EVERY SPOKEN WORD
150 min read · 30,007 words- 0:00 – 0:50
Start
- BGBen Gilbert
All right, so David, the real question is, after this episode, it gets released, it becomes this durable IP that is part of a IP franchise. Will we turn this into a musical?
- DRDavid Rosenthal
Oh, [laughs] yes.
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
Absolutely. With masks, dancing in the aisles.
- BGBen Gilbert
And I'm thinking too, we, uh, we may as well do Acquired on Ice and find another-
- DRDavid Rosenthal
Oh, yeah, while we're at it. Let's go
- BGBen Gilbert
... yet another adaptation of it. [laughs]
- DRDavid Rosenthal
Can we do Acquired in Space?
- BGBen Gilbert
Ooh. Uh, we know a few people who could make that happen.
- DRDavid Rosenthal
Yeah, help make that happen. All right.
- BGBen Gilbert
All right. Let's do this.
- SPSpeaker
Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the way. Who got the truth?
- BGBen Gilbert
Welcome
- 0:50 – 5:07
Intro
- BGBen Gilbert
to the fall 2026 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.
- DRDavid Rosenthal
I'm David Rosenthal.
- BGBen Gilbert
And we are your hosts. Disney is so much more than you think it is. It is Mickey and Minnie, and Ariel, and Simba, and Elsa, and Woody, and Buzz, and Nemo, and all the Pixar characters, and of course, it's The Avengers, and Luke Skywalker, and Darth Vader, and Winnie the Pooh, and Disneyland, and Disney World, and Disney cruises, Disney hotels. But now it's also The Simpsons, and Avatar, and National Geographic, plus the entire studio of 20th Century Fox, a privately owned government inside the state of Florida, a private island in the Bahamas-
- DRDavid Rosenthal
Yep
- BGBen Gilbert
... 10 Broadway musicals, the special effects firm Industrial Light & Magic and Skywalker Sound, one of the four major US broadcast networks, ABC. It is, of course, ESPN, where, uh-
- DRDavid Rosenthal
I was wondering when you were gonna get-
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
... to the worldwide leader here. [laughs]
- BGBen Gilbert
Unexpectedly, a giant amount of the profits of the whole company come from.
- DRDavid Rosenthal
Absolutely.
- BGBen Gilbert
It is the SEC Network, and for a period of time, David, they got even more exotic, owning the NHL team, The Mighty Ducks-
- DRDavid Rosenthal
Oh, yeah
- BGBen Gilbert
... the Anaheim Angels in the MLB.
- DRDavid Rosenthal
Angels in the outfield, baby. [laughs]
- BGBen Gilbert
And the 1936 British ocean liner, the Queen Mary.
- DRDavid Rosenthal
That's right.
- BGBen Gilbert
Despite being one of America's most storied and stable brands, the company is going through a time of immense upheaval. They're in the midst of a transition to streaming with Disney+ and Hulu, and ESPN, making giant technology and marketing investments to support that transition that lost billions for half a decade, and they're doing this while their old, fantastically profitable businesses are fading. Consumers don't really go to the movies like they used to. They don't buy movies on VHS or DVD or Blu-ray, and of course, consumers are also cutting the cords to cancel their cable subscription, so those fat profits from cable channels like ESPN are shrinking every year. And Disney, despite being over 100 years old, is at the very center of the most interesting business strategy questions that have ever been posed. Can we fight the innovator's dilemma and win? What exactly is enduring about our business as technology and trends change? And can our future be as bright as our past? Today, listeners, we tell the story of how Disney went from Walt's tidy, neat idea of an animation studio turned theme park operator into the global, sprawling, diversified behemoth that Disney acquired and expanded its way to today. And we'll answer that question: What does their future look like from here?
- DRDavid Rosenthal
Yes.
- BGBen Gilbert
All right. Well, big news from Acquired headquarters. This episode has a companion PDF with visuals, charts, tables, and illustrations of the key concepts we discuss. You can get access and follow along by clicking the link in the show notes or going to library.acquired.fm. You can join the email list at acquired.fm/email. That's where we'll send out behind-the-scenes photos of research, past episode corrections, and it's where you can vote on future episode topics. Plus, we'll give away a little hint each time at what the next episode is about. That is acquired.fm/email. And if you are in the Bay Area on September 17th, you should join us for the official 2026 Acquired Meetup with our friends at Sentry. Details are at acquired.fm/meetup.
- DRDavid Rosenthal
Woo.
- BGBen Gilbert
Before we dive in, we wanna thank our brand spanking new presenting partner, Sierra.
- DRDavid Rosenthal
Yes. Sierra is not only the very best partner for agents in the enterprise, but also home to the self-proclaimed co-presidents of the Acquired fan club-
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
... Clay Bavor and Brett Taylor.
- BGBen Gilbert
Yes, as, uh, Brett and Clay shared on stage with us a few weeks ago when we were in New York together.
- DRDavid Rosenthal
Yes, indeed. Thank you, Sierra.
- BGBen Gilbert
So with that, listeners, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes
- 5:07 – 11:33
Disney in Chaos (1984)
- BGBen Gilbert
only.
- DRDavid Rosenthal
All right. Well, we start. In 1984, the year I was born, all this was happening. I had no idea.
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
Disney is in chaos. In the 18 or so years since Walt died, Disney's star has faded so badly that it looks like no wish can save it. So Disney Animation, once the shining pillar of the American can-do spirit and the core of Disney's beautiful flywheel business model, has become a rotting carcass of its former self. Um, that's the kindest way I could think to put it. Epcot has just launched in Florida, not as Walt Disney's utopian dream of a city of the future, but as a massively over budget and underwhelming World's Fair knockoff that the company has sunk hundreds of millions of dollars deep into debt to build. Family drama among the Disneys runs rampant. Roy Disney's son, Roy E. Disney, has resigned from the company and is scheming to launch a boardroom attack on Walt's once beloved son-in-law, Ron Miller, who is currently the CEO running the company. The stock is in the dumps. There have been multiple corporate raiders swirling. There are deals on the table to break up Disney, sell off the film library, Snow White, Cinderella, Sleeping Beauty, sell it all off to MGM, sell the theme parks off to hotel operators, maximize shareholder value here in the 1980s. And in the midst of all this, desperate to ward off these corporate raiders, management strikes a series of friendly deals with four oil and gas and real estate brothers in Fort Worth, Texas, the Bass family, and their famous investment manager, Richard Rainwater, that results in the Bass family owning about 25% of the Walt Disney Company and becoming Disney's largest shareholders.
- BGBen Gilbert
Yeah, how crazy is this? It's quite the introduction that the company was in such bad shape in 1983, their stock dropped from $82 to $52, that the company was worth more if you sold it for parts than actually running it. And so the only defense that they have against these corporate raiders is to find a corporate raider of their own.
- DRDavid Rosenthal
Right.
- BGBen Gilbert
Dilute shareholders so much that they're creating all these new shares to give to these new guys that-
- DRDavid Rosenthal
These Texas guys
- BGBen Gilbert
... the Bass family, so they can own 25%, which basically makes them, you know, pseudo controlling shareholders.
- DRDavid Rosenthal
More than any of the remaining branches of the Disney family.
- BGBen Gilbert
Yes, and that is by far the best option to fend off these corporate raiders. Dark times. And David, things have gotten so bad in the creative core engine that nearly every dollar of profit is coming from the parks and licensing consumer products at this point. Films and TV, you know, the Disney that you know of, the content business, is basically break even. In 1984, Disney generated a quarter billion dollars of profit from its parks and consumer products, and a mere 2 million from film and TV. The core of the famous Disney flywheel is completely broken.
- DRDavid Rosenthal
But, but there is a spark of hope. A group of young innovators who will ignite a whole revolution in the movie industry, come in and save the company. I'm not talking about Michael Eisner, Frank Wells, and Jeffrey Katzenberg.
- BGBen Gilbert
Ooh, I thought that's where you were.
- DRDavid Rosenthal
You would think that's where we're going. Rather, the group that I am talking about is a new hope for the core of Disney Animation, the center of the flywheel. All right, so Ben, what if I told you that during this very same time as everything that I just said, Disney Animation is floundering, all of the following people are being taught-
- BGBen Gilbert
Ah
- DRDavid Rosenthal
... the craft of Disney Animation in a small basement room just a half hour's drive north of the Disney Burbank lot, in another institution that Walt Disney himself had created, set up, and endowed in his will.
- BGBen Gilbert
CalArts.
- DRDavid Rosenthal
John Lasseter, Brad Bird, Tim Burton, John Musker, who would do The Little Mermaid, Aladdin, and then, uh, many years later, Moana.
- BGBen Gilbert
Mm-hmm.
- DRDavid Rosenthal
And then later after them, Andrew Stanton, of course, writer and director of Finding Nemo, WALL-E, Toy Story 5. Brenda Chapman, head of story for The Lion King. And of course, Pete Docter, who today is chief creative officer at Pixar. All of these people are in a basement classroom, classroom A113, home of the character animation program at the California Institute of the Arts, or CalArts.
- BGBen Gilbert
Which was basically created as a pipeline for Disney, right?
- DRDavid Rosenthal
Yes, exactly. That was why Walt created CalArts. He wanted it to be this institution that would keep the pipeline of new animation talent flowing into Disney long after he was gone, and Walt left, like, half of his estate to fund-
- BGBen Gilbert
Huh
- DRDavid Rosenthal
... this institution. And it, it was that. I mean, so those people I mentioned, John Lasseter, Brad Bird, Tim Burton, John Musker, Brenda Chapman, all of them were hired directly by Disney in Disney Animation right out of school, and then Disney fired all of them. [laughs]
- BGBen Gilbert
But they all end up back, uh, eventually.
- DRDavid Rosenthal
But, you know, they all end up back. So there's this amazing story that one day while John Lasseter is a student there in the late '70s, he and a bunch of these people, they drive down to go spend the day at Disneyland, and, uh, John's girlfriend at the time comes along with them and she says to them, "Just think, someday this park is gonna be filled with the characters that you guys are gonna create." And she had no idea both how right and how wrong she was.
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
It would just take a few decades.
- BGBen Gilbert
Yes. Okay, so how does this company turn around? Because I was looking at the financials, and it looks like 1982 earnings are down 19%, and you sort of expect, oh, maybe that's a hiccup, it'll come back. Then 1983 earnings are down another
- 11:33 – 24:30
Eisner, Wells, Katzenberg Arrive (1984)
- BGBen Gilbert
7%.
- DRDavid Rosenthal
Yep, so in the wake of all that, in 1984, Roy E. Disney decides enough is enough. Together with the Bass brothers, the new 25% shareholders, Roy and his business partner, Stanley Gold, who's also on the Disney board with him, they gang up and they finally force out Ron Miller as CEO, who again, is Roy's cousin by marriage, [laughs] married to Walt's daughter, and they do this via dramatic boardroom coup that happens on September 7th, 1984. And then over a period of just 14 days, 'cause Disney now, like, is without a leader, [laughs] is in double crisis here, they go out and they identify, recruit, sell, and hire R- Arguably the greatest two-person management team in media company history, Michael Eisner and Frank Wells. And then, uh, Michael quickly brings in his number two from Paramount, Jeffrey Katzenberg, to run the film studios.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
All right. So who are these guys? So first, the board goes after Frank Wells. Frank had been the president of Warner Brothers and had since retired. But before that, earlier in his career, he was the mentor of Stanley Gold, Roy E. Disney's, you know, business partner and fellow Disney board member now, back at their old law firm. So Frank is their first call. They trust him deeply. He's eminently qualified. He's recently retired, so he's available. Frank says, "I'm interested, but I can't do this alone. There's somebody else you gotta call. You gotta call Michael Eisner." So Michael, until recently, the timing is just crazy on this, had been probably the hottest Hollywood movie studio executive in town. He had been the number two executive at Paramount under Barry Diller and had architected one of the most legendary runs in Hollywood history. The two of them, Barry Diller and Michael, within a span of seven years, they made Indiana Jones, Star Trek, Saturday Night Fever, Grease, Footloose, Flashdance. The list goes on and on.
- BGBen Gilbert
This is when Paramount was number one.
- DRDavid Rosenthal
Yep. And the way they did it was this famous strategy that they called the singles and doubles strategy. The idea was they would keep their production costs low, they would generally not work with A-list stars and directors, and instead they would focus on the quality of the scripts and the stories, and let that be their guiding judgment, as opposed to the typical Hollywood thing of who's attached to the project. Like, do we have the stars?
- BGBen Gilbert
And the singles and doubles name appealed to shareholders. It didn't exactly appeal to talent. And so the way they billed it the other direction was high concept-
- DRDavid Rosenthal
Exactly
- BGBen Gilbert
... describing a, uh, unique idea whose originality can be conveyed briefly.
- DRDavid Rosenthal
Yep. So Michael writes a famous memo in Hollywood history that gets leaked and spread around the rest of Hollywood describing this strategy, and he writes-
- BGBen Gilbert
Spoiler alert, n- no memo actually ever leaks in Hollywood. The- they're all intentionally leaked.
- DRDavid Rosenthal
[laughs] Yes, they're written for publication.
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
Yeah. [laughs] That's the way this town works. Uh, so Michael writes, "We have no obligation to make art. We have no obligation to make history. We have no obligation to make a statement. But to make money, it is often important to make history, to make art, or to make some significant statement. Not even the greatest screenwriter or actor or director can be counted on to save a film that lacks a strong underlying concept." There you go, Ben, high concept.
- BGBen Gilbert
That's right. And there was another memo leaked later by Jeffrey Katzenberg, who, you know, speaking of the lieutenants, you got Barry Diller's lieutenant is Michael Eisner. Michael Eisner's lieutenant is Jeffrey Katzenberg. Jeffrey writes a memo later where he espouses this really great line that celebrity can open a film, but celebrity can't carry a film.
- DRDavid Rosenthal
Mm. Yep.
- BGBen Gilbert
So yes, you can pay up to attach these big names, but ultimately the audience does experience the quality of the story for itself, and you kinda need the, the story and the characters and the emotion to take it from there.
- DRDavid Rosenthal
Yep, yep. Now, on the one hand, this is crazy that these guys are coming in to run Disney. Disney is not a Hollywood company.
- BGBen Gilbert
Right? It's a Warner Brothers retired executive and a hotshot Paramount executive. Michael, from Paramount, has not seen Disney movies. He was not raised on them.
- DRDavid Rosenthal
[laughs]
- BGBen Gilbert
He had never seen Snow White or Sleeping Beauty. He wasn't really a Disney guy-
- DRDavid Rosenthal
Nope, not at all
- BGBen Gilbert
... despite the fact that as soon as he later gets the job, he was never without his Mickey Mouse tie.
- DRDavid Rosenthal
Of course, of course. But yeah, didn't know how to run a theme park, flywheel, anything. But when you think about it, though, Michael's philosophy actually is pretty simpatico with the Disney philosophy. It's all about story. It's all about concept. And yes, Walt had a very different way of doing this. He was go big and invest tons in technology and animation, and Michael is like, produce things cheap, singles and doubles.
- BGBen Gilbert
But they're both story first.
- DRDavid Rosenthal
Exactly.
- BGBen Gilbert
They're both obsessed with, can we create characters that take you on these emotional journeys and tell compelling stories?
- DRDavid Rosenthal
And then the unthinkable happens. Michael gets forced out of Paramount at the peak of his success. [laughs]
- BGBen Gilbert
Well, sort of. Uh, Barry leaves. As we talked to Barry about on stage at Radio City Music Hall.
- DRDavid Rosenthal
Yeah, to team up with Rupert Murdoch and launch Fox.
- 24:30 – 37:33
Animation Renaissance & CAPS Tech (1989)
- BGBen Gilbert
thing.
- DRDavid Rosenthal
Yep. So as part of the deal, when they brought Eisner and Wells in, Roy had made them promise not to fully kill animation, and then he had made them make him, Roy, chairman of the animation division, under Katzenberg, who's running all the studios.
- BGBen Gilbert
Okay, so flash back to the day that Michael and Frank take over. What had happened the 13 years up to that point, Disney Animation had only released three movies from 1971 to 1984, and they had a film called The Black Cauldron in development for nearly a decade.
- DRDavid Rosenthal
Yeah, brutal.
- BGBen Gilbert
And morale is low. Th- there's even a sense by the current animators on staff that they weren't making anything as good as what the company used to make.
- DRDavid Rosenthal
And this is when all that young talent that's coming in from CalArts, Disney's either firing or they're leaving, 'cause they're just like, "Hey, this place is cooked."
- BGBen Gilbert
Yes. Okay, so we brought up Jeffrey Katzenberg. I was having breakfast with Jeffrey to prep for this episode, and he told me this story where Michael calls Jeffrey into his office on his first day, and this is before animation had been moved out to Glendale, so he's still pointing down at the original animation building, and he points to the ink and paint door, and Michael says to Jeffrey, "Do you know what they do down there?" And Jeffrey goes, "No." 'Cause, you know, Jeffrey's background is live action, Paramount stuff with Michael.
- DRDavid Rosenthal
And Michael says, "Neither do I." [laughs]
- BGBen Gilbert
He goes, "That's where they made the animated movies, and that's your problem." [laughs]
- DRDavid Rosenthal
[laughs]
- BGBen Gilbert
And so Jeffrey, like Michael, doesn't know anything about animation. The animators, w- when he sort of gets in there and he says, "Okay, I'm, uh, I'm the boss now," start looking at this invasion from Hollywood. I mean, Disney always existed outside the realm of Hollywood doing their own thing, and now you've got effectively the suits coming into a culture that is, like, a bunch of wackadoos.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
I mean, it is, like, the most fun, crazy place in animation, and this was quite the clash at first.
- DRDavid Rosenthal
Yep. But at some point, and I don't know, was it, was it Katzenberg or was it Eisner and Wells who realized, like, "Hey, there actually is an opportunity here"?
- BGBen Gilbert
Well, it was both of them, and it would take a third guy, and that guy is Peter Schneider.
- DRDavid Rosenthal
Hmm. Yes.
- BGBen Gilbert
So his quote when, when accepting the job is, "I knew I could do no worse than The Black Cauldron. You can't fall off the first floor."
- DRDavid Rosenthal
[laughs] That's great. That's great.
- BGBen Gilbert
So Peter and Jeffrey come in and, and they start making changes, and Peter had this license to, like, examine everything. They... He was not afraid to break any process. So he, he starts saying, "Why do we use this type of paint? Why do we make our own paint? Why do we use this style of animation pegs? Is there a better style? Why aren't we using computers? B- it seems like that could really help us." It sends a, a cultural message here in '84, '85, '86 that things are really changing, and all the way from the top, we are trying to get better. We want to make something great. We wanna make great films, and we wanna d- debate each other over how good of an idea things are. We want to iterate, all in service of making a great film. But this is exactly what they needed, new blood, a complete shakeup. There was good talent there, but they were just sort of, like, wasting around, not being led at all, and there was this i- sort of dichotomy where the, the old guard was stuck in their ways, and the young people who came in with all these fresh ideas were falling on deaf ears, and they'd never been part of anything successful, so they sort of didn't know what success l- looked like or felt like.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
So they slowly start to turn it around in animation. S- you know, at first with films like The Great Mouse Detective in 1986, nothing to write home about. They did Oliver & Company in 1988. That, that gets a little bit more press. Those people sort of saying, "Hey, look, Disney Animation can make good things that are commercially successful." But then the big idea, the crazy one that really worked, was to refine the formula of the Disney animated movie and make them musicals.
- DRDavid Rosenthal
Yes.
- BGBen Gilbert
These are gonna be Broadway musicals, but animated.
- DRDavid Rosenthal
Yes. We're gonna turn these things from cartoons with music to musicals that are cartoons, and it makes all the difference in the world.
- BGBen Gilbert
From story arc to the type of music. I mean, Snow White had some really catchy tunes, Whistle While You Work.
- DRDavid Rosenthal
Heigh ho, blah, blah, yeah, yeah.
- BGBen Gilbert
But they weren't musicals.
- DRDavid Rosenthal
No.
- BGBen Gilbert
And they didn't follow the sort of musical stage performance story structure. So Jeffrey Katzenberg recruits a guy named Howard Ashman.
- DRDavid Rosenthal
Yes.
- 37:33 – 54:32
Flywheel Extensions: Home Video, Retail & Broadway
- DRDavid Rosenthal
Okay. So on the back of all these Disney Renaissance animated hits, the flywheel is soaring again at Disney. I mean, really for the first time since Walt died. The core animated IP at the center of the company is back. It's inspiring new generations of children, their parents, and Eisner and Wells not only embrace all of it, they extend the flywheel even further. So they add three new incredible extensions to the Disney business model, all based on these characters and stories and this, this timeless IP that Disney Animation is once again creating. So the first, home video. [laughs] Man, this is a banger. So the Disney Vault already existed. Disney would take their classic movies, like Snow White or Cinderella, and re-release them in theaters every seven years or so to, you know, get a new generation of children exposed.
- BGBen Gilbert
Which was the only way to watch movies.
- DRDavid Rosenthal
Right.
- BGBen Gilbert
My brain sort of can't understand this since home video has existed my entire life.
- DRDavid Rosenthal
No Disney+ back then, baby. [laughs]
- BGBen Gilbert
Nope. And until 1985, there was n- no way to watch a Disney film outside of a theater.
- DRDavid Rosenthal
Yep, yep. So Eisner and Wells and Katzenberg, they're like, "Well, we can do the same thing with home video." You know, VHS exists now. It's a big thing. You know, it's high penetration in US households. None of the old people at Disney wanna do it. Roy's opposed.
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
The family's opposed.
- BGBen Gilbert
It's heresy.
- DRDavid Rosenthal
It's heresy. Michael has to convene the whole Disney family and get their approval to release Pinocchio as the first of the classics that they're gonna put on VHS here in 1985.
- BGBen Gilbert
And they're starting low stakes. I mean, Pinocchio-
- DRDavid Rosenthal
Pinocchio, right
- BGBen Gilbert
... has already b- been re-released in theaters five times.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
Seven years apart. You would think you're not cannibalizing much at this point on the sixth re-release to-
- DRDavid Rosenthal
Yes, of, of Pinocchio. So they agree to a very limited 1.7 million unit run of VHS of Pinocchio. [laughs] Priced-
- BGBen Gilbert
I'm glad you found this too
- DRDavid Rosenthal
... at the very high $29.95 at retail per copy. It sells out, like, instantaneously. So that's $50 million in gross merchandise sales. Basically zero incremental production costs except for the couple bucks of printing the cassette tapes. And then they do it the next year with Cinderella, which proves the exact same thing. So they do a theatrical re-release on schedule of Cinderella. Does 34 million in box office revenue, and then they put out the VHS home video. Six million units. So between the two of them, that is $200 million in gross revenue from Cinderella. Oh, man. I mean, it's basically another box office smash, like, for free that they're getting here. Yeah.
- BGBen Gilbert
So it's this crazy thing they discovered where it seems to not hurt anything, not dampen any demand, 'cause Michael Eisner would sort of later famously point out, "People buy these tapes, but they break, they lose them."
- DRDavid Rosenthal
Right. Right.
- BGBen Gilbert
It, it doesn't make people any less excited to go to the theater-
- DRDavid Rosenthal
You know what kids are really good at?
- BGBen Gilbert
... s- six, seven years later.
- DRDavid Rosenthal
Losing VHS tapes.
- BGBen Gilbert
Right. It's, it's not like, oh, you're permanently destroying an asset now that those tapes exist in the world. No.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
It only increases the demand for more Cinderella now that the tapes are out.
- DRDavid Rosenthal
This is the core philosophy behind how Walt Disney's flywheel business strategy works. I had read that Disney was keeping, like, between 17 to $20 a pop-
- BGBen Gilbert
Wow
- 54:32 – 1:05:55
Challenges & ABC/ESPN Acquisition (1994-1995)
- DRDavid Rosenthal
man. [sighs] Well, 1994 is a great year for Disney as a business 'cause Lion King comes out. It's a terrible year for Disney as a company, and there's three huge blows that hit the company in quick succession. First, on Easter Sunday, 1994, Frank Wells is shockingly and tragically killed in a helicopter crash while heli-skiing. This is terrible, um, on every level. For the company and the management team, for all that Michael Eisner was, Ben, as you said, like, the creative executive and had to be the public face of The Walt Disney Company and the Disney Renaissance, Frank was, like, the guy behind the scenes holding it all together. He absolutely was the yin to Michael's yang, and all of a sudden he's gone. Like, one day he's here, one day he's gone.
- BGBen Gilbert
And there's big personalities at the table. Michael's a big personality. Jeffrey's a big personality.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
And Frank was kind of the, the peacekeeper, the, the one who could always relate to everyone, be the intermediary, calm people down when they were hot about something.
- DRDavid Rosenthal
I mean, he was the guy who when Michael said, "I need to be number one," he said, "Okay, no problem. Let's all go make magic together."
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
And that force is just not at the company anymore. So then, three months later, while Michael is at the annual Allen & Company conference in Sun Valley, Idaho, he starts experiencing chest pains and has to be rushed back to LA into emergency quadruple bypass open heart surgery.
- BGBen Gilbert
Yeah, and he's out of commission. I mean, he is recovering from open heart surgery in the hospital while they're feeling the loss of Frank Wells.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
There's a lot of decisions that need to get made, and there's a lot of, like, personnel clashes that needed to g- get sort of through, but w- w- what can Michael do?
- DRDavid Rosenthal
He's in the hospital.
- BGBen Gilbert
He's, like, literally on the operating table. Uh, he even thought there was some chance he might not make it. He gave his wife instructions, "Hey, if I don't wake up, do X, Y, and Z." Harrowing times.
- DRDavid Rosenthal
Yeah, yeah. So then, in the middle of this, Katzenberg quits.
- BGBen Gilbert
Well, [laughs] there's a lot of different sides to this story.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
One version of it is that Jeffrey was promised the number two job at the company if Frank ever moved on or-
- DRDavid Rosenthal
Yep
- BGBen Gilbert
... you know, retired or anything.
- DRDavid Rosenthal
Yep. That was certainly Jeffrey's understanding, that Michael-
- BGBen Gilbert
Yes
- DRDavid Rosenthal
... had promised him that.
- BGBen Gilbert
Yes. There were other perspectives, including from Roy E. Disney, that y- "Hey, Jeffrey is great in the job that he has, uh, running the studios, you know, animation and the other film studios, but he's by no means ready to be the, the president of The Walt Disney Company."
- DRDavid Rosenthal
Which, again, at this point is much more than just the film studios. [laughs] You know, it's all of those other businesses that we talked about.
- BGBen Gilbert
Right. And so w- we need to sit tight for a little while. So Jeffrey's interpretation of this, which is, again, quite reasonable, is, "Well, I thought you told me this was mine. I am itching to do something bigger than my current responsibility. I've been a t- good team player. I just created some of the most successful m- movies ever."
- DRDavid Rosenthal
Iconic IP.
- BGBen Gilbert
That's right, with the Disney Renaissance films, Lion King and, and Beauty and the Beast, and all these. "If you don't think I have a, a future here to become president of this company, then I'm out. I'm gonna go do something else."
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
So he elects that option and leaves.
- DRDavid Rosenthal
Yep. And he doesn't just leave. He leaves and starts a competitor.
- BGBen Gilbert
And starts a lawsuit.
- 1:05:55 – 1:21:26
ESPN: Disney's Accidental Goldmine
- DRDavid Rosenthal
But it just so happened [laughs] that buried within ABC was the single best cable asset in the history of mankind, the Entertainment and Sports Programming Network, better known as ESPN.
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
Oh, man. The history of ESPN is, like, completely crazy on its own. It was acquired by the Getty Oil Company just months after it was founded, when it was still a startup. Texaco then acquired Getty, sold off ESPN to ABC. This happened in 1984. ABC wanted a financial partner for the deal, so they bring in Nabisco. Like, Nabisco [laughs] as a 20%-
- BGBen Gilbert
Huh
- DRDavid Rosenthal
... minority partner in ESPN.
- BGBen Gilbert
Why?
- DRDavid Rosenthal
I, I guess in theory, like, Nabisco was gonna get some advertising synergies [laughs] for their CPG products. Uh, I, I don't know.
- BGBen Gilbert
Okay.
- DRDavid Rosenthal
Uh, it doesn't matter because- The next year, Nabisco gets taken private by KKR in the Barbarians at the Gate, you know, largest deal in history.
- BGBen Gilbert
Right, the largest acquisition of all time.
- DRDavid Rosenthal
Yep, yep, yep.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
As part of that, they sell off this 20% ESPN minority stake to the Hearst Corporation, which still owns it to this day. [laughs] And Hearst, over the ensuing, like, four decades, just gets billions and billions of dollars of free cash flow out of ESPN.
- BGBen Gilbert
In a complete free ride.
- DRDavid Rosenthal
Free ride.
- BGBen Gilbert
They don't have to-
- DRDavid Rosenthal
Doesn't have to lift a finger. [laughs]
- BGBen Gilbert
That's right. That's right.
- DRDavid Rosenthal
But yeah, ESPN became this juggernaut, and they actually invented a whole second revenue line for cable networks in addition to advertising, the affiliate fee business model.
- BGBen Gilbert
'Cause before, uh, cable channels would just let themselves show up in a cable bundle. They'd let the cable bundle distribute and say, like, "Oh, well, we're selling ads, so can you just do the distribution for us so that anybody who's buying your cable bundle will get my channel and thus see my ads?" And pre-ESPN, that was the whole business model.
- DRDavid Rosenthal
Even more than that, I think for a lot of startup cable networks, the dollars went the other way. I think they were even paying-
- BGBen Gilbert
Oh, right, they would pay to be included
- DRDavid Rosenthal
... the cable operators to carry the channel, right? [laughs]
- BGBen Gilbert
Yes. And ESPN sorta realizes, like, they were buying sports rights-
- DRDavid Rosenthal
Yeah
- BGBen Gilbert
... to broadcast leagues, and they needed to cover their costs. So they asked the bundlers, hey, the, the cable companies, like, "Hey, will you pay us X cents per viewer so that we can actually afford to go buy these rights?"
- DRDavid Rosenthal
The money to buy the sports rights. That may have been how it started, but pretty quickly, though, ESPN and then within ABC, once ABC owns it, they realize that sports rights are the biggest point of leverage that they could possibly have-
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
... over the cable operators because all ESPN has to do is threaten to pull the plug [laughs] on any given cable operator and say to, you know, their thousands or millions of subscribers out there, "Oh, hey, you know, you wanted to watch those NBA games or those MLB games or those NFL games, or see those highlights on SportsCenter. Sorry, we're in a carriage dispute with ESPN. We're not gonna be able to show those."
- BGBen Gilbert
A stick that still gets used today.
- 1:21:26 – 1:34:53
Eisner's Decline & Save Disney Campaign (2001-2004)
- DRDavid Rosenthal
Now, all of this frankly is just window dressing on what the real problem is. The real problem is Disney Animation.
- BGBen Gilbert
Hm. That's interesting.
- DRDavid Rosenthal
Ben, you talked about what the movies were after 1994, and some of them were good, but it's a, a downhill slide, and by the time you get to the end of that period, Atlantis, Treasure Planet, these are bad movies.
- BGBen Gilbert
Yeah, and with Capital Cities ABC, ESPN coming in, it's a little bit confusing how to think about and organize the company because before, you had this nice, tidy flywheel business. You make films with characters that people love on these universally relatable journeys. You make money at the box office, home video, parks, consumer products, and then you recycle the IP every seven years. It's articulatable in one sentence. When they bought Capital Cities, it's totally different. Owning TV stations that generate revenue from advertising, from cable subscriptions, mostly using one-time use content that is not evergreen, most of which you don't create yourself in-house. I mean, it c- it can be profitable and, and sometimes fantastically profitable, but it's worth acknowledging that that's a totally different business model. And now you have these two completely different, uh, sort of business model, operating model things under one roof, and bringing in Michael Ovitz, what was he supposed to run?
- DRDavid Rosenthal
Right.
- BGBen Gilbert
'Cause they're actually two, two very different things.
- DRDavid Rosenthal
Yep, yep. So all this, and, you know, and animation's now without Katzenberg. Uh, Roy E. is still there, but a lot of the talent is bleeding out to DreamWorks. Even the talent that stays, they're getting competitive offers from DreamWorks, so Disney has to pay them more, so all their costs in animation are going up. It's really a downward spiral. And for the first couple years, it didn't really matter that much because the parks were still doing great. They still had all the great IP from the Disney Renaissance that was driving everything that they could, you know, put into the parks.
- BGBen Gilbert
Yeah, because they don't make most of their money from actual profits at the box office when the movie comes out the first time, there's a delayed impact to animation-
- DRDavid Rosenthal
Yes
- BGBen Gilbert
... sucking that doesn't [laughs] show up in the financials until way later.
- DRDavid Rosenthal
Yes. Or until something happens to the parks, which is exactly what happens in September 2001 with September 11th. Obviously, national tragedy, but Disney's parks business basically instantly falls off a cliff. I mean, it's like COVID for Disney parks for the few weeks and months after September 11th. All of a sudden, this crown jewel asset within the empire just goes to, you know, close to zero.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
Real bad.
- BGBen Gilbert
Yep, I mean, for a few weeks, zero planes are in the air, and for years after that, people don't feel safe traveling.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
Not to mention it triggers this, like, consumer spending impact.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
Not good if you're running a high fixed cost theme park business.
- DRDavid Rosenthal
Yep, yep. So Disney stock falls nearly 25% in the days after the September 11th attacks. Fairly quickly thereafter, they're forced to close the vast majority of the Disney retail stores that they had opened in malls across America. The operating profit from the whole consumer products division had already been slowly ticking down as no new good IP was coming out of Disney Animation to sell dolls and costumes. Now it's down to, like, a trickle. The worst part of all of this, for Michael Eisner at least, is that the Bass family, which to this point are still Disney's largest shareholders and Michael's strongest supporters among the shareholder base, in the days after September 11th, they face a margin call on their other investments. They have to become forced sellers of two billion dollars worth of Disney shares, which puts even further downward pressure on the Disney stock, which has already just fallen by 25%. They sell the majority of their Disney holdings in a block transaction, and overnight, Eisner's support in the shareholder base, or at least the biggest bulk of it, is, like, gone. Disney is now trading at depressed levels. I mean, it's almost like 1984 all over again.
- BGBen Gilbert
I know, right? It-
- DRDavid Rosenthal
Could there be corporate raiders showing up to break up the company? [laughs]
- BGBen Gilbert
It's eerily similar. Animation in the dumps. Before it was parks holding the company up, but now it's ESPN holding the company up.
- DRDavid Rosenthal
Exactly. And, and even ESPN for, you know, a short period of time is shaky. Like, sporting events stop after 9/11. It's a weird time for the country.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
And then just when it seemed that things couldn't get any worse at Disney in the years after 9/11, on November 30th, 2003, Roy E. Disney announces that he is resigning from the Disney board of directors, citing, quote, "Serious differences of opinion about the direction and style of management."
- BGBen Gilbert
Man, this really is a mirror of 20 years earlier.
- DRDavid Rosenthal
Is it ever. Except this time it all plays out in public because Roy and Stanley Gold, his business partner, who also resigns from the board, would promptly turn around and launch a first of its kind public grassroots shareholder campaign with the website savedisney.com, with the stated goal of mounting a proxy vote to oust Michael Eisner as the CEO of The Walt Disney Company. Man. Ben, uh, this playbook of starting a website of save company X dot com, like an insider resigning from the company, starting a website and a public grassroots campaign-
- BGBen Gilbert
Yeah
- DRDavid Rosenthal
... would famously be repeated once more in American corporate history. Do you know what company?
- BGBen Gilbert
Hmm. No.
- 1:34:53 – 1:41:58
Comcast Hostile Takeover Bid (2004)
- DRDavid Rosenthal
what happens next? Roy and Stanley had resigned in a huff from the board at the end of 2003, right at the holidays. Disney's annual shareholder meeting is coming up in March of 2004, where the vote is gonna happen to, hopefully in their minds, oust Michael Eisner as CEO of Disney. Disney, in response, schedules an analyst day, an investor day, for the company in Orlando in February of 2004 ahead of the meeting to sort of shore up support for Michael and shore up support for the stock. And they have good news to share. Pirates of the Caribbean is gonna save the company. [laughs]
- BGBen Gilbert
The movie did great. Based on a Disneyland ride, I mean, you can't write a better story.
- DRDavid Rosenthal
Can't write a better story. Revenue for the quarter is up 19%. Johnny Depp riding in, [laughs] gonna save Michael Eisner's job. They all wake up the morning of the investor day. Eisner's there. Bob Iger is there. By this point in time, he's been promoted to be president and COO of The Walt Disney Company. [lips smack] And they read the news that Comcast, the Philadelphia-based cable company, is making a hostile takeover bid to acquire Disney for $54 billion in Comcast stock. I remember when this news hit. It was shocking. I mean, it was shocking. The idea that a cable company, a cable company, could take over The Walt Disney Company was, like-
- BGBen Gilbert
Just offensive
- DRDavid Rosenthal
... offensive. There were practically no more hated, you know, genre of corporations in America than cable operators, [laughs] largely in part thanks to The Walt Disney Company and ESPN riling everybody up against them. [laughs] And that they would be taking over, with stock, this treasure of America... Honestly, for Roy and for Stanley and their Save Disney campaign, it was the best thing that could've happened because to many people, they look at this and they're like, "How low has The Walt Disney Company fallen?"
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
But Disney is doing great. The parks business was down because of September 11th, but it's coming back. Pirates of the Caribbean is a big success. They've got this great partnership with Pixar. They've got freaking ESPN, which is still crushing it. Why does Comcast wanna buy Disney? They sense this opening, this weakness, and wouldn't it be amazing if- Comcast could all of a sudden acquire its most important supplier in ESPN-
- BGBen Gilbert
Right
- DRDavid Rosenthal
... that has all of this leverage over them. [laughs]
- BGBen Gilbert
They're constantly going to war with ESPN every year to renegotiate the carriage rates. Be nice to own it.
- DRDavid Rosenthal
We might be able to get ESPN?
- BGBen Gilbert
Right.
- DRDavid Rosenthal
Holy crap, let's try it. [laughs]
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
Oh, man.
- BGBen Gilbert
Just to underscore this ESPN thing, friend of the show, Ben Thompson, has a, a great reflection on all this. Walt Disney's chart, the famous flywheel one, may have been a very satisfying business model, but the reality of Disney's TV business is that it was scalable in a way that the Disney chart could never be. The beauty of the cable bundle is that nearly every household in America paid for it every single month, regardless of whether or not Disney had a hit TV show or a must-watch sporting event. Thanks to its suite of channels anchored by ESPN, Disney received a big chunk of that money, and it grew like clockwork. In that world, Walt Disney's model was a nice side business to the real money maker.
- DRDavid Rosenthal
Yep, yep. Man, it's all, all about ESPN, everything that's happening. [laughs]
- BGBen Gilbert
[laughs] Yep. The cable network's operating income, the profit within The Walt Disney Company at this point, was $2 billion. Company-wide, they were only making $4.5 billion. So, like almost 50% [laughs] of the company's total profits is just these cable networks.
- DRDavid Rosenthal
Yeah, which is really-
- BGBen Gilbert
ESPN
- DRDavid Rosenthal
... ESPN. So on the back of this narrative of, you know, how low the Disney company has sunk under leadership of Michael Eisner, which gets ridiculous, but it's the narrative out there, the two major shareholder advisory services back the Save Disney Campaign, and Roy, and they advise shareholders to vote to withhold their support of Michael Eisner as CEO at the March shareholder meeting. CalPERS, the big California pension fund, they announce that they're gonna vote their Disney shares against Eisner and vote for him to resign. So all of this comes to a head on March 3rd, 2004, at the Disney annual shareholder meeting, which hilariously had been scheduled that year to take place in Philadelphia-
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
... headquarters of Comcast. [laughs]
- BGBen Gilbert
They're like just a few blocks away.
- DRDavid Rosenthal
At the end of the day, 43% of the shareholder base votes to withhold support for Eisner as CEO, which is a huge number.
- BGBen Gilbert
You don't renew a CEO's contract when 43% of your shareholders don't want that CEO.
- DRDavid Rosenthal
No. Yep. So the Disney board meets in an emergency executive session without management present, during which they decide to remove Michael as chairman, but let him remain CEO of Disney for the moment. They announce this. The Disney stock jumps in response. Uh, meanwhile, Comcast stock has been falling, so a few weeks later, Comcast formally withdraws their bid. But this doesn't, uh, placate Roy and Stanley and the Save Disney Campaign. Eisner is still CEO. A few months after that, Michael announces that he will leave the company when his contract expires at the end of 2006. So he's announced that he's gonna resign, but now there's question, okay, who's gonna take over? [laughs]
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
The board announces that it's going to initiate a public high-stakes CEO search, and they intend to name Michael's successor by June of 2005. Everyone, everyone believes it's gotta be an external candidate that is gonna come in and take over Disney, just like Wells and Eisner came in 20 years ago.
- BGBen Gilbert
Well, do you know what the press release says, who it names?
- 1:41:58 – 1:52:17
Bob Iger's Vision & Pixar Acquisition (2005-2006)
- BGBen Gilbert
we'll do it."
- DRDavid Rosenthal
So Bob is announced as the internal candidate, and the board promises they will run an exhaustive search for external candidates. Bob, and he recounts all of this in Ride of a Lifetime, comes up with I think one of the most brilliant campaign framings that I have ever heard. And he actually hires, like, a political campaign consultant to help him with this. And he realizes that, okay, I am the number two to an unpopular incumbent. I'm like the vice president of a massively unpopular president right now who has just become a lame duck.
- BGBen Gilbert
Right. Every board member's first, second, and third question for me should be, "Why should we pick you when you were a part of the previous administration that we think sucked?"
- DRDavid Rosenthal
And how did you screw up so badly?
- BGBen Gilbert
Yeah. [laughs]
- DRDavid Rosenthal
So he realizes that his only chance is to completely reframe the situation. This isn't about what happened in the past. This is only about the future, which both is the right way to look at this, and it is Bob's only chance to win. [laughs]
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
So he proposes to the board in his candidacy three pillars of his vision and strategy for the future of The Walt Disney Company. Number one, we need to devote most of our time and capital to the creation of high quality branded content, AKA, we need to revive Disney Animation, and along with it, the Disney flywheel. Spot on, especially now, because The amount of content in the world is exploding. We're here entering the social media era. There's Facebook. We're about to get YouTube. Consumers have infinite choice for content. The only way for a company like Disney to hope to try and still be relevant is to go back to making the very best content.
- BGBen Gilbert
And build a brand to be known for that so people know to look to you for that highest quality tier.
- DRDavid Rosenthal
And still, nobody is better positioned than Disney to do that. [laughs] Even despite all the problems and distractions and the downfall of animation over the last 10 years, it's still Disney.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
So that's one. Two, we need to embrace technology to the fullest extent. Now, this sounds like duh, why wouldn't you do that? But this is actually kind of a radical statement at this point in time. We're about to enter an era where the entire traditional media industry is going to be either running scared or actively trying to fight tech [laughs] in Silicon Valley. Viacom is about to launch a lawsuit against YouTube to try and sue it out of existence. Everybody remembers what just happened to the music industry and Napster. Bob is saying, "No, we are going to embrace technology."
- BGBen Gilbert
Both to produce fresh, new cutting-edge content the way that Walt did, but also embrace technology as a distribution medium-
- DRDavid Rosenthal
Yes
- BGBen Gilbert
... and figure out how to use that to our advantage, n- not let technology be the reason for our downfall.
- DRDavid Rosenthal
Yep. And then Bob's third pillar of his strategy is expand global reach. We need to better penetrate certain markets, particularly the world's most populous countries like China and India. Unlike Walt's era, at this point, something like a third of the global population lives in those two countries, and Disney is all about scale economies. Make the deepest, best, highest quality content and characters and stories possible, and get as many people around the world to fall in love with them as possible.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
And we need to get into those two countries.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
So amazingly, Bob wins on this campaign. In March of 2005, the board announces Bob Iger will be the future CEO of The Walt Disney Company. They accelerate his start date and Michael's departure date to that September 2005, a year ahead of when Michael had initially announced, and the Michael Eisner era at Disney comes to an end after 21 years.
- BGBen Gilbert
It's so interesting. Michael Eisner's tenure at Disney, in my mind, is really two chapters. There's that whole first chapter that sort of ends with Frank Wells passing-
- DRDavid Rosenthal
Yep
- BGBen Gilbert
... Katzenberg leaving, the end of the great Disney Animation era.
- DRDavid Rosenthal
And acquiring Capital Cities.
- BGBen Gilbert
But the ownership of Capital Cities is sort of that, that whole second era.
- DRDavid Rosenthal
Yes. Yeah, that, I think that's the way I would frame it, too. He and Wells and Katzenberg did an incredible job turning around Disney in the first 10 years. That sort of went sideways in the second 10 years. But also, Michael made one of the greatest acquisitions of all time [laughs] in the second 10 years, and because of all the drama, doesn't get anywhere near enough credit for it.
- BGBen Gilbert
Yeah. It's so interesting when you say the greatest acquisitions of all time, when I look at ABC, Capital Cities. It was because it had ESPN, but it also cost the company its strategic clarity.
- DRDavid Rosenthal
Yes.
- BGBen Gilbert
Disney never again would get to be just Disney. It's the flywheel business and the-
- DRDavid Rosenthal
ESPN business
- 1:52:17 – 2:03:11
Pixar: From Lucasfilm to Steve Jobs (1979-1995)
- BGBen Gilbert
So listeners, we thought something that would be fun on this episode is to tell the whole Pixar story. We could have done it sort of in line earlier with Disney Animation, but we wanted to carve it out, give it its own special section, and, um, in a really poetic thing for David and I, redo [chuckles] our very first episode on Acquired, which was on Pixar, here as a segment of this episode.
- DRDavid Rosenthal
Yep. Pixar is the spiritual successor of Walt Disney's vision for Disney Animation.
- BGBen Gilbert
Yep. All right. So we're winding the clock back. Let's start with John Lasseter.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
So this is a guy who dreamed of becoming a Disney animator his whole life. One of his early jobs is working the Jungle Cruise at Disneyland.
- DRDavid Rosenthal
That's right.
- BGBen Gilbert
And David, as you mentioned, he ends up getting into CalArts. It's a complete dream come true. Classes are taught by Disney's legendary animators who worked with Walt, the Nine Old Men, as they are affectionately referred to. Now, he does get a job at Disney Animation, but it's unfortunately during those dark times in the early '80s. John gets obsessed with the budding field of computer animation, even though no one else in the department is, although actually, Tron was happening elsewhere in Disney. So-
- DRDavid Rosenthal
That's right
- BGBen Gilbert
... full computer stuff was happening, just not in the culture of Disney Animation. This all comes to a head when John gets the chance for his directorial debut on the movie Brave Little Toaster, and in his big pitch meeting, he comes in with the idea that, uh, he's gonna use computer animation to do it. Now, remember, this is the early '80s, so computer animation was pretty primitive stuff.
- DRDavid Rosenthal
The time wasn't actually right yet.
- BGBen Gilbert
He gets asked if it's gonna be faster and cheaper than traditional animation, 'cause why else are they doing it? And he says, "Neither. It's just gonna push the envelope on what is possible in great storytelling." John is immediately, and I'm not kidding, same day, let go.
- DRDavid Rosenthal
Wow, I didn't realize it was same day. [laughs]
- BGBen Gilbert
It was, "Thank you for your meeting. We are declining to put this project into production, and since your project is over, you really have no reason to be here."
- DRDavid Rosenthal
"Thanks for your meeting. You're fired."
- BGBen Gilbert
Yes. So we'll put a pin in John's story for now while we introduce another co-founder of Pixar. Flashback to 1963. We're at the University of Utah, where we meet Ed Catmull. Ed also wanted to do animation his whole life, but he felt that he didn't have the chops to cut it as an artist, so he got into computers instead. He finds himself in this truly magical program for computer graphics at Utah, uh, though it was sort of just this, like, pocket of an esoteric field that most people did not really care about or appreciate at the time. Ed ends up creating one of the first films ever with computer graphics, a rotating model of his own hand, just a black and white wireframe. His classmates are famed computer scientist Alan Kay, Jim Clark of Netscape and Silicon Graphics-
- DRDavid Rosenthal
Yep
- BGBen Gilbert
... and John Warnock, who founded Adobe.
- DRDavid Rosenthal
And also, wasn't Nolan Bushnell knocking around there?
- BGBen Gilbert
He was. Yep. Past Acquired guest Nolan Bushnell, the, uh, famous founder of-
- DRDavid Rosenthal
Founder of Atari
- BGBen Gilbert
... not only Atari, but Chuck E. Cheese.
- DRDavid Rosenthal
That's right. That's right.
- BGBen Gilbert
So Ed ends up getting recruited to build out this pioneering computer graphics program at New York Tech on Long Island. So he's sort of in this academic sphere. Now, meanwhile, in Northern California, the year is now 1979, and there's a guy named George Lucas who is looking for someone-
- DRDavid Rosenthal
Heard of him
- BGBen Gilbert
... who can help him, uh, yeah, heard of him, push the, the field of computer graphics forward. George had just released Star Wars, and he was working on Empire Strikes Back, and he had this experience, this amazing first-hand experience of how computers could unlock brand-new filmmaking methods. And not just for Star Wars, but George was looking to develop tools to make the whole industry better. This is pretty heady stuff at the time. No one in Hollywood was looking to invest in building out new computer technology just because. And the reason why George... This is actually pretty interesting from a business analysis perspective. Why did George wanna make stuff to push all of filmmaking forward? Well, a filmmaker can only make one film at a time, and that takes one to three years. But you want an audience who's used to always going to the movies every week or every month and has a great experience. So if you are a filmmaker, you're rooting for all the other filmmakers to make amazing films to sorta condition your customer set that your product is good, and they should have a habit of going to the movies. So unlike other industries, being a filmmaker has this, like, sorta delightful, cooperative-
- DRDavid Rosenthal
Yeah, you're sort of collaborators/competitors.
- BGBen Gilbert
Right. So George gets put in touch with Ed. Ed accepts a job, moves across the country to join Lucasfilm. He brings Alvy Ray Smith with him from New York Tech, and they create the computer graphics group at Lucasfilm.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
And really, the goal here is figure out how to do stuff that you couldn't do with traditional live action techniques. Pretty broad. The first big success is actually not with a Star Wars film, but a Star Trek film, in The Wrath of Khan. It was a flyby of a planet as it was being terraformed, and it's shot from all these crazy swooping angles.
- DRDavid Rosenthal
Mm.
- 2:03:11 – 2:34:30
Toy Story, IPO & Eisner Conflict (1995)
- DRDavid Rosenthal
Yep. This is the beginning of the Disney-Pixar relationship as a vendor.
- BGBen Gilbert
As a vendor. So Pixar decides they need to show the world who they are. They make this short little film about a, a, a, a lamp and a baby lamp, and they're playing with a ball, and they show it to industry conferences, 'cause that's [laughs] what you did with computer graphics back then. And people go nuts.
- DRDavid Rosenthal
You were texting me. Your dad was at the conference where they showed Luxo Jr.?
- BGBen Gilbert
Yeah, at one of them. It wasn't the original SIGGRAPH, but it was r- right there in the late '80s. It was a joint robotics and computer animation conference. And I remember when I was a kid, he just told me, I think it was when we were seeing Toy Story, and it was the little short before it. I remember him telling me, "Yeah, I, I saw this at a conference, and I just, I, I knew this was gonna change the world."
- DRDavid Rosenthal
Wow. Wow.
- BGBen Gilbert
I just re-watched Luxo Jr. this morning. You go on an emotional journey and develop feelings for lamps over 90 seconds. To me, this is where the storytelling aptitude and an ability to animate lifeless objects into something you really care about starts to come through.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
So full steam ahead, right? Let's, let's go make movies. Well, there's a problem. You need, like, $30 million to go do that. So first they start making a bunch of commercials to try to pay the bills. They develop RenderMan as a piece of s- of software. It's actually still, uh, an industry standard today for computer animation. They release it externally. It actually gets used on Jurassic Park, on Terminator 2, uh, a bunch of cool films with early computer graphics. But the business is not working. These im- image computers are insanely expensive. They've only sold, like, 300 of them ever. If they're gonna do their dream of an animated film, they need to go all in on it, and, and someone needs to fund it. So here's what happens. John rekindles his relationship to Disney. From what I could tell, this is completely outside of the whole CAPS relationship. John is being recruited to join Disney as a director. This is 1991 or so.
- DRDavid Rosenthal
Oh, wow. So right as the Disney Renaissance is happening.
- BGBen Gilbert
That's right.
- DRDavid Rosenthal
They want him back.
- BGBen Gilbert
That's right. And instead, he says, "No, I, you know, I kinda threw my lot in with these guys in Northern California. We got something cool here. It's a great team. Uh, no, I'm turning down multiple offers to be a Disney Animation director," his lifelong dream. And he says, "But here's what I think we should do. Let's do a 30-minute Christmas special based on our Tin Toy short." And he's got a little bit of leverage to kinda ask for stuff here, 'cause they just really want him to direct something. And Disney, r- really it's Peter Schneider, who, who works with Jeffrey Katzenberg, says, "Hey, forget the 30-minute TV special. Let's do it a whole feature film, Toy Story."
- DRDavid Rosenthal
Yep, and this is how Toy Story happens.
- BGBen Gilbert
So why is this such a crazy idea? I mean, why is it gonna cost $30 million? Why did the folks at Disney think this was such a kinda nutty idea to make a computer animated film?
- DRDavid Rosenthal
Yeah, it, it seems on the surface like this should be easier than 2D animation, right? You're gonna just get computers to do all of it. [laughs]
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
Not quite. So we got to go spend a day at Pixar and learn from the folks there who make Pixar movies, how they do it, and wow, it was so cool.
- BGBen Gilbert
Embarrassingly, I did not really understand that the way these things are made is kinda like a stage play. You actually lay out all the objects on a stage in a 3D virtual environment, and you can put cameras and lights anywhere you want, all in this virtual environment. It's like a video game.
- DRDavid Rosenthal
Yeah. They're creating the universe, basically.
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
It's not just that you're illustrating a still frame.
- BGBen Gilbert
Yes. So hilariously, the best explanation of this, the best sorta seven-step process, is on the inside cover of their S1 IPO prospectus. We'll put it in the email. It has this little animated guide, the Pixar Animation Steps. So here they are. Step one, storyboards. Over 4,000 storyboard drawings are created as the blueprint for the action and dialogue of a feature length Pixar film. I think the most interesting part of this is they then take the storyboards and put them together in a story reel Where they're able to, like, watch it like a movie even though they're still frames, and th- they either narrate over it or they do temp dialogue on top. So in a very inexpensive way, using 2D sort of sketching, you really can get a true sense of what's going on. This also makes it very iterable and revisable. So we were chatting with folks at Pixar and they said, "Yeah, there's usually about eight different iterations where we are revising the plot, the script, the dialogue to really nail it and make sure that the story works." And I was watching old interviews, uh, with Lasseter and Jobs, and Lasseter has this quote, "If it's working in our story reels when we animate it and put color to it, it's gonna work even better. If it's not working in story reels, the animation won't save it." And then Jobs says, "In essence, it lets us beta test and iterate on our films before we actually make it. We believe it's one of the reasons that the hit rate can be substantially different." So they basically make a low-res 2D movie before they make a 3D movie.
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
And the story and characters all have to work in 2D first.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
All right, so step two, models. Pixar's proprietary animation software, Marionette, is used to create the three-dimensional computer models for characters, props, and sets. Three, layout. Each scene is begun by assembling the models for the required characters, props, and sets, and blocking out the action. This is where they really go into the computer for the first time. They take the models and they lay them out to kinda resemble the 2D paper sketches that they made for the story reels. Now hilariously, you can watch some of these, like you can watch the film when it's only done in the layout stage. The characters don't have any of their l- limbs that move. Their mouths don't move. They're these, like, lifeless puppets being dragged around. You kinda get the plot, but you get no personality or emotion.
- DRDavid Rosenthal
Yeah, they're like the 3D equivalent of stick figures.
- BGBen Gilbert
Yeah, they have t- the, the animators haven't really performed the characters yet.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
So then step four, animation. Pixar's proprietary animation software allows Pixar's animators to choreograph the motion in each scene by defining key frames or poses. So this is the exciting step. Each character goes through something called rigging-
- 2:34:30 – 2:46:37
Disney Acquires Pixar (2006)
- BGBen Gilbert
Which is a crazy call to get if you're Steve Jobs, right? Like, "Hey, my predecessor burned the bridge. I'd like to buy you. I'm basically open to any price, and also, I would like you guys to come and take over the core business that we operate, the most prestigious animation studio in the world. We're waving the white flag, we've lost. Please come in here and take over and fix this."
- DRDavid Rosenthal
Yep. And I think Steve is so surprised that it opens the door, and it leads to this great relationship between the two of them. Once again, just like Bob made peace with Roy and instantly fixed that relationship, he pretty much instantly fixes the Steve Jobs relationship.
- BGBen Gilbert
So listeners, we talked to Bob Iger as part of the prep we were doing for this episode. Bob had this idea, and before he called Steve, he went to the, the board and said, "Hey, can I have authorization to, like, open a conversation with Steve Jobs about buying Pixar?" And he said that it was so unthinkable and such a surprise to the whole board that they forgot to say no.
- DRDavid Rosenthal
Yeah. [laughs]
- BGBen Gilbert
That everyone was just like, "Uh, sure. Call him," because they thought there was no chance that it could possibly result in Steve saying yes.
- DRDavid Rosenthal
So Bob calls Steve back and floats this idea. Disney will buy Pixar, keep it fully intact as an independent studio up in the Bay Area, its own email addresses, its own culture. Nothing will change. John and Ed will still run it, and they'll also commute down to LA two days a week and take over and run Disney Animation.
- BGBen Gilbert
And interestingly, Iger also said, "Hey, Lasseter and, and Catmull, you can also tell us you think Disney Animation is unrescuable, or that you think that you'd kill both things by splitting your time, and you can just tell us you wanna shut down Disney Animation, and instead, Pixar will just become our one studio."
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
And Lasseter and Catmull have this like, "We couldn't possibly do that."
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
Like, Disney Animation is so important to where we all came from in the world, and they fly down, and they meet with people, and they see, oh, there's actually great talent here. They're just not being led well, and we think we can apply our process and institute a brain trust and change the physical construction of the building and bring in the Pixar way and make this great again. And they do. I mean, that's the crazy thing is that it was John and Ed's option to l-l-look at the enemy and, you know, chop off their head.
- DRDavid Rosenthal
Decide what to do with.
- BGBen Gilbert
And instead-
- DRDavid Rosenthal
Yeah
- BGBen Gilbert
... they said, "No, no, no, we're gonna come in there, and we're gonna, we're gonna make this thing great."
- DRDavid Rosenthal
Yeah. So pretty quickly, they come to terms on a deal. Seven point four billion dollars in Disney stock, newly issued Disney stock, which will make Steve Jobs the largest shareholder in Disney.
- BGBen Gilbert
Seven percent.
- DRDavid Rosenthal
Yep, I think it was a seven point seven percent-
- BGBen Gilbert
Wow
- DRDavid Rosenthal
... stake in the company, and he'll join the board.
- BGBen Gilbert
Which is much larger than the entire Disney family put together by this point.
- DRDavid Rosenthal
Yep. So it's all done. Both boards approve the deal. They're ready to announce it. Bob flies up to Emeryville, to the Pixar campus, the morning of the announcement, and before the official time when they're gonna announce the deal and meet with the whole company, Steve comes up to Bob and says, "Let's take a walk on the Pixar campus, just the two of us." They walk for a bit, and they sit down on a bench, and Steve says, "I have to tell you something, and you have to keep it confidential. My cancer is back, and I don't know how much longer I'm gonna live." This is January 2006, right as they're about to announce the acquisition. And Steve says, "I thought about it, and I feel I have an obligation to tell you before we announce the deal, and I want to give you an option to back out if you want, knowing that I'm about to become your largest shareholder, and I don't know what- what's gonna happen to my stake after I die." Bob says, "Wow, that's a lot." [laughs]
- BGBen Gilbert
And I've got 30 minutes.
- DRDavid Rosenthal
Yeah, I've got 30 minutes to decide. [laughs]
- BGBen Gilbert
And I can tell no one.
- DRDavid Rosenthal
Steve is ever the negotiator. [laughs] Uh, but, uh, he makes the decision that the deal is still on. But oh, man, it's devastating. So Steve would end up living another five and a half years after this, but he and, and Bob, and, and Apple, and then eventually the rest of the world knows soon, it's, it's just all borrowed time. And this is why Steve sold Pixar. One of the questions that we had going into the research for this episode was, could Pixar have actually built a full stack, like flywheel-based competitor to Disney if they'd remained independent? I mean, they had defeated Disney. Like, they won on every dimension, and why did they sell?
- BGBen Gilbert
And we asked all the Disney people this, and we asked all the Pixar people this, and we asked e- everyone we could this question because from the business strategy lens, they have what it takes.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
Like, they have the core IP, they have movies, they could slowly move into theme parks. After the five films, they would have control of their own sequel and merch rights, and they could do it. And it took us talking to all the people involved to realize, no, there was no chance.
- DRDavid Rosenthal
Yeah.
- 2:46:37 – 2:58:01
Marvel & Lucasfilm Acquisitions (2009-2012)
- DRDavid Rosenthal
Yep. No question. Acquisition absolutely saved the company. So after Pixar-
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
... Bob and the Disney board are like, uh, "Well, that worked well." [laughs]
- BGBen Gilbert
[laughs]
- DRDavid Rosenthal
"What can we do next?"
- BGBen Gilbert
And that sure is in line with Bob's point number one in his three-point strategy of-
- DRDavid Rosenthal
Absolutely
- BGBen Gilbert
... making the very best content.
- DRDavid Rosenthal
But before we talk about the other two of Bob's big three acquisitions, Marvel and Lucasfilm, now is a great time to thank our friends at Anthropic, the makers of Claude.
- BGBen Gilbert
Yes. And today, we are going to share how Claude saved us on recording day a couple months ago on our Disney Part One episode. So David, do you wanna set the scene?
- DRDavid Rosenthal
[laughs] Yes. So we were in the middle of recording Part One, and recording days are always very time crunched. [laughs] The whole thing feels like a high wire act. And right when we got to Snow White's box office numbers, we realized that a bunch of authoritative sources listed $8 million as the revenue for Snow White's box office in its original release. But we also had Disney's actual 1940 financial statements in front of us, and they showed four and a half million. We immediately thought, "Well, those can't both be right," and started reconciling the two numbers. We couldn't, and so we had to pause recording.
- BGBen Gilbert
So this was actually the day that Fable 5 came out. So while David and I were trying to sort through, I figured I'd let Claude kinda give it a shot. We uploaded photos we took of the original financials, along with another annual report that we had showing how the revenue breakdowns actually worked, and Claude untangled the whole thing for us. There are actually two different ways to report movie revenue, gross box office, which was that 8 million, and film rentals, which is Disney and the distributors' share after the theaters [laughs] take their cut. That is the $4.5 million number. All the sources we found saying 8 million in revenue to Disney were actually wrong, and Claude figured that out.
- DRDavid Rosenthal
Which is what let us develop the novel point that we hadn't seen anywhere else. Snow White's profits alone couldn't pay for the Burbank Animation campus. Walt had to go borrow more money, which created the cascading set of events that we talked about in the rest of the episode.
- BGBen Gilbert
So 20 minutes later, we were back to recording, and we were able to finish the episode both on time and-
- DRDavid Rosenthal
Sort of
- BGBen Gilbert
... to be factually correct, uh, which is the clearest example I've ever personally had of Claude being able to solve a problem in the moment using analysis from primary sources that we couldn't find anywhere else in the middle of a live recording day within minutes. So listeners, if you wanna try out Fable now or you just wanna learn more, go to claude.ai/acquired, and, uh, if you're inquiring for your team or for API use, just tell 'em that Ben and David sent you. All right, so David, Star Wars.
- DRDavid Rosenthal
[laughs] Star Wars and Marvel. Well, Marvel is first. So in 2009, Disney acquires Marvel for $4 billion. This was, like, highly contrarian at the time. People thought, "You're spending $4 billion for a comic book company?" The Marvel movies had already started to come out. Iron Man had come out, I think a couple others that had been hits. But, um, nobody could see what Marvel would end up becoming under Disney.
- BGBen Gilbert
Yeah, superhero movies were not obviously formulaically going to work. Like, there had been Batmans many years before. There had been Supermans many years before. There had recently been a Spider-Man-
- DRDavid Rosenthal
Yep
- BGBen Gilbert
... which actually was licensed to Sony. Before pursuing this strategy, Marvel actually licensed out their, their best characters- To other
- DRDavid Rosenthal
Studios
- BGBen Gilbert
... studios. And so the acquisition was weird 'cause it was kinda buying all these leftover characters. You couldn't use X-Men 'cause Fox already had that. You couldn't use Spider-Man 'cause Sony already had that. They already made a, a, a film out of Iron Man, and the big dogs, Superman and Batman, were over at DC. So what are you even buying when you're buying Marvel? But the team at Marvel Studios and Disney really figured it out. We're not gonna go into all the details here, but th- they crafted the Marvel Cinematic Universe in a way that became the blueprint for anybody else who wants to universe-ify their franchise. This very careful world building of all these interconnected movies, eventually culminating in The Avengers movie. The first three phases of the Marvel Cinematic Universe were r- really this franchise building masterclass to behold. By 2025, the Marvel Cinematic Universe has become the most successful film franchise in history.
- DRDavid Rosenthal
Yep
- BGBen Gilbert
... generating nearly $32 billion at the box office. That's more than Star Wars, that's more than James Bond, anything else. Now, it helps to have 37 films, plus, uh [laughs]
- DRDavid Rosenthal
[laughs] Yes, they're quite prolific
- BGBen Gilbert
... you know, Avengers: Endgame, which was the second-highest grossing film of all time, second only to Avatar, I think.
- DRDavid Rosenthal
Yep, I think that's right.
- BGBen Gilbert
And w- it's pretty difficult to estimate the profitability on this 'cause there's too many assumptions you have to bake in, but it's fair to say there are single digit billions in profit from the box office alone on Marvel movies. And then of course, there's the consumer products, and the park adaptations, and actually home video for a while-
- DRDavid Rosenthal
Yep
- BGBen Gilbert
... since those Marvel movies were still in-
Episode duration: 4:32:56
Install uListen for AI-powered chat & search across the full episode — Get Full Transcript
Transcript of episode 01QR2tmxSD4
