Sam felt Pixar had been fortunate to get a deal that funded all its production costs when Pixar had no track record, and that these exclusivity provisions were the price Pixar had to pay for Disney to take that risk.
Pixar did indeed have a share of the profits on its films, but by the time all the calculations were made, and Disney’s costs and fees taken off the top, Pixar’s ultimate share would be tiny, under 10 percent.
The impact of all these contractual provisions was crushing: until Pixar could release a film outside of the Disney contract, the most we could expect to earn from our first three films would be a few million dollars a year—and even then, only if those films ranked with Disney’s most profitable films ever. No one would invest in a company that had to perform at those levels in order to eke out a small profit.
In that world, he felt Pixar had fared quite well in this negotiation, especially for a company with no track record. He told me it was rare for Disney to give any profit share at all in an animated film, and that it had done so only because Pixar had invested so much in technology.
Fifty years of Hollywood lawyering had made it all crystal clear: Pixar could work only for Disney. Disney had to approve the films Pixar made. It chose whether to make sequels of those films. It had creative control over the films. It prohibited Pixar from working with anyone else. It kept the lion’s share of the profits.
Taking this company public seems like a crazy notion. No investor I know would come near this. Fifty million in losses, no profits, no growth, Disney holding all the cards. I’m not sure Pixar even needs a CFO.”
In 1986, when he took control of Pixar, Steve dreamed of building a technology company, a graphics powerhouse that would stun the world with machines that could do computer imagery like no other. Storytelling was an afterthought, a way to demonstrate the technology. The hopes of that graphics company had rested in part on the Pixar Image Computer, which had failed. By 1991, that division of Pixar had been shut down completely.
It was five years since his departure from Apple, and he had not had a hit since. If he couldn’t chalk Pixar up as a win, he badly wanted to avoid another highly public loss. That was the instant when the Disney opportunity came along. To Steve, the deal with Disney was a way to stop the financial bleeding.
“There’s nothing you can do about where the pieces are,” he’d say. “It’s only your next move that matters.”
Toy Story’s release date was set for November 22, 1995.
Pixar was marching into a place no company had ever been. This was the first computer-animated feature film ever attempted, and, as I was beginning to realize, the challenges were staggering.
But in animation, there is no sky, no trees, no leaves, and certainly no gentle breeze rustling those leaves. There is just a blank screen on a computer.
I learned that there was a reason the film was specifically about toys, and not about animals or people. Toys are made of plastic. They have uniform surfaces. No variation. No skin. No clothing that needs to wrinkle with every movement.
Making Toy Story was not just finishing another film. It was more like climbing Everest or landing on the moon for the first time. Computers had never been pushed to this level of artistry before.
Each frame of the film took anything from forty-five minutes to thirty hours to draw, and there were around 114,000 of them.
Steve had spent almost no time at Pixar during the nine years he had owned it. He didn’t even have an office there. He had founded NeXT in 1985, right after leaving Apple, and although he took over Pixar in 1986, he had worked full time at NeXT all those years.
My room filled with flowers and cards, from family and friends, and also from the Jobs family, and from Ed and the Pixar team. When I got home, Steve brought his family over to visit several times. I’d known him less than six months at this point, and he was acting like an old friend.
At the end of the closing credits on Toy Story is a heading called “Production Babies,” below which is a list of all the babies born to Pixar employees during the production of the film. I could not possibly have been prouder to say that my new daughter, Jenna, was among them.
“People are paying thirty or forty dollars a film to own them,” I continued. “Some are renting from Blockbuster, but with these animated feature films it looks like there’s a strong preference for actually owning them.”
Home video was turning animated feature films into big business, bigger than we had imagined. Beauty and the Beast, Aladdin, and The Lion King looked like they were among the most profitable films of all time.
Taking a company public meant selling its stock to investors through the public stock exchanges. It served the twin purposes of raising capital to finance a company’s business and enabling anyone, including the company’s founders, to freely sell their stock. In Silicon Valley this was an imprimatur of success like no other. From the time Steve and I had first met, Steve mused about taking Pixar public. It was one of the reasons he had hired me, and the idea was never far from his mind.
Steve’s willingness to fund Pixar for close to ten years went beyond all the norms for keeping a start-up alive. By Silicon Valley standards, Pixar should have closed its doors years earlier.
needed a crystal-clear vision for what Pixar was. That vision was not just important to taking Pixar public; it was the strategic direction that would guide the company for years. But so far, we didn’t have one. One of our challenges in developing that vision was that we were looking at a business Steve and I knew nothing about. We had no experience in the entertainment field. We had to learn it.
Some of the parallels between Disney and Pixar were striking.
In 1928 Disney released a short black-and-white cartoon that changed the course of animation. Called Steamboat Willie, it ushered in breakthroughs on two fronts. It introduced the world to the most fully formed cartoon personality audiences had ever seen: Mickey Mouse. It was also the first cartoon to use synchronized sound, meaning that the sounds were timed to the action, making the overall audience experience far more immersive than ever before.
After the success of Mickey Mouse, Disney set his sights on the first animated feature film. It took him until 1937 to release Snow White and the Seven Dwarfs, a virtuoso accomplishment that ushered in many more breakthroughs in story, character, color, sound, and the way animation displayed depth.
The enormous degree to which Disney had diversified made the idea of a pure animation company seem even more doubtful. If the undisputed king of the animation world hadn’t pulled it off, what was the likelihood that anyone else could?
There was no part of Steve that bought into the idea of making products that might not all have a shot at greatness. Live-action film was quickly losing lift as the risk-reducing strategy we had hoped it would be.
I understood that a public offering was the path, and probably the only one, to raise the funds we would need to build Pixar. But a failed public offering would be a gigantic, possibly even fatal, blow for the company. I was caught between Steve’s drive to go public and business realities that looked awful.
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.
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.
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.
Pixar was innovating on not just one but two fronts: storytelling and computer animation.
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.
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.
A stock option gives an employee the option to purchase stock in the company in the future. Its value derives from the fact that even though the employee doesn’t have to pay for the stock until later, the price the employee pays at that time is set at the value of the stock when the employee receives the option, usually when he or she joins the company.
This is how Silicon Valley gives birth to new generations of millionaires and billionaires.
If Pixar had failed in any one area, it was that its employees did not have stock options.
He was also adamant about taking no risk that he would lose control of the company in the future, as Pixar’s stock options were exercised by employees, and as Pixar sold stock to other investors. I didn’t need to ask him why. He wanted to avoid any risk of being in a position like he had been in at Apple where the board had effectively ousted him from the company against his will.
Giving up a little more stock would make little difference in the wealth Steve would enjoy if Pixar succeeded. In any other start-up, Pixar’s key employees would have had stock options years earlier, at very low exercise prices.
Somewhere on those drives, in the quiet of my own car, I realized that no amount of deliberation was going to resolve my worries. Sometimes there comes a point when you jump not because you feel ready or are sure that you’ll make it across the chasm, but because the conditions are forcing you off the edge. That’s when you find out if you can fly.
How was Pixar, in the new and untested medium of computer animation, possibly going to perform at the levels it needed to succeed? Any way you looked at it, building an independent animation studio required a level of box office success that was not only unprecedented; it was almost unimaginable.
As it was, the movie posters for Toy Story would say, “Walt Disney Pictures presents Toy Story,” or worse, “Disney’s Toy Story,” with Pixar’s name in small print. This would make it hard for the world to fully associate Pixar with filmmaking.
So that was all we needed to do. Besides making films that would enjoy unprecedented box office success the world over, we simply had to QUADRUPLE OUR SHARE OF THE PROFITS RAISE AT LEAST $75 MILLION TO PAY FOR OUR PRODUCTION COSTS MAKE FILMS FAR MORE OFTEN THAN WE KNEW HOW BUILD PIXAR INTO A WORLDWIDE BRAND Piece of cake.
The only viable path for a little company like Pixar to raise the kind of money we needed was to take it public. It was simply too much money, and too much risk given Pixar’s track record, for traditional banks or other financing sources to consider.
When companies want to go public, there is no way to do it without an investment banker serving as the intermediary.
If there is a singular function that defines the role of investment banks, it is to certify the quality of the businesses into which investors put their money. An investment bank would have to provide an indelible seal of approval to Pixar’s value and credibility as an investment.
Assessing a company’s value is one of the chief tasks of investment banks.
In one instant, Steve’s dreams of an iconic IPO had been dashed. There would be no Goldman Sachs. No Morgan Stanley. Just like that, the gatekeepers had closed the gate.
Now I had another reason for making Pixar’s IPO a big success: to prove to the world’s two largest investment banks that they were wrong. They might be the kings of the investment banking hill, but they were far from almighty. We’d show them.
It did not take long for my excitement at securing Robertson Stephens as the lead investment bank to wane a little. We still had no one who would certify Pixar’s credibility as an entertainment company, and we needed that if we were to convince the investment community we had what it took to make it.
With that, we had our investment banking team: Robertson Stephens as the lead, Hambrecht and Quist second, Cowen and Company in third position.
This made it especially ironic that in one week in November of 1995, Pixar’s entire future would depend on just two numbers: the opening weekend box office for Toy Story, and the price at which Pixar’s shares sold in its IPO.
For a total domestic box office of over $100 million, Toy Story would need an opening weekend in the $15 to $20 million range. Excluding the four Disney blockbusters, the average opening weekend for animated feature films during the past five years was under $3 million. No matter how we measured it, we were reaching for the sky.
On October 12, 1995, we filed Pixar’s prospectus with the SEC, showing a price range of $12 to $14 per share of stock.
On the morning of Saturday, November 25, all I could do was pace. We had arranged a chain of phone calls through which we would know how well Toy Story had performed Friday night.
“Thirty million!” I continued. “Even more, audience polling is off the charts. Disney thinks the film will have a huge run. It will sail past a hundred million, and probably past a hundred and fifty million.”
The biggest film of the year so far had been Batman Forever, with a total domestic box office of $184 million. Second was Apollo 13, with $172 million. It had never really occurred to any of us that we might reach into that territory.
The NASDAQ stock exchange is not a physical place like the New York Stock Exchange. There is no bell to ring, just stock symbols on a computer screen. A little after 7:00 a.m., six million shares of Pixar stock were placed with investors at $22 per share. They were immediately tradable by any person who wanted to purchase Pixar’s stock. “There it is!” Todd Carter exclaimed. “Pixar’s first trade.”
At the end of the first day’s trading, Pixar’s stock was at $39. That gave Pixar a market value of close to $1.5 billion and did indeed make Steve a billionaire.
Toy Story went on to become the biggest film of 1995, clocking in a total domestic box office of just under $192 million by the end of its run. At the time, it was the third-biggest animated feature film ever released, behind only Disney’s Aladdin and The Lion King.
Creative vision does not spring forth fully formed. It evolves, meanders, and all but stumbles its way to fruition.
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.
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.
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.
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.
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.
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
NEW DEAL CREATIVE CONTROL FAVORABLE RELEASE WINDOWS TRUE 50/50 PROFIT SHARE PIXAR BRAND
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.
“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 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.
We were unanimous. We had decided to walk away.
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.
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.
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.
The release of Toy Story marks the beginning of a new chapter in the storied career of Steve Jobs. If the movie’s a hit, he’ll rub shoulders with the kingpins of the brave new world of digital entertainment—moguls like Eisner and Steven Spielberg and megastars like Hanks and Allen. Jobs may in fact have found, at last, his natural element—a business in which fantasy and technology actually enhance each other.
Although I found Steve to be quite a private person, when it came to the public eye, he didn’t like to share the spotlight.
The new credits were added to A Bug’s Life for the first time. At the end of all the normal credits, just when it seemed they were all over, emerging from the bottom of the screen came these words: THANKS TO EVERYONE AT PIXAR WHO SUPPORTED THIS PRODUCTION and then the names of all of Pixar’s finance, marketing, and administrative personnel appeared. Of all my moments at Pixar, seeing this for the first time stood out as among the most gratifying. It meant even more when it became an ongoing tradition for all of Pixar’s films.
The signing of the new agreement with Disney was not the only event of import to occur in February 1997. Apple Computer bought NeXT, an enormous coup for Steve. It was hard not to miss the irony of Apple purchasing the company Steve had started in defiant rebellion against Apple.
One such change was that Steve now understood the entertainment industry. He was no longer just a high-tech CEO but also an entertainment industry CEO. Very few executives could lay claim to being comfortable in both worlds, a qualification that would become essential as Steve steered Apple through the complex thickets of music and entertainment.
When you added it up, there were many aspects of Pixar that had a big influence on Steve: becoming a billionaire, experiencing a stellar comeback in the eyes of the public, learning the ins and outs of the entertainment industry, enjoying a transformed relationship with Pixar, and bringing both business and creative imperatives into harmony. Combined with Steve’s aesthetic genius and product vision, these influences made for a very potent force as he jumped into the vortex at Apple. Indeed, Pixar may have been an interlude in Steve’s journey—one that remains the source of most of his wealth—but without Pixar one could make a case that the revolution ushered in by Steve’s second act at Apple might never have occurred.
When Steve rejoined Apple in July of 1997, I couldn’t help but feel a little empty. It spelled a change in the journey we had taken together these past few years.
Over the next ten years my relationship with Steve would continue to evolve in ways I could never have predicted. He was diagnosed with cancer in 2003 and underwent a series of treatments over the ensuing years. I spent much time as bedside companion while he fought the challenges of the disease and its treatments.
The five original films under the new agreement with Disney had been A Bug’s Life, Monsters, Inc., Finding Nemo, The Incredibles, and the soon-to-be-released Cars. Toy Story 2 had ultimately been released as a theatrical animated feature film sequel but did not count toward the five original films required by the agreement. Collectively, these films had an average domestic box office exceeding $250 million. They also won a slew of awards.
Ten years earlier, had I told Wall Street that Pixar’s films would perform this way, both in terms of box office performance and in accolades, I am quite sure I would have been laughed out of town.
But by October 2005, I was convinced that Pixar had to at least explore one of these two directions.
“I think Pixar’s at a crossroads,” I said. “Its valuation is too high to stay still. If we have any miss, any miss at all, even a small one, Pixar’s value could be cut in half overnight, and half of your wealth will go with it.” I paused, and then added, “We’re flying too close to the sun.” “We’ve had an incredible run,” I went on. “Ten years of blockbusters. But I think it’s time that either Pixar uses its sky-high valuation to diversify into other businesses, just like Disney did, or . . .” “Or we sell to Disney,” Steve finished my sentence.
At the end of October 2005, Eisner abruptly resigned from Disney, both as CEO and as a board member, leaving Iger for the first time in complete control. This was the exact moment we began to contemplate the possibility of selling Pixar to Disney.
Shareholders of Pixar would be exchanging their investment in a highly risky animation company for a diversified investment that included some of the highest-quality media assets in the world, including Disney World, ABC, and ESPN.
On January 24, 2006, Disney announced it would acquire Pixar for $7.4 billion. Steve still owned just over 50 percent of Pixar, giving his Pixar stock a value of almost $4 billion. In an instant, he became Disney’s largest shareholder.
Steve was now Disney’s largest stockholder, and the value of his stock in Disney would eventually soar to over $13 billion, making his investment in Pixar by far the largest source of his personal wealth.
Almost overnight, Pixar restored Disney’s dominance in animation, producing a string of hits including Cars, Ratatouille, Wall-E, Up, Toy Story 3, Brave, and Inside Out. Ed and John successfully turned around Disney Animation which, in 2013, released Frozen, which became the highest-grossing animated feature film of all time.
Now, I wondered what my deli might be. Oddly, perhaps, the fire that was burning within me was the desire to learn more about religion and philosophy, particularly the Eastern varieties. For much of my adult life, I was fascinated by ideas that address human experience and enhancing our well-being.
I felt embarrassed by my interests, however. What was a Harvard corporate guy doing thinking about philosophy? I was a business warrior, a corporate defender. I clearly knew how to play that role. But there lay the challenge. It felt like a role. For as much as I threw myself into that role, I still felt a bit like an actor on a stage. Deep down, something else was bubbling up.
It was hard to clean out my office and say goodbye to Pixar. I wrote an e-mail to the entire company expressing how much I would miss everyone, how amazing everyone was, and how happy I was to be joining Pixar’s board of directors. I ended the message with these words:
“Namaste.” It means: “I honor the place in you of love, of truth, of peace. When you are in that place in you and I am in that place in me, we are one.” Namaste.
The Middle Way is about finding harmony between the structure that helps us function and the fluidity that opens us to experience more ease, richness, and connection in our lives. One way to illustrate the ideas of the Middle Way is to imagine that there are two people inside of us. One is a bureaucrat; the other, an artist or free spirit. The job of the bureaucrat is to get things done: wake up on time, pay the bills, earn good grades. The bureaucrat likes stability, rules, and values efficiency and performance. The artist or free spirit within us cares about joy, love, adventure, spontaneity, creativity, and feeling deeply connected and alive. The free spirit wants to break through the sea of convention and expectation in which we often find ourselves swimming. The insight of the Middle Way is that becoming stuck in either of these states inevitably leads to frustration. If we are too focused on function, accumulation, and performance, we may wind up wondering if we have truly lived. If, on the other hand, we are so focused on living free and engaging our passions, we may become frustrated by lack of momentum or grounding. The Middle Way holds that the best outcomes arise from harmonizing these two sides—from harvesting our positive nature, spirit, and humanity without ignoring practicality. This invariably calls for finding the courage to look beyond the conventions that drive how we presently function.
“It’s about Pixar. I never realized it before. Pixar is a great metaphor for the ideas of the Middle Way.” “How do you make that connection?” Hillary asked, eager to discuss it. “All those risks we took to balance artistry with business discipline,” I went on, “they’re an example of what the Middle Way is talking about.”
The Middle Way is a dance between order and freedom, bureaucracy and spirit, efficiency and artistry.