. Jobs hoped to develop the $125,000 Pixar Imaging Computer into the must-have machine for the defense industry, oil companies, hospitals, and university research scientists. As one Pixar executive later recalled, “Steve’s vision was that we were going to populate the world with Image Computers.” When the company introduced 3-D software called RenderMan, Jobs wrote that “Rendering is extremely important now as we expect it to be a standard part of all computers in the next 12 to 24 months.” He thought that every household would soon be putting out photorealistic 3-D images on their desktop inkjet printers.

  To say Jobs miscalculated is an understatement. Not only was there little demand for RenderMan, but sales of the Pixar Imaging Computer slowly dropped away to almost nothing. Industries weren’t ready to jump into something so expensive, new, and unproven, and that was especially true for the medical industry. Jobs thought 3-D imaging might replace two-dimensional CAT scans in hospitals, but radiologists preferred to stick with what they knew. Pixar started running out of money.

  Until 1988, Pixar’s animation team had never earned a dime for the company. The unit had made a series of short, clever movies with the sole intent of showing off the 3-D capabilities of Pixar’s products. But when a new CEO joined the company that year, he met with the animators and told them that with the company in a cash crisis, they needed to start pulling their own weight. Out of pure desperation, Pixar began making TV commercials for companies like Tropicana and Listerine. Meanwhile, the animation team found time to make a new short film to promote the latest version of RenderMan software. The four-minute movie, called Tin Toy, wound up winning the 1989 Academy Award for best animated short film.

  In 1991, Pixar laid off almost all its employees and shut down manufacturing of the Pixar Image Computer. The company kept the animation team only because at that point commercials were bringing in $2 million a year in revenue. Later in 1991, officials at Disney were impressed enough with Tin Toy and Pixar’s TV spots that they offered the company a $26 million deal for three feature-length movies. It took four grueling years to complete the first one, Toy Story. The movie was almost scrapped in midproduction because Disney and Pixar were fighting over the script.

  When Toy Story was finally released in 1995, Steve Jobs said he hoped the film would gross $100 million, because then Pixar would finally make money after 11 years of struggle. Toy Story grossed $365 million and the next four Pixar movies did even better. Altogether, Pixar’s first five animated films made more than $2.5 billion, giving the studio the highest per-film box office average in Hollywood history. In January 2006, Disney bought Pixar for $7.6 billion. Steve Jobs, with his 50.1 percent ownership of the company, became a billionaire a second time over, in an industry he never had any intention of entering.

  That’s a great story of patience, persistence, and tenacity, isn’t it? It’s got Business Brilliance all over it. “It shows how small things, done well, can lead to big things,” wrote David A. Price in his remarkable book, The Pixar Touch. Price notes also that each of the main actors who followed this circuitous path to success, Jobs included, “was, by conventional standards, a failure at the time he came onto the scene.” It’s actually the kind of losers-become-winners-against-all-odds story that has become de rigueur for Pixar movies.

  It is also a story that Steve Jobs avoided telling. Appearing on the Charlie Rose show in 1996, Jobs gave the following outlandishly self-aggrandizing version of how Pixar came about:

  I first got involved . . . when I heard about this incredible group of computer graphic specialists that George Lucas had assembled at Lucasfilm that he wanted to sell. And so I saw what they were doing. And I met the leader of this group, Dr. Ed Catmull. And Ed told me about his dream, which was to make the first computer-animated feature film someday and showed me what this team was working on. And I was blown away . . . and so bought into that dream, both spiritually, if you will, and financially. And we bought the computer division from George and incorporated it as Pixar . . . it took us ten years to do it. We were pioneering every step of the way.

  That’s the Pixar story that Jobs peddled to the public in 1996, with all the time and money that Jobs wasted with his unwanted Pixar computers written out of the script. By the time author Walter Isaacson was interviewing Jobs for his authorized biography, however, the Apple founder was a little more humble about how Pixar studios was an accident that almost didn’t happen. Isaacson wrote:

  Looking back, Jobs said that, had he known more, he would have focused on animation sooner and not worried about pushing the company’s hardware or software applications. On the other hand, had he known the hardware and software would never be profitable, he would not have taken over Pixar. “Life kind of snookered me into doing that, and perhaps it was for the better.”

  The Truth About Failure

  Pixar started out with great employees and state-of-the-art technology. What it didn’t have was a sure path to profitability. That’s the piece of the puzzle it took 11 years of heart-wrenching trial and error to find. During those years, there was only one thing Steve Jobs did on a consistent basis to force the odds in Pixar’s favor. He pushed through adversity. Pixar’s ultimate success was not the result of product testing, market research, or technical breakthroughs. Pixar became one of the greatest movie studios in history by chasing opportunities, from one crushing failure to the next, until feature filmmaking proved to be the best and most profitable application of the company’s cutting-edge technology.

  Ellen Langer, a psychology professor at Harvard, is a leading advocate for the concept of “mindfulness” as a way to deal with setbacks and failures. From her studies of creativity and learning, Langer says that too often people get frustrated over the specific task they failed at, when the more productive approach is to think beyond one’s original intent. If you remain mindful that failure may have also resulted in some new unanticipated possibilities, you’re more likely to regard failure with an open mind. Langer points out that the first snow machines installed on ski slopes were adaptations of a failed crop-sprayer design. Minoxidil was a high blood pressure medication that produced some unfortunate side effects. It took creative thinking and some hard work to turn one of those side effects—unwanted hair growth—into the baldness treatment known as Rogaine.

  Success in both these cases required mindful consideration of some dismal results—frozen insecticide and unwanted hair—and some creative thinking about what options they presented. Pixar’s stumbling entry into the movie production business followed the same general route. Imagine if those $125,000 Pixar Image Computers had been a hit. Pixar’s animation team might have remained a part of the support staff at a computer company, instead of the Hollywood moguls they are today.

  The trouble with Langer’s prescription is that most people don’t like to think about their failures at all. They especially resist thinking about failure long enough to do anything productive with it. Psychology literature shows that the experience of failure threatens feelings of self-confidence and self-esteem in most people. On the other hand, research shows that they feel much better if, having failed in a task, they’re allowed to change the subject quickly. When 9 out 10 members of the middle class say they respond to failure by giving up and doing something else, I have to assume that this flight-from-failure instinct is partly what’s motivating them. Fewer than 2 out of 1
0 middle-class people say that failure is important in telling them what they’re good at (it was 7 out of 10 among self-made millionaires). When the psychology literature is combined with our survey results, I have to conclude that for most of the middle class, failure is so painful that they don’t want to hang around it long enough to learn from it.

  Whenever something fails, whether it’s a business or a toaster, failure creates uncertainty about what to do next. You may wonder why it failed, whether it’s worth fixing, or whether you can manage without it. Langer’s studies show that in general, most people feel uncomfortable with even trivial levels of uncertainty. It gives them the unpleasant feeling that they lack control over their lives. But from the mindful perspective, Langer writes, “uncertainty creates the freedom to discover meaning.” Success may make you money, but failure makes you think.

  To most self-made millionaires, failure is a wellspring of opportunity because every failure produces such a wide variety of unexpected results—lessons, experiences, relationships—that it can be an appealing challenge to sift the ashes and see what can be made of them. To some, a career like that of David Neeleman may seem chaotic and filled with intolerable uncertainty. But Neeleman is a living example of how a mindful response to failure can reap enormous rewards and personal growth. Through soaring victories and terrible defeats, we can see how each of his triumphs was shaped in large part by the lessons he learned and the meaning he derived from all his previous flameouts.

  Way back in 1983, Neeleman was living in Salt Lake City and running a travel agency that specialized in air-and-hotel packages to Hawaii. A recent college dropout, he had 20 employees, no debt, and $8 million in annual revenues when, in December of that year, Hawaii Express airline suddenly went bankrupt. Neeleman’s agency relied on Hawaii Express flights for nearly all its travel packages, so when the airline stopped flying and the Hawaiian hotels refused to return Neeleman’s advance payments, his travel company ran out of cash and folded.

  Feeling discouraged is a natural response to failure and Neeleman was no different from most people. He was so demoralized by the sudden loss of his company that he considered moving to Arizona and joining his in-laws in the drapery business. But the head of Morris Travel, Utah’s largest travel agency, took Neeleman in and gave him a chance to redeem himself. Neeleman soon realized that the only real mistake he made with his failed agency was that he had run it with too little capital. When Hawaii Express collapsed, Neeleman didn’t have enough cash reserves to ride out the storm. That was a mistake he never made again.

  From 1984 to 1993, Neeleman helped build Morris Travel into a full-fledged airline called Morris Air. He was running 23 jets serving the western states, when his chief concern about the growing carrier was its thinning cash reserves. He persuaded the Morris family to put more money into the company and then he courted investors and raised an extra $14 million, which the airline ended up never touching.

  Times were tough in the airline industry in 1993. But Morris Air was one of only two U.S. carriers to turn a profit that year and Southwest Airlines responded by offering to buy the airline for $129 million. Neeleman idolized Southwest founder Herb Kelleher. He created Morris Air with Southwest in mind, and copied Kelleher’s approach and practices whenever he was able. Now with the sale of Morris Air, Neeleman owned $25 million in Southwest stock and had a new job as executive vice president. At the time, Kelleher regarded Neeleman as a kindred spirit. According to Neeleman’s biography, Kelleher told Neeleman, “We need a guy like you.”

  But the impetuous Neeleman proved to be a poor fit for Southwest’s lumbering corporate culture. He had grand plans for upgrading Southwest’s antiquated ticketing systems, only to find that Southwest’s policy was to let competitors struggle with risky, unproven technologies. His other ideas were either shot down or ignored. Neeleman grew frustrated with the endless meetings on the executive steering committee and Southwest executives grew frustrated with Neeleman. Five months after Neeleman started, Kelleher took him to lunch and fired him. “You’re a pain,” his idol told him.

  Saddled with a five-year agreement forbidding him from working for competing airlines, Neeleman took some of his millions and consoled himself by dabbling in venture capital. He lost money on a pretzel bakery, a skin-care product manufacturer, and a fitness company, among many others. The lesson he took was that he should stick with what he knew and loved. He entered two businesses in the airline industry that didn’t compete with Southwest, cofounding an automated airline ticketing company and working with a carrier in Canada, where Southwest doesn’t fly.

  By 1999, when he was free to raise money for the start-up of JetBlue, Neeleman had drawn three hard-earned lessons from his previous failures: Overcapitalize, do what you love, and be your own boss. JetBlue launched in 2000 with $130 million in investment capital, the largest initial capitalization in airline history. Then the airline released a stock offering in near-record time, earning CEO Neeleman a $118 million payday. By 2007, Jet Blue was the eighth largest carrier in the United States and its stock was trading at nearly 40 times earnings—until the day that freezing rain put Neeleman’s job on ice.

  Although Neeleman told the media in 2008 that he had no intention of starting another airline, his fourth lesson from failure was that if he ever did take another CEO role, he would retain voting control over the board. In 2009, an investor group approached him with an offer to start a new carrier in Brazil and they agreed to Neeleman’s terms. He would put in $15 million of his own money, they would put in $135 million, but he was to have 80 percent voting rights on the board. He told Fortune, “I’ve set it up so I can’t get sucker punched again.”

  There is another way to view Neeleman’s succession of failures. You could conclude that Neeleman is kind of a mess. Shouldn’t he have known he needed more cash on hand before his first business failed? Wasn’t it obvious that as an entrepreneur he’d hate working for corporate Southwest? And didn’t he know that a CEO is supposed to be responsive to the board of directors?

  The answer to all of these questions is yes, Neeleman is kind of a mess. He is impulsive and obsessional. It wasn’t until he turned thirty-three that he was diagnosed with attention deficit disorder. But none of these traits explains why he was undercapitalized, decided to work at Southwest, or left his JetBlue board out of the loop.

  On each of Neeleman’s rebounds, it was never a simple matter of going back to do what he had failed to do in the last attempt. Each time he returned from failure, he had a different outlook and a different approach. He was a different person. In order to learn from bad business decisions, 7 out of 10 self-made millionaires say that the most important change they make is within themselves. Less than 2 percent say they try to change their partners’ behavior.

  They keep the focus on themselves.

  Changing your behavior is not done casually. So while it might seem easy in retrospect to say that Neeleman should have known that his first business needed more cash reserves, few small business owners are inclined to raise money that they intend to sock away for a rainy day. And nothing could have prepared Neeleman for his brief unhappy stay at Southwest. If he had passed up the opportunity to work with his idol Kelleher (and possibly succeed him as CEO) he would have always regretted it. With JetBlue and its board, Neeleman no doubt felt that JetBlue was his baby and no one would ever dare take it away from him.

  The thing about failure that makes it so painful is the thing that makes it so instructive. The pain of failure yields a premium if you hold it correctly. Randy Komisar, a Silicon Valley veteran of the tech boom and bust years, puts it this way: “You got to feel it if you’re going to learn it.. . . Ultimately, the only way to really, really, to get your money’s worth out of failure, it better be your own. And that’s largely because of that hollowness in your stomach, the disappointment of 250 people whose lives and families depend on you, the chagrin of your board members. You got to feel it.” Komisar is a partner today with one of the Va
lley’s private equity firms. In a lecture series he videotaped with Stanford University’s business school, Komisar advised students to look at “constructive failure” as a way to deal with setbacks, try again, and then “take your experience and cash in on it as an asset.”

  In certain industries, like technology and pharmaceuticals, this process of constructive failure is a necessity. But in the rest of the corporate world, failure has very few friends. Amy Edmondson, a professor at Harvard Business School and an authority on failure inside organizations, writes, “The idea that people and the organizations in which they work should learn from failure has considerable popular support—and even seems obvious—yet organizations that systematically learn from failure are rare.” Another Harvard professor, Stefan H. Thomke, says that when he speaks before business groups, “I try to be provocative and say: ‘Failure is not a bad thing.’ I always have lots of people staring at me, [thinking] ‘Have you lost your mind?’”

  Public companies interested in attracting investors and protecting their stock prices prefer to keep their failures private if they can. Even Pixar, a wildly successful studio with a golden reputation, has basically rewritten its history and wiped out all but a few incidental references to the failed Pixar Image Computer, from which the company got its name. One-third of the CEOs in Inc. magazine’s list of fastest-growing companies said they started their companies after being fired from their previous employers, and iconic business founders like W. H. Macy, Henry J. Heinz, and Colonel Harland Sanders were legendary for their perseverance and determination to overcome failures. But it is unlikely that any of these companies carry on their founders’ legacies and declare themselves as places where failure is the path to success.