Disney: The Renaissance and the Empire (Audio)

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? >> Oh, ho, ho, ho, yes, absolutely. With masks, dancing in. the aisles. >> And I'm thinking too we. may as well do Acquired on Ice. >> Oh, yeah, while we're at it. Let's go. >> Yet another adaptation of it. >> Can we do Acquired in Space? >> Ooh, we know a few people who could make. that happen.

>> Yeah, we'll make that happen. All right. >> All right, let's do this. >> [music]. [music]. [music]. >> Welcome to the fall 2026 season of. Acquired, the podcast about great. companies and the stories and playbooks. behind them. I'm Ben Gilbert. >> And David Rosenthal. >> 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, 10. Broadway musicals, the special effects. firm Industrial Light and Magic and. Skywalker Sound, one of the four major. US broadcast networks ABC, it is of. course ESPN. >> I was wondering when you were going to. get [laughter] to the worldwide leader. here. >> Unexpectedly a giant amount of the.

profits of the whole company come from. >> Absolutely. >> It is the SEC network and for a period. of time David they got even more exotic. owning the NHL team the Mighty Ducks, the Anaheim Angels and the Mighty Ducks. >> outfield baby. >> [laughter]. >> And the 1936 British ocean liner the. Queen Mary. >> That's right. >> 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 Plus. 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 a hundred. years old is at the very center of the. most interesting business strategy. questions that have ever been posed. Can. we fight the innovators 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? >> Yes. >> 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 Century. Details are at. acquired.fm/meetup.

Woo! Before we dive in, we want to thank. our brand spanking new presenting. partner, Sierra. >> 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, Clay Bavor and Brett Taylor. >> Yes, as uh Brett and Clay shared on. stage with us a few weeks ago when we. were in New York together. >> Yes, indeed. Thank you, Sierra. >> 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. only. >> All right. Well, we start. In 1984, the year I was born, all this was happening. I had no idea. >> [laughter]. >> Disney. is in chaos. In the 18 or so years since Walt died, Disney 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. 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 Disney's 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. >> 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, right? Dilute shareholders so much that they're. creating all these new shares to give to. these new guys. >> These Texas guys. >> The Bass family, so they can own 25%. which basically makes them, you know, pseudo controlling shareholders. >> More than any of the remaining branches. of the Disney family. >> 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. 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. >> Ooh, I thought that's where you were. going. >> 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. >> Uh-huh. >> 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. >> CalArts? >> John Lasseter, Brad Bird, Tim Burton, John Musker who. would do The Little Mermaid, Aladdin, and then many years later Moana. 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 Doctor, who today is. chief creative officer at Pixar.

All of these people. are in a basement classroom classroom A. 113. home of the character animation program. at the California Institute of the Arts. or CalArts. >> Which was basically created as a. pipeline for Disney, right? >> 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. this institution. And it was that. I.

mean, so these people I mentioned, John. Lasseter, Brad Bird, Tim Burton, John. Musker, Brenda Chapman, all of them were hired directly by. Disney and Disney Animation right out of. school. And then. Disney fired all of them. >> [laughter]. [gasps]. >> But they all end up back uh eventually. >> 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 John's girlfriend.

at the time comes along with them and. she says them, "Just think, someday this. park is going to be filled with the. characters that you guys are going to. create." And she had no idea both how. right and how wrong she was. It would. just take a few decades. >> 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 7%. >> Yep. So, in the wake of all that, in. 1984, [clears throat]. 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, 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, cuz. Disney now like is without a leader, is. >> [laughter]. >> in double crisis here, they go out and they identify, recruit, sell, and hire. arguably the greatest two-person. management team in media company. history, Michael Eisner and Frank Wells. And then, Michael quickly brings in his.

number two from Paramount, Jeffrey. Katzenberg, to run the film studios. Yep. 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 got to call. You got. to 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. This is when Paramount was. number one. Yep. And the way they did it. was this famous strategy that they. called the singles and doubles strategy. The ideal 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? >> And the singles and doubles name. appealed to shareholders. It didn't. exactly appeal to talent. And so, the. way they built it the other direction. was high concept. >> Exactly. >> Describing a unique idea whose. originality can be conveyed briefly. >> Yep. So, Michael writes a famous memo in.

Hollywood history that gets leaked and. spread around the rest of Hollywood. describing the strategy. He writes. >> Spoiler alert, no memo actually ever. leaks in Hollywood. They're all. intentionally leaked. >> Yes, they're written for publication. [laughter] Yeah. 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. >> 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. 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 kind of need the the story and the. characters and the emotion to take it. from there. >> 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. >> 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. He had never seen Snow White or. Sleeping Beauty. He wasn't really a. Disney guy despite the fact that as soon. as he later gets the job, he was never. without his Mickey Mouse tie. >> 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. >> But they're both story first. They're. both obsessed with can we create. characters that take you on these. emotional journeys and tell compelling. stories. >> And then the unthinkable happens. Michael gets forced out of Paramount at. the peak of his success. >> Well, sort of. Uh. Barry leaves as we talked to Barry about.

on stage at Radio City Music Hall. >> To team up with Rupert Murdoch and. launch Fox. >> Yes. Fox the TV network cuz Fox the film. studio already existed. So Barry leaves. Michael is supposed to get the job that. Barry had as chairman of the movie. studio over at Paramount and he doesn't. get that job largely because of internal. politics and who's making how much money. those sort of games and Michael. basically his contract says that he's. owed a check if he does not get the job.

when Barry leaves. So Michael decides, you know what? I don't really want to. stay here without Barry anyway. I'm. going to start poking around for other. things. He had been having these kind of. background conversations. I'll take the. check and get out of here. >> Yep. >> So all of a sudden. Michael's available. >> Right as all this drama is going on at. Disney. >> He was on the board of Cal Arts with Roy. E. Disney. So they've been talking for a. while, but now it all comes together. >> So Frank is offered the top job and. Michael's offered number two.

Then there's a second iteration where. they're sort of offered co-CEOs. and Michael basically tells Frank, hey. look, if I'm going to do this, I'm CEO. or I'm I'm chairman, I think is even. what he says, and you're number two. because we need to send a signal to the. world that Disney is run by a creative. executive of which he was at Paramount. and Frank had always sort of been more. the numbers and legal and operations. >> Operational, you know, he has a legal. background. >> Right. So if this is going to work, I.

have to be the top guy. And Frank, this. tells you everything about who Frank is. and sort of how how the company would. work for the next decade. Frank says, okay, that's that makes sense to me. I'm. perfectly happy to do it. I'll be your. number two as long as we both just. report to the board. I'll be president, you can be the chairman, but we both. have our own relationship with the. board. Michael says, works for me. >> Yep. So on September 21st, 1984.

Michael Eisner and Frank Wells are. introduced as the new CEO and president. of the Walt Disney Company. >> Can we just talk about what dire straits. this company was in that they had to go. in a matter of weeks find two people who. had zero relationship with the company, had never worked there, and bring them. in and make one of them chairman of the. board. Also, we should say there was a. giant comp package if the studio did. well. There was massive profit sharing, there was big stock options issued. It. was like we need a complete reboot and.

we're bringing in these Hollywood guys. from other studios to make it happen. >> Yep. Yep. Yep. They turn around quickly and bring in. Jeffrey Katzenberg from Paramount as. well to come in and run the studios. under Michael. >> at Disney. >> And the plan is Disney's going to become. Paramount. >> [laughter]. >> Actually, one of the first items on. their agenda is they move the animation. department out of the Burbank lot and. basically exile Disney animation over to. Glendale. They're like, "Hey, we got to make room.

for all the, you know, movie producers. that we're going to bring in here and. make live-action films.". >> If you're one of these animators who is. looking at it from the perspective of. what makes this place special, and the. very first thing, let's let's say you. were optimistic about change that. happens is. they kick the animators out of the. building that Walt's office was in. This. is like the historic animation building, they clear them out, and they say go to. Glendale in this like really rickety. run-down building instead. >> Not looking good for the core of the. Disney flywheel here. And then.

Eisner and Wells turn their attention to. the parks. And this is where some light. bulbs start to go off. One of the first. things they do that ends up I I think. really setting up all the following. success that Eisner and Wells and. Katzenberg have is they raise the ticket. prices at Disneyland and Disney World. Ticket prices at the Disney parks had. basically been flat since Walt died. Like the spirit around the company and. the ethos of management is like, "Well, Walt wanted this to be accessible to.

everybody, and he set these prices, so. like we shouldn't change them." Never. mind that inflation was rampant during. the 1970s. So, parking at Disney World and. Disneyland when Eisner and Wells come in. to run the company is still only a buck. So, they start raising ticket and. parking prices at the parks. Not. enormously, but like. >> so much head room here. I mean, you can. criticize them all you want today for.

raising prices, but they had, I don't. know, five to 10x of you can raise the. price and it wouldn't impact demand for. a second back then. >> So, I mean, you can raise the price of. parking from $1 to $5, so nobody will. care. But, when you do that in an operational. business like parks, all of that. incremental profit falls right to the. bottom line. This is pure incremental. cash flow into the Walt Disney Company. cuz they're not changing the operations. at all. They're just making more money.

So, Eisner and Wells turn around and they. take all these quick profits from the. parks and they start investing them into. building the live action studios and. running the Paramount playbook. >> Sort of. That still didn't generate as. much cash as they'd actually need to. finance the full film slate. So, for. each of the films, all 75 films they. would make over the next eight years, those were financed by a partner called. Silver Screens. >> Ah, interesting. So, Michael's singles.

and doubles strategy worked at. Paramount. It works even better at. Disney. They make Down and Out in. Beverly Hills, Three Men and a Baby, Good Morning, Vietnam, Dead Poets. Society, Pretty Woman. These are all. huge hits with, you know, singles and. doubles size budgets. >> And they would get actors that would go. on to be big, big names. I mean, you you. name it, Robin Williams and Bette. Midler, >> Julia Roberts, >> and. they were basically looking for ways to. get deals on talent. Yes. So, a lot of.

times it was like actors that had been. in rehab and were looking to make a. comeback [laughter]. or it was these up-and-comers, but it. was. in many ways like a young Warren Buffett. strategy of looking for cigar butts. >> Yes. >> that they they knew they could get a. guaranteed return on. >> Uh, but it works, man. All told, 27 of. their first 33 movies that they make are. profitable, which in Hollywood, to have. a hit rate like that, that's like making. 33 venture capital investments and only. losing money in six of them.

>> Right. Films are like books or like. startups, power law distributed. >> Yep. >> Normally. >> But, of course, along the way, as we all. know, they do. quickly realize that, hey, there's some. potential in this animation thing here, too. >> Well, this is a Roy E. Disney special. Roy views his job as the keeper of. Walt's vision and the keeper of the. thing that made the company special and. the thing that made the company special. was this ridiculous. flywheel, for lack of a better term,

that they had where you make amazing, compelling characters on universally. relatable stories told through. animation, drawn in a spectacular way. that no other studio can do, and then. you get to pump that into consumer. products and parks and kids pass down to. their kids and it's this like. beautiful, special business model. >> re-release the classics in theaters from. the Disney vault and you make cash flow. on that. >> And Roy's sitting here looking at the. current business of singles and doubles. and live action and being like, "Hey, we. got to do the Disney thing.".

>> 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. >> Okay, so flashback 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. Yeah, brutal. And morale is low. 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. >> And this is when all that young talent. that's coming in from CalArts, Disney's. either firing or they're leaving cuz. they're just like, "Hey, this place is. cooked.". >> 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." Cuz, you know, Jeffrey's background is live-action. Paramount stuff with Michael. >> And Michael says, "Neither do I.". >> [laughter]. >> He goes, "That's where they made the. animated movies and that's your. problem.". >> [laughter]. >> And so Jeffrey, like Michael, doesn't. know anything about animation. The.

animators, when he sort of gets in there. and he says, "Okay, I'm 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. I mean, it is like the most. fun crazy place in animation and this. was quite the clash at first. >> 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.". >> Well, it was both of them and it would. take a third guy and that guy is Peter. Schneider. >> Mhm, yes. >> 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.". >> [laughter]. >> That's great. >> So Peter and Jeffrey come in and and. they start making changes. And Peter had. this license to like examine everything. They he's 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? It seems like that could. really help us." It sends 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 want to make great films and we want. to. 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 shake-up. There was. good talent there, but they were just. sort of like. wasting around not being led at all. And. there was this 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 looked like or. felt like. >> Yep. >> So, they slowly start to turn it around. in animation. You know, at first with.

films like The Great Mouse Detective in. 1986, nothing write home about. They did. Oliver & Company in 1988. That that gets. a little bit more press. There's 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. Yes, these are going to be. Broadway musicals, but animated. >> Yes, we're going to turn these things.

from cartoons with music to musicals. that are cartoons. And it makes all the difference in the. world. >> From story arc to the type of music. I. mean, Snow White had some really catchy. tunes, Whistle While You Work. >> Hi ho, ba ba, yeah, yeah. >> But, they weren't musicals and they. didn't follow the sort of musical. stage performance story structure. So, Jeffrey Katzenberg recruits a guy named. Howard Ashman. Interestingly, introduced.

by David Geffen. >> yeah, David Geffen [laughter] connects. them, right? >> Yes. Howard, when he hears the word. Disney, instantly says, "I want to work. in animation. I feel there is a. connection between animation and musical. theater." And I don't think this was. obvious to anyone else. This is like a. unique Howard insight. So, Howard brings. along Alan Menken. >> Composer Alan Menken. >> The two of them had done Little Shop of. Horrors together and they hit the ground. running. They come into Disney animation.

and the first film that they work on. together is The Little Mermaid. >> Yeah. These guys. are geniuses. When we really started to. dig into the question of like, the. Disney Renaissance, who was responsible? Who created these incredible movies and. totally turned around Disney, it's these. guys. >> Yeah, that I they weren't the original. story pitch. >> No, and they weren't the executives, but. they're they brought the magic. >> So, Howard has this great quote where he. says, "Well, in every great Broadway. musical, the third song, the leading lady goes.

and she sits on something, might be a. rock, might be a trash can, and she. sings a song to the world telling the. audience what she wants. If she could. only have this thing in life and then. the whole rest of the film, we root for. them. That is the entire crux of the. play is what is the leading lady want. and we we hope that she gets there." And. he's like, "I just realized we could do. that in Little Mermaid." So, Part of. Your World is just the setup song for. Ariel sitting there explaining to. everyone, "I just want to, you know, go. where the people are. I want to see them. dancing, walking around on what do you.

call them? Oh, feet." And this amazing. sort of like lyrical explanation of what. she feels as a character that ends up. kind of carrying the whole movie. Uh. Howard is also the the one who says, "Hey, that little little crab, should we. make him Jamaican?". >> Yep. >> And [laughter]. that leads to the whole song "Under the. Sea". I mean, these are like formative. songs that are in at least David you and. my our generations head forever and why. we watched the films I'm sure a million. times when we were kids. >> Yep. And why they survive. I mean, my. girls are watching these movies today.

So. Little Mermaid comes out in 1989. It's a. classic. >> But it's not like it blew the doors off. at the box office. And it had a pretty. big budget. Animation grew its head. count from that low when it was left for. dead of 150 people to 550 people. And. here's a great quote from our friend Ben. Cohen at the Wall Street Journal in a. piece that he wrote. "Once upon a time, Disney movies got beat at the box office. by rom-coms. The Little Mermaid made. less money than When Harry Met Sally in.

1989. Only when it came out on home. video in 1990 and kids could watch VHS. tapes of The Little Mermaid anytime they. wanted did the iconic children's movie. become truly massive.". So if you're just looking at box office, you're kind of like, "Okay, I see green. shoots here. We're really onto. something. People love this, but it's. not like it magically made the company. It's not like we just generated a bunch. of profits.". >> Which, you know, look, trust in Disney. animation had eroded, right? Like people.

were used to crap coming out of. the studio. >> So they do Rescuers Down Under in 1990. It's fine, but it's not like one of the. great Disney Renaissance films the way. that Little Mermaid and the one we're. about to talk about. >> And then Beauty and the Beast. I know. Lion King's bigger, but like Beauty and. the Beast is my favorite of these. movies. >> It was my first movie in theaters. >> Oh, wow. >> And this is another Howard Ashman. special. >> Yep. Yep. It's so good. >> Yes. So Beauty and the Beast builds on. the momentum of the team that trusts.

each other, the new style of musicals as. animation. This one actually lights up the box. office. 330 million gross at the box. office on a 25 million dollar production. budget. >> Man. >> [laughter]. >> Disney animation is back. >> They do it again the next year. I'm. telling you year after year after year. 1992 with Aladdin. Box office. >> 500 million is what I saw, right? >> That's right. >> A half a billion.

>> On a 28 million dollar production budget. and they're pulling out the stops on. sort of the Disney stars at this point. They're bringing in Robin Williams to be. the genie. >> From Good Morning Vietnam to the genie. >> [laughter]. >> That's right. And then they do it again. two years later with The Lion King 1994. This time a little bit bigger production. budget. It's 45 million dollars. It's. very sophisticated animation. You know, you've got James Earl Jones. >> How much money did this thing make? >> This brings in 750. million dollars.

>> Yeah. Unprecedented at the time. >> The most successful traditionally. animated hand-drawn film in history. >> In history. >> Michael Eisner actually announces then. they are going to build a new animation. building and bring all of the animators. back onto the Disney lot. >> Yes. Back to Burbank. >> [laughter]. >> Which as a fun little aside Disneyland. when it was originally supposed to be. like a little 15 acre park or something. right next to the Disney lot before it. became a much bigger project. This is.

actually the plot of land. >> Where the new animation building is. today. So great. So great. >> So that's the Disney Renaissance. >> So it's interesting, right? Little. Mermaid cost 40 million dollars to make. And then Beauty and the Beast and. Aladdin were cheaper. And you said like. oh production budgets ballooned back up. with Lion King but only to 45 million. How are they making these so cheap? >> Yes. So the process of actually doing. the hand-drawn animation and it all was. still hand-drawn at this era had. progressed from the actual inking and.

painting to kind of skipping the inking. step cuz they use xerography so you. could directly transfer the paper. sketches onto the transparent celluloid. for each. frame so that you can photograph it. But. the thing that Disney does here during. the the Renaissance films is something. called CAPS. Starting in 1990, the computer animated. production system. This was really. pushed by Roy E. Disney who felt this. was a big part of his uncle Walt's.

legacy, kind of pushing the frontier of. technology and how investing in new. technology can push the state of the art. in storytelling. Computers had advanced. a lot by 1990 and so they got to. thinking, why are we still using. physical paint to color in the lines on. every single one of these hand-drawn. frames? Also, multiplane cameras were really really. expensive to operate so they started. cheaping out in the dark times where. rather than photographing really.

complicated, you know, six-plane. animation, they would just kind of slap. one animation cell down, put a. background underneath it, photograph it, and move on to the next one. And so they. invested $10 million. in fixed costs into software that could. do two things. One was effectively Microsoft Paint for. 2D animation where you could look at all. the lines on a computer, you could. select a color, you could bring over. your little paint tool, and dump your. bucket of color into an enclosed area. It sounds like I'm describing something.

that you were like, yes, we've all used. MS Paint, but this was rocket science at. the time. This was really cool and meant. that not only do you not have to do. inking anymore, you don't do painting. either. And on top of that, what CAPS. was was a super-duper multiplane camera. that could do an unlimited number of. planes, not just limited to whatever you. could actually do in in Walt's era. So. you could do it faster and cheaper. without actually operating the. multiplane camera. So The Little. Mermaid, which only had three multiplane. shots cuz it was before CAPS, by the.

time you get to The Lion King, it had. hundreds. So, it's better, it's faster, and it keeps the budget down. >> Yeah, it seems odd that. Disney, a, you know, media company, would develop this computer software. technology in-house. >> [laughter]. >> Yes, they relied on a partner for that. who was getting really, really good at. early computer graphics, Pixar. >> Yeah, mhm. Well, put a pin in that. >> Yes, and one other just fun, just cuz. this is cool nerdy stuff, the scene in. Beauty and the Beast that is the.

ballroom dancing scene that has this. crazy cool camera pan. It's a quick. shot, but it's one of the most memorable. shots of the whole film. The background of that was actually 3D. rendered using Pixar software. And then they composited, using CAPS, a. 2D hand-drawn Belle and the Beast. dancing, and that is the first time they. used any 3D animation. >> animation. >> in any Disney films. >> Oh, that's so cool. >> Yeah, and if you go back and watch it, you're like, "Whoa, yeah, the background.

is computer-generated.". >> Yeah, oh, that's awesome. 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. >> [gasps]. >> 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 7 years or so to, you. know, get a new generation of children.

exposed. >> Which was the only way to watch movies. My brain sort of can't understand this. since home video has existed my entire. life. >> No Disney Plus back then, baby. >> Nope. And until 1985, there was no way. to watch a Disney film outside of a. theater. >> Yep. Yep. So, Eisner, 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 want to do. it. Roy is opposed. The [laughter].

family is opposed. >> Heresy. >> 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 going. to put on VHS here in 1985. >> And they're starting low stakes. I mean, Pinocchio has already been re-released. in theaters five times. Seven years. apart. You would think you're not. cannibalizing much at this point on the. sixth re-release. >> Yes, of Pinocchio. So, they agree to a. very limited 1.7 million unit run of VHS.

of Pinocchio. >> I'm glad you found this, too. >> Priced. at $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. 6. million units. So, between the two of. them, that is $200 million in gross. revenue from Cinderella. Oh, man. I mean, that's basically. another box office smash like for free. that they're getting here. Yeah. >> So, it's this crazy thing they. discovered where it seems to not hurt. anything, not dampen any demand cuz.

Michael Eisner would sort of later. famously point out, "People buy these. tapes, but they break, they lose them. It doesn't make people any less excited. to go to the theater. >> You know what kids are really good at? Losing VHS tapes. >> Right. It's It's not like, "Oh, you're. permanently destroying an asset now that. those tapes exist in the world." No. It. only increases the demand for more. Cinderella now that the tapes are out. >> 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 in. profits per VHS tape that they were. selling cuz I think they had so much. leverage over the retailers. So, home. video quickly becomes. a billion-dollar business for the Walt. Disney Company. It's the second biggest. profit center for the whole company. after the theme parks. And then, that's. just re-releasing the classics. Then, they start doing home video of the. new hits that are coming out. And like,

man, does that blow the doors off. >> Having a home video release channel. instantly makes whatever you want to. spend on animation worth it. >> Yes. >> It is this sudden renewed focus on. animation because they realize, "Oh my. god, there's a way to get value out of. this.". >> Yes. So, the numbers on this. Aladdin sells 30 million VHS tapes in. 1993. >> So, that's $900 million. in.

sales. >> sales. >> Sales of tapes. >> Yeah. Yeah. And then, The Lion King. eclipses it in 1995 when it comes out on. VHS with 32 million units, the. best-selling VHS of all time period in. history ever. >> That's a billion dollars of tapes of The. Lion King sold. >> Yes, that Disney is getting roughly 50%. or greater cash flow margin out of that. You you should think each of those is. half a billion dollars in Disney's bank. account. >> Cuz these films are already quite. profitable from the box office cuz the.

budgets are low and the box office is. super high. >> I mean, Lion King is just ridiculous, right? Like 750 million. at box office on a $45 million. production. So, let's say what is Disney. make? 300 million in cash flow out of. that theatrical? >> Minus distribution and marketing. expenses. I don't know, 250? >> Yeah, okay. Sure. 250 out of a half a. billion from home video, you're at 3/4. of a billion in cash out of The Lion.

King within a year. >> [laughter]. >> of release. And then, well, we'll get to what else comes out of The. Lion King in a second. >> And I don't think there was much back. end at that point for any of the actors. So, I think this is literally just going. to Disney. >> No, this is also why it fits so great. with Eisner's philosophy because even. though they were signing stars to be. voice actors, like Robin Williams as the. Genie, etc., etc., they weren't getting paid much. So, like. these are very different deals, especially back then for those actors. than for the live-action films that were.

starting to get expensive and actors. were, you know, making real money out. of. >> Yep. >> So, that's home video. Next, they. launched Disney retail stores across the. country. >> That's right. >> remember these? I spent so many weekends. at the mall when I was a kid in Disney. retail stores. >> Plastered with Disney stuff, giant piles. of stuffed animals. It was a. hallucinogenic experience to go in. there. >> 1990s. >> Yes. >> So, they build more than 750 Disney. stores, retail stores in in like.

basically every mall in America, which. now between home video, where for the. first time you've got kids and families. watching these movies over and over and. over again at home. Then on the weekends. these American families, they go to the. mall, they go to the Disney store, they. buy the merch, they revel in all this. Disney like it is back to the peak of. Disney under Walt where it just takes. over America, basically. >> Yep. I bet people of our generation have.

a unique relationship with Disney. because of this period. Because we were. there in such a heyday. I bet people. that are 10, 15 years older than us. don't have the same. Disney relationship. >> Yeah. >> Since they were sort of grown-ups by the. time the Eisner era hit. >> Yeah, I mean it was the dark period when. they were children. And you got to get. children to make this work. >> Yep. >> And then they pass it on to their. children and then etc. etc. So, okay. Home video, Disney retail. >> [gasps].

>> And then three, Broadway. This is an absolute master stroke. When. we first started the research, we're. like, "Ah, yeah, yeah, we'll put a thing. about The Lion King the musical in there. and Broadway. They do that, you know, great. It's a thing that Eisner and team. do in the '90s.". >> Right. Oh, it must be like Disney on. Ice, some random extension that I'm not. really sure how much it contributed, but. cool that they did that and very. artistic of them. >> Okay. So, first they do Beauty and the. Beast, that's a big success on Broadway. They end up buying the New Amsterdam. Theatre, Disney owns that in I know in. New York now.

Then they put on The Lion King musical. >> Which is spectacular. >> Oh, amazing. >> I haven't been in I don't know, 15 years. or something, but I have a visceral. memory of the parade of animals walking. down the aisle and just how uniquely. they did the costume designs with the. faces of the animals that sort of hover. above their heads. >> It's art. It's back to Walt Disney. It's. art and commerce. Like right there. It's. absolute art. And. it becomes the highest-grossing Broadway. show in history. It's still running today. And if you add up.

gross on Broadway over the past 30. years, plus the touring company, The Lion King musical has grossed over. $11 billion. in. in total revenue in its run, which I. think makes it the single. highest-grossing. entertainment product in history in any. medium, film, music, TV, video games, other Broadway shows. >> What? >> Lion King the musical is the. highest-grossing piece of entertainment.

ever created in history. >> Of any medium, the highest-grossing is a. Broadway musical? >> Yep. Of a a single, like not an. episodic, but like a single piece of. media, a single story concept. Lion King the musical. >> How is it $11 billion? Cuz even the. biggest box office films do 2.8, 2.9. billion. I mean, that's Avatar, that's. Avengers: Endgame. And then if you were. to add like an entire home video on top. of that, we already said The Lion King. home video was a billion. >> Yeah, it doubled, but maybe more, yeah.

>> How do they get to 11 for a Broadway. musical? >> running for 30 years. >> 30 years? >> And they're packing the house around the. world. >> Traveling show, pretty high ticket price. to go to a musical. >> it's in New York, it's got the traveling. company. >> Wow. >> Yeah, so even spread out over 30 years, Lion King the musical on average, that means it has generated $350 million. in gross revenue for Disney every single. year. That is an extra hit movie every. year.

>> [laughter]. >> And they own it outright? >> Yeah, I mean, the they have to share. theater revenue with, you know, especially the touring company when they. go to theaters around the world, but. that's the same as any movie. It's it's. another movie every year. >> Wow, $11 billion. >> Yeah. >> Fascinating. >> Absolutely incredible. >> So, Eisner in this era really did crack. the. extensions of the brand thing. And he. also kind of dipped his foot back into. traditional marketing more. Didn't they. start running a whole bunch of like come. to Disneyland commercials? And like.

explaining the rides and I think this is. also when they started the campaign. where the winning Super Bowl MVP would. always say, "I'm going to Disney World.". right after they won the the Super Bowl. >> Well, so so this is the other big big. thing that Michael Eisner does. is he transforms the parks. The parks. were obviously Walt's genius and part of. the original Walt vision and business. model for what Disney would become. But. they're just theme parks when Michael.

takes over. >> not really resorts. >> He makes the parks and especially. Florida. a resort. It goes from, "Ah, yeah, we. got Disney World and we got Epcot and. sure come to Florida." They build the. Grand Floridian Hotel, they build the. Swan, they build the Dolphin, they start. the Vacation Club time share program. with the old Key West resort which my. family was a member of. And so what did. we do every year? We went to Walt Disney. World every single year. It was a. resort. It was a vacation. They add. Hollywood Studios, then they add the.

Animal Kingdom. They completely. transform what a theme park resort is. >> And the Animal Kingdom in particular is. a wild pitch. What if we build an actual. Animal Kingdom with lions and zebras and. you know, the most it's not it won't. feel like a zoo. It'll feel like you're. on the African safari when you're out. doing it. They changed the park from. something that could compete with going. to a baseball game on a Saturday to. something that could compete with your. European. five-day vacation.

>> Yes. Yes. And they get into all the real. estate all around it. All those hotels. that they're developing, having. Imagineering develop. It's not just. Marriotts that they're throwing in. there. >> Right. And with him raising prices, plowing cash into building out the next. 10, 15, 20 years of parks and. attracting, "Oh, I'm not going to spend. $300 here. I'm going to drop $3,000 here. on a family vacation. This. starts to become kind of a behemoth. business of its own. >> Totally. I mean, it sets the stage for.

today. Last year, Disney Parks and. Experiences contributed $10 billion in. operating profit to Disney. And it starts with this. >> Nuts. Now, it's not all sunshine and. rainbows on the park side during the. Eisner era. Euro Disney? >> There is Euro Disney, >> [laughter]. >> which cost $4 billion to develop and. just loses money for years. The sort of. glib line that I like about this is it. took Disney a decade to figure out that. European parents want to drink wine. while their kids run around.

>> [laughter]. >> There's more to it than that, but. >> And also, I'm not sure that Europeans. love being called Euro. >> Yeah. Yeah. Yeah. >> if you if you live in Paris, you. consider yourself French or Parisian. You don't consider yourself Euro. >> Yeah. >> So, they rename it Disneyland Paris. They make a whole bunch of changes. They. eventually write the ship. And there's a. global macro thing that changes, too. They sort of opened into a recession, but yeah, that was a disaster for a. while. >> Yep. Yep. But, that aside, I mean, man, by the time we're in the mid-90s.

here, Disney and the Eisner, Wells, Katzenberg. dream team is just. crushing it. Operating profit at the. company goes from well under 300 million. when they take over in 1984 to just. under 2 billion a decade later. So, yeah. Almost what's that? Eight X operating. profit in. >> In a decade. >> Wow. >> and it had been declining. I mean, it. fell 25% in 2 years before they joined.

>> Yeah. Those three guys didn't just save. Disney. Like, they made Disney flourish. in a way that Walt only could have. dreamed of. >> It is quite reasonable to say that. Disney has never been as successful as. they were in this period from the early. to mid-90s. >> Well, I've got the stats to prove it. So, by 1994, Disney's market cap hits. $22 billion, up 10x from when the Eisner crew took. over. And it becomes the highest valued of all.

the traditional media companies. More. valuable than Time Warner, more valuable. than Viacom, more valuable than Fox and. NewsCorp. Disney. is on top of the world. And it's all about to fall apart. >> [laughter and gasps]. >> But before we tell that story, now is a. great time to thank our new presenting. partner, a company that we are very. excited about, Sierra. >> Yes, we study founders and CEOs of some. of the greatest businesses in history, and those folks today are all wrestling.

with the same question, how do I use AI. to grow my business without losing what. makes us unique? >> And that's exactly where Sierra comes. in, and part of why we're so excited to. be partnering with them. >> Well, that and the fact that it's built. by basically the supergroup of tech from. the last two decades with Bret Taylor. and Clay Bavor. >> Previously ACQ2 guests. >> Yes, and the ridiculous group of talent. that they have assembled there. >> Yes, Sierra has built customer-facing AI. agents that can do a huge range of. things.

Not just basic support stuff like. answering questions, but the kind of. hard things that are closer to a. company's core value creation. So, think. about things like helping with a. mortgage application all the way to. closing, or a car accident to getting a. claim paid, a doctor's referral to. handling a specialist appointment, or. other use cases like renewing customers. at risk of churn, collecting overdue. bills, or turning around abandoned. shopping carts into completed purchases. >> So, the magic is that these are not. one-off conversations. These are. journeys that unfold over days, weeks,

or even months across phone calls, texts, emails, chat. Every interaction. teaches your AI something new, which. creates knowledge that is uniquely yours. as a company and strengthens your. competitive advantage over time. >> That ambition is what's attracting some. of the world's biggest companies as. customers. Today, Sierra partners with. over 40% of the Fortune 50, one in three. of the world's banks, and five of the 10. largest health insurers in the United. States. And our favorite part, it's an. entirely new business model. Instead of.

paying for usage or tokens, you pay for. outcomes. A subscriber renewed or a. claim got paid. So, you can focus on. growing your business, not choosing. models or managing tokens. >> And in fact, we think so highly of. Sierra that we invested in the company. So, to find out how you can build. standout customer experiences that grow. your business with AI, visit. sierra.ai/acquired, and just tell them that Ben and David. sent you. Okay, so. David, they're flying high. What could.

possibly go wrong? >> Oh, man. Well, 1994. is a great year for Disney as a. business, cuz 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 of 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. >> And there's big personalities at the. table. Michael's a big personality, Jeffrey's a big personality, 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. >> 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.". >> Yep. >> And that force is just. not at the company anymore. So then,

3 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. >> 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. There's a lot of. decisions that need to get made, and. there's a lot of like personnel clashes. that needed to get sorted through, but. what can Michael do? He's like literally. on the operating table. 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. >> Yeah. Yeah. So then, in the middle of this, Katzenberg quits. >> Well,

there's a lot of different sides to this. story. One version of it is that Jeffrey. was promised the number two job at the. company if Frank ever moved on or, you. know, retired or anything. >> Yep. That was certainly Jeffrey's. understanding that Michael had promised. him that. >> Yes. There were other perspectives, including from Roy E. Disney, that hey, Jeffrey is great in the job that he has. 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.

>> Which again, at this point, is much more. than just the film studios. You know, it's all of those other businesses that. we talked about. >> Right. And so, 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. good team player. I just created some of. the most successful movies ever. >> Iconic IP. >> 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 going to go do. something else. >> Yep. >> So, he elects that option and leaves. >> Yep. And he doesn't just leave. >> [sighs and gasps]. >> He leaves and starts a competitor. >> And starts a lawsuit. >> Yes. Yes, he also sues the Walt Disney. Company for bonuses that he was owed. They end up settling that lawsuit many. years later for a reported $280 million.

But yeah, he leaves and starts a. competitor. >> Yes. >> DreamWorks. >> Yes. >> With Steven Spielberg and David Geffen. And the intention is DreamWorks is going. to be a full-stack Disney competitor. They're going to do live action, they're. going to do animation, they're going to. do music with David Geffen. They're going to do television, they're. going to do video games. Basically, the whole Disney flywheel. minus the parks. But then they sign up. with Universal as their movie. distributor. And they set up their headquarters on.

Universal's lot, which is also a theme park. So, yeah. >> Suddenly, a very very formidable. competitor. >> And then, they decide to build the DreamWorks. Animation Studio. just down the street from Disney in. Glendale. And they start poaching the Disney. animators. And one of the first people. that Katzenberg recruits is Brenda. Chapman, remember from CalArts and room. A113. who was head of story for The Lion King.

and DreamWorks Animation would soon go. on to create Shrek. that would do half a billion dollars at. the box office. This is the first time Disney has had. something like this, a full stack. competitor in its backyard. >> Yep. Adding insult to injury here is you. might say, "Okay, well. animation is roaring and you know, it. wasn't all Jeffrey, so they should be. fine.". Sadly, Howard Ashman passed away from. AIDS just a couple years before this.

And there's a vacuum of Howard's. presence in the animation department and. in the films that they would go on to. make from here. >> Yep. >> So, kind of from here what comes out of. Disney Animation is. >> Next one is Pocahontas, right? >> Yep. Then Hunchback of Notre Dame, Hercules, Mulan, Tarzan, Fantasia 2000, a movie called Dinosaur. in 2000, which I actually remember. fondly. >> I think that was Disney's first 3D. animated movie, yeah. >> Yeah, exactly. Emperor's New Groove,

Atlantis, Lilo and Stitch, and Treasure. Planet. >> Yeah. You know. You know some of those films. None of them are The Lion King. >> Right. >> No. >> Right. >> So, yeah, in the vacuum left by all of. this, Michael decides that. the person he's going to promote to. number two, president and chief. operating officer of Walt Disney Company. is. himself. >> Yeah, it's the Michael Eisner company. now through and through.

>> Yeah, hey. He was great. Like, he's he's. eminently qualified. >> the last 10 years have been. unbelievable, so. >> Yeah, but uh. it's a big job on top of an already very. big job. >> And really what he's saying is, "Look, there's there's no one obviously ready. to be number two across films and TV and. the parks." And so, until we figure that. out, I'm I'm just going to be the guy. >> Yep. Yep. And he's also. about to pull the trigger. on.

a pretty fundamental change in what the. Walt Disney Company. was. that he had been planning for a couple. years. He's been sniffing around. the TV networks. >> Yes. And wasn't there some regulatory. reason why suddenly this was possible? >> Yes. So, back in 1993, the FCC had. repealed a law called the financial. interest and syndication rules that. prohibited TV networks from owning the. programs that they aired.

>> Right, cuz the thinking behind this, I. think in the '70s when it was enacted, is that these TV broadcast networks, the. the big three networks, are kind of a. monopoly on content in the country. There's no cable. So, if those companies. basically vertically integrate and own a. movie studio, and then they air those. movies on just the three networks, then. we kind of have a problem cuz there's. not enough competition in this. marketplace. But, as two decades go by, now you've. got cable TV, and suddenly you've.

hamstrung all these networks, and the. networks aren't allowed to produce their. own content while they're trying to. fight this existential battle of, "Oh my. god, cable's coming in and eating our. lunch.". >> Yep. >> So, of course, the thing that makes. sense, which is great. I love it when. laws get repealed when they they don't. make sense anymore. That law is. repealed, and suddenly you now have like. open season on movie studios and TV. networks trying to combine. >> Yep. So, Michael.

is sniffing around. >> He's like interested in CBS first, right? >> sniffing around CBS. NBC isn't for sale. He talks to ABC, does a typical Michael. kind of lowball offer. that goes nowhere. But, Michael had. actually started his career at ABC. So, Barry Diller and Michael, they were TV. guys at ABC before they went to. Paramount. Right. So, he knew everybody. there. And then. at the Sun Valley conference the next. year in 1995. >> It's always at Sun Valley. >> Always at Sun Valley.

Michael strikes a deal. for the Walt Disney Company to acquire. ABC Capital Cities for 19 billion. dollars, which was the second largest. acquisition in history to that point. >> Man, crazy. 19 billion dollars, that's. like quaint today. >> The only bigger one was RJR Nabisco. >> Yes. Yes, which is going to come up here. in a sec. >> And I think there's there's so much. great lore around this, but I think this. was like a parking lot conversation.

where Michael had been hoping to run. into Warren Buffett and he finally did. and Warren calls over Tom Murphy, who is. there too. >> Cities ABC, yep. >> And they kind of start talking and I. think within days, maybe a week or. something, then they've got a deal. >> hammered out. >> Yep. Yep. Yeah, so Warren Buffett and Berkshire. was the largest shareholder in ABC Cap. Cities, which had been created a decade. earlier in the famous minnow swallows. whale transaction. >> That's right. A lot of listeners.

probably won't know this, but ABC is. actually not the parent company that. Disney was going after to acquire. ABC. was owned by something called Capital. Cities, which had unbelievably managed. to acquire ABC even though ABC is much. bigger than it was. >> four times bigger. >> You might say, "How is this possible?". Well, they had the financial backing of. Warren and. >> and Berkshire Hathaway. >> That's right. That's right. So, it's. basically a. using Berkshire Hathaway's capital and. the small company of Capital Cities to.

sort of jointly buy and control ABC. >> Yep. One of Warren Buffett's many, you. know, genius deals. >> Yep. >> So, Buffett and Berkshire are the. largest shareholders in ABC Cap Cities. here. So, really the person that Eisner. is pitching is is Buffett. Now, Ben, you. mentioned something really important, which was that the reason that these. laws had been repealed by the FCC was. the new competition from cable TV. I. mean, the broadcast networks used to. have this monopoly on television content. in America. Now, all of a sudden here in.

the '90s, cable and pay TV is just this. explosion of content in America, and the. broadcast networks are under threat. So, the broadcast networks like ABC went. from like historically these great. businesses to. uh it's kind of like okay businesses. because so much of American viewing time. and thus advertising dollars had. transitioned over to cable. But, it just so happened 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. Yes. 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 as a 20% minority partner in. ESPN. >> Why? >> I I guess in theory like Nabisco was. going to get some advertising synergies. for their. CPG products. I I don't know. >> Okay. >> Uh it doesn't matter because the next. year Nabisco gets taken private by KKR.

in the Barbarians at the Gate, you know, the largest deal in history. Yeah, yeah, yeah. >> As part of that, they sell off this 20%. ESPN minority stake to the Hearst. Corporation, which still owns it to this. day. And Hearst, over the ensuing like four. decades, just gets billions and billions. of dollars of free cash flow out of. ESPN. >> And a complete free ride. >> Free ride. Doesn't have to lift a. finger. >> That's right. That's right.

>> 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. Cuz 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. >> 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. >> They would pay to be included. >> operators to carry the channel, right? >> Yes. And ESPN sort of realizes like they were. buying. sports rights to broadcast leagues and. they needed to cover their costs, so. they asked the bundlers the cable. companies like, "Hey, will you pay us X cents per viewer.

so that we can actually afford. >> to go buy these rights. That may have been how it started, but. pretty quickly though, ESPN and then. within ABC once ABC owns it, they. realized that sports rights are the. biggest point of leverage that they. could possibly have over the cable. operators because all ESPN has to do is. threaten to pull the plug. >> [laughter].

>> 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 going to be able to show those.". >> A stick that still gets used today. >> Right? I mean, when that happens, people. actually show up at the doorstep of the. cable operators and basically riot.

Americans love nothing more than their. sports. >> Yep, that is pricing power right there. >> And so, once ESPN figures out this. business model, it just becomes this incredible. juggernaut. At first, Ben, like you. said, they get the cable operators to. pay them a few cents per subscriber that. gets the ESPN channel and it goes up to. a dollar, then $2 a month, and then $5 a. month. Do you know what ESPN's current. affiliate fee average deal is per month.

with pay TV operators? >> I know it's the single highest paid. channel by like 3x. >> 4x. >> Yeah, much higher than any I'm going to. guess, I don't know, $10 per subscriber. >> $9.42. per month. per subscriber that the cable operators. pay ESPN. This is billions and billions. and billions of highly predictable. cash money dollars. >> [laughter]. >> flowing into ESPN. >> Contractually.

>> guaranteed. Virtually guaranteed every. month. >> I mean, yeah, sports are the reason, especially today, that people are buying. cable. >> Right. >> And ESPN is very aware of that value. that they provide to the bundle. >> They're very good at value capture. >> Yes. Yes. >> Uh. so, back to the Disney Cap Cities ABC. deal here in 1995, I don't think, if they're really honest, that Disney and Michael.

really knew how how big ESPN was going. to become. At this point, ESPN had 66. million cable subscribers, but they were. only just beginning to really ramp their. pricing leverage. >> There's a Roy E. Disney quote on this. "Nobody would have told you when that. deal, the ABC deal, was being made that. ESPN was going to turn out to be the. weightlifter of the group. Nobody. [snorts] in involved in it in any way. ever would have thought that.". >> Yep. Yep. At that point, ESPN's average.

monthly affiliate fee with their cable. partners was still less than a buck. So, there was so much more room to scale. ahead of it. But, absolutely quickly after Disney. acquires Cap Cities in 1996, ESPN. becomes this just crown jewel within the. company almost. overnight and almost completely by. accident. The business model, once they. got it going, was so simple. Just like, call up the cable operators every year.

or two and say, "Hey, we're going to. raise carriage rates 20%. Oh, you don't. like that? Um, okay, we'll pull the. plug. You sure you don't like that? All. right, 20% it is.". >> And they had locked up the sports rights. for like a decade for any of the sports. they were bidding on. They realized that. though we should go get the longest. contracts we can, so we have the most. leverage over these cable companies. >> Yep. So, this is like the heyday of ESPN. here in the late '90s into the early. 2000s. MLB,

NBA, they do a big NFL deal in 1998 to. get Sunday Night Football and Monday. Night Football rights for ABC. They get. three Super Bowls out of that. Meanwhile, they invented the whole. sports highlight category, which is just. like, "Hey, we've got these rights, and. live sports are worthless the minute. after they aired, but what if we show. them again a few hours later in a. nightly highlights show with a lot of. sizzle and some great anchors, and this.

is SportsCenter. And like, man, was it. awesome. >> Yep. The cost to operate ESPN beyond the. sports rights was not that much. They're. operating out of Bristol, Connecticut. >> Yeah. The cherry on top to all this, too, so. so Disney is already in the cable game. before acquiring ABC Capital Cities. ESPN. They had launched Disney Channel. in 1983. >> Yep, I think that's right. >> And it was super rocky at first, expensive to get off the ground, way. over budget, was actually part of the.

problems they were going through in '83. along with Epcot cost overruns. But now. that they have ESPN, they're able to. like collectively bargain with the cable. companies. So not only could they. command premium rates for ESPN, they. would also say, "Oh, the Yeah, do you. want the Disney Channel and A&E and. Lifetime?". >> Yeah, those rates are going up, too. >> Yep. >> Exactly. >> It's almost like a bundle within a. bundle. >> And that's not even getting into ESPN2, ESPN Classic, ESPN News, ESPN Ocho, you.

know. >> And [laughter] these days, the SEC. Network, they go they go nuts. >> So, this is a grand slam for Disney, an. absolute grand slam, but it's yet. another. huge. management item. competing for Michael Eisner's attention. among all the other existing management. items at The Walt Disney Company. >> And Eisner's thought going in was it is. important to have the Disney brand and.

our products and our content distributed. on television. Walt did this, that's how they built the. Disneyland mania around that TV show. >> With ABC. >> Bringing it full circle. And all that. did become important. It was kind of. amazing to have ABC and these cable. stations as an outlet to promote. Disney. stuff, you know, in this kind of. flywheel synergistic aligned way that. we've been talking about. But, to your point, David, what it ended.

up actually being was just an amazing. source of continuous free cash flow that. they could do other stuff with. Yeah, it's great that we can promote the. Disney brand and it can provide all this. alignment. But, you know what's even. better than that? Just spitting off. mountains of cash that we can use in. movies, in parks, to sort of expand the. the business. >> Yep. I think you can make an argument. that ABC fits in with the Walt Disney. Company and the Disney flywheel.

ESPN is this wholly separate thing. >> [laughter]. >> that really doesn't. >> Mickey Mouse and SportsCenter do not. meet. >> I mean, they tried to put what ESPN. World of Sports in Disney World and. stuff like that. >> Wide World of Sports. >> Yep. >> An ESPN Zone. >> Yeah, that's right. Oh, ESPN Zone. Yeah, yeah, yeah. >> But, the correct move that they figured. out eventually was kind of firewall ESPN. out on its own, make the best ESPN you. can, and just enjoy the dollars. >> Yep. >> And the timing totally lines up with. everything you were talking about,

David, expanding the parks, building. hotels, leaning into resorts. This is. how they funded it all with all the cash. that ESPN and the cable networks, but. mostly ESPN, were spitting out. >> Yep. >> There's even a quote in Bob Iger's book. with which we haven't talked about Bob. yet, but we will. >> Comes into Disney via the Cap Cities. acquisition. >> That's right. He worked at Capital. Cities. >> Bob is COO of Cap Cities. >> Yep. The quote is, "It gave Disney a. scale to remain independent while other. studios were falling on hard times. ESPN.

also further stabilized the business. during the ups and downs of animation.". And here, David, is an astonishing. statistic. >> Lay it on me. >> So, we're flashing forward, but later on. in the 2008 to 2011 time frame, Disney's. cable networks segment of which analysts. believe that 3/4 of the cable network. segment is ESPN. >> Yep. >> That segment accounted for 60%. of the entire company's operating income.

during that 2008 to 2011 period. >> Yeah. >> Over $5 billion in profit just from the. cable channels. I mean, they evolved. into the cable TV affiliate fees. company. >> Yep. So, back here to the late '90s into the. early 2000s, Michael's just overloaded managing all. this. And one element of the backdrop to. all this is it's the dot-com era.

>> [laughter]. >> Disney does all sorts of crazy dot-com. stuff. Uh they acquire Starwave, Paul Allen's. company, after Michael. >> you're in Seattle. >> Yep. Starwave was basically like a web. developer that they I think paid a. couple hundred million dollars for. Then. they buy Infoseek, which was like the. seventh-place search engine. They then. create a separate Disney internet assets. tracking stock that they float. >> What? [laughter]. >> publicly. Yeah, you can't make all this.

stuff up. It's, you know, dot-com. insanity. And like, hey, okay, great. Give Give Eisner a pass cuz everybody's. doing dot-com insanity during this era. >> Well, the biggest credit to give is the. deal that he didn't do. >> Exactly. Yeah, AOL approached him. Steve. Case approached him before Time Warner. about an AOL Disney combination. And to. Michael's eternal credit, maybe the best. thing he did as CEO of the Walt Disney. Company among many, many great things. >> Other than buying ESPN. >> Other than buying ESPN, but yeah, was. was say thanks, but no thanks to AOL.

>> Yeah. I mean, looking at what AOL did. with Time Warner, AOL merged its. stock that was highly marked, but the. intrinsic value of the company was. actually worthless with Warner Brothers, like a real durable stable company at. least at the time. And that could have. happened to Disney, too, but amidst all. these very high valuations of the. dot-com era, and I watched a bunch of. interviews of Michael at this time, he. was. skeptical and very careful about not.

giving away Disney in like a foolish. transaction like that. >> Yep. Yep. Yep. While we're on bad decisions during this. era, Michael does. finally. >> hire a number two. >> hire a president. >> Yeah. >> And [laughter] the number two. His close friend and Hollywood super. agent Michael Ovitz comes in as. Disney president to be Eisner's number. two and help him operate the company in. 1995. >> Michael, famed past acquired guest. >> Founder of Creative Artists Agency. This.

was huge. This was huge news in. Hollywood. >> Shattering stuff. I mean, Michael Ovitz. built CAA into such a force. in. not only Hollywood, but kind of the. whole creative community. The only thing that rivaled the power of. the studios at the time was CAA. Going. to be the number two after being the. founder number one at at CAA said a lot. >> And you know what? It also speaks to. what Eisner had built and assembled at.

Disney, especially after Cap Cities. They're like it was the place to be in. media. >> And it was almost immediately a horrible. decision. >> Yep. >> On both sides. >> Ovitz was an agent, Eisner was an. executive. This was a bad idea from the. start. >> You know what the job of a president and. COO is? It's to sit in meetings all day, herd cats, make aligned decisions, tell people no, don't people please, make sure that the.

thing runs and manage processes that. take a really long time with tens or. hundreds of thousands of employees to. carry out. The job of being an agent is. being liked, saying yes, wielding your. power, making things happen quick, being. involved in 15 projects at once, or in. Michael Ovitz's case, 500 projects at. once. The day-to-day operations of being. the number two at Disney could not have. been more different than the skillset he. had perfected at CAA. Yep.

>> So, Ovitz lasts just over a year at. Disney and leaves in December 1996 with. a $140 million severance package. >> Cuz neither Ovitz nor Eisner thought. there was any chance this was going to. fall apart, and so the Walt Disney. Company was. willing to put in a contract and say if. you don't make it X amount of time, then. you get a $140 million extra dollars. >> Yep. Now, all of this, frankly, is just window. dressing on what the real problem is.

The real problem is Disney animation. >> Hmm. That's interesting. >> 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. >> 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 7 years. It's articulable. 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 can 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? Because they're. actually two two very different things. >> Yep. >> Yep. >> So, all this and you know, and. animations. 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 and 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. >> 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. sucking that doesn't show up in the. financials until way later. >> Yes. Or. until something happens to the parks, which. >> [sighs]. >> 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. Yeah. Real bad. >> Yeah. I mean, for a few weeks zero. planes are in the air. And for a.

years after that people don't feel safe. traveling. >> Yeah. Not to mention it triggers this. like consumer spending impact. Not good. if you're running a high fixed cost. theme park business. >> Yeah. Yeah. 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 $2. billion. 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. Could there be corporate raiders. showing up to break up the company? >> 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. >> Exactly. And even ESPN for, you know, a. short period of time is shaky. Like. sporting events stopped after 9/11. It's. a weird time for the country. >> Yep. >> And then. >> [sighs and gasps]. >> 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. >> Man, this really is a mirror of 20 years. earlier. >> 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. Then then uh.

this playbook of starting a website of. savecompanyx.com, like an insider resigning from the. company, starting a website and a public. grassroots campaign, would famously be. repeated once more in American corporate. history. Do you know what company? >> Mhm. No. >> savepapajohns.com. >> [laughter]. >> No way. >> Yeah. Save Disney and save Papa John's. Oh, my. man. >> [laughter]. >> Well, before we tell the story of Save.

Disney. and Disney's ultimate leadership. transition to Bob Iger that would come. out of it, now is a great time to thank. one of our favorite companies, Sentry. >> That's right. That's S E N T R Y, like. someone standing guard. >> Which is what they do for developers. Sentry helps teams debug everything from. errors to latency issues, basically any. software problem, and fix them before. users get mad. It is considered {quote}.

and {unquote} not bad by millions of. developers out there. >> And David, this might be one of the most. on-theme sponsor moments that we have. ever had on Acquired. We are about to. spend a good chunk of time on the Disney. Plus launch later the episode. >> Yes. And think about what that launch. actually was. One service going live on basically. every device on Earth all at once. Phones, video game consoles, smart TVs,

streaming sticks, tablets, all ready for. tens of millions of subscribers on day. one. At that scale, things break in places. you've never seen. Disney Plus launched with Sentry as the. centralized error logging service behind. it. So when something broke, the team. knew exactly why it broke, on which. device, and in which release, all before. the angry emails started. >> And here's the wild part. That was 2019. What Sentry does now goes a step. further. Software is starting to fix.

itself in production, and the clever. thing is how they pull it off. So Sentry. is already watching your app in. production, so the second it breaks, it. has the whole picture. Error logs, the. trace, the release that it started in. It hands that context straight to the. tools developers already use, whether. that's Claude code or Cursor, or. Sentry's new agent Seer, and it. automatically finds the root cause and. opens the PR for the human to review. That is what makes software. self-healing, and it's why 200,000. organizations run on Sentry.

>> Yes, thanks to Sentry for making sure. everyone's favorite stuff, including. Disney Plus, which let me tell you, is. our favorite stuff in this household, >> [laughter]. >> actually works. They've got an. incredible customer list including not. only friends of the show Anthropic and. Vercel, but also Cursor, Linear, GitHub, and many more. If you want to learn. more, go check out century.io/acquired. >> And uh one last thing, Century is the. host this year of the official acquired.

community meetup with David and me in. San Francisco Thursday, September 17th. at Fort Mason. David and I are going to. have a live conversation going behind. the scenes of acquired. We'll have food. and drink and uh a room full of the. acquired community. Tickets are $20 and. 100% of the proceeds will go to the. Susan Wojcicki Foundation for early. detection of lung cancer. >> So great. >> It really is. Space is limited to 500. people only, so grab your spots now at. acquired.fm/meetup.

and we look forward to seeing you there. >> Indeed. >> All right, David. So, the Save Disney. campaign. First, let me just open with an excerpt. from Ride of a Lifetime, Bob Iger's. book. This is about the resignation. letter that Roy had written. >> Which he sent copies to Eisner, the. board, and then The Wall Street Journal, The. New York Times, and the LA Times. >> He went on a blistering three-page. critique of Michael stewardship of the. company. The first 10 years had been a. success, he acknowledged, but the latter.

years had been defined by seven distinct. failures, which Roy laid out point by. point. One, a failure to bring ABC. primetime back from its ratings abyss. Two, the consistent micromanagement of. everyone around you with the resulting. loss of morale throughout the company. Three, a lack of adequate investment. into theme parks, building on the cheap. that has depressed park attendance. Which. that is counter to every other thing. that I've heard. >> I mean, yeah. Well, park attendance was. down cuz of September 11th.

>> Right. Michael sort of famously had an. eye for making the theme parks great. This sort of second all these sensible. >> Nobody invested in the parks like. Michael Eisner. >> Right. Right. Four, the perception by. all of our stakeholders that the company. is rapacious, soulless, and always. looking for the quick buck rather than. long-term value, which is leading to a. loss of public trust. Disney was by this. point distributing Pixar's early films, but Eisner and Pixar had a very. contentious relationship. >> We'll put a pin in that for now.

>> Yep. >> Five, a creative brain drain from the. company due to mismanagement and low. morale. Six, a failure to build good. relationships with Disney's partners, particularly Pixar. And seven, your. consistent refusal to establish a clear. succession plan. This is a brutal letter. >> Yeah. And then Roy ends the letter with, "Michael, it is my sincere belief that. it is you who should be leaving and not. me. Accordingly, I once again call for your.

resignation and retirement.". Woo. Man. So, what is Roy so upset about? Amazingly, Disney animation. had continued to go downhill. >> Right. 2003 had Brother Bear, 2004 had. Home on the Range, 2005 was Chicken. Little. You've never heard of any of. these films, I'm sure. Maybe you've. heard 2007, they had Meet the Robinsons, which I guess would have been in. development. >> Yeah. Yeah. Yeah.

Uh Bolt was the end of this misery in. 2008. >> Yeah. I mean, if you are a little bit. younger than David and I, call it 25, maybe 30, you probably don't actually have any. Disney movies from your childhood that. you remember, the way that we remember. Aladdin and The Lion King and The Little. Mermaid and Beauty and the Beast. >> Totally. But yeah, back to Roy Abusive. Disney campaign. I mean, look, Roy, as we already talked about earlier, he's. a complicated guy. He's so upset about.

Disney animation. I mean, technically. he's the one in charge of Disney. animation. So, like who's he upset at. here? Like himself? But, I think really. like. what this is really about. and Roy's superpower for Disney. was that even if he wasn't, you know, the best executive or leader or in touch. with the marketplace as evidenced by the. total flop of Fantasia 2000, he. absolutely was the steward and protector.

of the Disney spirit. And it was so clear that the Disney. spirit the creative spirit, the spirit. that made these timeless stories that. got handed down from generation to. generation. had left the building. >> And the company is just spread too thin. It's got two completely different. business models doing two completely. different things from this merger with. ABC. >> Yep. So, 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 going. to 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 going to.

save the company. >> [laughter]. >> The movie did great based on a. Disneyland ride. I mean, you can't write. a better story. >> Can't write a better story. Revenue for. the quarter is up 19%. Johnny Depp riding in. >> [laughter]. >> going to 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.

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 just offensive. >> There were practically no more hated, you know, genre of corporations in. America than cable operators. Largely in part thanks to the Walt. Disney Company and ESPN riling everybody. up against them. >> [laughter]. >> 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 have happened. Because to many people, they look at. this and they're like, "How low has the.

Walt Disney Company fallen?". >> Yeah. >> 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 want to 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 that has all.

of this leverage over them? >> They're constantly going to war with. ESPN every year to renegotiate the. carriage rates. Be nice to own it. >> We might be able to get ESPN? Holy crap, let's try it. >> [laughter]. >> Yep. >> Oh, man. >> Just to underscore this ESPN thing, friend of the show Ben Thompson, has 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. >> Yep. Yep. Man, it's all all about ESPN, everything that's happening. >> [laughter]. >> 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% of the company's. total profits is just these cable. networks. >> Yep, which is really. >> 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 funds, they announced. that they're going to 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, headquarters of Comcast. >> [laughter]. >> They're like just a few blocks away. >> At the end of the day, 43% of the. shareholder base votes to withhold. support for Eisner as CEO, which is a. huge number. >> You don't renew a CEO's contract when. 43% of your shareholders don't want that. CEO. >> 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 in 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 going. to resign. But, now there's question, okay, who's going to take over? >> [laughter]. >> Yep. >> [gasps]. >> 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 got to. be an external candidate that is going.

to come in and take over Disney, just. like. Wells and Eisner came in 20 years ago. >> Well, do you know what the press release. says? Who it names? >> Well, it says that there will be. external candidates, and that there will. be one internal candidate. >> Initially, it actually said internal and. external candidates. And Bob Iger was. reviewing the press release, cuz he's. COO, and he goes to the board and says, "Wait, Michael's going to be CEO for. another year?" Bob's like, "You You.

can't really do this. Are there other. internal candidates, or Or just me?" And. they say, "It's just you." And he said, well then you need to put me in the. press release because it it's going to. There's going to be a power vacuum. Right. People will need someone to look. to for leadership cuz no one's going to. be looking to Michael. He's a lame duck. and there's going to be all these people. vying for power. The company will not. function. You have to say external candidates and. Bob Iger. And they agree and say, okay, then we'll do it. >> 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. >> 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? >> And how did you screw up so badly? >> Yeah. >> 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. >> Yes. >> 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. >> and build up brand to be known for that. So, people know to look to you for that. highest quality tier.

And. >> still nobody is better positioned than. Disney to do that. Even despite all the. problems and distractions and the. downfall of animation over the last 10. years, it's still Disney. >> Yep. >> 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 and. 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.". >> Both to. produce. fresh new cutting-edge content the way. that Walt did, but also embrace. technology as a distribution.

>> Yes. >> medium and figure out how to use that to. our advantage, not let technology be the. reason for our downfall. >> 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. >> Yep. >> And we need to get into those two. countries. >> Yep. >> 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. >> 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, Katzenberg leaving, the. end of the great Disney animation era, >> and acquiring Capital Cities. >> But the ownership of Capital Cities is.

sort of that that whole second era. >> 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. in the second 10 years. And because of. all the drama, doesn't get anywhere near enough credit. for it. >> 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. Disney never. again would get to be just Disney. It's. the flywheel business. and the. >> ESPN business. >> affiliate slash. advertising cable business. >> Yep. >> And. it's worth it cuz buying ESPN was this. pseudo infinite wellspring of capital to. fund everything else.

But it cost the clarity. >> Yep, that's exactly right. >> By the numbers, Michael's tenure was. unbelievable. He comes in with a market. cap a little shy of 2 billion, leaves. with it worth, I don't know, 50-ish. billion. I think there was some. dilution, so it wasn't quite a 25x, closer to a 20x of the stock. He comes. in, revenue is 1.7 billion, he leaves at. 31 billion. >> Yep. >> That's a 15% compound annual growth rate. over his two decades, and net income. goes from 97 million to 2.5 billion.

>> Yeah, 26x. net income. during his tenure. >> By the numbers, >> By the numbers, yeah. >> great. And you know, ESPN is arguments. one, two, and three of why was he a. great CEO? >> Yep. Yep. Yep. >> And also Disney's Renaissance, but like. I'd put that at four, below ESPN, ESPN, and ESPN. >> And then the Disney Renaissance, yeah. >> Yes. >> I don't know, you got to count Lion King. the Musical for something. >> That's true, that's very true.

>> Uh. >> [sighs]. >> So, Bob Iger. is named CEO. One of his first calls. after he gets the news on, I think, a. Sunday afternoon, is to Steve Jobs, the then CEO of Pixar, in addition to. being the CEO of Apple. And he writes in Ride of a Lifetime, "I. barely knew Steve at that point. He was. typical Steve. 'How long have you worked for Michael?'. he asked. '10 years.' 'Huh,' he said.

'Well, I don't see how things will be. any different, but sure. When the dust. settles, be in touch.'. And it turned out that that phone call. was probably the most important phone. call in the history of the Walt Disney. Company. But before we tell the story of Pixar, now is a great time to thank one of our. favorite companies, WorkOS. >> Yes. So, I want to start with a line. that we quote on this show all the time. Focus on what makes your beer taste. better. >> Yes. One of the great business metaphors.

from back when breweries ran their own. power plants. All that electricity did. nothing for the taste of the beer, and. every era of software has its own. version of the power plant. Right now, the cost of building software is. collapsing to near zero, and you can. build a real working product with AI. writing 100% of the code. The stuff that. differentiates you is what you build, your ideas, and how to serve customers. >> And this is where WorkOS comes in. Something that you absolutely should not. build yourself is enterprise.

authentication. Nobody needs to roll. their own. If you're selling software to. B2B or enterprise buyers, they deeply. care about their data, and they care. about security. They need things like. SSO or SCIM, S C I M, audit logs, role-based accounts, the entire. checklist. None of that is the sort of. thing that you listeners can uniquely do. well to make your product better, but. all of it sits in between you and. closing a deal with a customer. >> This is the whole reason WorkOS exists.

They turn those enterprise requirements. into drop-in APIs. Your team adds. enterprise SSO in an afternoon instead. of a couple months, and gets back to the. stuff that really differentiates your. product. >> Yes. And that is why OpenAI, Cursor, Perplexity, friend of the show, and. Anthropic, and hundreds of other AI. startups build on WorkOS instead of. building the power plant themselves. They just plug into the grid so the. product that you built over a weekend. can be ready for the enterprise on. Monday. You can learn more at. workos.com, and just tell them that Ben.

and David sent you. >> So, during his CEO audition process, Bob. Iger had completely lost faith that. Disney animation can be fixed from. within. And secretly. he concludes that the only viable path. to restore Disney animation to its. proper glory. is to replace the entire leadership team.

with Pixar leadership. There's this. famous moment that Bob writes about. where he's at the opening parade of Hong. Kong Disneyland in 2005. He's watching all the floats go by and. he sees, you know, Cinderella and Mickey. and Snow White and he realizes that. there are no Disney characters from the. last 10 years or so that are in this. parade. And on the contrary, it's stuffed to the.

gills with Pixar characters. Yep. And. that's the moment where he's like, you. know what? The path is clear. Pixar. needs to take over Disney animation. And. that's why he called Steve Jobs the. evening that he knew he was going to. become CEO. >> 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, you know, really poetic thing. for David and I, redo our very first. episode on Acquired which was on Pixar. here as a segment of this episode. >> Yep. Pixar is. the spiritual successor. of Walt Disney's vision for Disney. animation. Yep. >> All right, so we're winding the clock. back. Let's start with John Lasseter. >> Yep. >> 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. >> That's right. >> 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. >> That's right. >> So, cool 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 he's going to use. computer animation to do it. Now, remember, this is the early '80s, so. computer animation was pretty primitive. stuff. >> The time wasn't actually right yet.

>> He gets asked if it's going to be faster. and cheaper than traditional animation, cuz why else are they doing it? And he. says, "Neither. It's just going to push. the envelope on what is possible in. great storytelling.". John is. immediately, and I'm not kidding, same. day, let go. >> Wow, I didn't realize it was same day. >> 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.". >> Thanks for your meeting. You're fired. >> 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. 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, and John Warnock who founded. Adobe. >> And also, wasn't Nolan Bushnell knocking. around there? >> Yep. Past acquired guest Nolan Bushnell,

the uh famous founder of. not only Atari but Chuck E. Cheese. >> That's right. That's right. >> [laughter]. >> 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 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 want to make. stuff to push all of filmmaking forward?

Well, a filmmaker can only make one film. at a time and that takes 1 2 3 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 sort of 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 sort of. delightful. >> Yeah, you're sort of collaborators /. competitors. >> 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. >> Yep. >> 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. >> Mhm. >> So, this is now where the two paths collide. You got John Lasseter and Ed Catmull and. they see each other at an industry. conference, of all places, on the Queen. Mary. John has just been fired from. Disney. Ed doesn't actually know that.

Ed is hitting the limitations within his. graphics group where none of them really. know how to tell stories or create. characters or imbue any emotion into the. things that they're making. Ed begs John to see if there's any. chance he could take some time and come. up north to hang out at Lucasfilm. Graphics and improve the storytelling in. the short films that they're starting to. think about. >> Sounds like, "Oh, let me check my. calendar. Uh yeah, I'm free.". >> [laughter]. >> Yes. And this is really the first chance. that they had to get like a real. animator. So, the duo is now together,

but computer hardware at the time was. not capable of doing what they needed. So, the group needs to develop hardware. They make the Pixar Image Computer. within Lucasfilm. This is the first time. they've actually used the Pixar name for. anything. So, they're making these short. films, which. >> There's no It's not a real market. It's. fun to make, but it's not like anyone's. buying them. The Pixar image computer. could do MRIs. Basically, anything where. you needed to turn images into 3D. renders, they did the first volumetric.

renders of an MRI. They also would. analyze satellite photos for. intelligence agencies and build 3D. models there. So, they're finding these. like. niche. interesting markets to try to make some. money. >> For their software and hardware? >> Yeah. >> So, it's interesting. All of this is part of. Lucasfilm. Is George. interested in. MRIs or or or even like making animated. films? >> Not particularly. I mean, he wants them. to develop capability for future films,

but he doesn't want to actually staff up. a big story team and have this be a. filmmaking division. And no, I don't. think he's particularly interested in. the MRIs. He actually has a a different piece of. news to share with the team. He's going. through a divorce. He's short on cash. He needs to free up. cash for the divorce. So, actually, what. he wants to do is sell the graphics. group. >> Which this is fascinating, by the way. This all happened because George. believes so deeply in Star Wars and the. movies he was making that he didn't want.

to give up any equity in Lucasfilm as. part of his divorce. So, he needed to. raise cash. to pay his. >> [laughter]. >> former wife cash instead of giving her. any equity in Lucasfilm. >> Wild. >> This is like the butterfly flaps its. wings that results in Pixar saving. Disney. >> So, >> he finds a buyer. >> Yes. Enter Steve Jobs. >> Steve Jobs. >> Amazingly, they are first introduced by. uh Alan Kay, legendary computer. scientist, former classmate of Ed's, and.

a trusted friend of Steve. Steve visits Lucasfilm to see the. technology firsthand, and he's. impressed, but then he goes dark. >> Yeah. >> Just vanishes for a while. The Lucasfilm guys are wondering, "What's going on?" And it turns out this. is right in the middle of when Steve is. getting fired from Apple and ousted from. his own company. So, then Steve gets back in touch after. the dust settles and at first what he. actually wants is the Pixar team and. technology to create a rival consumer.

computer company to Apple. He wants to. get back at Apple. using Pixar as the seeds of the company. >> Pixar to be NeXT. >> Exactly. Ed and John and Alvy and the. team have no interest in doing that. Steve eventually does go and start NeXT. on his own, but he keeps in touch and he. likes these guys and he kind of comes. around on the vision to create films. He. does agree to buy the company and kind. of rescue it out of Lucas Film. He goes. into business with Ed and John and the. team. He writes in 1986.

a $5 million check to George Lucas to. buy the company, another $5 million. check into a new entity that he just. created to fund the company. It's formally named Pixar and it is. owned 70% by Steve Jobs and 30% by. employees. >> And that's Pixar. >> And that's Pixar. Can we just say how. insane this story is? There's a guy who. worked at hallowed Disney Animation. He. gets his first directing gig, but he's. fired for advocating to use the.

technology of the future. Then he finds. a kindred spirit who happens to be. working for George Lucas. >> [laughter]. >> George freaking Lucas right in between. Star Wars and Empire. >> Yep. >> They're inventing all this insane stuff, but George needs to sell it off and. somehow manages to find Steve goddamn. Jobs. It is like the Avengers of. technology, of film, of business. I. mean, the only way this story could get. any more awesome is if they somehow beat. Disney at their own game, got bought by. Disney, breathed new life into the core.

of the company and Steve Jobs became the. largest shareholder of Disney itself. >> [laughter]. >> Uh, it sounds like a Pixar movie. >> Doesn't it? This is like. This is why Acquired exists. >> It's so It's so great. So, they spin off. the company. They don't have any. customers for the product. So, they go. out. and they recruit. someone to come and buy their software. as a commercial product. >> Yes, and that customer is Disney.

>> Yes. >> The first check to Pixar Inc. is from. Disney to work with them on create the. CAPS system for improving their 2D. animation. >> Yep. This is the beginning of the. Disney-Pixar relationship as a vendor. >> As a vendor. So, Pixar decides they need to show the. world who they are. They make this. short little film about a a lamp and a. baby lamp and they're playing with a. ball and they show it to industry. conferences cuz that's what you did with.

computer graphics back then and people. go nuts. >> You were texting me. Your dad was at the. conference where they showed Luxo Jr.? >> Yeah, at one of them. It wasn't the. original SIGGRAPH, but it was. 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.

going to change the world.". >> Wow. Wow. >> I just rewatched 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. >> Yep. >> 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 of software. It's actually still an industry standard. today for computer animation. They. release it externally. It actually gets. used on Jurassic Park, on Terminator 2, a bunch of cool films with early. computer graphics, but the business is. not working. These image computers are. insanely expensive. They've only sold. like 300 of them ever. If they're going. to 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. >> Oh, wow. So, right as the Disney. Renaissance is happening. >> That's right. >> They want him back. >> That's right. And instead, he says, "No,

I you know, I kind of threw my lot in. with these guys in Northern California. We got something cool here. It's a great. team. 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 kind of ask for stuff here. cuz they just really want him to direct. something. And Disney, 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.". >> Yep. And this is how Toy Story happens. >> So, why is this such a crazy idea? I. mean, why is it going to cost $30. million? Why did the. folks at Disney think this is such a. kind of nutty idea to make a. computer-animated film? >> Yeah, it seems on the surface like this. should be easier than 2D animation, right? You can just get computers to do. all of it. >> [laughter].

>> 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. >> Embarrassingly, I did not really. understand that the way these things are. made. is kind of 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. >> Yeah. They're creating the universe, basically. It's not just that you're. illustrating a still frame. >> Yes. So, hilariously, the best. explanation of this, the best sort of. seven-step process, is on the inside. cover of their S-1 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 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. going to 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. >> Yeah. >> And the story and characters all have to. work in 2D first. >> Yep. >> 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 kind of 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 limbs that move. Their. mouths don't move. They're these like. lifeless puppets being dragged around.

You kind of get the plot, but you get no. personality or emotion. >> Yeah, they're like the 3D equivalent of. stick figures. >> Yeah, they have to the the animators. haven't really performed the characters. yet. >> Yep. >> 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. >> Yep. >> by this point where they provide the. animators with a buffet of options for.

each character, like moving the hand at. the wrist or the arm or the elbow or the. shoulder. And the animator then very. carefully, frame by frame, first animates the bodies and then later. the faces. Because if the body motions. are working for the story with no facial. expressions, then all of the facial. expression and mouth moving is just. icing on the cake, but you never want to. rely on the facial expressions to do the. heavy lifting for you. This is such a. cool part of the process.

>> You're turning them from stick figures. into something that's. alive is really the best way to frame. it. >> Yeah, and to your point, they use the. same thing here that the animators used. in 1938 with Snow White where they. filmed themselves acting it out first. and then they use that video as sort of. reference for how would this character. act. And there's all this great footage. on YouTube of in 1992.

the guy who was animating Woody sort of. going through motions or for the Army. men to figure out how the Army men were. going to move in Toy Story, they duct. taped ski boots to a. giant plank of wood and they sort of. jumped around the room in it to really. understand how would a person move if. their feet were locked together. So, it's it's this really amazing like. performance and then you're teaching the. computer. through the rigging and through. effectively like pulling the strings how.

to make the character move the way that. you want it to. >> Yep. >> Then there's shading, computer programs. that describe these surface. characteristics like textures, finishes, colors that are added to every object in. the scene. This is where you can get. things like wood and metal and fabric. and glass and hair and skin. Then step. six is lighting using digital lights. Each scene is lit much in the same. manner as stage lighting. David, you and. I saw some really cool examples of. scenes that look boring and lifeless and. then they go through lighting and oh my.

god, suddenly they're gorgeous and. emotional. >> Yep. >> And then lastly, step seven, rendering. Pixar's RenderMan software draws the. finished image by computing every pixel. of the image from the model animation. shading and lighting information. This is insane. That this is the part. that if you think about all the. computing involved for every single. frame, it needs to compute and recompute. every pixel based on what object. something is, where all the light. sources are, each one for each pixel, if.

they're in motion and if so, how to. apply motion blur. Rendering is so. computationally expensive here. In those. days, each frame would take an hour or. two to render and they could only render. like 3 and 1/2 minutes of footage per. week. They were on this Sun Microsystems. hardware that was state of the art at. the time and they had 117 of them. clustered together to create a render. farm for the film. >> Yeah, this last uh just highlights what.

a fundamentally different thing this is. from 2D animation. 2D animation is art. It's like you're. painting a picture. What Pixar does is they are creating a. universe. And then they are calculating. every atom of that universe. >> That's exactly right. >> And where it really, really does have. the same spirit as Walt and Disney is. that every single one of those steps is. also a story step. It's not just like, "Oh great, we wrote the story. Let's. throw it over to the tech guys and like.

turn it into the renders." It is all a. collaboration creating a universe and. constantly refining the story and making. it better and better and better over. years. >> All right. So, back to Toy Story. January 19th, 1993, they get the green. light from Disney. And specifically what. they have is a deal to make up to three. pictures, just one for now and Disney. has the exclusive option to extend for. two more. Where.

Disney's basically hiring Pixar to make. a movie for them. And here are the terms. Disney puts up. all the capital for production. It ends. up being about $30 million. dollars. Initially, it was budgeted to be about. 17 million. Disney is also responsible for the. marketing costs. Pixar exclusively can make films with. Disney. Pixar is entitled to a small amount of. the profits, and that is profit after. paying back some of the marketing costs. So, that ends up being less than 10% of.

the profits, which is not exactly an. engine that they can use to build a. business. >> Yeah. [laughter]. Oh, by the way, Disney keeps all of the. intellectual property rights to Toy. Story, all the characters, all the. merch, all the etc., etc. >> Disney also will have the right to make. sequels if they choose. They will offer. Pixar to make the the sequels with them, but if Pixar declines, they're still. Disney's to make. And lastly, the three. picture deal does not actually include. those sequels even if Disney elects to.

make them. So, if Disney wants a sequel, Pixar makes a sequel, but it does not. count against the total of three. So, it's kind of a crappy deal, but it is all of their dream, and it is. basically the only option. And it's Disney, right? I mean, it it's Disney, you do it. >> Right. Well, there's no other studio. that would make this with them. And Disney did stuff like this. So, they. made The Nightmare Before Christmas with. Tim Burton. It's like, "Hey, this is.

stop-motion animation. It's something. different than what we do here at Disney. Animation. Uh let's get this out there. It's a. boutique thing. We'll publish it. We're. the best in the world at publishing. animated family pictures and. distributing them to theaters, marketing. them. Great.". >> Yep. So, uh what are they actually making here? Pixar knows they want to make a film. that is different than your typical. Disney animation. They don't want to. make it a musical cuz at this point in. 1993, the last four were all musicals, and they don't want it to be a fairy. tale. They don't want to hearken back to.

sort of the classic Walt's tales, either. But, that does sort of mean that. they're in uncharted waters. They have. to develop their own tone and style and. process. So, they start translating John. Lasseter's vision into the storyboards, and they keep going to Disney for notes, which is both useful cuz Pixar doesn't. really know what they're doing yet, and. contractually required. >> [laughter]. >> So, Katzenberg is at the helm at this. point. He keeps pushing to make the film. edgier. And through a combination of.

Pixar not really feeling their. confidence in storytelling and the notes. pushing them this way, Woody ends up. very mean. He's got this. like brand of insult humor. He's so. threatened by Buzz that that emotion. overshadows every other action he could. possibly take in any scene. He's like. actively and intentionally pushing Buzz. out windows and, you know, behind. dressers and stuff like that. So, December of '93, the story reel. screening happens down in Burbank.

They're like, all right, here's all the. the notes that we've taken. Here's the. story we've got. It goes over like a lead balloon. Katzenberg hates it. Roy E. Disney hates. it. None of the characters were working. So, Disney cuts it off. Disney says, I. know we've got a deal, but we are. stopping production. No more money. The Pixar team's like, whoa, whoa, whoa, crap. Like that. that's our whole company. Uh can we have. two to three weeks? We just want to do a. total rewrite. We'll work day and night.

And so, they go back up to Northern. California, and they make the version of. the film that they want to make. And it's not perfect, but suddenly these characters get. multi-dimensional. They come back, and it's good enough. There's real. tension in the story. Disney, to their credit, looks at it. again and says, okay, you're back on. Continue the process. Over the course of 1994, they're looking. at their story reels. They're kind of. iterating through. They're adding more.

depth. And the early tests of the scenes. that have gone through most of the. render pipeline, they're really good. The Pixar team. knows it. Steve Jobs has become a. believer, and he's starting to believe, "Hey, we've got a hit on our hands." And. David, I know you've got this part. >> Yeah, so uh Steve, being Steve, starts thinking through this and. realizes, "If Toy Story is a hit, what's going to happen? Disney. and Michael Eisner, who's still CEO at. this point time,

are going to realize that they actually. just created their worst nightmare, a true animation competitor to Disney. They can do something that they can't. So, let's play this out. That happens, he's probably going to come back to us. and want to renegotiate the deal to lock. us up for longer. We want to have as much leverage as. possible. In order to do that, we need to have our.

own capital to actually go in 50/50. on the production budget of the movies. that we're making together. If we don't. bring any capital, Disney will be able. to walk all over us and keep the. majority of the profits, plus take their. distribution fee, etc., etc. Okay. How are we going to get the capital? We need to go public. >> And we can't go public now because the. last 4 years have been losses, and we. have not yet released a movie.

We don't want to wait too long after the. movie comes out. So, I think we should go public the week. after. >> Yeah. >> Toy Story comes out. >> And this is where Steve was just. brilliant because he was like, "If it's. a success, we'll make a big splash. We'll be the darlings of the media. We'll have a big hit movie. That is the. time to go public.". >> If you're anyone else at Pixar, you have. to be thinking, "No, no, no, no. Like, can't we just do this one and see how it. it works out?" But this is this is Steve. Jobs. >> Yeah. So, Toy Story comes out on November. 22nd, 1995, grosses nearly $400 million.

worldwide. >> It is the Thanksgiving movie for. families to see. Yep. It made $29. million in its opening weekend, went on. to become the number one film in the US, and it was the first ever animated film. that was a blockbuster that was not. created by Disney. >> And it was the highest grossing film of. the whole year. >> Not children's movie, like highest. grossing period. >> Period. So, 1 week later, after Toy.

Story premieres, on November 29th, 1995, Pixar goes public. >> Right, which means Steve had been like. flying around doing a road show and. meeting with all these investment. bankers as Toy Story is finishing. production and getting ready to go out. It's unbelievable. >> Well, this is actually a theme that. we're going to come back to in a minute. There's no other business guys at Pixar. It's [laughter] just Steve. Steve does. everything. that's not creative in making the. movies. So, Pixar closes its first day of trading at.

a $1.5 billion market cap. This is how. big a hit Toy Story was and how much it. was in the public consciousness. This is how Steve Jobs becomes a. billionaire. >> Yes. >> The Toy Story IPO. He didn't make. anywhere near that kind of money from. Apple. Toy Story and Pixar is how Steve. Jobs makes his fortune. >> So, that $140 million they raised makes. it the largest IPO of the year, larger. than Netscape.

>> Netscape, yes. >> The numbers on Steve, he bought the. company for $5 million. He actually did. dump $54 million into it over 9 years. >> Yep. >> He was like wiring money for payroll and. stuff like that. And on IPO day, he. owned 78% of the company. >> So, what's that, like $1.2 billion? >> Yes, Pixar alone made Steve Jobs a. billionaire on IPO day. >> Yep. Incredible. >> Also, this was just a bet-the-company. move. I mean,

if Toy Story didn't work, then the IPO. wasn't going to work, and then the whole. thing would go bust. And if the IPO. didn't work, >> then Pixar would have gotten crushed by. Disney in the next negotiations. >> This was a series of successive. bet-the-company moves that all needed to. work in order for it to work at all. So, what happens next? Steve was exactly. right. Michael Eisner wants to. renegotiate after uh realizing, "Oh my. god, we only have two more films left. with these guys, and they're the only.

credible competitor." Jobs throws out, "Hey, let's do it 50/50 with joint. participation 50/50 in the upside, now. that Pixar has the cash to do it.". Michael Eisner agrees as long as they. can expand into a brand new five-picture. deal, rolling the remaining two uh from. the old contract into the new deal. So, after Toy Story, Disney would have the. right then to make five more movies with. Pixar in addition to sequels. Now, Disney also would be doing the. distribution of the film, so they'd. actually end up with more like 65%, not.

50%, but that's some Hollywood. accounting that uh I I don't actually. think Steve realized that at the time. >> Well, the story I heard was that he did. And And like it makes sense like. distribution has real costs and. marketing, and like of course Disney. should get paid for that. The story I. heard is that. Steve found out later from George Lucas. that the terms of Lucas's distribution. deal with Fox were better than the. distribution terms that Pixar got with.

Disney, and that's what he was pissed. about. >> So, the second film they make is A Bug's. Life. This was also a big success, 360. million at the box office. Pixar is sort. of viewed as this uh hit factory. You. know, it's only been two so far, but. they're developing Toy Story 2 as the. next film after that. Meanwhile, their relationship with Michael Eisner. is. kind of deteriorating. Yeah, with Steve. Jobs. Disney wants to go direct to video with. Toy Story 2. This is actually.

interesting to flashback and think about. this. Disney had never done anything except. for direct-to-video for sequels. The. thinking was that you make something. great once, you put it in theaters, and then. >> You don't over exploit the IP. >> That's exactly right. But also, the. belief was that sequels can't possibly. be as good. You're always making this. like lesser, second-tier thing. And they. actually hadn't done a ton of sequels, which is quite funny that it's. completely flipped now. Now the goal of. creating the first film is to be able to.

create a franchise so they can exploit. the IP more and more after that. Toy. Story 2 is where they learned the lesson. that, "Oh, actually, that is a viable. business model." It's actually the Pixar. team that goes to Disney and says, "Hey, this sucks. We don't want to create an A. team and a B team at Pixar cuz like the. A team's on A Bug's Life. The B team is clearly working on the. thing that's going to be lower budget, lower distribution, direct-to-video. We. don't know how to do it." Disney is. says, "Okay." So, in February of '98,

Disney says, "Toy Story 2, you are. greenlit for theatrical release.". >> But the question is, does it count towards the deal or not? >> So, Steve realizes Toy Story 2 is going. to be good. And again, he wants to. renegotiate. He goes to Eisner and says, "Hey, can the five picture deal include. sequels?". Meanwhile, Michael Eisner is like, "Why. would I do that? The paper says what it. says. We negotiated this for a reason. You. want to change the terms of the deal. I. don't want to change the terms of the. deal, so we'll just stick with the deal. we have.". >> Yep.

>> You can see why the relationship starts. to deteriorate. >> Yes. Yes. They make Toy Story 2. Doesn't count. They release it in theaters. It grosses. almost $500 million, Pixar's highest. grossing film yet, and Disney learns all. the way to the bank that sequels can be. real profitable. >> Yes, they do. So, meanwhile, the backdrop to all of this. is Steve Jobs had come back to Apple. By.

this point time, Apple had bought NeXT. Steve is now CEO of Apple, leading the. turnaround and the renaissance at Apple. The iPod comes out, iTunes comes out, and one of the big marketing campaigns. for the iPod and iTunes is rip, mix, burn. >> But, you know who doesn't like the word. rip? It's Michael Eisner. >> So, Eisner. goes and testifies in front of Congress. in 2002.

against. the technology industry. and specifically calls out Apple's rip, mix, burn marketing campaign, saying it. encourages theft of. intellectual property via digital. piracy. And uh. Bob Iger has a quote about this in Ride. of a Lifetime. It was clear that Pixar. was gaining swagger as Disney was losing. it, and these two strong-willed. personalities were destined to battle. each other for supremacy. Man, and if.

you really want to. poke Steve Jobs, it's one thing to go. after him in the Pixar negotiations. It's another thing to come after him at. Apple. Now, to be totally fair to Eisner. here, Disney had a big music business. and a big album business. I mean, album. soundtracks for. >> and regardless, at this point everyone. is sort of banding together and. realizing like, what's going to happen. to music is happening to movies next. >> Yep, yep. So, he had good reason to be.

worried here. But, >> Yep. >> yeah, you probably don't want to come. after Steve Jobs and Apple, you know, one of your most important partners, and Pixar. So, then it gets even worse. Finding Nemo is the next movie in the. deal. And as Nemo is coming together, Eisner sees a early screening of one of. the reels of Nemo, decides he doesn't. like it. >> Which is how story reels work. They're. crap at first. This is Pixar's process. to iterate and make them better. Early. ones are always bad.

>> Yep. >> [laughter]. [gasps]. >> So, Pixar has become a board left topic at. this point for Disney. After seeing the Nemo reel, Eisner. writes a memo to the Disney board where. he says that he's seen the Nemo reel, it's a bad movie, it's going to flop, and it'll be a quote reality check for. those guys, and it'll be great for. Disney's negotiating leverage for Pixar. to fail. Never mind that Disney is.

getting over 50% of the economics in. Nemo. So, you should be incentivized to want it to. succeed. >> The memo leaks, right? >> The memo gets leaked from the board to. the press. >> And Jobs can see that Michael thinks. Nemo's bad. He's actively rooting. against it, even though he's the. creative partner producing it with. Pixar, and that it'll give leverage over. Pixar in a negotiation. You can almost. interpret it as I'm going to actively. work to make it fail so we can increase. our leverage.

>> Yep. So, Nemo comes out in 2003, and Michael. could not have been more wrong. It grosses $871. million in theaters, making it the. second highest-grossing movie of 2003, behind only Lord of the Rings: Return of. the King. And then they put it out on. home video, on DVD. >> And so, even before this, let's say the. theaters get, I don't know, $400 million. of that. So, that's $470 million dollars.

to Disney Pixar. >> Yeah. >> from this film even before DVD. >> [sighs]. >> These were the days, Ben. These were the days. The Finding Nemo. DVD. was just like The Lion King VHS was the. high water mark for VHS. The Finding Nemo DVD. was the peak. The absolute pinnacle. >> of home video. >> of home video in the DVD era. >> Cuz even Netflix isn't streaming yet at.

this point. This is 2004. >> No streaming. This This is the peak. So, we heard in the research. that. Disney and Pixar would sell 65. million copies [laughter]. of the Finding Nemo DVD all told, you. know, across all. all time frame. >> At 30 bucks a pop. >> 30 bucks pop. That is $2 billion. in home video gross. So, $3 billion give.

or take total gross revenue. for Finding Nemo just between theatrical. and DVD alone. That's not including. merch. That's not including parks. That's not including TV rights. Steven Pixar did get a reality check and. the reality check is that they don't. need Disney at all. >> The LA Times had an article right around. this time after Nemo. Pixar films have. accounted for as much as half of the. studio Walt Disney's operating income in.

recent years and much of that is driven. by Nemo. Remember, this is the same time. that Disney animation is releasing. Treasure Planet and Atlantis: The Lost. Empire. So, Jobs is pissed. He comes back with an even stronger. counter proposal. He thinks at this point Pixar is an. established studio that knows how to. make hits and he just looks at Disney as. a financing and distribution partner. >> Yep. >> Which is true, but they did have a.

contract that still had two more movies. in it. He proposes a deal to Eisner, and. this is where the relationship becomes. irreparable. Pixar should actually be getting 100% of. the profits, not 50%, and they're now. prepared to fund the budget themselves, too. Disney would just get a 10%. distribution fee, much like Lucasfilm's. deal with Fox. And to top it all off, Jobs asks Disney to relinquish its. co-ownership of the past movies. Jobs.

knows that at this point, Disney needs. Pixar real bad. Eisner stands his ground. and declines. And in reality, I mean, Steve was asking. for too much here. It actually wouldn't. make economic sense for Disney to do it. because they had such little upside in. the straw man that Steve was putting. together. But man, would it hurt to lose. Pixar when it is really the only thing. working right now. >> Yep. >> Except for ESPN.

>> Yep. >> So, all this comes to January 2004, where. Pixar pulls the plug on the. negotiations. And they issue a press. release. And listeners, we'll we'll link. to this. In fact, we'll I think we'll. put a picture of it in the email that we. send out. I found it on the Wayback. Machine. You can actually see Pixar. posted it to their website. After 10 months of trying to strike a. deal with Disney, we're moving on. We've. had a great run together, one of the. most successful in Hollywood history,

and it's a shame that Disney won't be. participating in Pixar's future. successes. >> [laughter]. >> Classic Steve Jobs. >> That is definitely written by Steve. personally. >> Definitely written by Steve. >> The deal will be up after Pixar finishes. out the contract with The Incredibles in. 2004 and Cars in 2005. Pixar is actively. in talks with other Hollywood studios. They think at this point they just need. a distributor. Disney actually does. start a new studio inside the company.

called Circle Seven Animation that will. be tasked with developing, right away, Toy Story 3, Monsters Inc. 2, and. Finding Nemo 2. >> Yep. >> I think they had actually done work on. Toy Story 3. >> Man, you can bet that that is buried. pretty deep in the vault these days. >> Yes. So, all this happens in the last. breaths of the Eisner administration. >> Yeah, this is part of the backdrop. happening during the Save Disney. campaign, the Comcast offer, the. shareholder proxy vote, the CEO search.

>> In fact, in that earnings call that blew. the doors off. >> Yeah, it wasn't just Pirates of the. Caribbean. It was Nemo. >> Exactly. Exactly. Both of those movies. opened in that quarter. >> Yep. So, this brings us back to. Bob Iger's phone call to Steve and his. conviction that Pixar needed to come in. and be part of Disney and. not just be owned by Disney, but take. over Disney animation.

>> 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.". >> 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. >> 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. >> Yeah. >> [laughter]. >> 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. >> 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 2. days a week and take over and run Disney.

Animation. >> And interestingly, Iger also said, "Hey, Lasseter and and Catmull, you can also. tell us you think Disney Animation is. unrescueable. or that you think that you'd kill both. things by splitting your time and you. can just tell us you want to shut down. Disney Animation and instead Pixar will. just become our one studio.". >> Yeah. >> And Lasseter and Catmull have this like, "We couldn't possibly do that. 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 look at the enemy and, you. know, chop off their heads. Instead, they said, "No, no, no, we're going to. come in there and we're going to we're. going to make this thing great.". >> Yeah. So, pretty quickly they come to terms on. a deal. $7.4 billion.

in Disney stock, newly issued Disney. stock, which will make Steve Jobs the largest. shareholder in Disney. >> 7%. >> Yep. I think it was a 7.7%. >> Wow. >> stake in the company and he'll join the. board. >> Much larger than the entire Disney. family put together by this point. >> 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 going to. announce the deal, 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, 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. going to 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 going to happen. to my stake after I die.". Bob says, "Wow, that's a lot. >> [laughter]. >> And I've got 30 minutes. >> Yeah, I've got 30 minutes to decide. >> and I can tell no one.

>> Steve is ever the negotiator. >> [gasps]. >> 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 5 and 1/2. 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? >> And we asked all the Disney people this, and we asked all the Pixar people this, and we asked everyone we could this. question because. from the business strategy lens, they have what it takes.

>> Yep. >> 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. Pixar never ever. ever would have done what it takes to. become Disney. >> So, I think there's two reasons. One, Pixar.

is. what Walt wanted the Burbank animation. campus to be when he built it in 1940. It is a utopian. creative. artist paradise. There are no suits at Pixar. It's all about the stories and the art. and the films. >> And amazingly, by getting acquired, they. kept it that way. I mean, there were no. suits in the early days, but all the. suits are in Burbank. It just gets to be.

creative in in Emeryville. >> It's this crazy course of history that. allows this like. treasure to exist in Emeryville in a way. that it couldn't at Disney. Like it. didn't work at Disney animation in. Burbank to make it this utopian paradise. because it had to be a business, too. >> Yep. >> The. reason that could happen before they. sold to Disney was Steve Jobs. >> Right. >> Like it was only Steve that could have. done it. And I do think. if Steve had lived, and if he had felt.

he had the energy to do it alongside. Apple or maybe who knows even merge the. two companies, he could have done it. He could have built a Disney competitor. But he knew he was he was going to die. >> Right, but without Steve, you can. imagine the rest of the Pixar folks. looking at each other like. who of us has any interest in doing. that? No, we just want to keep making. unbelievably good stories and delighting. audiences and making the very best. feature films we can. Yep, which does. not make a Disney competitor.

>> Yep. So. Pixar. had to find a home. And. >> in particular Disney is the home. This. is the thing that brings it full circle. The Walt era of animation had a. spiritual successor which was the. Disney Renaissance. which had a spiritual successor that was. Pixar. >> Yes, absolutely. And this leads to the. revival. of Disney animation. Princess and the Frog, Tangled, Frozen, Big Hero 6, Zootopia, Moana.

all. Pixar era. Meanwhile, the hits just keep. on rolling at Pixar. Cars, Ratatouille. That was like a big thing before the. acquisition. Word had gotten out that. Pixar was working on a movie about rats. making food. >> [laughter]. >> Who could do that? What a terrible idea. Oh, amazing movie. Wall-E, Up, Toy Story 3, Brave, Inside Out. just the best. So years later after many of these.

movies come out during the months before. Steve died he and his wife Laurene have. one last dinner with Bob Iger and his. wife Willow. And during it, Steve raises a glass in a. toast. to Bob and them together and says, "Look. what we did. We saved two companies.". The first time I read that years ago. I thought. I don't really get it. Like I get that. it saved Disney, but how did it.

save Pixar? And then now, doing the full research. and understanding, Steve was going to die. And that Pixar really couldn't continue. independently without him. And that's how they saved two companies. together. It's just such an incredible. story. >> Yeah, it is. And to validate the Disney animation. thing, I mean, I really wondered about. this. How did. Disney animation turn into that hit. factory? They're not Pixar movies, but.

like they they rhyme so closely. We were talking with Kristen Bell to. prep for this episode, who of course. plays Anna in Frozen, and she very much. confirmed the way that Disney animation. works today is similar to that Pixar. blueprint from the early '90s. It's an. iterative process, all about making sure. that you're feeling if the story is. landing when you're looking at the early. reels and the scripts, this. collaborative way to take the notes. without ego, having a willingness to. stop, take apart the story, rebuild it.

if it's not working. Her perspective was. like, this actually has a lot to do with. why Disney, the company, works. >> Yeah, I mean, super validating to hear. that. Now, what is it, 20 years after. the acquisition? >> Yeah. So, if we sit here today and look back. at the Pixar acquisition, it's just such an obvious giant giant. success. I mean, the the first thing is. it clearly saved Disney animation, which. if you believe the thesis that that's. the center of everything good and. durable at the company, then great,

pencils down, easy answer. They paid 7.4. billion, 6.4 billion when you back out. the billion of cash, but effectively 6.4. billion is the hurdle that you're trying. to overcome. There's a couple of ways to slice it. David, you and I did the Finding Nemo. exercise earlier. There's another exercise you can run, kind of going franchise by franchise. Toy Story alone did over 4 billion at. the box office, which means 1 and 1/2 to. 2 billion to Disney. 30 billion in retail sales so far,

lifetime of all Toy Story consumer. goods. So, with Disney's 5% licensing. fee on that, that's another 2 billion. So, that's 3 and 1/2 billion dollars. conservatively in very high margin. revenue to Disney before you even start. thinking about the contribution to. Disney parks and they have 19. attractions across four lands with two. hotels, or doing any attribution from. Disney Plus revenue, or any of the. licensing deals that they did for a long.

time with Netflix. >> Yep. Or man, any of that sweet, sweet. home video revenue back in the day from. Toy Story 1 and Toy Story 2. >> So, you get at least half, probably 2/3. the purchase price back from the Toy. Story franchise alone, even without all. of that ancillary sort of flywheel. revenue. But really here I think is the most. useful way to justify it. We've heard. that the vast majority of the top 15. movies viewed every week on Disney Plus. are either Pixar or Disney Animation,

not live action, not Star Wars, not The. Avengers, the stuff that kids watch over. and over. And those Disney Animation. movies. >> are almost all of the top ones. >> that they're actually watching, kids. these days, are the post-2005. Catmull and Lasseter era films. >> Yep. >> Kids are not sitting there binging Snow. White on repeat. They're watching Frozen. and Encanto and Moana and Zootopia. And. this is on Disney Plus, which is the. biggest strategic bet that the company.

has made in the last decade. I mean, all. of their chips are there for the future. of the company. >> Yep. No question. Acquisition absolutely saved the. company. So, after Pixar, >> [laughter]. >> Bob and the Disney board are like, uh, "Well, that worked well.". >> [laughter]. >> "What can we do next?". >> And that sure is in line with Bob's. point number one in his three-point. strategy of. >> Absolutely. >> making the very best content. >> 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. >> Yes. And today, we are going to share. how Claude saved us on recording day a. couple months ago on our Disney Part 1. episode. So, David, do you want to set. the scene? >> Yes. So, we were in the middle of. recording Part 1, and recording days are.

always very time crunched. >> [laughter]. >> 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 4 and 1/2 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. >> 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 kind of 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.

distributor's share after the theaters. take their cut. That is the 4.5. million-dollar number. All the sources. we found saying 8 million in revenue to. Disney were actually wrong, and Claude. figured that out. >> Which is what led 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. >> So, 20 minutes later we were back to.

recording and we were able to finish the. episode both on time and 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 want to try out Fable now or you. just want to learn more, go to. claude.ai/acquired. And uh if you're inquiring for your team. or for API use, just tell them that Ben.

and David sent you. All right, so David, Star Wars. >> 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 and had been hits, but.

um nobody could see what Marvel would. end up becoming under Disney. >> 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, which actually was licensed. to Sony. Before pursuing this strategy, Marvel actually licensed out their their. best characters to other. >> studios. >> studios. And so, the acquisition was weird cuz it.

was kind of buying all these leftover. characters. You couldn't use X-Men cuz. Fox already had that. You couldn't use. Spider-Man, cuz Sony already had that. They already made 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 going. to go into all the details here, but. they crafted the Marvel Cinematic.

Universe in a way that became the. blueprint for anybody else who wants to. universify 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 really this. franchise-building masterclass to. behold. By 2025, the Marvel Cinematic. Universe has become the most successful.

film franchise in history, >> Yep. >> generating nearly 32 billion dollars 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. >> Yes, they're quite prolific. >> Avengers: Endgame, which was the. second-highest-grossing film of all. time, second only to Avatar, I think. >> Yep, I think that's right. >> And it's pretty difficult to estimate. the profitability on this, cuz 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, since. those Marvel movies were still in the. the Blu-ray era. And then, of course, part of the reason people subscribe to. Disney Plus. So, >> Yep. >> um Marvel's also been great. >> Yep, Marvel's also been fantastic. I I. think really. it was another version of the same. thesis of Pixar, which was there are.

great stories and storytellers here and. let's give them a bigger canvas to paint. on. >> Yep. >> And it worked incredibly well. Incredibly, incredibly well. >> And then Lucasfilm in 2012 for another. $4 billion. >> I would argue again, very different. dynamics, but a same version of the. story. Here is. one of, if not maybe maybe the greatest.

story. of the last 100 years in humanity. The. original Star Wars saga. >> Of myth-making. >> Of myth-making. >> Yeah. >> And let's give that a greater canvas to. paint on. >> Yeah. It's pretty interesting reflecting. back on these what a tear Iger was on of. identifying. tier A+ intellectual property franchises. that had running room ahead of them and. building the stable cuz now that. Disney owns so much of it that there's.

not much left. I mean, there's Harry. Potter, there's the Nintendo universe. There are. a few things left, but Iger kind of saw. this before anyone else went in with a. bigger checkbook that I think a lot of. people would have been willing to go in. with. Diluted Disney to do it. They they these. were, you know, stock acquisitions or or. many of much of it was. But now they own these things. It's also. fun to sort of speculate on why. Lucasfilm and Marvel were lower price. tags than. >> Pixar was.

>> Like dramatically lower. Lucasfilm seems. easy to me in that it certainly hasn't. generated as much. >> they didn't have any movies in. production. >> Right. It was certainly right to pay. less than Pixar. Turns out they should. have paid well less than whatever they. were willing to pay for Marvel, too, cuz. Star Wars just didn't turn out to have. that much more exploitation ahead of it. And frankly, they weren't done as well, but you know, that. >> Well, we'll get to that in a a. >> Yeah, yeah. Avengers had 37 films. And. there's there's new Star Wars stuff I. like. Andor's unbelievably good. Rogue.

One is unbelievably good, but yeah. >> Yep. So, on the back of these three. acquisitions, the Disney flywheel is revived and. soaring again. The core film characters. and stories are back to all-time. heights, not only at Disney animation, but now Pixar, Lucasfilm, and Marvel, too. The core of Disney is much bigger. and more diverse than it used to be. Consumer products, after Frozen comes. out, Disney sells 3 million Elsa and.

Anna dresses in the first year after the. movie's released. By 2015, Disney is doing over $50 billion a year. in gross sales at retail of merchandise, up almost 2x over the past 5 years. That. is the health of the characters and IP. in the company, right there. Music, hit songs are back for Disney. Let It Go wins the Oscar for best song. And get this, this is wild. The Frozen.

soundtrack is the best-selling album of. 2014, selling 10 million copies with. streaming equivalents in there. Even beating 1989 from Taylor Swift. >> [laughter]. >> Wow. >> My girls love Taylor, but they might. love Frozen even more. >> Wow. >> The parks are revived. Disney launches. Cars Land in LA in 2012. >> So, fun fact about that, they were. originally, before the acquisition of. Pixar, developing Cars Land.

>> Mhm. >> And then they bought Pixar and they. thought, "Oh, well, let's just make Cars Land.". >> Yeah. >> [laughter]. >> This is back when the Imagineers. independently developed lands that were. unrelated to. >> Mhm. >> franchise flywheel stuff. >> Yep. >> Overall parks revenue nearly doubles and. operating income nearly triples in the. decade from 2005 when Bob takes over to. 2015. And yeah, overall during that time. period Disney's market cap is up 4x to.

$200. up from the $50 when Bob took over. Overall revenue grows from 32 billion to. 52 billion. Operating income goes from. 4.7 to 14.7 billion. Incredible. >> And I'm going to keep bringing this back. to cable profits because that continues. to be this guaranteed contractual. cash gushing business that they have. If. you go line up those three acquisitions.

which sound ludicrous on their price. tags, especially when you didn't know. how they were going to pay off. Pixar at. 7.4 billion, let's even include the cash. in there. That's about 2 and 1/2 years of cables. then profit. >> Right. >> Marvel at 4 billion, that's less than 1. year in 2009 of cable profits. And. Lucasfilm in 2012. their 4 billion was well under a year of. cable profits. >> Yeah. >> ESPN kept providing the cash to do all.

of this. >> Such a good point. ESPN paid for Pixar, Marvel, and Lucasfilm. >> with about 4 years of ESPN cable. profits. >> Right. >> It's almost like a Buffett type thing. where Buffett has things in his. portfolio that are cash producers and. cash consumers and he's just trying to. construct the most efficient way to get. cash out of the cash producers where you. can't effectively reinvest the capital. and put the cash into places where you. can reinvest the capital.

>> Yep. So, speaking of ESPN. >> [sighs]. >> come 2015. ESPN and all the rest of Disney is. really riding high. >> The strategy looks completely genius and. and Wall Street loves it and consumers. love it and the franchises are all. healthy and producing stuff people love. and the parks are doing great. Everyone at Disney looks like geniuses. >> Yep. As you pointed out, it's like Bob. has finally figured out a way to marry. these two sides of the company, use the.

cash flow geyser from ESPN to add and. feed to the flywheel on the Disney side. It's all working great. >> Yep. >> Unfortunately, the stock. hit an all-time high on the very same. day. as Disney's Q3 2015. earnings call. >> Well, an all-time high except for that. weird COVID aberration. >> That will get to. >> There was a little little little. short-lived moment there where it went. even higher there in 2021.

>> Yep. So, on that earnings call on August. 4th, 2015, Bob Iger mentions that ESPN was. experiencing, quote, "modest subscriber. losses due to consumer cord-cutting of. cable subscriptions.". It would come out later in Disney's. annual report that ESPN lost 3 million. subscribers that year. Which still meant it had 92 million in. total. >> But still, they'd only ever grown. I.

mean, I think they hit around 100. million and kind of stayed flat for a. while cuz 100 million households. >> basically is all of America. >> Yeah. But. ESPN and anything related to ESPN. revenue only ever went up. Profits only. ever went up. So, this was a shock. Even. though everyone had been talking for a. while about. >> Oh, cord-cutting is coming. This is. >> And young people, when they move, they. don't necessarily activate a cable. subscription. They'd like to access.

stuff online. It was like, "Yeah, yeah, yeah, yeah, yeah, but the numbers are. still up into the right, so we're all. good.". >> Yep. This sets off a barely controlled freak. out across the entire media landscape. with ESPN and this earnings call as like. ground zero. People knew that this was coming, like. you said, but I mean Netflix was already. a $50 billion market cap company at this. point. So, shouldn't have been a. surprise to anyone.

But the very next day, Disney stock. drops 10% and over the next couple days, Fox, Time Warner, and Discovery all. experience similar drawdowns. And. Viacom, which people view as even more. indexed to the cable network landscape, gets whacked over 20%. And we should. say, just so we don't bury the lead, Disney's stock price today. is what it was then. Yep. It's gone up. and down, but it is flat to 11 years.

ago. >> Yeah. >> Meanwhile, the S&P 500, David, what did. you tell me is up how much in that time? >> Three and a half X over that time. period. >> Yeah. Now, market cap isn't everything, but it. is a measure of what the investment. community. believes your company's cash flows are. worth in the extreme long run. So, we're. not here saying, you know, Disney's. revenue's been flat or profits been. flat, although we'll we'll get to all. that. But what we are saying is 11 years. ago, people thought Disney's future was.

exactly as bright in the form of future. cash flows. that they believe today. >> Yep. Well, we're about to talk about what happens. to the whole rest of the traditional. media landscape after this earnings. call. >> Yeah, Disney managed to stay. independent. >> Yeah, yeah. So, that moment kicks off. I really don't know how to say it other. than the most insane. period of panicked frenzy.

in media landscape history. I mean, maybe in industries history. Basically, everyone in the TV and film landscape. decides all at once that they need to. take dramatic action to respond to. cord-cutting and the rise of streaming. So, over the next couple years, Time. Warner sells itself to AT&T. AT&T changes its mind, spins out Time.

Warner, which [laughter] then merges. with Discovery. Viacom. re-merges with CBS. But, none of those brands are any good, so they decide to name themselves. Paramount after the studio that they. own. Paramount almost collapses under its. debt load, and David and Larry Ellison. Yes, of course that Larry Ellison buy it. and merge it into Skydance Media, so it. becomes Skydance Paramount. >> Which is the thing that David Ellison.

kind of founded and runs. >> Yep. And then, of course, this all. culminates in what's happening here real. time here in 2026, where Warner Brothers. Discovery almost gets bought by Netflix, and instead looks like it's getting. merged into the Paramount Skydance fever. dream. So, like. it's insanity out there. >> Well, now on hold pending legal challenges as. of recording date, so we'll see. >> But, what's really happening is that. all of these traditional media. companies, with the exception of Disney,

have basically all become kind of serfs. in the streaming kingdoms of the. technology companies, of which Netflix. and YouTube are actually the winners. here. >> Yeah, I think that's the right way to. phrase it. I mean, if you just do the. very simple exercise of looking who. generates profits in the movie TV. Hollywood landscape right now, it is. Netflix, YouTube, and Disney generating. the large profit streams.

>> Yep. So, Disney decides to launch Disney. Plus. Bob and the board basically draw a line. in the sand and they say, "We are not. going to just sit around and let. ourselves get Netflixed like everyone. else. We're going to stand and fight. toe-to-toe. We are going to build our. own direct-to-consumer streaming. company." This goes back to Bob's. priority number two in his strategy. presentation to the board when he became. CEO. And like, look, this is totally. laudable. It's also arguably necessary.

I mean, without Disney Plus and its own. streaming service, Disney wouldn't have the ability to. control discoverability of its films and. shows. And like, that's so important. You want to get people into the parks, they got to interact with the IP and the. characters. >> Yeah, it's funny. You and I sort of had. this thesis coming in where. you just keep the hundreds of millions. of dollars that Netflix is paying you. each year and you keep putting your.

content on Netflix and other places. and everything downstream of that, all. the consumer products and parks and. everything, works better because. you're spreading your content across the. whole world. >> And the problem with that thesis is that. once Netflix's algorithm controls. whether families see your movies or not, you've got a big problem. >> That's right. That's right. You have no. sort of guaranteed distribution. Having. Disney Plus and we'll talk about all the. trade-offs involved in this in a minute.

cuz god are there trade-offs. But the. thesis is, if we do this and we stand up. our own streaming service, then we can. form deep direct relationships with. consumers. We can create these whole. sort of universes on Disney Plus that. more deeply explores the characters from. given movies, which creates more IP that. the the parks can use, which creates. these merchandising opportunities, spin-off shows, all this stuff. And on. top of this, it's crazy to think that. Disney didn't have any relationship with. any of their customers prior to this. unless you had visited a park. For 100.

years, if you bought a home video, you bought it from a retailer. If you. went to a theater, you went to a. theater. Or if you had a cable. subscription, Disney did not know who. you were. >> Yeah. Disney didn't collect revenue. directly from consumers except in the. parks. >> And they didn't collect email addresses. or home addresses or demographic. information. They just got the checks. from the people that they were. distributing through and trusted there. was an end consumer on the other side.

>> Yep. So, after August 2015, Bob and the. board decide very quickly, let's go build our own Netflix. competitor. Or more accurately, let's go buy the. pieces we need to build it because. Disney [laughter] doesn't have like any. in-house capabilities to go build and. operate an internet streaming service. here. >> Right. >> And this is when Disney almost buys. Twitter. >> [laughter]. >> The forgotten chapter. >> The forgotten chapter. Thankfully, the. chapter that did not come to pass.

So, yeah, they start looking around at. like, okay, what scaled internet. companies are out there that we could. buy and use as a base to set up our. streaming service and. basically, the only ones within reach. are Twitter and Snapchat. >> Everything else is just too big. I mean, they're giant market cap companies. >> Jack Dorsey happens to also be on the. Disney board at the time. So, they. basically get all the way to a deal and. then at the last minute, Bob backs out. He just like can't imagine Disney owning. and operating Twitter and that was. probably the right decision.

>> it was all papered and they were going. to sign Monday morning and announce it, right? >> Yep. Yep. >> it was like Sunday night that he bailed. on it. >> Yep, something like that. It was very. last minute. So, once the Twitter deal falls apart, they turn to a far more logical. candidate, although a more hidden one, BAMTech. >> Yes. >> BAMTech is this incredible story. It is a streaming technology platform. that was part of Major League Baseball. They began a streaming service for. baseball games all the way back in 2002.

Initially, I remember this from the research when I. went back and looked at it, to start. streaming Seattle Mariners games to. Japan. >> That's right. >> Because Ichiro. >> That's right. >> to MLB and was a phenomenon back in. Japan. >> Nintendo owned the Mariners at this. point. >> That's right. That's right. Nintendo of. America owned the Mariners. >> This group actually started Advanced. Media by making websites. >> Yes. >> for MLB baseball teams. >> And then they got into streaming for. Japan and Ichiro.

>> Yep. And then their first when when they. spun out of baseball, they I think stood. up the streaming back end for the then. fledgling HBO Now. >> Yes. Yes. And they also had taken on the. NHL. So, they were doing the NHL's. streaming service. So, it's kind of perfect. They can do. sports streaming. They've run HBO Now, a. streaming service for HBO. Like it's. perfect. So, August 2016, Disney buys a. 33% stake in BAMTech from Major League. Baseball with an option to increase that.

to a majority stake over the next couple. years. The next year in 2017, they announce. that they're going to accelerate that. option to purchase a controlling stake. in BAMTech and they announce publicly. that they will be launching an. over-the-top direct-to-consumer. streaming service for ESPN. the next year in 2018. and then a Disney streaming service in. 2019. And as part of the same. announcement, Ben, like you alluded to, they say they will be ending their. content agreements with Netflix and.

pulling all Disney, Pixar, Marvel, and. Lucasfilm content off of Netflix by. 2019, which Netflix was already paying. them hundreds of millions of dollars. annually for that content. >> Yep. And that's just pure profit. >> Yeah, no expenses associated with that. >> Which Disney at that point was. generating about 15 billion dollars in. Disney-wide operating income at that. time. So, that's two-ish percent of the.

company's profits are coming from that. one Netflix deal, and they're just. saying, "All right, we're going to we're. going to rip that up. We think it is. worth it in the long run for us to start. from zero, build an entire customer. base, and then reach this customer base. directly.". >> And look, this is another point where. having ESPN as part of the company as a. bulwark, even though ESPN is now. declining, is critical. Like, that's what enables. Disney to do this. >> That's a great point, and it means that. you have to nerf the ESPN offering on.

streaming because you need to keep that. gravy train flowing in. So, the ESPN. Plus thing that ended up debuting in. 2018. >> It's kind of a nothing burger, >> Yeah, all the content that almost no one. wants to watch cuz all the good stuff is. still. on ESPN, the cable channel that prints. cash, so we're going to leave it there. Thank you very much. >> And like, look, it's a really tough. thing for the ESPN side of the business. to move to direct-to-consumer because. part of the whole magic of the affiliate. fee business model is you get paid a.

subscriber fee whether those subscribers. watch the channel or not. All of a. sudden, you're now going to actual. usage-based of like, "Hey, I'm only. going to get paid by the people who want. to watch this.". >> Well, this is the magic of bundling is. you get some money from the people who. would never have paid you any money. before if you were trying to sell just. one product. There are way fewer people. who are willing to subscribe for a high. dollar amount, call it $30, to ESPN. directly than there are people who are.

willing to pay 50, 70, 80, 100 dollars. for all the channels. You're missing out. on all of those sort of casual fans or. Or the. >> The non-consumers. >> That's right. That's right. >> So, Bob basically issues an. all-hands-on-deck directive. He directs. all the creative studios within Disney, Disney Animation, Disney Live Action, Pixar, Lucasfilm, Marvel to start. producing content and gearing up. specifically for the new first-party.

Disney streaming service coming in 2019. on top of all the existing slate of. content that they were also working on. And then he gets. >> a call from Rupert Murdoch. >> [laughter]. >> And Rupert says that he and Fox are. obviously going through the same. strategic reviews and exercises as. Disney and every other media company. And Rupert has concluded that the best. path forward for Fox. is to combine with Disney and lend its. scale, its content, and its efforts to.

Disney's first-party streaming service. to compete with Netflix. >> Well, to combine some of its assets. Basically, Fox did an analysis and looked at. everything that had a library value, you know, the rewatchability, and they. kind of looked at it and said, "The. highest and best use of a library over. the coming decades is going to be on. these streaming services. The deep. catalog, like I fall asleep at night.

watching The Office. So, I have Peacock. cuz they have library content so I can. watch The Office. Same thing with. Arrested Development, same thing with. Seinfeld. They ran all the numbers and. decided we don't really want to be in. the streaming game over here at Fox. Let's try to fetch a high value for. people who do and who need that library. content. But I think we'll keep. everything that has all of its value on. first run. So, news, sports, they sort. of went all in on linear TV instead of.

keeping the library, which would require. building out the streaming service. It's. the opposite of Disney. Disney's keep. things that have high rewatchability and. monetize them over and over. >> Yep. Now, you said Rupert and Fox ran some. analysis on their library. vis-a-vis streaming. I suspect part of. that analysis also led them to the. conclusion that. their library just isn't strong enough. >> [laughter]. >> to be compelling as a streaming product.

Like, it's true. You know, it's got. Avatar. It's great. It's got The. Simpsons. >> Come on, how often are people rewatching. Avatar? >> Exactly. Simpsons are rewatchable, maybe. >> Family Guy? Family Guy's rewatchable. >> Yep. Yep. >> The National Geographic Channel. >> But, you know, it's a lot of live-action. film IP. >> We do have the FX network, which has. Always Sunny and a bunch of great shows. >> Right, it's not zero, but it's not. anywhere near enough to be compelling on. its own. >> And its synergy value is actually a lot. higher than the value is just to Fox.

Because if you start to look at some of. these things, X-Men, Deadpool, Wolverine, Fantastic Four, huh. Those are actually worth a lot more to. Disney than they are to us. >> Exactly. Bingo. So, December 2017, they. announced the deal. Disney will be. acquiring all the entertainment and. international assets of Fox in a $52. billion all-stock transaction. So, not. Fox News, not Fox Sports, not the Fox. broadcast network,

but the library and all the general. entertainment assets. >> And that 52 billion was after a lot of. back and forth negotiation. It was best. and final. Everyone at Disney ran all. the models they possibly could to see. what is the very most we could pay. to get the value that we need out of. these assets. So, the deal's done, ish. It just needs regulatory approval, which. is going to take several months as it. always does. >> Yep. >> During the regulatory approval process,

there's a different ruling that happens. around AT&T's merger. >> That's right. >> That causes Comcast to go, "Huh. >> Mhm. >> You know, we previously counted. ourselves out for these assets because. we didn't think it was going to pass. regulatory approval. I bet it would have. Let's see if we can lob in a bid, even. though Disney and Fox say they have a. done deal. Let's just throw in a bid and. see.". >> Comcast once again.

Disney ends up getting bid up to 71.3. billion dollars. >> A full 19 billion more than they had. originally signed the deal on. That's a. free 19 billion for Fox shareholders. because Comcast lobbed in the bid. >> Yep. Disney's total market cap at the. time was around 170 billion. So, this is. like 40% of the value of the entire. Walt Disney company. Way more, way more than Pixar, Marvel,

and Lucasfilm all combined. Now, to be fair, so they do the deal. Disney is able to pay down a lot of that. purchase price pretty quickly through. divestitures of Fox's regional sports. networks and then their stake in Sky, the British pay TV operator. >> Yeah, that those numbers were 14 billion. and 15 billion. So, together, you can. actually back it down 29 billion. The. real price of what Disney paid and the.

assets they kept was about 44 billion. So, that's sort of the the hurdle to. overcome in trying to make this. acquisition pay back. >> Yep. And. >> [sighs and gasps]. >> they probably don't get anywhere near. 44 billion dollars worth of value out of. the assets that they do get. As we. talked about the library assets for the. streaming service, sure they're nice to have, but they're. not really going to drive that many sign. ups or retentions for the service.

>> Wolverine and Deadpool had a big box. office win. Avatar now has lands in the. parks. >> Yep. >> True. Yeah, it's not nothing. Uh, they. did get a third of Hulu as a part of. this deal. So, they already owned our. third. This gave them a third. So, then. they have had a controlling interest. >> Yep. Another big part of the strategic. rationale for the deal and for the. increased price was that Fox had a lot. of India assets both content and. distribution. And this is back to Bob's. strategic pillar number three for the.

company. Great, we need to enter India. This is a great way to do it. Those assets end up not performing for. Disney nearly as well as they thought. they would. They end up merging them. with Reliance in 2024 in a deal that. values them at only a fraction of what. they valued them in the Fox acquisition. >> Yeah, but the general philosophy of. we're going to go buy a deep library and. we're going to buy. a third of a general streaming service. with Hulu, not a specialized curated one.

with universes like Disney. It does kind of give them this kitchen. sink in addition to their highly curated. thing with Disney Plus where you can get. kind of scale this general entertainment. platform without diluting the pristine. Disney brand as long as you can keep. Disney Plus really separate from Hulu in. the mind of consumers. That's kind of. the strategy. >> Yep. >> But certainly it's the worst of the four. big acquisitions, five if you include.

BAMTech. >> Yep. Either way, the deal closes in. March 2019. right in time. before Disney launches the long-awaited. Disney streaming service the very next. month in April 2019. at an investor day that they hold. to announce Disney Plus. The vault is now open. >> I love this. >> It was great. >> The clarity of product vision of the. original Disney Plus is incredibly.

laudable. >> Totally. It was a very compelling. product. All of Disney IP, Pixar, Lucasfilm, Marvel, the Fox assets coming. in. And then they announce the price. $6.99 a month for the initial price. >> Consumers go nuts. I mean, they beat. every early projection that they had to. sign up for this thing. >> Wall Street loves it. The stock jumps. 11% the next day. By the end of April.

2019, the stock is up 20%. When the. service finally launches in November, Disney gets 10 million sign-ups within. the first 24 hours, 26 million in the. first quarter. And the setup for all. this looks great. Here we are midway. through 2019. Pixar and Disney Animation are soaring. Lucasfilm is crushing it. They're 2/3 of. the way through the new Star Wars. trilogy, plus they've made Rogue One, which is an amazing amazing movie.

>> High art. >> Oh, so great. The Marvel run is just. reaching its apex, its peak. I mean, unprecedented in Hollywood history. Avengers: Endgame is about to come out. and set new records all over the world. >> $2.8 billion in box office gross just. from that film. >> Yep. But, unfortunately, all is not quite as well as it seems. Under the hood, each of Disney's core IP.

pillars. is actually not in a great place right. now. So, >> I'd call them fully exploited. >> Well, that's part of it. There's a bunch. of problems. So, at Pixar and Disney. Animation, they're in the midst of a. major leadership transition. John. Lasseter has just been kicked out of the. company. and Ed Catmull has just retired. So, they need new leadership at both of the. marquee studios of Disney. Lucasfilm.

looks great, but. it's on the cusp of a major crisis. Solo just bombed in theaters and. audiences don't know it yet, but Episode. 9 is in trouble. Like, major trouble. >> Well, Episode 8 and 9 did not have a. cohesive vision between the two and had. different directors. So, Episode 8 went. in this. interesting, but somewhat not Star. Wars-y direction and then Episode 9 had.

to like smear Star Wars Vaseline all. over the top of it so that you would. remember that it was still Star Wars. So. much so that we got Palpatine back from. the dead again and like 10,000 Star. Destroyers rising up from a planet. >> It was bad. >> A little foresight and vision would have. been nice. >> Yeah, yeah. But, then nobody knows this. yet cuz the film doesn't come out until. December of that year. >> Episode 8 was so different than the. films around it and it's like no one was. talking to each other. >> And and there was no plan for Episode 9.

That was the problem. And then Marvel, I mean Marvel's on this. absolute high with Avengers Endgame. But, the problem is it's literally an. endgame. Like, the story. >> [laughter]. >> ends. Right as Disney is now saying, "Oh, hey. Marvel, we need you to start pumping out. even more content for the streaming. service.". >> And it ends in this beautiful cinematic. fashion. Like, it it tied 15 different. strings all together. Marvel actually. did have a tremendous amount of. foresight. It was highly coordinated. I.

think I cried in that last scene where. they're. showing each character as they're sort. of reflecting back on the whole thing. and the way they they handled the the. the. the character development of the villain. with Thanos. Like it's a very relatable. villain. It's a villain that is like. trying to do the right thing. It's the. best kind of villain. Really elegant if. the end game is the end game. >> Right. >> [laughter]. >> Really inelegant if you're about to. follow it up by increasing production. 50% in the studio.

>> Yes. >> Yeah, which they do. >> And if you do flash forward the. post-2021 movie slate. might actually be negative on a. theatrical return. If you look at The. Marvels, Ant-Man Quantumania, Eternals. This is even ignoring the Disney Plus. shows, some of which were very cool, Loki and WandaVision, but the existence. of them by trying to be. bigger and broader and more expansive. even than the movies make the original.

universe feel unimportant. >> Yep. >> Like my beef with Loki is who cares. about Thanos. when he's killing people in just one. strand of an infinite multiverse. And. like all you kind of should care about. is what Loki's doing versus that. pathetic little thing called the MCU. So. that, you know, like we I just spent a. decade of my life investing in that. And. now you're telling me it didn't even. matter. >> Yeah. >> So there's this big issue that it's kind. of supposed to be over. And both. creatively and commercially the stuff.

that comes after people don't want it, whether it's on streaming or whether. it's in theaters. Other than the second. Black Panther, which was amazing. >> That was great. That was great. >> Yeah. >> But all of this. and everything you're saying. highlights the strategic trade-off that. Disney made in pursuing the streaming. strategy to go toe-to-toe with Netflix. Operating a tier one. direct-to-consumer streaming business. is yet another.

wholly and completely different business. model than either the core Disney. flywheel. or the ESPN affiliate fee model. >> Yep. >> If you're going to try and operate a. tier one streaming service, a service. that is going to reach the maximum. number of subscribers, not a niche. service, but a Netflix type competitor, your number one job is to retain. subscribers that have signed out. >> You got to feed the beast.

>> You need to feed the beast. >> Those existing subscribers content or. they're going to churn. >> Exactly. So, I want to quote Ben Gilbert. here. >> [laughter]. >> Oh god. When? >> From the end of Acquired's 2019 Disney. Plus episode, >> [laughter]. >> in which we were incredibly excited. about Disney Plus. I mean, it was so. exciting back then. But, you did say one. thing at the end of the episode. You. said, quote, "One reason to doubt it, it. being Disney Plus, is I think Disney may.

be underestimating just how much content. people need to stay satiated. It's a. beautiful and amazing thing to have. access to the entire back catalog of all. these really storied franchises, but am. I going to pay $7 a month to keep an. option available to go watch those. things? No. If I ever want to rewatch a. Star Wars movie, I'll just reactivate my. subscription at a given time. They. really do need to aggressively turn on a. fire hose of content here.". >> Oh man. >> You summed it up.

>> [sighs]. >> You summed it up. This is the problem. That. whole strategy of a fire hose of content. is completely orthogonal to. >> Yes. >> the flywheel strategy of only the best. content very infrequently. >> And that is what Disney did. The best. content infrequently with a theatrical. release, a cultural moment around it, and then be quiet for a while. And and. harvest the fruits of that one movie,

but be quiet for a while. And streaming. is the exact freaking opposite. It is. Every time I open that, there better be. something new and fresh for me to. consume. And I I. got to wonder how. much. the Disney folks knew that when they. made this decision to push all their. chips in and accelerate. going to streaming in a. direct-to-consumer way. >> Yep. >> The biggest issue really is that. Disney had something to lose. They had.

two things to lose. They had an existing content library. that was highly differentiated. And when. you bolt things on to a universe of a. differentiated library, it makes the original content less. valuable. >> Yep. >> I remember watching the Obi-Wan. TV show on Disney Plus and being like, "Oh, man, that kind of shatters how I. think about Obi-Wan.". >> Yeah, it's not as cool as I thought it. was. >> Yeah, because you have something to. lose, you actually risk destroying.

the stuff you had that's great by sort. of corrupting it and and destroying the. competitive advantage that you have in. the marketplace by. >> This is such a good point. In a. top-tier, high-quality content, stories, and characters world, every time you make a sequel, you're. taking a big risk. And this is the risk. >> This is why Disney didn't make sequels. prior to the '90s. >> Yep. Now, Pixar proved to them that you. can make sequels and they can be great.

>> Well, I mean. >> need to put that same amount of care and. effort and time into it. >> Yeah, Pixar does one every 7 years. >> Yep. You can't increase the production. line. >> The second thing is that the Disney. brand itself means something. >> Yes. >> The Netflix brand doesn't mean anything. to anyone. The Netflix brand is the. button that I push on my TV when I want. to watch stuff. And sometimes it's great. stuff, but if it's not great stuff, whatever. It whizzes by. I I don't think. one way or another about Netflix. The. Disney brand has something to lose. And. so if you have a bunch of bombs in a.

row, I think less of the Disney brand, which again takes away your compounding. competitive advantage by being Disney. Whereas if you release a bunch of great. things in a row, even if they're more. spaced out over time and you're really. judicious with it, which is not. congruent with the streaming operating. model, then it can really add to the the. brand bucket of the Disney brand. So. Disney sort of has this compounding. asset that is at risk when going. head-to-head with Netflix. >> Yep. Yep. Yep. So that's all the. strategic trade-offs on the. Disney film and TV side.

Then there's the whole cable ESPN side. of the house. >> Yes. Like what what is going on there in. this 2018-19. period? Well, as you can imagine, cable. subscriptions are only getting canceled. at a faster and faster rate. Which. can actually still be fine. You can. actually still grow your revenue for a. while if you're in the high leverage. position that ESPN is because. you can just raise your prices faster. than.

>> cancellations are happening. Yeah. >> Exactly. But later on around 2023, even this would come to a head. The. declines were happening too rapidly and. affiliate fee increases could no longer. outpace subscriber losses and revenue. then would start to decline 23 into 24. So. >> Basically, cable and ESPN enter the end. game, to use an Avengers term. >> Yes. Yes. So that's on ESPN's revenue. side. On the cost side, there's another. big problem. >> Yeah. >> Sure, people are churning off cable, but.

I don't know, that's manageable as long. as your your costs stay fixed. But the. sports leagues have now realized that. they can extract much more value. That. it turns out that in this whole value. chain of watching a sports game, way more of the profits should be going. to the sports league than to the network. that's sort of sitting in the middle. >> Yep. >> And. the NFL, the NBA, I think they just. didn't fully extract everything that. they could have for decades.

>> That probably is true. But they were. hamstrung because there there really. weren't any other bidders except ESPN. for so much of these rights because ESPN. had this whole scale economies power. where because they were getting the most. cash and affiliate fees, they could pay. the biggest prices for sports rights and. block everybody else out except for the. like really, really big stuff that the. broadcast networks would come after, too. Now, other bidders show up in the form of the.

tech companies. >> And the tech companies not only have. these incredibly deep pockets, at least. until all of them started destroying all. their free cash flow doing AI CapEx. >> Building data centers. >> Yes. But. they have more ways to monetize the. consumer. So they can afford to bid more. for the same consumer than an ESPN or. that a TV network could because Amazon. can get you as a Prime subscriber. >> This is Amazon's NFL deal right here. >> Yes. Yeah, so any any student of.

economics will kind of see the writing. on the wall here. The price is set by the highest bidder. And if somebody has a business model. that structurally can out monetize what. you can, then they're going to win and the price. is going to be set by them. >> Yep. This is why ESPN won for many years. and this is why the tech companies are. winning now. >> The other thing driving the prices up is. as you get a more and more abundance of. content online and onlineness, there is an increasing return to.

shared cultural experiences happening. live in a way that made sports way more. important than they ever have been. before. The prices people were paying. for World Cup final tickets and Taylor. Swift tour tickets and Super Bowl. tickets, that sort of manifests in. rights deals, too. >> Right, there's a trickle-down effect. >> Exactly. Exactly. So, in 2006, just look. at the Monday Night Football package. that ESPN buys. '06, it was at 1.1. billion. 2011, it was at 1.9 billion a.

year. And by 2021, it went up to 2.7. billion dollars a year now. And the. viewership for Monday Night Football is. actually going up. Even amidst all this. cord-cutting. Like it It turns out that. the NFL is the thing that we all want to. watch. >> Yep. So, the structural force though that's. working against ESPN here is that. ESPN used to be the only place that you. could go to watch highlights and. replays. And now, you can get a lot of.

that on social media. So, in the long. run, if the main reason to subscribe to. any given channel ends up being actually. about the game content itself and not. differentiated by stuff around the game, then the excess profits in the long term. will just be captured by the rights. holders like the NFL and the NBA. >> Yep. And to be clear, we've probably. undersold ESPN's. creativity and innovation in this. episode. I mean, highlights, SportsCenter, everything they did was.

>> Even more recently, >> absolutely incredible. >> Pat McAfee show or my god, Manningcast. I cannot wait for fall to watch. Manningcast on Monday Night Football. It. is the thing I look forward to. from uh I don't know, July 15th onward. >> They really are the best of the best at. high-quality content production around. sports. However, this is not the same as Disney. Sports. have a very limited shelf life. You are.

not going back and watching Manningcast. episodes from last season. >> Yes. [laughter]. >> The flywheel does not apply here. So, you can't build long-term value around. that original content. You know, sure. you can with like 30 for 30 and stuff. like that, but that's so small and niche. at ESPN. The vast majority of the. production that ESPN is making. has very, very limited shelf life. >> That's so interesting cuz the content. has very limited shelf life, but they've locked up these incredibly.

predictable revenue streams. Yeah, there's ad sales they have to figure out. how they're going to do in the ad sales, but that's plus or minus a few percent. They know a few years from now. how much free cash flow they're going to. get from ESPN in a way that they have no. idea from their movie slate. It has been. this stabilizing force. >> Oh, yeah. The beauty that we've talked. about on this episode that Iger ended up. realizing of of having these two. businesses together was take that stable. cash flow and use it to invest in the. Disney flywheel. >> Right. >> I'm just making the point that it's not.

like as ESPN has come under this. pressure that they could start building. their own flywheel here. It's like, "No, no, this is a declining asset.". >> Right. Right, right, right. All right. So, take this forward. How does Disney. Plus go? How does ESPN Plus go? >> So, for better or for worse, I think Disney. either doesn't see or doesn't have to. deal with the fact that they have these. pretty major strategic issues on both. sides of the house with their streaming. strategy. because the minute after they launch it,

the entire world gets turned upside. down. >> Yep. >> Disney Plus launches in November 2019. >> It's unbelievable that was just sitting. there right on app stores and in TVs the. moment COVID hit. >> Yeah. February 2020, Bob Iger retires as CEO. Uh this COVID thing is starting to. happen. He says, "Hey, I'm going to. remain as executive chairman for a. little while to just help stabilize the. transition, especially, you know, in the. parks here the couple weeks before we.

reopen everything here.". >> [laughter]. >> Oh, man. Bob Chapek, of course, who was head of. the parks division has come in as the. new CEO. March 2020 comes and everybody realizes. this COVID thing isn't a uh. couple week kind of thing here. Disney's market cap drops 40%. in March of 2020 because the parks. business. goes to zero. Actually zero. Nobody's. there. >> I mean, Disney's net income that year.

was actually negative. >> Yeah. Yeah. And then. the roller coaster goes up. >> [laughter]. >> And then, as you said, Disney Plus is. just sitting there. Everybody's at home. now. When they announced Disney Plus. originally, Disney said that their goal. was to get 60 to 90 million subscribers. within 5 years. All of a sudden COVID. happens, everybody's sitting at home. Disney gets 100 million subscribers. within 16 months. March of 2021, they.

announce they've passed 100 million. subscribers. Blown way past even their. most aggressive projections. The stock goes to the moon. >> Well, that's the other thing. It was. zero interest rates, so any. any good sign, the market's amplitude is. higher than normal. >> Yes. Disney's market cap in March of 2021 on. this announcement hits 360 billion. dollars. >> Wow. >> Here at its peak. They all look like.

geniuses. And for the moment, they were. All these strategic questions we've. talked about are non-issues. >> And worth noting, it hit that peak right. around January 1st of '21, and by. October of '21, it had begun its fall. right back down to where it started. >> Yep. So, that December of 2021, Bob Iger. fully retires. As we head into the next. year, there start to be some cracks in the.

Disney Plus strategy. Subscriber numbers are still good, but. churn is high. And they're spending a lot of money. acquiring and reacquiring. subscribers. This is the treadmill of a Netflix. competitor streaming service. You got to not only provide the content. to people every month, but you got to. tell them about it. I mean, on the ESPN. side, ESPN didn't do the marketing to. consumers. That was the cable company's.

job. They got the subscribers. They. managed the churn. On the Disney side, >> Yeah, you got to advertise a new movie, so that they. >> Sure. Sure. >> You spend tens of millions or hundreds. of millions of of dollars advertising. the new movie. >> is no concept of churn. >> Right. >> You're not trying to, you know, keep. everybody. >> Right. So, the interesting thing, they're all. in on this Disney Plus and Hulu this. streaming strategy. And the question is, is there actually a. pile of gold worth chasing in streaming? It's structurally a worse business, as.

you were just mentioning, than the old. cable bundle where you just. got checks. Consumers can cancel easily. They do so every few months. It's. expensive to make the amount of content. you need to make, especially now with. the quality that people expect out of. streaming content. They expect like. cinema-like quality TV shows, yeah. Consumers don't want to have a zillion. services. You have to build your own. technology and keep the user experience. great as platforms add new features and. change the UI and everything, which is. very expensive to hire and pay good.

engineers, good designers, good product. people. You have to acquire your own. customers directly, expensive. You have. to retain your own customers directly, expensive. >> When they churn, you have to reacquire. them. >> That's right. And critically, you don't. get a second exploitation window the way. that a a limited edition home video. re-release has. >> Yep. >> Theatrical re-releases followed by home. video windows, that uh mwah, that was. the business to be in. And sitting here. grumbling about it and wishing that that.

could come back is is not the answer, but Disney is sort of seeing the reality. in '23, '24 that, oh my god, streaming. wasn't just like invest some money to. build it out one time and then we've got. this great asset. It's this constant. expensive nurturing thing that we hadn't. had to deal with before. >> Yep. So, heading into 2022, Bob Chapek does a reorg, basically. reorging the entire company around the.

streaming strategy. Consolidates all the. studios all together into one reporting. segment, Disney Media, I think, DMED. Meanwhile, losses at Disney Plus are. just piling up as they're spending all. of this money in production and customer. acquisition cost and churn management. and technology development. It. culminates in November 2022 in Disney's. fiscal Q4 earnings call. when investors start asking a lot of.

questions about these losses at Disney. Plus and Bob Chapek and the company's. strategy for addressing them. And it does not go well. >> Well, and there's all these other. self-inflicted wounds. I mean, all over. the company. They They announced they're. moving a bunch of Imagineers to Florida. and then they canceled that expansion. even after a bunch of them like already. bought houses. Then there's the whole. spat between Chapek and the governor of. Florida. Then they designed, built, opened, and. operated a Star Wars themed hotel at.

Disney World that I was very excited to. go to. I mean, it's super expensive, but. I I. really wanted to see. >> paid it. Yeah. >> And then they promptly closed it. It. felt like a company in complete disarray. even streaming challenges and losses. aside. >> After the earnings call, the board meets. and fires Bob Chapek as CEO of Disney. two and a bit years into his tenure. and Bob Iger returns out of retirement.

to come be CEO. again and stabilize the ship. >> Yeah, you and I have been kind of going. round and round back and forth. Why did. Bob come back? Why did Bob need to come. back? What does it mean that Bob came. back? Ultimately, I kind of think they just. chose the wrong guy in Bob Chapek and I. think Iger's mistake in recommending Bob. Chapek for the job was thinking that the. company was about to enter a peacetime. >> Yeah. >> A a time where it needed like a. caretaker and that needed the exact.

opposite. >> Like, ah, yeah, all the pieces are in. place. Disney Plus, it's doing great. >> But they weren't. What Disney Plus ended. up being is so different than the. original thing they conceived of Disney. Plus as. It's a super different. business, different business model and I. think all the downstream effects of the. Disney Plus strategy, it wasn't just. like, great, execute the strategy now. It's like, we're still learning a lot in. real time. So it's almost like. the person that set that in motion kind. of needed to see it through and it was.

by no means just a keep your hand on the. wheel and make sure the company is cared. for time. >> Yep. And then things got crazier. 2023. was the year of the Hollywood strikes. >> Yeah. >> And then there's another. proxy shareholder fight this time with. Ike Perlmutter who was the previous. owner and chairman of Marvel and his. friend and activist investor Nelson. Peltz. They launch a public proxy fight against.

Disney. Ultimately, it doesn't go. anywhere, but it's a major distraction. that costs a lot of time and money. And. then there's this big question of what. to do with the declining asset of ESPN. >> It's so funny. I'm I'm just sitting over. here chuckling. This declining asset of. ESPN. Yeah, it's a declining asset that. does $3 billion a year now in operating. income. >> Right. Right. >> I mean, this is like. is this still this cash gusher? >> I'll take that declining asset. Thank. you very much. >> Right. And when you say declining, I. mean, might be more fair to call it.

flat. The cable side is declining, but. the thesis is maybe they can using the. ESPN streaming service. I don't know. that Disney would acknowledge that it is. a declining asset. >> Which actually sort of explains Wall. Street agitation to spin it out. Oh, it's not any good in Disney anymore. I. would like that, please. >> Right. >> In response to that, in October of 2023, they do separate ESPN out into its own. business segment for the first time in. Disney's financial reporting. So, there's now a sports business segment,

which is ESPN. Basically, that's. creating optionality to spin it out. >> the thinking that I want them to make a. segment for. general streaming entertainment. >> [laughter]. >> Hulu with Fox-like assets on it. That. that that should be its own non-Disney. company. >> [laughter]. >> All right. Well, we'll get there. We'll get there. In 2025, they do a deal with the NFL. The NFL. trades the NFL Network cable channel.

into ESPN in return for a 10% stake in. ESPN itself. >> I love this deal in so many ways. >> Great deal for all everybody. >> The NFL gets 10% of ESPN, which is great if you're ESPN, honestly. It's like, "Woo, good. They're invested. in our success." And then. what is the NFL doing in this like. content production and distribution. business? Made no sense. So, having NFL. Network and Red Zone and all that live. over in ESPN, which they're core. competency, what they're good at, love. it. >> And for the NFL, they want ESPN to.

continue to be a viable bidder for their. rights. So, it's in their interest to. prop up ESPN. Yep. Finally, at the end. of the year, they launch the. long-awaited full [snorts]. direct-to-consumer ESPN service, ESPN. Unlimited. So, 30 bucks a month, full. unlimited access to all ESPN channels. They aggressively bundle it with Disney. Plus and Hulu. Basically, if you. subscribe to ESPN Plus, you can add. Disney and Hulu for only an extra $6 a. month. No brainer.

>> Which actually is done for two reasons. that I I did not fully appreciate at. first. The first is obviously the. general bundling theory, which is. even if I'm not that big of a Disney. Plus fan, I'll just subscribe to this. whole bundle and that that way you get. subscribers that you wouldn't have. otherwise, that the casual fan. The. second that I didn't realize that Disney. has really keyed into is churn. mitigation. >> Yep. >> The. bundle subscribers churn at a much lower. rate than any individual streaming. service, cuz you're not thinking that.

hard about how much value am I getting. out of this particular app this month. >> Yeah, I mean, there was just so much. that Disney had to learn about operating. direct-to-consumer streaming services. >> Yep. >> The real story of the last couple years. though has been the parks. Man, coming out of COVID, the parks have just been crushing it. And there's all sorts of criticisms that. you could levy at them and people do, like they're charging too much, they're. nickel and diming, but especially as.

ESPN has been declining and as. Disney Plus streaming has had a rocky go. at best over the last couple years, the parks have totally filled that gap. >> David, it's so funny you say they've. been crushing it. Visitors are actually. down. >> On a financial basis. >> Everything is about price increases. There's 145 million people that visit. the parks each year. Before the. pandemic, it was actually 157 million. That was their all-time high. So, they are down from the pre-pandemic.

high even 6 years after the pandemic. But of course, the amount that they make per visit is. is way up and has climbed, I don't know, 5% per year for decades now. >> Yep. Which, yeah, maybe that is a. double-edged sword. >> But, maybe it's not. On the other hand, every time I go to Disneyland, it's. super full. It It doesn't seem to be. keeping people away. >> Yeah, exactly. That was the point I was. going to make, too. I think consumers. have had some version of that complaint.

about Disney ever since Michael Eisner. took over in 1984. >> [laughter]. >> Yep. >> And it doesn't keep people away. >> And if it did, they would stop doing it. >> Yep. >> Because it's in Disney's interest to. keep a giant middle class. wrapped around the Disney brand. I mean, it If If you could get the same amount. of revenue from. 200 million visitors a year or 100. million visitors in a year, you want it. more dispersed cuz you want all 200 of. those people imbuing Disney fandom into.

their core childhood memories. >> Yep. So, parks is now almost 60% of the company's. operating income, while ESPN and sports. is down to 16%. So, it's a total reversal from the. situation 10 years ago. Wow. And all. that leads to. February of this year, 2026, where Josh D'Amaro, the head of Disney. Parks and Experiences, is announced as.

the next Disney CEO. effective 6 weeks later in March with. Dana Walden, who came over from Fox, named president number two and chief. creative officer of the company, a new. role within the company, and Bob Iger. will stay on as a senior advisor and. board member until his full retirement. at the end of this year in 2026. >> Yep. So, before we get to the business. today, we should talk about the. beginning and end of Bob Iger's tenure, just like we did with Michael Eisner.

So, when Bob Iger came in September. 30th, 2005, market cap of about $50. billion, the stock price 5x by the time. he left. So, you know, that second. decade, like we talked about, flat, but. that first decade had 5x growth in it. Revenue tripled from 31 billion in 2005. to 94 billion 20 years later, and net. income went from 2.5 billion to 12.4. billion. So, interestingly, net income.

outpaced revenue. They became five times. more profitable while generating three. times more revenue. >> Interesting, which also is the same. thing that happened under Eisner. >> Right. So, it's been an exercise in for. two big CEO stretches making the company. more profitable. >> Which probably says more about the. company back in 1984. >> [laughter]. >> than it does over the last 40 years, but. but yeah. >> I think that's right. Okay, so should we. talk about the business today? >> Yep. >> First, some stats on Disney Plus, since. that is the strategic focus of the.

company today. 132 million people are Disney Plus. subscribers. A little under half of. those are in the US and Canada. Hulu. has 64 million subscribers. ESPN Plus. has 24 million subscribers. So, here's a. crazy number. When they last reported. this in 2024, Disney generated over $19 billion. in subscription revenue, up from. essentially zero in 2017 when they.

launched any of these streaming. services. That 19 billion of revenue, probably closer to 22-ish billion now. They they've stopped reporting it. individually. Which is around a quarter of the. company's revenue. and their single largest source of. revenue. We've been talking about Disney Plus in. this like, oh, it's. low margin, or oh, it costs a lot of. money to build it out, but the revenue. is huge. They have transitioned revenue. sort of from other places into Disney.

Plus now. >> And. as of now, it is still subscale compared. to Netflix. Netflix has 325 million subscribers. around the world. >> That's the last time they reported. It's. up since then. >> Yep. >> So, it's nearly triple Disney Plus. >> Yep. And last year generated 45 billion. in revenue. So, what? Almost twice as. much as Disney's 25 billion that they're. doing in streaming revenue? >> Yeah, and that's Hulu and Disney Plus.

combined. >> Yep. >> Hm. How much operating income does. Netflix generate? >> 13 and 1/2 billion. >> [laughter]. >> Compared to negative for Disney, right? >> No, Disney is now positive. >> up positive. Okay. >> on on on their direct-to-consumer. segment. But, for a long time it was. negative. But, uh. So, Netflix's operating income on. streaming, their their entire business, is the same as Disney's entire company. operating income. >> Yep. Yep.

>> That is a completely new phenomenon. The. just to go go back in time, in 2017, Netflix's operating income. was under a billion. >> Wow. >> Disney's. was 14 billion. >> Right. >> Disney had that severe dip from COVID, parks closing, investing in Disney Plus, massive losses from investing Disney. Plus, and they're almost back to where. they were. Whereas Netflix, over that 8-year.

stretch, has taken their. operating income from sub billion to now. equal to Disney. >> Yep. And look, I mean, just streaming is. a scale economies business. So, like, the more scale you have, the more. operating leverage you should have. >> Yep. So, to put numbers on the. investment into Disney Plus, cumulatively, there were 13 billion. dollars or so of losses that Disney. incurred in building it out in that. segment. But David they they are now. profitable. They generated about a.

billion dollars last year. This is not. and probably never will be the margins. of owning cable channels, but it is. definitely a a writing of the ship. versus how expensive it used to be to. run Disney Plus acquire retain. subscribers all that stuff. >> Yep. >> And really this is what. Bob Iger spent the last couple years. since coming back from retirement doing. >> Moving over to the parks. Like we had. said earlier, there's 145 million people. who visit the parks each year. They have.

12 parks across six locations. They're. designing a new park in Abu Dhabi. They. have eight cruise ships, which is. growing to 13 bringing on a new cruise. ship almost every year for the next. several years. >> Yeah, cruises we didn't talk about but. has been a big success for the company. >> Yeah, that was an Eisner thing. The. thesis actually originally was after you. finish up at Disney World for three or. four days you may want to go hop on a. cruise for three or four days and so you. sort of depart from Florida and then go. down to the Bahamas and come back up.

They were kind of wrong that people. would want to do those things at the. same time. >> a strategy not devised by people who. actually have young kids. >> [laughter]. >> But people love the cruises. >> They're awesome. I've done them. They're. great. >> This area is where the company is. investing the most heavily. So in 2023. they announced that they're investing 60. billion dollars of capital expenditures. over the next decade into parks and. cruises. A lot of that is probably going. to build those cruise ships one giant. cruise ship a year. 30 billion of it will be used in.

domestic parks in Florida and Anaheim. So if you live in the US get excited cuz. there's lots of new rides and lots of. new lands that are opening. The mental model I have around this. is. they had a cash gusher in cable. affiliate fees. It's going away. They. had a very profitable box office, especially in the golden era where you. could make and market a film like. Avengers, the original one, for I don't. know, two, three hundred million dollars. and then gross a billion and a half at. the box office. That kind of seems to be.

over. ESPN affiliate fees are declining. Sports leagues are commanding more of. the profits. People aren't going to the. movies like they used to, and these big. IP movies are more expensive than ever. I saw. a rumor go by that Avengers Doomsday is. going to cost 700 million dollars. between production and marketing. Well, that'll come out this December. And of. course, Disney, along with the whole. world, has shifted to streaming, which. has proved to not be as profitable of a. business that they sort of had had.

hoped. And so, where do you make your profits? Parks. But theme parks, unfortunately, don't. really scale the way that cable profits. did. There's a constraint of physical. room in the parks and rooms in hotels. So, that's why they turned to charging. more per guest since they really can't. cram more more guests in. And what do. you have to do to justify a trip to. Disney World or a cruise costing. thousands of dollars now? You better. invest 60 billion dollars and make it.

worth it. So, that's like how you can. kind of wrap your mind to this giant. investment and the price increases in. the parks. So, overall business, 94 billion in revenue, 13 billion in in. net income. The segments are actually pretty. interesting to look at. Entertainment is. 42 billion, that's movies, streaming, content. Experiences is 36 billion, so. somewhat comparable to entertainment. Sports is smaller at 18 billion, but. profits are where it gets interesting.

So, in entertainment, the operating. income is 4.7 billion. But in. experiences, the operating income is 10. billion. Yeah. [laughter]. So, despite comparable revenue between. entertainment and experiences, the parks. and the cruises are generating twice as. much profit. >> Yep. Yep. And And this is Disney Plus. Like, it should not be the case in. theory that a media content product is a. lower margin product than a physical. in-park [laughter] product except when. you're investing heavily into a.

streaming service. >> Yep. Almost 60% of the profits of the. entire company come from parks and. cruises. >> This is why Josh is CEO. >> Right. Yes. And when I say the entire. company, that includes the $3 billion a. year of profits from ESPN, and it's. still 60% come from parks and cruises. >> Yep. >> And my last observation, I could not. believe this. I thought I was. misinterpreting their annual report. Disney does report subsegments of their. business. Their segment for theatrical.

distribution, that's movies released in. theaters, is $2.6 billion. >> In revenue. >> That is 3%. of their overall revenue. >> Yep. >> From the outside, we think about the. Walt Disney Company as these movies and. box office, and that is not the. business. That's 3% of the revenue of. this company. >> Yep. >> It's streaming's world, and Disney is. just living in it. >> Yep. >> Well, I think that is probably the perfect tee.

up to transition to analysis. And the main question here, which is was. Disney Plus the right strategy? Like, could Disney actually viably have done. anything different back in 2015, 2017, 2019? >> Right. The only way to answer this. question is to answer it with a real. thing they could have done differently. because do nothing was not actually an.

answer. >> Right. Right. >> Like, enjoy the the wonderful profits of. the past was not an option. >> Well, yeah. So, just to start off, clearly what would have happened in the. do nothing category is what happened to. every other major media company, which. is consolidate, get acquired, or slim. down significantly. >> Yep. It's funny that one thing that I I did. want was for them to slim down. significantly. In my heart, I want.

Disney Plus to be a boutique streaming. service with just. high-quality content on it, to not be. messing around with Hulu, to just focus. on the core franchises, and somehow also. to discover a streaming business model. that doesn't require a content. treadmill. That just treats these these. gems as the the special gems that they. are. I don't think that's a business, even. though I like the product. >> I know. I know. I so wanted this to be.

the answer to all throughout our. research of the past several months. of making these episodes. >> As a consumer and as a parent, I want. Disney Plus just to be what it is to me, which is the very best parenting product. ever invented. >> [laughter]. >> in the history of humankind. >> And the laying around on Saturday and. throwing on a Marvel movie thing. >> Yeah, exactly. But, I don't think it's. realistic. >> Yeah. >> And the reason I don't think it's. realistic, people just don't go to the.

movie theater anymore. >> Yep. >> And the old Disney business model and. content model was completely dependent. on that. The way that you seeded new. stories and characters, and. reinvigorated old stories and characters. into the public consciousness, was through. the movie theater. People go once or twice a year for a. huge event movie. They'll go for the Odyssey. They'll go for Toy Story 5. >> I'm going for the Odyssey on Saturday,

and the reason I haven't gone before is. cuz I've been prepping for this episode. and I never had time. But like that is I. went literally to Toy Story 5 and I'm. going to the Odyssey and I have no other. plans to see movies. Oh, Dune 3 I'll go. see. >> Nice. Yeah, yeah, I'll go see that, too. But they're probably not going to go see. a film like Ratatouille, and they're. >> Oh, that's interesting. >> Yep. They're not going to go see. Encanto, and they're not going to go see Tangled, and those franchises are so important to. Disney. So, the only way that Disney can. make sure that the maximum number of.

people in the maximum number of. generations get exposed to those. franchises is to. have a. widely available streaming service. >> You know, it it's interesting. It is. backed up by the numbers. If you look at. the new. Pixar films developed in the last 10. years, 9, 10 years, none of them have set new records. >> Yep. >> The only record setters and real smash. hits are the sequels.

>> Yep. Toy Story 5 is going to be a. banger, but again, you know, five. >> I don't think Pixar's gotten any worse. at doing the Pixar thing. I think these. have been great films that they the. original ones that have come out, but. only generated two, three, 400 million. box office. It's that the the bogey has. moved. Product market fit. is an evolving thing, not just because. the product is changing, but the market. is changing. >> Yeah. >> And the market is not one that goes and. sees Ratatouilles when they enter the. movie theater anymore. >> And so,

what is going to get Ratatouille in. front of consumers? It's either the. Netflix algorithm or the YouTube. algorithm, or it's a first-party streaming service. that Disney owns and can make sure that. Soul or Turning Red or Elemental or. Encanto. gets in front of consumers. >> Even though you can't be that profitable. by running said service. >> Yep. >> But. >> Huh. >> when you're making 10 billion out of the. and that's the IP that's feeding the. parks,

you damn sure need a way to make sure. people see it. >> Yep. Could you have your cake and eat. it, too? Could you run a high-quality. skinny service that reaches, I don't. know, 30 to 50 million people who really. just want the straight drip of Disney, but also make hundreds of millions of. dollars licensing that content. elsewhere, but just kind of spreading it. around to make sure that when you have a. big thing that you think is the. equivalent of a box office hit, you you. do release it on Netflix to their. 350-ish million people?

>> That's the only other viable strategy. that I could think of. Sounds like you. ended up in the same. >> Yeah. >> spot. >> Uh Disney Plus also constrains your. reach. I mean, it was quite bold to. think that you could go and build a. Netflix competitor 10 years after. Netflix started and just bet that the. Disney IP was enough to sort of catch. you up to them, and then also be as good. as they are at going and getting filler. content, even when you have the. high-prestige Disney brand holding you.

back from smashing as much filler. content as you can in. So, the result is you you don't, and you end. up with a subscale streaming platform. So, they do have Disney Plus. It does. have 130 million people subscribed, but. 130 is not 350. And so, your content. that you want to drive people to the. parks and to merch is only reaching 40%. of the people that it could if it were. on Netflix or whoever the biggest. streaming service of the day would be. Yeah, you'd be subservient to them in in.

actually showing it to people, but you. are hamstringing yourself by not giving. your content the most reach that you. possibly can. In the theatrical world, you'd come out with a Disney movie, it. would go to every theater, everyone. would see it. You know, you had reach. In the Disney. Plus world, Disney Plus doesn't actually. give you the reach that being on the. biggest streaming services would give. you. Yep. I still think. >> [sighs]. >> it probably doesn't work and the reason. is the algorithms. Netflix is not the.

movie theater. >> Yeah, but if if your content is. unbelievably compelling, it will rise to. the top. >> Sure, for people that Netflix knows will. be interested in that content. Again, it's not like the movie theater. The. movie theater they rises to the top for. everybody. People go to the movies. >> No, I I disagree with that. In an in an. alternate universe where the Disney. Netflix deal is still in place, whenever. a new Disney movie would get released on. Netflix, it would be a top 10 movie for. sure.

Both organically and if it's a good. movie, then people are going to talk about it. and they're going to tell their friends. and it's going to get more popular and. it's going to bubble up in the. algorithms. >> I. Yes, but even a top 10, top five, top. three movie on Netflix in a given month, what percentage of Netflix's subscriber. base is watching it? I don't think it's. a super high percentage. It's a. supermarket driven by an algorithm. It's. not a movie theater with a curated. finite set of. >> I see.

>> stalls that. are showing a real. >> It's not parallel distributed enough. where like the big content each month. gets 70% of people to watch it, you're. saying. It any given piece of content. tops out at like 10% of viewers or. something like that. >> You're you're competing with Seinfeld on. Netflix. You go to the movie theater, you're competing with whatever else is. out that week in the seven other, you. know, theaters in the movie in the. multiplex. >> Yeah. Yeah, it's interesting. >> All that to say, same as you, I went in. wanting there to have been a different. strategy and I'm actually not sure I. could come up with a better one. >> And any pontificating we could do lacks.

data and Disney has all the data and so. if there were a better strategy, they're. real smart. Like they probably would. have come up with it and they have. access to more information than we do. >> Yep. >> The one thing that I that I don't think. has become true is that Disney Plus. provides a deeper relationship with. customers. It's not like there's any. synergy with the park. Yeah. I mean, they finally unified my login, but it's. not like my park experience is any. different based on my Disney Plus. viewing habits. I'm not even sure I. would want that. I can't think of any of.

the synergies that you you would. actually want. It sounds good in a pitch. to say, "Oh, we have this direct and. personal relationship." But like the. biggest benefit I can tell is what we. already talked about, that you actually. can force content in front of my. eyeballs this way. >> Yeah. >> But this general insight that I didn't. have before starting the episode, that. if you want to operate a streaming. service that gets to scale, and if. you're going to operate a streaming. service, it has to get to scale since. the fixed costs are so high, then you. must have a broad set of content.

That is weird. That it must be a broad set of content. because you must appeal to lots of. people, and therefore you need diverse. content to appeal to all of them. Put. another way, the winning streaming. service will be the kitchen sink. >> Yep. Yep. Yep. And. that's what Netflix is. >> And that's how bundles work. I mean, the. winning thing in TV was the kitchen. sink, the cable bundle. >> Yep. >> That's a kitchen sink. That's what Hulu. is. >> Yep. Again, I don't know that I actually. could come up with a different better.

strategy, but the world that Disney and. all the traditional media companies. entered starting in 2015. is just a fundamentally worse one for. their content. >> To run content businesses. >> Yes. >> Yeah. >> And specifically for Disney because they. got to increase their production output. so much. And the whole brand promise of. the company is founded on scarce content. that's always great. >> Yeah. >> Kind of interesting. Is it a worse world.

for content businesses, but we actually. live in the best world ever for. consumers of content? >> Mhm. >> Like consumers have an immense amount of. choice. You can and you can choose from. everything from someone influencing on. their phone to. high quality cinema available both in. the movie theater in IMAX and on your TV. a mere 45 days after it comes out in the. theaters. >> Right, immense amount of choice for a. minuscule amount of money compared to.

the old world. >> Right. Right. It's It's the best deal. ever for consumers. >> Yeah, YouTube is free. >> All these services combined cost. approximately the same price as a cable. bundle. >> Right. And compare that to going to the. movie theater every weekend. >> The only case I can possibly make that. we live in a worse environment is. the. overexploitation of IP franchises and. and sequelitis. >> Yep. >> But we live in a pretty amazing content. time.

>> Yep. Okay, so I think we should move this. into bull and bear. Bull case and bear case for Disney from. here. Let's start with the bear case. The core. of the Disney flywheel and the ESPN. beautiful affiliate fee business model. are both. compromised and perhaps permanently. impaired. >> Yes. >> That's the core of the bear case to me. >> Yes. Illustrated by this question. Has.

Disney produced a single new franchise. in the last decade that has been a. commercial success? Everything I can think of that did big. dollars after 2016 at the box office and. and I pick 2016 cuz that's when Moana. and Zootopia came out. Everything after that that was big box. office for the company is harvesting. existing IP. >> Yep. Yep. And coincides exactly with. when streaming kind of became king. >> Yeah.

If you wanted to have a big concern, I I. think that's sort of it. What What's the. Lion King of tomorrow or the Toy Story. of tomorrow or the Avengers of tomorrow. Coco and Encanto are probably the best. shots at it, maybe Elemental. But it's interesting cuz those those did. not have big box offices. And so you. sort of have to rely on streaming to. tell you that it's big and number two to. kind of carry it. >> And it's kind of case in point. As. awesome as those movies are and those. franchises are and they're showing up in. the parks, they're not Frozen.

Frozen might have been the last mega. hit. >> Hm. It's fascinating. My other one. is that the three acquisitions, Marvel, Pixar, Lucasfilm, were brilliant. But in retrospect, it's kind of looking like they provided. amazing fuel for about 20 years, but not. for 50 years. >> Yep. >> I mean it is where does Star Wars go. next? And is is Marvel fully exploited now?

And and. the company has bet so big on these IP. flywheels that like, you know, every new. thing in the park is tied to one of. them. All the sequels are tied to them. And when you run out of sequels, I got. to tell you I'm scared for Avengers. Doomsday. I saw the trailer and I was. like, I remember when I used to be really. really excited about this. >> I know. I know. >> And I just have a feeling in my stomach. like I'm just not anymore. >> I'm barely even aware that it's coming, which is even a worse place.

[clears throat] to be. >> Which says a little bit more about the. cultural importance of theaters. Although I bet you knew the Odyssey was. coming. >> Yep. >> I bet you knew Dune 3 is coming. >> Yep. Yep. So, Okay. Full case. I will take the. exact opposite. side of what you just laid out in the. long run. I think these franchises, whether it's. core Disney, Pixar, Lucasfilm, Marvel, are just like luxury brands.

You cannot kill them. They will have. uptimes and they will have downtimes, but they will always come back because. these are the core myths of our society. and they get handed down generation to. generation. And. when they are at their lowest point, that is. the moment that they will turn around. and surprise us in new ways. >> That's a great narrative. I have no way. to push back. And to make your point, at. some point here in the next couple of. years, I can't wait to show my son Star.

Wars for the first time and he's going. to grow up watching Star Wars. And is he. going to care that they made a crappy. Obi-Wan show? No, he'll never see it. They It's It's. still the core myth of his time. In. fact, didn't George Lucas do like a Star. Wars Holiday Special way back in the. '80s and you know what none of us have. ever seen and never affected any of the. myth making? >> The Star Wars Holiday Special. Yeah. Well, and I think it's actually the. story of this whole episode. And it. always comes back. It always comes back. These franchises,

these studios, and and these characters. and stories are going to live forever. >> Yep. All right, I've got a few reasons. for optimism here. >> Great. >> Despite the fact that they intentionally. accelerated the demise of their older. profitable businesses, they're back to all-time highs on total. profits now. They took those kind of. rebuilding years, 5-6 years in the. middle, had a pandemic in the middle of. it that shut down all their parks. But I. I think in 2026 it's looking like.

they'll set a brand new net income. record ever based on the way it's. trending. And just 5 years ago it was negative. during COVID and really kind of dug out. of that hole after losing all this money. in streaming. So, yeah, for for all the. headwinds that we described, they're going to continue to set new. financial records. Now, it's not growing. at the speed that you'd want for a. business to justify. a high multiple or a fast growing stock. price, but in many ways Disney is a.

scale company that has kind of. accomplished its mission. So, I don't I. don't know that I want it to be a 20%. year-over-year grower. I As a consumer, I quite like that it's a 3% or a 5%. >> [laughter]. >> growth company. >> Yeah. I think this might even be a version of. the same thing, too. The Disney parks are also a fundamental. just part of our culture that gets. transferred from generation to. generation. Parents take their kids. And it's just always going to be that. way. >> Yep. The parks are amazing. No.

competitor has the sort of brand. affinity they have, the flywheel. infrastructure they have. Yeah, a lot of. reason to be optimistic. >> All right. Then I've got one more point. to the bull case for Disney. >> Are you going to pitch Josh tomorrow on. doing an acquisition? >> Absolutely. >> [laughter]. >> I But, here's what it is. I think Disney. still is, just like it was when Bob took. over, I think it's still the very best. home for the best characters and stories. and IP franchises in the world when they.

need a home. And there are two extremely obvious ones. to me out there right now. One is Bluey, which, you know, is the. greatest children's show ever made. that's also much more than a children's. show. It's already quasi within Disney. and. >> It's It's got placement in the parks. It's got a deal with Disney Plus. >> Bluey is not Pixar. It's not at that. scale, but it's so many echoes of Pixar. right now.

It's not really capable of continuing. and standing alone on its own. Like Joe. Brum isn't going to make Bluey into a. Disney competitor, but Disney can be the very best steward. for. all the future of Bluey. And Bluey has. so much more running room ahead of it in. terms of what it can be. >> Yep. >> All right. So, that's one. >> There's one. >> And then the other one the opposite end. of the spectrum is Nintendo. Man, Nintendo has fallen on hard times. Do. you know what Nintendo's market cap is.

right now? 50 billion, but down 50% from last year. >> Woah. >> Yeah, I mean, you could pick up Nintendo. for less than the cost of Fox now. Now, I I I don't know that Nintendo would. ever sell. >> Japan would not let it. There's no way. >> Uh but you know, look, they have this. relationship with Universal now. I mean, it is a travesty frankly, that Disney. let Nintendo go to Universal. Nintendo. is like Pixar, Marvel, and Lucasfilm.

combined. I mean, they have some of the. very best IP. in the entire world. They've got three. franchises that can stand toe-to-toe. with anything at Disney in Mario, Zelda, and Pokémon. And then they've got a whole slew of. other great stuff. Donkey Kong, Metroid, Kirby, Star Fox, Animal Crossing. I. mean, there are movies for decades to be. made here plus the video games and then. the parks. I took my girls to Nintendo.

Land at Universal Studios in LA. It was. amazing and it's like 1 50th the size of. Disney world. With the bigger Disney. canvas, Nintendo physical experiences. could be so much more. >> Hm. >> [clears throat]. >> There you go. That's my pitch. >> I like it. Seven powers? >> Powers, yes. >> All right, so listeners, this is the. part of the episode where we use. Hamilton Helmer's framework to discuss. why a company gets to be more profitable.

than its nearest competitor. And there. are seven of them: scale economies, network economies, counter-positioning, switching costs, branding, cornered. resource, and process power. Man, how do we do this this time? >> I think we do it this time for the. streaming era. >> Disney Plus versus streaming. competitors. >> Yep. Yep. Yep. >> So, the pitch of Disney Plus versus. other vertical. competitors, Peacock or Paramount Plus, is that it has higher quality.

durable franchise intellectual property. that those other ones don't really have. >> Yep. Cornered resource. Yep. >> And they have them forever. Just like. the vertical ones, you know, that. Peacock has The Office forever or that. Paramount Plus has Star Trek forever. But, Disney just has a lot more of those. than any of the other vertical ones. The. funny thing that I'm struggling with. here is it's not like they actually do. generate more profits than the real. competitor, than than Netflix. >> Yeah. Well, I think it's really simple.

It all just comes down to scale. economies in the streaming business. This is why Netflix has What did we say? 45 billion in revenue and 13 and 1/2. billion in operating income? And Disney streaming business is. half of that in revenue and barely. profitable. That is the clearest. illustration of scale economies that I. can present to you. >> Yeah. Mhm. So, does the world end up where you have. Netflix, which is the giant. winner-take-all scale economies player.

in paid streaming, then you have. YouTube, which is the giant. winner-take-all one in. ad-supported free creator-led. content instead of professionally. created content? And Disney. can sort of stay subscale cuz it's. subsidized by the profits from their. other businesses. So, it doesn't need to be. as competitive on a like-for-like basis. with Netflix?

>> Yeah. I think Disney's best bet here is. to be a clear number two. >> And they probably should have leaned. into that. Cuz if you're trying to be. number one, then you're going to chase. the content kitchen sink all the way. there. Yep. >> Yep. They need. enough of a content kitchen sink to. be you superior to Peacock, etc. But, frankly, they're already there. Right. They can dial back content production a. lot and let the flywheel heal itself a. little bit. >> Agreed. >> And still be just fine. >> Keep Hulu Hulu.

>> Yeah. >> Hulu and Disney Plus keep getting closer. and closer together and the more they. bundle it and and put the content in. each other's apps. >> starting a uh make Hulu great again. campaign here? >> I'm I'm starting a spin co of Hulu and. Fox assets campaign here. That's what. I'm doing. Keep Avatar in Disney, but. everything else has to go. All right. Quintessence. Listeners, this. is our exercise to wind down the. episode, bring it home, and talk about. kind of the one big idea that stuck with.

us. >> Yep. >> My quintessence is that the environment. changed. >> Yep. >> Disney used to operate in an. unbelievable and easy environment. The. cable bundle allowed ESPN to generate. huge profits basically on autopilot. Partially because of ESPN, all the other. TV channels that Disney offered also. were super profitable. Customers used to. go to the movies super often and Disney. had some of the most profitable and. successful movies. Then to put this on. steroids, they could box and sell the. movies after that and make giant profits.

again. >> Yeah. >> You had everything going for you. >> That was peak traditional media. >> Then the modern environment is the exact. opposite. Cable bundle is getting. destroyed. Disney could no longer. realize those profits. People stop going. to movie theaters, so box office gross. dries up. Streaming turns out to be. expensive to build, expensive to. maintain, expensive to acquire. customers, harder to create events. around. People don't rally around them. like they did movie theaters. It's. expensive to retain customers, it's far. less profitable, and it's not a. replacement for the theatrical revenue.

And ultimately, because of all of this, there's just not as much cushy surplus. everywhere. And you have to make a lot. of really shrewd business decisions if. you want to keep generating the same or. more profits each year. So, where does. this leave us? Disney's going to be fine. And if. managed very carefully, thrive. They're. still going to produce beloved. characters and stories we all love, but. the prosperity from the late '90s and. the 2005 to 2019 era, that was a. complete anomaly due to how good all the.

structural forces around the business. were. And it's just brutal that as a company. they will forever be compared against. those eras. >> Yep. Yep. And. frankly, the management team. in that era. just knocked it out of the park in terms. of seizing those opportunities and and. innovating. All the stuff they added, home video, Broadway, the stores in the. malls, the parks and transforming Walt.

Disney World into a resort. >> You know what it is? You could make. money in media then. >> Yeah. Yeah. Yeah. >> Like, you you had to do clever stuff, but like, there was money to be made. >> room for creativity to thrive. >> There's much less of that now. >> Totally agree. >> Absent a completely different business. model like being Mr. Beast. There's a. whole other universe where you can. create very successful media business. models now, but it's so far from. Disney's universe that it you you can't. even see a path to it. >> Yep.

And that leads right into my. quintessence. I guess I'm. >> [laughter]. >> ever the optimist on this front. Disney is the home of generational. myths. And you'll never kill it. It's what I. said in my bull case. >> Unkillable. >> It'll have its ups and downs, and maybe. we'll never see another era like the. '90s and that was truly peak. Disney from a business and creativity. standpoint. >> And the early 2010s. >> And the early 2010s, too. Yep. Yep. Absolutely. But this is sort of my. point. It goes in 20-year cycles, and I.

wouldn't be surprised if it's back on. top of the world in another 10 years. >> Love it. Carve outs? >> Carve outs. Let's do it. >> This is the part where we talk about. products that we've been loving that. have nothing to do with this episode, but we want to share with you listeners. I have a Warby Parker one to share with. everyone. >> Ooh, fun. >> I have been wearing glasses more. recently, and in the. summer months it's nightmarish to carry. two pairs of glasses with you. So,

what's the answer? Transition lenses. But transition lenses just look. so derpy. >> [laughter]. >> Classically transition lenses are like. there's a treatment on regular glasses, and when you're wearing regular glasses. and they're tinted, it just looks really. bad. So, Warby Parker has a product. called their Transitions XtraActive, which are dark outdoors, they even. transition in the car, and I got them in.

brown, and I think this is the key. unlock, they don't look as dorky when. the tint is brown as when the tint is. just regular gray. And if you get them. in a frame that can kind of play as both. >> indoor outdoor. >> indoor outdoor, then then it can work. So, for the first time in my life I've. been wearing a form of transition lenses. that I like, and. yeah, brown XtraActive. from Warby Parker. >> Nice. Nice. >> At some point, this is like my fifth.

sunglasses carve out, my carve outs will. exclusively be forms of eyewear. >> We should start a acquired retail. >> Yes. >> sunglasses. >> Yep. >> All right. Moving on. I have three carve. outs. So, my first one that I was sure you. were going to take is Michael Arndt's. Toy Story 3. >> it's so good. >> lecture on YouTube. Michael was the. screenwriter for Toy Story 3, and shared. this lecture on YouTube about how story.

works at Pixar. It was part of our. research for this episode. So many. people told us about it. >> And not only did he share a talk, he got. permission to share a bunch of the early. story reels. So you get to see the rough. drafts of what the story was before the. brain trust weighed in and made it. better. >> Yeah. It's so good. Well worth it. It's. like an hour and 20 minutes of your time. if you care at all about story or even. just understanding what goes into making. the magic of a Pixar movie. >> Yeah. >> Go check it out. Um then I have a carve.

out request also related to the episode. So we were in New York recently for the. event that we did with Sierra and I. brought the family and my older daughter. was super excited to go to the Nintendo. store in Rockefeller Center in New York. because she thought that. there in New York at the you know. flagship they might have Princess Peach. costumes. They did not have Princess Peach. costumes. As far as I can tell, Nintendo. does not make first-party Princess Peach.

costumes. This is why Disney needs to. acquire Nintendo because the fruit. [laughter] is just laying there ripe, hanging off the trees. >> Josh, David wants to come in and do. strap planning with you. So. >> Yeah. >> bring him in. >> I don't care if it's Disney or Nintendo. or Universal or whoever, just make some. Princess Peach costumes for my almost. 5-year-old. >> [laughter]. >> And then my last carve out is the Golden. State Valkyries, the WNBA franchise here.

in San Francisco. We've gotten to know. Jess Smith, the president of the. Valkyries. We. have done a few events with her. >> Yeah, she's so great. Actually at the. Century event that we did what last. year? >> Yes. What she and. the whole Valkyries organization and the. Warriors organization, it's the same. ownership group have done with the. Valkyries is nothing short of. incredible. It's the second year of the. franchise. It is. the most successful women's sports.

franchise in the entire world. It's. worth over a billion dollars now. We went for the first time to experience. it. I'd never been to anything like it. It. was one of the best sporting events I've. ever been to, period. My little girls. were so into it. It's like magic. They. were standing up, cheering, applauding, yelling. The arena was sold out. They've. sold out every single game they've ever. played. It's really awesome. If you're. in San Francisco, go to a game. >> All right, I'll have to come down. Well, with that listeners, we have some.

thank yous for everyone who helped us. with this episode. First to our. partners, Sierra. Sierra helps the great. companies of the world build better, more human customer experiences. sierra.ai/acquired. To WorkOS. Start selling to enterprise. customers with just a few lines of code. and build authentication in minutes. instead of months. That's workos.com. To Sentry. Application monitoring. software considered not bad by millions. of developers. That's.

sentry.io/acquired. And also Sentry is our partner for the. annual acquired meetup this year, happening on September 17th. More info. at acquired.fm/meetup. And to Anthropic. Claude is a truly. incredible AI product that thinks with. you, just like it thought with me in. preparing for this episode. claude.ai/acquired. You can click the link in the show notes. to learn more about any of our partners. And as always, all the sources and books. and everything for our this episode are.

linked in the show notes. So, some thank yous. First, as always, to Arvin Navaratnam at Worldly Partners. for his great write-up on Disney, linked. in the show notes. Check out. worldlypartners.com. >> Yep, well, I've got a long list of folks. to thank for all their time and. conversations helping us prepare for. this episode. First to Nancy Lee, to Bob. Iger, to Josh D'Amaro, to Pete Docter, Jim Morris, and all the incredible folks. who hosted us for the day at Pixar,

including Danielle Feinberg, Katherine. Sarafian, and the incredible people who. run the Pixar archives. That was an. experience like none other. To Kristen Bell, the voice of Anna in. Frozen, who helped us think about Disney. animation and Pixar. To our friends Ravi. Nandan at A24, Chase Carey at Liberty. Media and Fox, and to Mitch Lasky at. Benchmark. To Robbie Whelan at The Wall.

Street Journal, who has a book on Disney. coming out later this year. Also to Ben. Fritz and Emily Nelson at The Wall. Street Journal. And you know you have a list, too. >> To Ed Catmull, who needs no. introduction. To Jeffrey Katzenberg, same thing. To Bill Block, who formerly. led Miramax. To Ben Thompson for his. exceptional analysis of Disney over the. last decade that inspired a lot of my. thinking. I think I read every. Stratechery piece. on the company to prepare for this. And. lastly to our friend Shawn Bailey,

former executive at Disney and led one. of the studios there, and has helped us. with a bunch of episodes, but obviously. this one was particularly close to home. So thank you so much, Shawn. If you like. this episode, go check out Disney part. one on Walt's life. Some other episodes. you may like, the NFL, Coca-Cola, Vanguard, or if you're willing to dive. very deep into the acquired back. catalog, we've got Pixar, Marvel, Lucasfilm, ESPN, BAMTech,

a Disney Plus episode from 2019. I may. be forgetting some, but there's. there's plenty of Disney sprinkled. around in the back catalog. >> Yep. >> You can click the link in the show notes. to get access to the companion PDF with. visuals, charts, tables, and key. illustrations from this episode. You can join the email list at. acquire.fm/email. to get access to all the photos that we. talked about and to learn a hint at what. next [music] episode will be. That's. acquire.fm/email. Join the Slack at acquire.fm/slack.

And with that, listeners, we'll see you. next time. >> We'll see you next time. >> Who got the truth? Is it you? Is it you? Is it [music] you? Who got the truth now? >> [music].