How To Turn 10 Million Into 7 Billion: A Brief History Of Pixar

George Lucas needed cash (there’s a sentence you don’t read everyday) and a lot of it. The cash flow problem stemmed from a divorce. Lucas’ Wife, the well respected film editor Marcia, wanted her share of the wealth they had accumulated while still married. George wanted to keep his businesses going. Looking for something to sell, George’s eye lit on a small, almost inconsequential, part of the LucasFilms Empire: the computer animation division.

George Lucas had created the new division precisely because of Star Wars. The light sabers and spaceships were all maddeningly tedious and expensive work with and Lucas hoped computers could come to the rescue. To accomplish this he hired computer animation pioneers Alvy Smith and Ed Catmull. They, in turn, added staff to what would eventually become the nucleus of Pixar.

Ed Catmull and associates started churning out impressive graphics for LucasFilms and other projects but their key move was likely not the genesis scene in the half-baked Star Trek II but a key hire. In meetings with Disney (LucasFilms was selling them computers and software to handle the drudge work of inking and painting) Alvy and Catmull met John Lasseter. Lasseter had become disenchanted (forgive the pun) with Disney and in 1985 agreed to join LucasFilms.

All the key Pixar players, except Steve Jobs, were now in place and, thanks to the previously mentioned divorce, for sale. Steve Jobs was interested in buying Pixar but not at the price point (30 million) that Lucas wanted for the division. After Jobs rejected the original price Lucas relented and offered the division for a divorce sale price of 10 million. Veritable chump change to the movers and shakers of the West Coast and far too cheap a deal for Steve to pass up.

Many people, at both NeXT and Pixar called Pixar Steve’s hobby. The description may be accurate; one individual puts Steve’s visits to the Pixar division at less than five over a six-year period. Pixar may have been his hobby but Steve’s passion is selling hardware, and that’s what he intended to do with Pixar.

At the time, Pixar made a fantastically expensive ($135,000) and technically challenging computer. The computer was so convoluted that to actually interface with the machine you needed both a Ph. D. in Computer Science and a Sun workstation. Sure, it was the anti-Mac in every conceivable way but it did graphics very, very well. Steve envisioned selling the computer to hospitals for archiving X-rays and imaging surgery.

To show off the capabilities of the Pixar Image Computer John Lasseter began to make animations. They were well received and one effort, Luxo Jr., won an Oscar for best-animated short films. The shorts may have been fantastic at illustrating the power of the computer and providing a glimpse into the future of animation but they miserable at moving the computers. Apart from some orders from Disney, the computers just weren’t selling. Without the expected revenue from hardware sales Pixar was spending far more money than it was bringing in. Sane corporate governance says that it was time to cut expenses. One of the expenses Steve decided to chop was the animation division.

The reasoning was simple, the animation division may have just won an Oscar but it didn’t bring in any cash. You have to pay to play so Pixar would soon be out of the animation business. Luckily, for Steve and the rest of Pixar, John Lasseter convinced Steve to save the animation division with an impassioned sales pitch of his next short: Tin Toy. Later the animators would generate income by selling their services to commercial makers. The plan worked, and if you remember the boxing Listerine bottle advertisement, you remember at least one of their ads.

Even with the animation group generating income Pixar was still a money pit. That was about to change. Disney had decided they were willing to give a computer-animated movie a shot. Steve was desperate, at this point he had sunk 60 million dollars into Pixar, but negotiated shrewdly. He asked for 22 million to do the movie. Disney offered 15 million and Steve jumped at the chance. Pixar was saved, though no one knew it yet.

Pixar’s first movie: Toy Story, featuring Buzz and Woody and watched with annoying regularity by three year olds, was a monster hit. The problem for Pixar is that they didn’t see a lot of revenue from the success of the movie; they had signed most of the revenue away to Disney. This is where having Steve at the helm first paid off.

Steve decided to take Pixar public. Ignoring the fact that most investors like to invest in profitable companies and hand waving away the dim prospects of future profits at Pixar, Steve was hoping to glom on to the internet bubble. Investing in companies that might go through the roof on little more than speculation, rather than a sound business plan, was becoming fashionable. However, Steve had a problem, and the problem was profit sharing.

As part of assuring Disney that the principals of Toy Story would be around to produce the rest of the movies the original contract called for, Steve had granted contracts and profit sharing to key Pixar employees. This was a major problem, in a public company profits don’t go to the employees, profits go to the shareholders.

The moment was particularly delicious for Ed Catmull. Years earlier he had, at Steve’s insistence, given up a 4% stake in Pixar. Now he, and three other Pixar employees, were in a position of power, if they didn’t agree to trade their profit sharing for stock the public offering of Pixar would likely not go through. Realizing they were now holding Steve Jobs by a very sensitive part of his anatomy (the wallet) they started to squeeze.

The rest of Pixar employees fared much worse. Characteristically, Steve froze as many people out of the deal as possible to maximize the number of shares he would own. The IPO went ahead and Steve was suddenly worth $1.5 billion dollars.

This is the point where Steve Jobs became truly valuable to Pixar. The contract with Disney was worth very little. Steve wanted more. It may be commonplace for pro athletes to renegotiate contracts but no one would try it with the negotiators at Disney. No one, that is, but Steve Jobs.

Steve wanted Disney and Pixar to be equals. In the new deal, Pixar would begin picking up 50% of the production costs and Disney would start sharing 50% of the profits. And if Disney wouldn’t mind too much they’d also give Pixar equal billing to Disney and allow Pixar creative control. Completely ridiculous demands, but demands Disney accepted.

Once the new contract was in place Pixar went on to produce a string of successful films. Disney’s animated movies didn’t fare nearly as well. This leads directly to the next chapter of Pixar history: an acquisition by Disney. The deal is not certain yet but with Disney’s largest successes coming from Pixar, it seems likely that Disney will part with roughly seven billion dollars to acquire Steve’s former hobby and former Disney employee John Lasseter.

Two notes:
The source material for this article is, largely, The Second Coming of Steve Jobs by Alan Deutschman. I highly recommend the book for anyone interested Pixar, NeXT or compelling writing.

You can check out a Lasseter coached Mac II animated ad online.