Founders - #235 Steve Jobs (The Pixar Story)

Starting point is 00:00:00 Steve Jobs had been hunting for a CFO of Pixar and reached out to Jordan, who agreed to meet Jobs for breakfast. I show up in my suit jacket, Jordan recalled, and Jobs walks in in torn clothes 20 minutes late. Jobs had only two interview questions for Jordan. Question 1. You went to Stanford Business School in the late 80s, and then you're in the center of the company creation universe, in the most exciting time in the world. And you became a fucking management consultant? Question two. How could you work at Disney for eight years?

Starting point is 00:00:33 Those guys are fucking bozos. Jordan saw the questions for what they were. A Steve Jobs stress test. I'll cop to the first one, Jordan said. It took me ten years to find my way back here, but I'm back and I'm here to stay. On the question of Disney, he pushed back, hard. You're wrong on Disney, he said. Then he explained that Disney stores, which he was previously the CFO of,

Starting point is 00:00:57 had higher consumer ratings than the Disney theme parks. Jobs seemed satisfied and pitched Jordan on Pixar. Jordan demurred. He had just been a CFO, and he was looking for something different. Jobs proposed that Jordan join Apple instead. I have this new vision for Apple stores, Jobs said, and proceeded to outline a reimagined shopping experience from the ground up. Jordan thought Jobs was delusional and politely declined the offer.

Starting point is 00:01:26 Of course, Jordan said of Jobs' retail concept, he nailed it. That is an excerpt not from the book I'm going to talk about today, but a book I did two podcasts ago on episode number 233. That is The Founders, the story of PayPal and the entrepreneurs who shaped Silicon Valley, and it was written by Jimmy Soni. And that is a footnote in the book of a previously, at least new to me, Steve Jobs story. And the reason I started with that is because the author of the book that I'm going to talk to you about today, which is To Pixar and Beyond, My Unlikely Journey with Steve Jobs to Make Entertainment History, written by Lawrence Levy. Levy was the first CFO of Pixar recruited by Steve Jobs. And that was the person he had

Starting point is 00:02:03 retired or he went on sabbatical and moved to the board of directors of Pixar and in that interview Steve is trying to find somebody to succeed him and it's always amazing to me how so many of these stories fit together and are related in some fashion or form so I'm going to jump into this book I want to jump into the prologue and in the prologue Lawrence tells us what this book is about it's the very early history of Pixar. And the reason that I'm bringing it to your attention is because I think by reading about the very early days of Pixar, we get more insights to how Steve Jobs thought about building companies. And so Lawrence brings with the fact that Walt Disney has just agreed to pay $7.6 billion for Pixar, and how unlikely an outcome like that

Starting point is 00:02:44 would have been when if you told him that when he started at Pixar back in 94. So he says, when I first started talking to Steve about Pixar a little more than 10 years earlier in late 1994, the company had burned through almost $50 million of his money with little to show for it. The value assigned to Pixar's stockholders on its financial statements at that time was negative $50 million. Now, Steve's investment in Pixar had made him one of the wealthiest individuals in the world. My tenure at Pixar lasted from my first conversation with Steve in 1994 until the sale to Disney in 2006. This opportunity was one of the great privileges of my life. Although much has been written about Pixar's legendary creative

Starting point is 00:03:23 and production process, my side, and he's going to get into why legendary creative and production process, my side of the story looks at Pixar from a different angle. It is about the strategic and business imperatives that enabled Pixar to flourish. And so I think the book that he's referencing that goes into most detail about the actual building of Pixar from the creative angle, it's actually written by one of the co-founders of Pixar. I did it all the way back on Founders No 34. It's called Creativity Inc. And it's written by Ed Catmull. I use this app I've told you about before. I can't make the podcast without it. It's called Readwise. And it stores. So every time I read a book, I store all the highlights and notes from that book into the Readwise app. And over time now it's become like this gigantic database on like my notes on the history of entrepreneurship.

Starting point is 00:04:05 And something that was surprising out of the 240 something books that I've read so far for the podcast, Creativity Inc. is the one that I have the most highlights for. I have almost three, I think almost 300 highlights from that book alone. I highly recommend reading that book if you haven't done so already and definitely going back and listening to that podcast. So he goes into more about his time at the very early days pixar still in the prologue he says the making of pixar was more akin to the high pressure grinding of tectonic plates pushing up new mountains one of those plates carried the intense pressures of innovation the drive for artistic and creative excellence in storytelling combined with the invention of a new medium, computer animation. So Pixar, the very first Pixar movie is Toy Story.

Starting point is 00:04:47 Toy Story is the very first computer animated feature film ever made. So it says the other of those plates carry the real world pressures of survival, raising money, selling movie tickets, increasing the pace of production. These two forces ground ceaselessly against each other. So you can think of on the creative side, you have Ed Catmull and John Lasseter, which are responsible for making the actual films that Pixar creates. And then on the actual real world pressures of survival, like the raising money, selling movie tickets, that is the role that Lawrence Levy and I don't

Starting point is 00:05:21 know if it's Levy or Levi. I guess I'll say Levy. That's Lawrence Levy and Steve Jobs are going to be working very close together throughout this entire book to do, to actually turn Pixar from a negative $50 million creative endeavor into a multi-billion dollar company. And he says, this is how I learned that the tensions at Pixar were the very same forces that lie at the heart, not just of making great films,

Starting point is 00:05:40 but of living great lives and building great organizations. There's a line that jumped out at me when I was reading the founders, the PayPal book, the history of PayPal book. The early days of PayPal were very similar to the early days of Pixar. And there's a line in that book that I think illustrates the point that Lawrence is trying to make to you and I. And it says, at PayPal, disharmony produced discovery. Okay, so I want to get to the point where Steve Jobs, this is back in 94, Steve Jobs is trying to recruit Lawrence. And the title of the chapter is like, why would you do that? And you'll see why like there is a there is a an element of he had to throw caution to the wind to leave this great job for something to take a risk on something that's unproven. So this is my

Starting point is 00:06:21 phone ring, I picked up the phone and says, Hi, is this Lawrence? Yes, this is me. This is Steve Jobs. I saw your picture in a magazine a few years ago, and I thought we'd work together some days. Even in those days, when the downfall of Steve Jobs was a favorite topic around Silicon Valley, a call from him was enough to stop me in my tracks. Maybe he wasn't as hot as he'd been before his departure from Apple 10 years earlier, but our industry had never had a more charismatic figure. I couldn't help but feel a spurt of excitement at realizing not only that he knew who I was, but that he had actually called me. I have a company that I want to tell you about, he said.

Starting point is 00:06:55 The company is called Pixar. And so he agrees to meet with Steve before he takes this meeting. He starts doing some, he's like, I don't know what Pixar is. So he starts to do a little bit of research. And he says, the initial thrill faded rapidly. My research revealed that Pixar had a decidedly checkered history. Steven acquired ownership of Pixar when George Lucas spun it off from Lucasfilm eight years earlier. And Lucas had to, I did a, that pops up in multiple podcasts I've done on Pixar. But in the George Lucas biography, I think it's Founders Number 35, the reason he had to sell it is because he was actually going through a divorce. He then poured millions of dollars into the company in the hope of developing a high-end

Starting point is 00:07:31 imaging computer and accompanying software. The result? Not much. Pixar had long abandoned the quest to develop an imaging computer, and it was not clear to anyone I talked to what was sustaining Pixar now. And we're going to find out the only thing sustaining Pixar for many years had been Steve Jobs' personal checkbook. Moreover, Steve Jobs had been Silicon Valley's most visible celebrity. But that made it all the more glaring that he had not had a hit in a long time. A very long time. So he is just what Lawrence is doing here. He's writing the book in 2016.

Starting point is 00:08:01 If Steve Jobs had recruited you in 2007, 2008, 2010, of course you're going to jump at the opportunity. It is not at all the same opportunity in 1994. It is not at all clear that he's actually going to actually come back and transform himself into one of the greatest entrepreneurs to ever live. His last two products before being stripped of all his responsibilities at Apple in 1995 were the Lisa and the original Macintosh computers. Both had been commercial failures. And the next computer had been unable to compete with Sun Microsystems and Silicon Graphics. More and more, Jobs was looking like yesterday's news. When I told friends, and this is a great example of that, when I told friends that I was meeting Steve Jobs about Pixar, the

Starting point is 00:08:37 most common response was, why would you want to do that? And then he gets into the point that Steve Jobs' failure, his lack of hit was something that's really well known. He says a year earlier, there had even been a book published, Steve Jobs and the next big thing by Randall Strauss. So I read that book. It is founders number 77. I think every entrepreneur should read it because it is all about the 13 years. It's Steve Jobs wilderness years. I think on that podcast, I called it like bizarro Steve Jobs. One thing that jumped out at me is the first out of the first 10, you know how important your first 10 hires in your company are, right?

Starting point is 00:09:09 The first 10 hires at Next, one of them was an interior designer. And so that book is important to read because you have this gifted, really intelligent entrepreneur making mistake after mistake after mistake. So it says, the book was a scathing critique of Steve's behavior and business practices at Next. I didn't want to risk being a Steve Jobs fall guy. But Lawrence does something that winds up being incredibly intelligent. He doesn't dismiss it. He's like, okay, well, you know, I'm not sure.

Starting point is 00:09:36 And Steve's like, go up to Pixar, see what they're working on, and you'll see. He's like, we're not doing hardware. We're trying to build feature films, and you'll see. And so this is where Lawrence is going to drive up. They have like this dingy office like across the street from an oil refinery. But inside magic is happening. And so something that I think I've told you over and over again, or I think I've brought up at least a few times, was that Steve learned a lot from Ed Catmull. In fact, the end of there's a there's a there's a like an epilogue or an afterword in Creativity Inc.

Starting point is 00:10:06 that I think is worth the price of the book just from that alone. It's like 30 pages. I think it's called The Steve I Knew or The Steve We Knew, something like that. And Ed just brings out the point. He's like, listen, I'm the person that worked the longest consecutive time with Steve Jobs. I worked with him for 24 or 26 consecutive years. I can't remember. I'm going off memory right now. And he just talks about like his portrayal in media was not the person I knew. And it's just an absolutely fantastic

Starting point is 00:10:30 story that Ed writes about. And one thing that Steve learned from Ed was the importance of having an extremely high bar of talent because he said Pixar was the very first company he ever saw that was an entire company full of A players. And so what Steve is setting up here is actually going to be very useful for not only recruiting new talent, recruiting investors, getting press is when they tour Pixar, they're blown away. So we're going to go to that section. It says my host for the day was Ed Catmull, co-founder of Pixar. So I just want to pull out a few highlights here. As you know, Ed said, we're making a feature film due out in November. We're also selling RenderMan software so i really what i'm going to spend a lot of time talking about

Starting point is 00:11:09 because that's what lawrence is the entire time of reading the book is is he's identifying like what the company was when he came in and what like the ideas and the discussions and the strategy that him and steve jobs uh work together on to transform the company into something that is actually extremely valuable. And a lot of this is taking like just taking an inventory of everything that you're doing and realizing, hey, I understand we added little by little over time, but none of this makes sense to our mission, which is to make a computer animated films, which is what Ed Catmull, that was his dream for his entire life. That's why he dedicated his life to Pixar.

Starting point is 00:11:49 So he says, and some of this is like R man what i'm about to tell you about like this is just these are side shows um so says we're making a feature film out in november we're also selling render man software and making commercials but we don't but we really don't have a business plan for building the company and then lawrence is like all right well how does pixar fund its business now ed explained how it was very much just month to month. This is crazy. Remember, let's say this is 1994. Twelve years into the future, they're going to be bought for $7.6 billion. It's just amazing.

Starting point is 00:12:15 And then you can even add, I mean, and that's back in 2006. What's Pixar worth now? It's a hell of a lot more than $7.6 billion, right? So it says, how does Pixar fund its business now, I asked. Ed explained how it was very much month to month. Disney paid for film production costs while sales of RenderMan software and animated commercials brought in some revenue. That wasn't enough to cover Pixar's expenses, though. So they're losing money every month.

Starting point is 00:12:39 How do you cover the shortfall, I asked. Steve, Ed explained, every month we go to Steve and tell him the amount of the shortfall and he writes us a check. And then this next sentence from Ed is probably the largest understatement in the entire book. It's not an easy conversation to have with Steve. So then Ed continues to bring up Lawrence up to speed of what's going on. He says, Steve was on board when we negotiated with Disney to make a feature film. He was a big, big help in making it happen, but he still gets frustrated at having to keep funding the rest of Pixar. How much has he invested in the company, I asked. Close to $50 million, Ed said.

Starting point is 00:13:07 Remember, this is not super wealthy Steve Jobs. I think I've read different numbers. I think it was like $70 million to $100 million that he had. $50 million he put into Pixar. So it says close to $50 million, Ed said. $50 million? That was a huge number by Silicon Valley startup standards. No wonder Steve griped when he had to put in more. And then Lawrence's question, he's like, this is not really,

Starting point is 00:13:29 this is a really bad way to recruit somebody because he's got a stable job. I think he's a CFO of a public company at the moment. He says, why would I join a company that had been struggling for 16 years and whose payroll was paid every month out of the personal checkbook of its owner? I had not realized how dire Pixar's financial situation was. It had no cash, no reserves, and it depended for its funds on the whim of a person whose reputation for volatility was legendary. And then his perspective changes because of a demo. If you go back and read any of the biographies and autobiographies of like the great advertisers, so like the Claude Hopkins, the great copywriters, Claude Hopkins, David Ogilvie, Albert Lasker, they tell you over and over again, there's not a better advertisement than a demo.

Starting point is 00:14:07 And so this is an example of that. They're like, hey, come to our theater, this little ramshackle theater we have in this crappy office that across from an oil refinery in this company that was hanging on by a shoestring i witnessed a level of creative and technical wizardry that i could never have imagined then ed takes him and shows him how the actual movies are made and he's just he's going to witness a level of craftsmanship and love for creation that he's never seen anywhere so he says ed walked walked me to Pixar storyboard department, rows upon rows of large cork boards were filled with index cards, cards on which appeared hand drawn scenes from the movie. The quality of each drawing was remarkable. And there were thousands of them all drawn by hand,

Starting point is 00:14:57 all telling a little piece of the film story. Then we visited the film lab, a dark room almost filled from wall to wall with a mysterious machine that sat in the middle. That is the Pixar imaging computer. I couldn't quite understand its purpose, but something to do with transferring images to film. It had been hand-built by Pixar. There's only one in the world at that point in time, too. The scale and detail of what I was observing was staggering.

Starting point is 00:15:21 And then he meets John Lasseter. John Lasseter is like the head. You can think of him as like the head of product. Ed is like the manager of Pixar. He winds up becoming the chief creative officer of Pixar. He's the chief. Then when they sell Disney, he's the head of Walt Disney Animation Studios. He might be the most legendary animator of all time. But says John listened attentively as I described my career so far. And I told him about my law practice and how I'd left to join one of my clients. John was interested in why I left. This was fantastic.

Starting point is 00:15:49 I love that he says this because I try to bring this up in the books where it's just like, I really want my life to be an adventure. I don't want to have a normal life. There's a line in Arnold Schwarzenegger's autobiography, Total Recall, the second one, the one he wrote when he was older, that I felt in my soul. And he says the whole idea of a conventional existence was like kryptonite to me. And so Lawrence was working for clients and he had his law firm and he's like, this is not it. This is not what my life is supposed to be. And so as John was interested in why I left, I double underlined a bunch of parts in here. I enjoyed practicing law,

Starting point is 00:16:22 I explained, but it could be a grind. And I didn't love billing my time in six minute increments. And then he's in the heart of Silicon Valley. So he's around entrepreneurs all day, right? And he says, I looked at my startup clients, and to me, they were on an adventure. I yearned for the kind of adventure that they were on. And so they continue to have a conversation. I'm going to skip ahead a little bit i want to read you lawrence's uh like impression of john and the important thing to think about like i've read i don't know close to 10 books i think on steve jobs by this point there's very few people alive that steve jobs respected more than john lassiter and so let's let me go to this conversation that he's having with lawrence uh john had become really passionate about what he was telling me the These are brilliant, creative, dedicated people from the top to the bottom of Pixar, he continued.

Starting point is 00:17:08 I want to see them gain the recognition and reward that they deserve. It has always been a struggle, but I want Pixar to succeed for them, for all of us. By this point, John's voice was all but quivering with emotion. It was as if he were the flag bearer for a deep injustice that needed to be corrected. So back on Founders number 229, I read the autobiography of Sidney Harmon. It's called Mind Your Own Business, A Maverick's Guide to Business and Life. There's a line in that book where he talked about his feelings for the company he worked on for almost 50 years, a company he loved. And it really makes me think of what John, like the role that John plays in Pixar. And Sidney says, I regard myself as guardian of the company's soul.

Starting point is 00:17:52 That is how I think about Lasseter, Lasseter's role in Pixar. As I sat there with John and Ed, my experience of the day was suddenly giving birth to a new feeling. These two leaders had dedicated themselves for years to their crafts with almost no commercial success and recognition. I had no idea how, when or where they might succeed. But one thing was becoming clear to me. They were winners. I might not know how that victory would come, but I was quite confident that for them somehow it would. Pixar remained an enigma.

Starting point is 00:18:20 There was so much that was great about it, but there was an even greater number of red flags. And I'm really glad Lawrence spent so much of the book writing about it. I just wasn't sure about this because this is it speaks to like if you think about how crazy this is, this is the greatest opportunity of his entire career. And he's why he's going back and forth. He's like, I don't know if I should take the risk. This is crazy. There is like something to say with like your intuition or listening to your gut and making a decision even if it's irrational. Him joining Pixar was irrational.

Starting point is 00:18:51 And it was the best decision he ever made. So he goes back and he talks to Steve. He's like, I don't know what the hell. Like, I don't know what I'm doing here. He's like, listen, I have questions about Pixar's business. I said, the products, the technology and team seem amazing, but I'm not certain where the business growth would come from. That's what we have to figure out, said Steve. Pixar has this amazing collection of talent doing work that no one has seen before.

Starting point is 00:19:12 Now it's time to turn that into a business. And he's like, yeah, I understand that, but I still like I don't I'm risking a fantastic career I have for this huge unknown. Rationally, it just didn't add up. I had worked my way up into an enviable position as a chief financial officer of a public company in Silicon Valley. I was about to give it up and go work for a little company owned by the notorious Steve Jobs, whose record for success had gone off the tracks, and the record of Pixar itself had fared no better. But the more he's like, no, I can't do this, the more in these quiet times in his mind, he's like, there's just something here go do it but there

Starting point is 00:19:46 was just enough intrigue about the opportunity that I could not get this out of my head a couple of days later still not fully certain if it was the right move I took the leap and accepted Steve's offer so I'm skipping ahead in the story he starts at Pixar and this is something this is not too dissimilar to if you read about when Steveve jobs came back to apple 1987 just the first thing he did is like i needed to an inventory of every single thing that we're doing and see if anything makes sense and he spent weeks and weeks like this is this is nonsense and that's when he i think he he eliminated something like 70 or 80 of the product line he does that famous like two by two matrix he's like we're just going to make a consumer desktop and a professional desktop

Starting point is 00:20:25 and a consumer laptop and a professional laptop and like we're going to direct all of our energy and making best the best product these four products insanely great and we're not going to do anything else uh lawrence has his own way to get there but he's going to essentially cut everything with obviously working with steve except film and so they pixar had made this this software internally. They need to make their movies to do computer animated special effects. It's called RenderMan. And they're like, hey, we should sell this to other people.

Starting point is 00:20:52 And he's just realizing, well, this is just not... Steve also wants to take the company public. That's why he hired Lawrence. And so how are you going to take it public? You haven't made any money. It's negative $50 million net worth. What's happening here? When studios are making films with special effects, they need lots of of lots of render man otherwise they don't need it at all some years

Starting point is 00:21:09 our sales are up some are down so he's talking to people within pixar trying to get a lay of the land so she's what i'm telling you what's the average sales price i asked about three thousand dollars she responded in a very good year pixar could sell a thousand copies of render man at three thousand dollars per copy that's3 million. To make a difference, RenderMan's business would have to scale by a factor of 10. And that, simply put, was impossible. There were not enough customers. This wasn't a business. It was a sideshow.

Starting point is 00:21:36 And so there's going to be many examples of this when they make commercials and everything else. It's like, why are we doing this? These are not big growing markets. Why don't we cut it and then take the talent and the expertise and the people that we have doing these other things that aren't our main focus and put them on our main focus? And so that's a principle we've seen over and over again in the history of entrepreneurship and one that's just very, very useful to use for your own work, right? I just want to pull out two sentences here. It gives you an idea of Lawrence's impression of Steve.

Starting point is 00:22:01 Steve had an almost permanent intensity about him. Like he was always in top gear. Whenever we did talk, it was like shifting from zero to 100 miles per hour in an instant. And Steve was like that almost all his life. When he worked for Nolan Bushnell, the founder of Atari, when Steve was 19, Nolan said that about him. He's like, if I needed something done, I'd give it to Steve because he had one speed. Go. And then Lawrence goes into like, what was it like working with Steve at this point? This is going to remind me of something that I learned back on Founders Number 212 when I read, or no, I'm sorry, it's 213, when I read the autobiography of Michael Jordan, the closest thing we're going to get to an autobiography is called Driven From Within. So I'm going to read

Starting point is 00:22:43 you the quote first before I read you Lawrence and Steve working together. And Michael Jordan said, I'm not so dominant that I can't listen to creative ideas from other people. Successful people listen. Those who don't listen don't survive long. And so this is what Lawrence said. This is the first example of a pattern I would experience often with Steve. He would debate with intensity over an issue, over any issue we were discussing, big or small. Sometimes we agreed, sometimes we didn't. When we didn't, I would find myself having to stand resilient, steadily holding my own position, yielding not to his intensity but to the merits of the matter. Time and time again, I saw how Steve preferred that we come to a mutual resolution, marching forward together, rather than acting on an outcome that he imposed. Years later, Steve told me he

Starting point is 00:23:26 felt the business and strategic choices we made at Pixar were neither his nor mine, but the product of justice process. And it goes back to that famous anecdote or story Steve would tell over and over again. It's the rock tumbler story, how when he was a young person growing up, his neighbor would show him what a rock tumbler was. And they'd take these rough, jagged, ugly rocks, throw them in the rock tumbler. They'd come back the next day, and the rock tumbler just basically smashes the rocks together over an extended period of time. And then when you take the rocks out after the process is done, they're smooth and beautiful. And so Steve, to Steve, that was a metaphor of that idea that I think the founders of PayPal knew that disharmony can produce discovery. And part of this process is going through and just eliminating every single business that is not your main focus. And so they go and they're like, why the hell are we doing animated

Starting point is 00:24:20 commercials? This doesn't make any sense. It says, once again, Pixar was committing its talents to an endeavor that would never go anywhere. It might keep a small, talented group busy, but as a strategy for growing a company, animated commercials was another dead end. With little promise in RenderMan and animated commercials, the options for growing Pixar's business was diminishing, and my level of worry was on the rise. The next thing I had to probe was the short films. So it starts starts off they try to sell hardware that doesn't work right so then they move in they have the render man software they have animated commercials they have short films and then they're trying to build Toy Story and they're doing all

Starting point is 00:24:53 this at the same time eventually they're going to cut 75% of what was left and only focus on Toy Story which is a fantastic idea by the way because Toy Story is going to wind up making like 200 million dollars it's going to open every single future opportunity for pixar so this is really really smart and i'm really glad that lauren spent so much time talking about this so says animated short films had no commercial value they were either done purely as a labor of love or in a way to test and develop its technology and story development process and they're cutting a business that they had won i don't know like three oscars for they had there was a series of uh like they had won, I don't know, like three Oscars for? There was a series of, like they had won Academy Award for Best Animated Short Film, one, two, three, he names three, maybe four different movies on this page.

Starting point is 00:25:33 So this has got to be difficult, right? They didn't make a dime, and in fact, they were very expensive to make. Pixar's an enigma, I shared with Hillary, that's his wife, one night after dinner. I don't think I've ever seen so much, he uses Pixar's an enigma over and over again in this book, by the way. I shared with Hillary one night after dinner. I don't think I've ever seen so much. He uses the Pixar's an enigma over and over again in this book, by the way. I share with Hillary one night after dinner. I don't think I've ever seen so much talent under one roof. Their efforts have been nothing short of heroic, but every business that has tried has either failed or has such limited potential it's hardly worth the effort. If nothing's worked, how did it survive this long? Hillary wondered. Steve's stubbornness, I replied. I don't know any other investor who would have stuck it out this long? Hillary wondered. Steve's stubbornness, I replied. I don't know any other investor who

Starting point is 00:26:07 would have stuck it out this long. I mentioned on either, I think it was the last podcast with Sam Walton, it might have been on the PayPal podcast, but I saw this headline and the new Peloton CEO said, you can't possibly know what the TAM is, what the total adjustable market is. You're in the middle of inventing the tam and that is exactly what pixar is facing before they release their first movie and it says nothing i'd done prepared me for for understanding the toy story's business potential pixar had never released a computer animated feature film no one had there was no way to predict the market for it and so i want to read you a paragraph that appears in different forms throughout the book

Starting point is 00:26:45 because you think, okay, he was uncertain, then he took the job, and the uncertainty goes away. No, no, it continues for a very long time. And it really speaks to, you know, some people might have got scared and quit. And there is a benefit, like Steve's extremely stubborn, and that wound up working out to his benefit. And in his own way, Lawrence also has a form of stubbornness. And he keeps having these pillow talks with his wife.

Starting point is 00:27:07 He's like, if I had known, now he's in months into his tenure here. If I had known what I know now, I said, I can't imagine I would have taken this job. Taking this company public seems like a crazy notion. No investor I know would come near this. $50 million in losses. No profits. No growth. And Disney holding all the cards.

Starting point is 00:27:26 And it's at this point where he actually applies some advice that he had previously gotten from mentors. He has a group of usually older mentors that are extremely important in his life, and they wind up guiding his career and being extremely useful, like coaches and things like that. So he says, I learned the wisdom of not griping over the hand I was dealt. One of my mentors said, there's nothing you can do about where the pieces are, he'd say. It's only your next move that matters. I had worked at training myself in his way of thinking. It was a lot more productive than getting emotional about things that were out of my control.

Starting point is 00:27:57 And then he just speaks to not only how difficult this is, but how unlikely it was to go from negative 50 million to 7.6 billion in a decade. I guess 12 years, a little bit more decades. He says, the more I learned, the more the magnitude of what Pixar was attempting to do dawned on me. 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. And I double-online this section. This is fantastic.

Starting point is 00:28:24 One of my favorite lines in the book pixar was embarked on a lonely courageous quest through terrain into which neither it nor anyone else had ever ventured in this section of the book this is where him and steve are going they're doing an insane amount of research and trying to piece together like what is the animated film potential so this is a quote i want to give you an example of this i've repeated this a few times over the over the podcast but i think it's important it comes from becoming steve jobs uh the evolution of a reckless upstart i think i covered this back on like founders number 19 it is a book i definitely have to reread so it says nobody in hollywood wants to take any risk he told me a year later he was this is steve

Starting point is 00:29:02 talking he was truly proud that he and Lawrence Levy had studied Hollywood closely and had learned enough to understand how Pixar could cut a great deal in an industry that has thrived on plundering the dumb money of starstruck outsiders. You can't go to the library and find a book titled The Business Model of Animation, Steve explained. The reason you can't is because there's only been one company, Disney, that's ever done it well, and they're not interested in telling the world how lucrative it was. And so this section of the book that I hold in my hand is where they're doing the research that he becomes extremely proud of. And so this is back in 95, you used to buy like, I don't know if DVDs existed, but you buy VHS tapes, and you would own a movie, right? I guess

Starting point is 00:29:37 you can own the digital form now, but they're just going through like, okay, well, where are we going to make our money as we make films? So he says, Steve, we don't have precise data, but I'm looking at the home video market and it's huge. Disney is making a fortune on it. And I had read I heard a podcast one time that blew my mind. You know, I think his name's Russell Russell, not not Russell, Richard Simmons. I was thinking Russell Simmons, the hip hop, the founder of Def Jam, Richard Simmons, I heard on a podcast one time, he had made like $150 million selling VHS, like tapes of his workouts, like an insane amount of money. And so they're realizing, hey, Disney's over here quietly printing money, not telling anybody about it. It says Disney's making a fortune on this. People are paying 30 or $40 a movie to own them.

Starting point is 00:30:21 And so it gets really crazy because something I learned from Steve Jobs is that when he was he was doing the study he's like you know disney and this is many many years ago they probably sold way more now and who knows what the value is because of disney plus and everything else but it's like disney sold 28 million copies of snow white that's insane so says do you know how much disney makes on them he says not precisely but remember the calculation that said that if pixar had released beauty and the beast which had been one of the most. So basically they had no models to go off of. And Disney wasn't even though Disney was a partner, they're not telling them all this stuff. Just like, OK, can I backdate some of this stuff? He's like, what if we run a model?

Starting point is 00:30:55 It's like, OK, what if in our current deal, let's assume that Toy Story winds up performing as well as Beauty and the Beast. And they knew the deal was a crappy deal and they'd have to wind up renegotiating it because i think they would have gotten i want to say it was like out of the 170 million that would have came in they only would have gotten 17 million and disney would have taken the rest and lawrence is making the point he's like i'm pretty sure the profits on the film are enormous they're probably 150 million or more and i think a lot of that is coming from home video home video was turning this is a fantastic idea our insight home video was turning animated feature films into big business bigger than we had ever imagined beauty and the beast aladdin and the lion king were among the most profitable films of all time and so they're like okay well steve steve's takeaway from this is like pixar can be in a

Starting point is 00:31:43 multi-billion dollar video market. And so this is like their first one of their first disagreements because Steve's in a rush to take Pixar public. Lawrence thinks he's a little bit more conservative, wants to wait. And, you know, Steve famously ties this. He's like, OK, Toy Story is going to come out on Thursday and the following Wednesday we're going to go public. And the entire book is essentially trying to get to that point and how crazy this experience was and so Lawrence is taking away like he's telling us after the conversation with Steve's over where they're trying to like identify hey what's the potential for this market and Steve just had he was just full risk on it was one thing

Starting point is 00:32:18 to learn that animated feature films had more financial opportunity than we thought it was quite another to bet the entire company on it. There was no modern precedent for taking an independent animation company public. But Lawrence also makes the point, he's like, yeah, this has never been done before, but, you know, Disney had diversified. It wasn't a purely animated movie studio or animation studio, and that has one movie taken public. But he also said, well, Steve's not, that doesn't really bother, if something's never been done before, that doesn't really bother Steve. And he makes this point here, Steve's willingness to fund Pixar for close to 10 years went beyond all the norms for keeping a startup alive. And so part of the mental model that they're trying to build and figuring out how to run a company is exactly what you and I are doing

Starting point is 00:33:02 right now. And it's like they go to history and try to learn insights from history that maybe relate to their business or they can use in their work. So they said that they started reading everything they could about the Disney company. And it says some of the parallels between Disney and Pixar were striking. Walt Disney encountered animated cartoons for the first time. This is when he was serving in World War I as an ambulance driver in france and he quickly fell in love with the field ironically he feared that he had entered the field too late that we see over and over again too that there was no growth opportunity left in it he ended up creating

Starting point is 00:33:36 the opportunity by pushing the field into new territory both creatively and technologically just as pixar was doing now so what they're doing here is they're saying, okay, this is what Disney experienced in his time, this is the lesson from that, and this is how it compares to what we're going through. In 1928, Disney released a short black-and-white cartoon that changed the course of animation. This is Steamboat Willie. It ushered in breakthroughs on two fronts.

Starting point is 00:34:01 It introduced the world to the most fully-formed cartoon personality audiences synchronized sound, meaning that the sounds were timed to the action, making the overall audience experience far more immersive than ever before. Disney then set his sights on the first animated feature film. It took him until 1937 to release Snow White, a virtuoso accomplishment that ushered in many more breakthroughs in story, character, color, sound, and the way animation displayed depth. So all these breakthroughs

Starting point is 00:34:35 that Pixar is the first people to do for computer-generated animation is to think about where we're at in the story, okay? Other parallels between Disney and Pixar were less inspiring. Like Pixar, Disney had struggled financially for years. Walt Disney had bet it all on Snow White, including mortgaging his house. The success of the film paid off financially, but it wasn't long before Disney was struggling once again. An imitation was proving to be,

Starting point is 00:34:59 or excuse me, animation, excuse me, animation was proving to be a very fickle business. So then he winds up diversifying. In 1954, he goes into television with the acclaimed Disneyland television show. And in 1955, he opened Disneyland, a daring adventure to re-envision the theme park experience. 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 animation of the animation world hadn't pulled it off, what was the likelihood that anyone else could?

Starting point is 00:35:32 And what they do here is so smart. They're like, okay, we need to stress test these ideas we're learning. So maybe we should go and we diversify into, we're like, we won't just do animated films. We'll do live action too. So they went to a meeting with the guy who runs disney's live action films right they're like maybe we should diversify just like walt did and so there's just a lot of great insights that this is going to um this is going to occur over two pages so i'm just going to hit some points here

Starting point is 00:35:58 filmmaking is not a great business joe said it's hard to succeed by releasing new films. The value often comes from the library. How does that work? Steve asked. If it's a good film, it stands to be watched again and again and again over the years. New and this is so important. And I think this is an echo of what Warren Buffett said. I think it was Warren that said it, not Charlie, that time is a friend to the great business and an enemy to the mediocre. I'm paraphrasing there. And why? Because what you're doing now, you have no idea how the invention of new technologies that will happen 5, 10, 15, 20 years in the future can actually benefit you.

Starting point is 00:36:35 And so it says if it's a good film, it stands to be watched again and again over the years. Now Snow White is what? At this point in history, what, 80 years old? And people, they're still watching it. So it says if it's a good film, it stands to be watched again and again over the years. New technologies like home video make that even more likely. The major studios have built up enormous film libraries that continue to provide value to their film businesses. Joe continued to explain, look at the value of the major Hollywood studios and you'll see their libraries of films is, and you'll see their library of films is really

Starting point is 00:37:01 significant. The big studios are really about providing capital and distribution, Steve said. They don't focus on making one single great product. This is a different business model completely, and he's comparing it to what he's been used to. In that model, this is Lawrence saying, even if a film does just okay in its actual release in the theaters, it may have value for years in a film library. That's the opposite of tech products

Starting point is 00:37:28 that become obsolete quickly. And so Steve makes the insight. He's like, okay, well, the longer we can hold on, the more valuable our library is, the more valuable that Pixar comes over time, we might not have to do computer, like we might not have to do live action or diversify. We just, like, if we can produce enough

Starting point is 00:37:45 computer animated movies right and just pay our bills and hold on and we have a couple hits like i think pixar almost every pixar movie's been hit but his thing he's like okay well why we don't we necessarily don't have to diversify and so ed catmull they go meet with ed and they bring up their thinking and he's like no no we don like, we have amazing advantages over live action films. And so he provides Lawrence and Steve with insights of why not to do this, like, just go all in on what we're doing. A few days later, we took the topic up with Ed. We sat in his office and discussed whether we should make live action films the same way we made animated films. It's about the way the films are made, Ed said.

Starting point is 00:38:20 In animation, there is much more control. We iterate on the story over and over again do storyboards character uh character modeling animation tests and other processes if the story or a character isn't working it's almost like you know what it just hit me when i was rereading this now and i'll continue this in a minute it's almost like the combination of what pixar is doing it's a combination of like making a tech product and making a movie and you have the best of both worlds because this sounds less like and he's going to tell us why it's not like a live action movie. This sounds a lot like building a product, right? We iterate on

Starting point is 00:38:51 the story over and over again, through storyboards, character modeling, animation tests, and other processes. If the story or character isn't working, we can change it. Live action doesn't offer that flexibility. Once the film has been shot, you're locked into using the footage you have. That is why, and this is still Ed talking, that is why so many films don't quite hit the mark. So what he's saying is we have more control. In Ed's opinion, we have a higher chance of continued consistent success in computer animated movies than you would in live action because you have more control and more time to iterate over the entire process. And Steve's not going to do live action films for this reason. This is a fantastic sentence. There was no part of Steve that bought into the idea of making products that might not have a shot at greatness.

Starting point is 00:39:37 So this is another good point. Just because somebody in the past was unable to do it doesn't mean that you can't. And so they find this book is written in 1987. It's like there's people in the past that had tried to ipo just to make films and they all failed and so the author this is really important because this guy named vulva who writes the book winds up being one of the he's working for like a small boutique investment banker uh firm and he's there's three investment banks that take uh pixar public and this guy's one of the head analysts at one of the banks that winds up agreeing it's like no this is actually different this time is different so says vogel

Starting point is 00:40:10 was talking about taking a film company public exactly what we're hoping to accomplish and this is what he wrote in time in the 80s uh it was a long torturous and expensive obstacle course and an investment nightmare there it was not the ideal scenario. Steve was pressing for a public offering, and here Vogel was holding up a big, bright, neon warning sign. So this decision is like, are we going to go all in on just being an entertainment company? We're going to say, hey, this is it. This is the only path forward. We're going to make computer animated feature films,

Starting point is 00:40:42 and that's what our goal is going to be. It goes on for several chapters of them going back and forth. Should we do this? Should we diversify? They eventually say, hey, we're going to go all in. And so there's all these kind of meetings in the book. And I just want to – this is pre-IPO. What I'm about to tell you, this is pre-IPO. And it's their game plan for moving forward.

Starting point is 00:41:01 It's the list of objectives they must, it's going to be extremely difficult, and they know that, they must achieve. So it says, we have to change the way the world perceives Pixar, Steve said. Even if Disney gets the billing, people need to know that we made these films. We cannot build a company without a brand. We're not, so we've seen this over and over again.

Starting point is 00:41:19 Akira Morita, at a time when the founder of Sony, this is, I think, founder's number 102, winds up, they don't have a lot of money. They're building electronics in Japan. They get this huge order where they get like 100,000 units, which is, you know, orders of magnitude more in revenue than the company had ever taken in its history. And the guy says, okay, but take off the Sony name and put our name on it.

Starting point is 00:41:41 So you're just going to be like our house brand. And Akio stands his ground. He's like, no, I'm building one of the greatest, like I'm building a legendary brand 50 years from now that my brand will be as well known as your brand is today. And so he turns down that money. I haven't finished reading or haven't made a podcast on it yet, but I've watched a documentary on Ralph Lauren. He did the same thing. Had no money, had a desire and a goal to build a fashion brand named Ralph Lauren, starts out making ties. I think it was like Bloomingdale's or a department store like that say, hey, we love what you're

Starting point is 00:42:11 doing. Here's a big order. Take off your name and put on our house brand name. And he stood firm. He's like, no, I'm not doing that. So same thing. Steve's like, I'm not just, we're not just a supplier to Disney. We're building one of the great entertainment brands.

Starting point is 00:42:24 And so you have to know this is a non-negotiable. And he walks away from negotiations with Disney over like, I think at least twice over just this term. He's got multiple terms, but are multiple things that he wants done. But this Pixar is going to be a brand. And he was dead set on that. So he says, we cannot build a company without a brand. That was the fourth pillar of our plan. Turn Pixar into a brand. So that the fourth pillar of our plan. Turn Pixar into a brand. 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. And so now they have four pillars. Okay.

Starting point is 00:42:54 Number one, we have to quadruple our share of the profits. The only way to do that is to renegotiate with Disney. The only way to renegotiate with Disney is Toy Story has to be a massive success. Okay. So that's number one. Number two, we have to raise at least $75 million to pay for our share of the production costs. And the only way they can do that is through IPO. Number three, we have to figure out how to make films far more often than we know how. You can't have this, hey, one film every four years cadence. The company will fail.

Starting point is 00:43:24 And number four, pixar into a worldwide brand and then lawrence says piece of cake so there's a lot of exchanges in the book where lawrence and steve lawrence is way more cautious and i think steve demonstrates something uh that max max levchin at the end of that book the founders so max levchin at the end of that book, The Founders, so Max Levchin is the founder of PayPal. I think he found another company he sold to Google, and then he's the founder of this company called Affirm. And he made a speech that was interesting because, you know, he's trained as an engineer and a programmer.

Starting point is 00:43:54 He's like, we're meant to be skeptical. But he talks a lot about the fact that, like, the people he admires the most are, like, the founders of the world. And there's a post that he says. He says one key ingredient of being this kind of person is an almost irrational lack of fear of failure and irrational optimism. And we're seeing that. We see that throughout the entire story of Pixar. Just Steve believed, even if he didn't, there was no reason for him to believe that. There's no like rational reason for him to believe that. He just believed that what Pixar was doing

Starting point is 00:44:29 was valuable and that it would succeed and thrive in the world. And he says, it worried me that he saw Pixar's IPR through glasses that were too rose colored. The markets seem healthy and receptive right now, Steve declared while we were on the phone one morning. Other companies are getting ready to go public. Netscape is going to be as big an offering as we've seen in a while. I think Pixar is bigger and better. And Lawrence does his best to try to temper, temper rather. Steve's like irrational optimism, but he does not, he cannot, it's impenetrable. Netscape represents an entire new industry, I replied.

Starting point is 00:45:00 Interest is huge. Investors all over are talking about the internet. They're not thinking about animation. We'll have to convince them about Pixar. They'll get it once they see what we're doing, Steve asserted. We should plan a Pixar public offering as soon as possible. I wasn't sure I agreed. So many pages later, they're trying to build a board. They're trying to get Pixar ready.

Starting point is 00:45:23 And it's more of this. So he says, I brought up the topic with Steve on the phone that night. We'll have to disclose what we know about Pixar's business risk up front. Investors will figure it out anyway. It's better coming from us. If that's what you think we have to do, we'll do it, Steve said dismissively. I could tell he wasn't against the idea. He just didn't think it mattered. He was convinced investors would see beyond it that they would be so enamored with pixar's vision that the business risks would be minimized in their eyes and then i left myself on this page as steve knew he wound up being completely correct and they also have the

Starting point is 00:45:58 benefit of the fact that their product is a movie toy story at its time was truly revolutionary so investors could watch it before the IPO. They had to have the IPO lined up, but I think they thought they were going to come out like $14 a share or something like that. And it winds up exceeding that by three times that amount or whatever the number winds up being. I'll talk about it later on the book. But a large part of that is what Steve's saying is like, when they see it, they'll get it. They're just in a more unique position than most companies in history. And the fact that like your product demo, right, is something that people pay to see. They want to watch a movie.

Starting point is 00:46:29 It's like, oh, wow, now I can see what you guys can do. This is huge. And what's amazing is Steve keeps this fundamental, almost like zealous religious belief in Pixar. Even after, so they think, okay, Steve's like, hey, they're going to love it. Let's get Morgan. Lawrence is like, should we have Morgan Stanley do the IPO? Should we have Goldman Sachs? Steve's like, we'll get them both.

Starting point is 00:46:50 They both wind up touring Pixar. They talk to Steve, and they both decline. They do wind up getting one firm lined up for the IPO. Now they wind up needing to get two more. This is where Lawrence does something smart. He contacts the guy who wrote the book, warning about the difficulty of IPOs, film companies. And what this guy said was really interesting.

Starting point is 00:47:10 So it says, Hal Vogel was now managing director and senior analyst of entertainment, media, and gaming at Cowan & Company, a boutique investment bank based in New York that I had never heard of. And so he's like, hey, can I talk to you about this? And so Hal's like, of course. She says, this was Hal's chance to remind me how terrible an idea this was but instead he replied i'd love to learn more i've had my eye on pixar from afar so this is let's see at this point this

Starting point is 00:47:33 guy's been involved maybe 20 years analyzing the entertainment industry and this is he gets it he this is like a huge boost of confidence for lawrence I love it, Hal said. I just love it. You're doing everything that the entertainment industry needs. What? I thought to myself. What do you mean? Technology is a huge driver in entertainment, Hal explained. Companies that combine great story, technology breakthroughs, and seasoned management will lead the way into the future. Pixar has all these ingredients.

Starting point is 00:48:05 Believe me, it's rare, and this guy's going to know because he's been a historian of the industry for 20 years. I'd love to be part of this. Maybe Cohen can be part of your IPO. And this is the takeaway. He's like, my jaw dropped on the floor. Here was one of the top analysts in the field saying that we had all the ingredients for success. So one of my

Starting point is 00:48:27 favorite quotes from Steve Jobs ever, he says that there's just a tremendous amount of craftsmanship in between a great idea and a great product. And there's a line in the book that Lawrence writes that reminds me of that. He says, Steve once told me that the gestation of great products takes much longer than it appears. What seems to emerge from nowhere bellies a long process of development, trials, and missteps. Steve once told me that the gestation of great products takes much longer than it appears. So they eventually get three investment banks to line up. They're like, okay, we're going to be able to raise the money because they want to be able to.

Starting point is 00:49:04 Right now, Disney's paying for all the production costs are like there's no way we can do a 50 50 split if we can't come up with our own money and so everything's going to come down to the fact that like what is toy and this was a huge gamble by steve jobs and it was his strategy which wound up paying off handsome he's like no we're gonna time the we're not gonna wait the ipo is coming right after toy story toyster is going to be a hit and all the the publicity in the news is going to affect the ipo steve called it down to t like he got it so it says now we get to the point where like the movie just released and at this point they're like this is like the fax machine and telephone world so lawrence is waiting on calls to figure out they have a good idea it's like what

Starting point is 00:49:41 is your i think it's the friday because they're it's the they're it's like a thanksgiving release so i think the movie comes out like on wednesday night they're like disney tells them hey by friday we're going to be able to project what this thing's going to do so it says it was now approaching 10 30 in the morning it would only be moments before we knew the first magic number first magic number that of toy story's opening weekend box office i take 10 million i reminded myself 20 minutes later the phone. I rushed to answer it. I hung up the phone trying to absorb what I had just been told. So, Hillary couldn't wait. What was it? It's massive, I said. Massive. Disney predicts a weekend box office close to 30 million. In other words, three times what he had just told himself that he'd be happy with 20 minutes earlier. 30 million, I continued.

Starting point is 00:50:26 Disney thinks the film will have a huge run. It will sail past 100 million and probably past $150 million. It's amazing that they can project that at that point because it winds up doing, what, 182, I think? 172, something like that. Five minutes later, the phone rang. It was Steve. It's amazing Steve started excitedly. This is huge.

Starting point is 00:50:40 They're thinking it could be the biggest film of the year. We did it, Lawrence. We totally did it. And so this is the result of why he wanted to do this with he wanted to time the release of Toy Story with the IPO. So that's happening. They get a call on Friday, next Wednesday. So five days in the future, they're going to that's that's a day that the IPO is going to happen. And Roberts and Stevens is the the bank that's taking them out. They say, as a result, it says Robertson Stevens thinks that they can now price it over $20 per share before the movie. Before the movie, they're like, OK, it's $12 to $14 range.

Starting point is 00:51:17 Now, Toy Story has this massive opening weekend. They're like, let's bump it up to $20. And so this is the moment of truth. Two days later, Steve, Ed, and I huddled around a computer in the San Francisco offices of Roberts and Stevens. The NASDAQ stock market had opened at 6.30 a.m. They were ready to launch Pixar stock. A little after 7 a.m., 6 million shares of Pixar stock was placed with investors at $22 per share. We were live. Pixar was a public company. It immediately jumped up into the high 30s. Demand was off the chart. We all stared at it, partly beaming, partly in disbelief. Todd Carter broke the silence.

Starting point is 00:51:50 He turned to Steve. Congratulations, Steve. You're a billionaire. While I was glued to the computer screen watching Pixar's trades, Steve had stepped into a nearby room and made a phone call to his friend Larry Ellison. All he said was, Larry, I made it. The next day's headline in the Wall Street Journal's report on the IPO read, Steve Jobs is back in the saddle again, becoming a billionaire in Pixar IPO.

Starting point is 00:52:14 Responding to the skepticism over Pixar's valuation, Steve said, it's not for me to decide what the value is. That's why we have a market. But we are only the second studio in 60 years to produce a blockbuster animated feature film, and we're doing it in a new medium of 3D computer graphics. I felt something between disbelief and jubilation. For most of the past year, I had been utterly wrapped up in what was right in front of me, simply trying to move everything ahead.

Starting point is 00:52:43 Now, in the space of one whirlwind week, Pixar had taken off. So they celebrate for a little bit, but then they realize, wait a minute, this was just step one. We have a bigger plan than this. As jubilant as I was about the IPO, I also understood that my responsibilities were just beginning. After all, the IPO was just one of four pillars that we had described. We still had to drastically increase Pixar's output, which they don't know how to do yet, earn a much bigger share of the film's profits, which they don't know if Disney will agree to, and build Pixar's brand. Pixar was very far from reaching a stable orbit.

Starting point is 00:53:16 And now they have to deal with what if you're just a one-hit wonder? And so this is just fantastic because if you really think, like, what is the goal? Long-term excellence is the goal. Long-term excellence is the goal, and itterm excellence is the goal and it's extremely difficult. Let's go to Lawrence. He says sustained performance is the hallmark of business success. We had to face the biggest challenge of all, how to make great films. Without that, no matter what else we did, Pixar might easily join the long history of one-hit wonders.

Starting point is 00:53:42 Coming up with a second act after a big hit is a thorny challenge. The problem with success, even a little success, is that it changes you. You're no longer walking along the same precipice that drove you to do the great work in the first place. Success has a way of taking away your edge. And this is where the importance of how talented pixar the team at pixar is starting with steve ed and john i do want to john's gonna say something brilliant here john laster's gonna say something brilliant here first this is lawrence has his own great line i want to bring to your

Starting point is 00:54:15 attention i double underline this so you know it's important creative vision does not spring forth fully formed and then this is so they're they're trying i'm going to get to what john says they're trying to figure out like what kind of process and oversight oversight should be put in place at pixar so then they can grow and create more movies right that's one of the pillars the four pillars that they're trying to figure out like how do we up our production and they're like okay well other studios like right now john and ed have just been making all the creative decisions like now we're a public company we We have to be more serious. Right. And you're obviously I think if you know anything about Steve Jobs, you're going to realize that he's not so sure.

Starting point is 00:54:52 And I really think of one of the main lessons, not only of this podcast in general, but in that book, The Founder specifically, the one I did two podcasts ago, is that you have to live and die by the founder. And you can think of, yes, Steve's the founder of Pixar, but really Ed and John are the creative forces. It's like the role that he played at Apple, that Steve played at Apple, is what John and Ed play here. And this is just fantastic. I'm going to read a few paragraphs here to you, because it's just fantastic. Because they're like, what should we do? Should we hire a creative director? Should we have some oversight? And so John says, I understand the concern here. I really do. But we don't want to make safe films.

Starting point is 00:55:34 We want to keep breaking barriers in story and in animation. Our story team is like no other. It has incredible vision and depth. We have to rely on it. This is more on his soul in the game. Our films must come from the heart, John explained. It's not just about entertainment. It's about telling stories that audiences connect with emotionally.

Starting point is 00:55:57 The way to do this is to make our films personal, to make certain they mean something to our directors. John had such passion in his voice, such sincere conviction that it was almost impossible not to be moved by it. So what you're saying, Steve said, is that we should bet on our creative talent no matter the risk. Yes, John replied. I know that's asking a lot, but it is what I think we should do. And of course, Steve is going to be in alignment with that because he also has soul in the game he's seeing like a mirror image of himself in a different domain I guess is what I'm trying to get here real recognizes real is a way to think about this like this guy is a craftsman he is a gifted creative person Steve is going to bet on him and so it

Starting point is 00:56:40 says what John was asking us to do was unprecedented he wanted to put all the creative approvals in the hands of Pixar's story team it just wasn wasn't done. After John left the meeting, Steve asked Ed what he thought. From Pixar's shorts to all the way to Toy Story, we've done it the way John described. Only now the stakes are higher as we try to make more films and our production budgets go up. But we have to take John's thoughts seriously so often studios sacrifice story by playing it safe john's please had struck a chord and all i wrote on this page i'm going to read another few paragraphs on this i want to tell you my note first this is great it's just fantastic i love this john's please 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 saidon says the founder may be bizarre and erratic but

Starting point is 00:57:46 this is a creative force and they should run the company this is exactly what it's their the exact same realization and applied to a different domain that they're realizing at pixar so it says isn't that the way we should be making great films steve said from the heart of the filmmakers why would we want anyone to interfere with that and so lawrence tries to play devil's advocate. He's like, well, Disney made great films and they had executive oversight. And then Steve says something that is just perfect. But did they have a John Lasseter? Steve mused. This was a great question. John and his young team seemed to be cut from a different cloth. They were virtually inventing how to tell stories in the entirely new medium of computer animation. And what we're aiming for, and we're aiming for something different, Steve added, truly original films, truly original films, stories that have never been seen or heard

Starting point is 00:58:35 before. At this point, my job, and this is so, this is another great point. 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 teens running amok. I didn't bring them up. That wasn't why I came to Pixar. I came because I believed in Ed and John and Pixar's team. Now I found myself surprised to find Hollywood so risk-adverse. I loved the idea that filmmaking could use a dose of Silicon Valley bravado. Every startup impulse within me said this was the time to bet on our team.

Starting point is 00:59:20 That would be the Silicon Valley way of filmmaking. No hedging. Bet on innovation. Bet on greatness. Take the shot to change the world. I want to read that one more time to you. Okay, so now we get to the point where they're going to renegotiate with Disney. The chapter I'm in is Anatomy of a Deal. This is probably, not probably, this one chapter is worth the price of the book. Just to, even if you didn't read the whole story, I'd pick it up and read Anatomy of a Deal because I think the strategy they have here is very fascinating. It's very short.

Starting point is 01:00:13 I have, you know, a lot of highlights over the next few pages. So what I'm going to quote from is they're really, what they're trying to do here is they're trying to map out like the strategic relationship between Pixar and Disney. So this is happening in 1996 so lawrence and steve are meeting he says we're going to discuss where we thought pixar was in relation to disney as we often did we wrote down the main points of the discussion on a whiteboard we had discussed all these points before but it was helpful to see them all in one place steve made two columns disney and pixar under the disney column he would write the points that gave disney leverage and under the pix column, he would write the ones that favored Pixar. Point one for Disney,

Starting point is 01:00:47 no obligation to change contract. They have a three-picture deal, and they can stick to that contract simply because they want to. Steve added a second point in the Disney column. They can invest in computer animation themselves. They might easily assume that they could hire the best talent so that they could build up their own capability. And the third thing Steve wrote in a Disney column, other Pixar options inferior. So this is the advantage Disney has. They can sign with another movie studio, but they're not going to be as good as Disney. Disney was clearly better at distributing animated feature films than anyone else. It had extraordinary merchandising capability for churning out toys, clothes, and other

Starting point is 01:01:23 branded items. It had the very best theme parks for showcasing the film and their characters and the imprint of the disney brand on an animated film gave it a cachet that no other studio could provide so when i got to that uh sentence or paragraph rather it made me think of one of my favorite quotes from this book the billionaire and the mechanic i think i did this back in like founders number 124 somewhere in there it's a biography of larry ellison and larry says and this is just again disney's one of the greatest companies that ever been created and he talks about larry in the book talks about

Starting point is 01:01:54 how crazy things got during the the first internet bubble in the like the late 90s early 2000s and he says he got a call from uh a friend or guy who used to work at Oracle and was now a top executive at Yahoo. His name is Nassim. Nassim told Larry, Disney wants to merge with us, meaning merge with Yahoo. Why would we ever want this? This seems so unbelievable. It talks about this mass hysteria that's going on. Why would we ever want to do something like that?

Starting point is 01:02:21 What have they got? Larry answered his old friend. And this is his Larry's thinking is completely in line with what Steve was just telling writing on the whiteboard. Gee, let me think. They have the most valuable film library in the world. The most valuable TV channels in the world. And successful theme parks everywhere. Disney makes tons of money.

Starting point is 01:02:40 And they're probably the most beloved brand on the planet. Now, what have you got a web page with news on it and free email has everyone gone crazy so now we go back to this book next steve added another uh thing to the disney column pixar has only had one hit and so they're trying to figure out okay is there another something else that is also in disney's favor and at this point it's not at all clear michael eisner's uh running he's the ceo at this point, it's not at all clear. Michael Eisner's running. He's the CEO of Disney. And it's like, is he still interested in animation?

Starting point is 01:03:08 It's possible his interest in animation is waning. So it says, Eisner had a reputation for being mercurial and hard to read. The notion that he might not care 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 at this time.

Starting point is 01:03:24 He had just spent $19 billion to buy ABC. So Steve wrote in the Disney column, animation might be losing priority. So I'm just going to review real quick. They have no obligation to change the contract. They can invest in computer animation themselves. Other Pixar options to distribute their films are inferior. Pixar only has one hit, and animation might be losing priority. So then they start building the case for Pixar.

Starting point is 01:03:51 The first thing Steve wrote in the Pixar column was IPO money to pay for productions. We can now pay for our own production, Steve said. Disney doesn't have to pay for all the costs. Number two, Toy Story success. Toy Story was still playing in theaters and had already surpassed $170 million in the domestic box office. So then Steve brings up the fact that Jeffrey Katzenberg was Michael Eisner's second in command. He winds up leaving Disney. He gets in a fight with Eisner, winds up leaving because he wasn't getting promoted, leaves to start DreamWorks with David Geffen and Steven Spielberg.

Starting point is 01:04:29 And Steve figured, hey, Eisner's not going to want, like, DreamWorks, if our deal expires, they don't renegotiate with us. If Disney doesn't renegotiate with us, we can go to DreamWorks. Eisner should most likely do everything in his power to stop that from happening. Says Katzenberg would like nothing more than to trump Disney in animation, Steve said. He's been a thorn in Disney's side. If Eisner loses Pixar to another studio and DreamWorks succeeds in animation, Eisner would go down as the Disney CEO who lost animation.

Starting point is 01:04:56 So he can't do that. Steve wrote in the Pixar column, DreamWorks is a threat to Disney. 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 will then have multiple studios bidding for Pixar's business. So now they're done with the two columns and they're realizing this is very difficult to assess how this is going to shake out. Both of us had leverage. And so now Lawrence is going to get into why Steve Jobs was such a good negotiator.

Starting point is 01:05:26 I'm going to read another quote from that book, Becoming Steve Jobs. And this is Bill Gates after the fact, what he saw when he sees what Steve Jobs was able to, Steve Jobs became the single largest individual shareholder of Disney as a result of this sale that he's going to negotiate with Bob Iger a few years from where we're in the book. And Bill Gates just could not believe this. He says, like many others, Bill Gates was astounded by what Steve had been able to negotiate. When he has the upper hand, he's good at using time, says Gates. He knows, you know, he would wait people out. Just look at how much of the resulting company ends up being owned by this fairly small and yes, very high tech studio. they end up owning a very substantial percentage of the entire

Starting point is 01:06:05 disney abc espn entity and it's owned by a little animation studio that took three rounds of negotiations and by the time the acquisition is being done this is still bill gates talking and by the time the acquisition is being done disney is just flat on his back saying take me because of the political dynamics of disney at the time they needed that win, and Steve knew they needed it. So let's go back to this book. The natural tendency in negotiations is to engage in positional bargaining. This means taking a position knowing that it is not your final position, and holding in reserve a backup position. Both Steve and I had a strong distaste for approaching negotiations this way.

Starting point is 01:06:45 Steve doesn't do this. He has his own way. 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. And so once Steve decides what he wants, he's not going to relent on any of that. So the new deal he wants, he wants creative control over the characters and the story. Number two, payroll release windows. So he wants it to be, I guess there's two times in the year. It's like the early summer and then around Thanksgiving and Christmas where usually you have the biggest box office success he wants 50-50 profit share and he wants Pixar branding you can't say we're

Starting point is 01:07:30 not like Pixar has to have equal branding with Disney not just on the films but also the merchandise you're going to make he's going to wind up getting all this by the way so over the next like six months he tries to negotiate with Eisner and he's going to walk away the Pixar walks away a few times but this is a another time this isner and he's going to walk away the pixar walks away a few times but this is a another time this is before eisner is going to wind up getting kicked out of the company but i'm going to bring up this point because it's exactly what bill gates was just telling us and it's the fact that eisner would give greed with three out of the four but he's like we're not going to build pixar equal branding because if our if your deal if this

Starting point is 01:08:01 deals expires we just created our our most formidable competitor so says steve says 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 i'm reading this to you so you understand jobs thinking behind why he would potentially torpedo a deal with disney because he's like i'm building pixar as a brand. It's extremely important. It's just like the two anecdotes I shared earlier,

Starting point is 01:08:29 the Kiyomurita and Ralph Lauren. It's like, no, no, I'm building a brand. I'm not just going to be your subcontractor. So let me start this section over. 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.

Starting point is 01:08:40 We'll have our self-respect if we walk away and I think we'd get better terms later on anyways. And then John Lasseter agrees. I'm'm in too we'll get through the next two 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 and he was right two months later he doesn't do anything he walks away eisner calls hey we'll give you co-branding and uh we'll basically he wanted a way to share in the upside so he's like we want to make and we want to buy some of your stock in case your company becomes extremely valuable because of your partnership with us we want to partake in the profits of that so they find a way to do to have an alignment of incentives between the two companies and what's remarkable

Starting point is 01:09:20 is this is all happening on the same month that Apple buys next. So it says, Assigning a new agreement with Disney was not the only important event to occur in February 1987. Apple computer buys next. I could not see the whole picture at that moment, but the signing of the Disney deal and the sale of Next to Apple triggered a chain of events that would mark a change in my journey with Steve. An ever so gentle pulling was now beginning to take us in different directions. And what I wrote here, Steve's attention is going to

Starting point is 01:09:50 be directed to his true love. He loved Pixar. He thought what they were doing was extremely talented. It does not compare with his love of Apple. With the IPO and the Disney deal behind us, Steve was more relaxed. He would often stroll over to my home. Lawrence and Steve live like a few blocks apart. He would often stroll over to my home on the weekend and we'd go for a walk or sit in the backyard and talk. Our conversations meandered from Pixar to World Affairs to our children and personal lives. In several of our talks around this time, Steve mused about Apple. He felt Apple had long ago lost its way and was more adrift than ever. It was rapidly becoming a shadow of its former self. Slowly, I began to realize that Steve's musings were in fact the visible flickers of an internal raging fire. Steve's designs on Apple's future were far more than theoretical.

Starting point is 01:10:40 So we're fast forwarding a little bit in the story. Steve's been back at Apple's for quite a while. He decides he's the one negotiating for Pixar still. And he decides to call off the negotiations because he just hates Eisner. And then Lawrence makes the point here. It's like, well, this looks like it was a bad thing. But given time, it wound up being one of the best things that ever happened. He just has a great way to put it. This is a fantastic line. One never knows if an event that appears detrimental is in fact part of a larger pattern that we cannot see. That is so important. I'm going to read it again. One never knows if an event that appears detrimental at that time is in fact part of a larger pattern that we cannot see. A year and a half earlier, in early 2004, Steve had called off talks with Disney to extend the agreement. Ten years of unprecedented success had done very little to bring Steve and Eisner close enough to find a way to continue the relationship between Pixar and Disney. So they wind up, Roy Disney, who was on the board and family member, wind up waging this like Save Disney campaign.

Starting point is 01:11:38 They were just very unhappy about the direction Eisner was taking. They thought animation was extremely important to the core of Disney, and they weren't taking it seriously enough. So it says Eisner had been unable to withstand the pressure, and on September 9, 2004, he announced that he would step down when his contract ended. A few months later, Eisner's successor was announced, Bob Iger. This was the exact moment we began to contemplate the possibility of selling Pixar to Disney. And one thing Steve talked about in his other biographies is that Bob Iger was no bullshit. There's no bullshit. He liked the way he dealt.

Starting point is 01:12:11 He's like, I just put all my cards on the table and Bob was the same way. And that's why they built a relationship. I'm pretty sure Bob Iger was the first person outside of Steve's family. I'm pretty sure Steve said this, if I remember correctly, that Bob Iger was the first person he told outside of his family that his cancer had returned so that that gives you a level of the relationship they wanted building from the moment the meeting began the tune of Pixar's relationship with Disney changed gone were second guessing and posturing that had characterized Steve's relationship with Eisner with Iger there were no games no politics no posturing Iger made it clear that animation was very important to him and to Disney he said it was the heart and soul of the company

Starting point is 01:12:45 and bringing it back was central to his vision of Disney. Iger did not have to be so forthcoming with us about this. The more he claimed Disney needed animation, the more leverage Pixar might have. But this was his style. With Steve, this style worked like magic. On January 24, 2006, Disney announced that it would acquire Pixar for $7.4 billion.

Starting point is 01:13:06 Steve still owned over 50% of Pixar, giving his Pixar stock a value of almost $4 billion. In the ensuing years, the acquisition of Pixar by Disney proved to be one of the most successful corporate acquisitions of its time. Disney's businesses soared in value, almost quadrupling the value of Disney's stock a few years later. 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. Think about how crazy that is, from negative $50 million net worth to $13 billion. And I'm going to close on this. And as we're going to see, you'll hear people say that business isn't personal.

Starting point is 01:13:51 It's just business. But when you give your heart and soul to a company and to an objective and to a mission like Lawrence and Steve and Ed and John did here, that's simply not true. It is personal. For John and Ed and Steve, they can continue their relationship with Pixar. But when Pixar sells to Disney, that's the end of the Pixar adventure for Lawrence. And even though it's a fantastic outcome financially, you'll see Lawrence experience what a lot of entrepreneurs that we've studied experience

Starting point is 01:14:16 when they sell their company, when they think that's what they actually want. And then after it happens, they realize, oh no, I made a mistake. This is a terrible emotional loss. By every single measure, the acquisition could not have been more successful. Every single measure, except one. You seem like you're down, Hillary asked me about a week after the acquisition. How do you feel? This was hard for me to admit.

Starting point is 01:14:42 Every morsel of the lawyer, CFO, strategist, and board member in me told me that the sale of Pixar was the right move, the fitting move, the best possible endgame in this phase of Pixar's history. As soon as Disney bought Pixar, Pixar's board of directors dissolved, and all my formal ties to Pixar would come to an end. My journey with Pixar was over. Letting go of Pixar is harder than I thought, I said. I wasn't sure exactly why, though. After all, it was a business, it was a chessboard, and it was about making the right moves. It's not actually though. Something about

Starting point is 01:15:26 this was lingering. I felt the way I did when I saw my children go off to school for the first time, or went to their graduations. Why was I feeling this way? Maybe it was because, in many ways, to me, Pixar had been like a child. Sweet, innocent, playful, and full of wonder and potential. It took a certain amount of vulnerability, humility, and delicacy for Pixar to work. Ed, Steve, John, and I had watched over that. We had poured ourselves into it, pushing each other, learning from each other, helping each other. We had tried all we could to nurture and protect all that made Pixar great. I recalled the challenges over Pixar's stock option plan

Starting point is 01:16:11 and worrying whether our best people would stay and see Pixar through. I remembered how excited my family had been to attend Toy Story's premiere and how we all anxiously waited at home for the phone calls that would reveal the opening weekend box office results of Pixar's films. I looked back almost comically at our first meanderings into the entertainment industry and how we had cobbled together our first film financial model. I recalled the way Steve and I had debated every permutation of every possibility that bore on Pixar's strategy and business. I remember the triumph of Pixar's IPO and the obstacle course we navigated to make it happen. And I recalled the long, protracted negotiation with Disney

Starting point is 01:16:52 that set Pixar on the course of making real profits and becoming a worldwide brand. Yet now, it was all behind me. Pixar was in new hands. Safe hands. Hands that would take care of it from here on out. But I guess I was taking one last look back as this one disappeared from my view. I could not help but think of the way Nemo's dad, Marlon, felt in the exquisite scene in Finding Nemo

Starting point is 01:17:23 when he could not muster any more strength to continue to search for his son. Marlin's newfound companion, Dory, in her endearing, quirky, innocent way, says to Marlin, when life gets you down, you know what you gotta do. And then in her sweet, rapturous manner, she begins to sing. Just keep swimming. Just keep swimming. Just keep swimming. Swimming. Swimming.

Starting point is 01:17:55 And that is where I'll leave it. For the full story, read the book. If you buy the book using the link that's in the show notes or your podcast player, you'll be supporting the podcast at the same time. You can also go to Amazon.com forward slash shop, forward slash Founders Podcast, and you'll see every single book I've ever done for the podcast in reverse chronological order. If you have a friend or a family member

Starting point is 01:18:11 that you'd want to give the gift to Founders to, you can buy a gift subscription. That is in the show notes as well and also available at founderspodcast.com. That is 235 books down, 1,000 to go, and I'll talk to you again soon.

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Founders - #235 Steve Jobs (The Pixar Story)

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