Disney: The Renaissance and the Empire

Ben Gilbert opens the episode by describing how much more Disney is than its animated characters. Alongside Mickey, Ariel, Simba, Elsa and the Pixar cast, he lists the Avengers, Star Wars, Winnie the Pooh, the theme parks, cruises and hotels. Since the Fox deal it also owns The Simpsons, Avatar, National Geographic and the whole 20th Century FOX studio. He adds stranger holdings too: what he calls "a privately-owned government inside the state of Florida," a private island in the Bahamas, 10 Broadway musicals, Industrial Light and Magic, Skywalker Sound and the ABC broadcast network.

Ben singles out ESPN as the place where, "unexpectedly," a giant share of the whole company's profits comes from. David agrees. Ben also mentions the SEC Network and past holdings he calls "even more exotic": the NHL's Mighty Ducks, MLB's Anaheim Angels and the 1936 British ocean liner The Queen Mary.

The framing argument is that this stable, storied brand is in the middle of a major upheaval. Disney is moving to streaming through Disney+, Hulu and ESPN, and Ben says the technology and marketing spending behind that shift lost billions for half a decade. Meanwhile its old, very profitable businesses are fading. People go to the movies less, no longer buy films on VHS, DVD or Blu-ray, and are cancelling cable, so profits from channels like ESPN shrink every year. Ben poses the episode's guiding questions in Disney's voice: can the company fight the innovator's dilemma and win, what about the business lasts as technology changes, and can its future be as bright as its past?

David starts the story in 1984, about 18 years after Walt's death. He describes Disney Animation, once the core of the company's flywheel, as "a rotting carcass of its former self" and calls this "the kindest way I could think to put it." EPCOT had just opened in Florida. In David's account it was not Walt's utopian city of the future but a hugely overbudget, underwhelming World's Fair knockoff, and the company had gone hundreds of millions of dollars into debt to build it.

The family was split too. Roy E. Disney, son of Roy Disney, had resigned and was planning a boardroom attack on CEO Ron Miller, Walt's son-in-law. The stock was low and corporate raiders were circling. David says deals were on the table to break up the company: sell the film library, including Snow White, Cinderella and Sleeping Beauty, to MGM, and sell the parks to hotel operators.

To fend off the raiders, management made friendly deals with the Bass family, four oil, gas and real estate brothers from Fort Worth, Texas, and their investment manager Richard Rainwater. The Bass family ended up owning about 25% of The Walt Disney Company, making them its largest shareholders. David notes that this was more than any remaining branch of the Disney family held. Ben calls their position "pseudo-controlling" and argues the dilution was by far the best defense available. He says that in 1983 the stock fell from $82 to $52, and the company was worth more sold for parts than run as a business.

Ben's numbers show how badly the creative engine had broken down. In 1984, parks and consumer products generated a quarter billion dollars of profit, while film and TV made "a mere $2 million." The content business was basically break-even, so the core of the flywheel was "completely broken." Earnings fell 19% in 1982 and another 7% in 1983, which ruled out reading the first drop as a one-time hiccup.

David points to a hopeful thread running through the same years, and he stresses it is not Eisner, Wells and Katzenberg. Half an hour north of the Burbank lot, at CalArts, an institution Walt created and endowed in his will, a basement room called Classroom A113 housed the character animation program. Its students included John Lasseter, Brad Bird, Tim Burton, John Musker, Andrew Stanton, Brenda Chapman and Pete Docter. David links them to later work: Musker to The Little Mermaid, Aladdin and Moana, Stanton to Finding Nemo, WALL-E and Toy Story 5, Chapman as head of story on The Lion King, and Docter as Pixar's current chief creative officer.

David says Walt built CalArts to keep new animation talent flowing into Disney after he was gone, and left about half his estate to fund it. The pipeline worked in that Lasseter, Bird, Burton, Musker and Chapman were all hired straight out of school. But David adds: "And then Disney fired all of them." Ben notes they all eventually came back. David also says that in the same years the young CalArts talent was either being fired or leaving because they felt "this place is cooked."

David tells a story from the late 1970s. On a student trip to Disneyland, John Lasseter's girlfriend told the group the park would one day be filled with characters they created. David says she had no idea "both how right and how wrong she was," and that it would just take a few decades.

In 1984, Roy E. Disney, his business partner and fellow board member Stanley Gold, and the Bass brothers forced out Ron Miller in a boardroom coup on September 7th. With the company in what David calls a "double crisis" and no leader, they found and hired Michael Eisner and Frank Wells within 14 days. David calls them "arguably the greatest two-person management team in media company history." Eisner then brought in Jeffrey Katzenberg, his number two at Paramount, to run the film studios.

Frank Wells was the board's first call. He was a former Warner Brothers president who had recently retired, and he had mentored Stanley Gold at their old law firm. Wells said he could not do the job alone and told them to call Michael Eisner. Eisner had been number two to Barry Diller at Paramount. In David's account, within seven years the pair made Indiana Jones, Star Trek, Saturday Night Fever, Grease, Footloose and Flashdance, during a stretch Ben describes as Paramount being number one.

Eisner became available through timing and internal politics. Diller left Paramount to team up with Rupert Murdoch and launch the FOX TV network. Eisner expected to take over Diller's role as chairman of the studio but did not get it. Ben attributes that largely to internal politics and pay. Eisner's contract owed him a check if he was passed over, and he chose to take it and leave. He already knew Roy E. Disney from the CalArts board.

Ben says the roles changed during negotiations. Wells was first offered the top job, then the two were offered co-CEO roles. Eisner insisted on being the top executive because Disney needed to show the world it was run by a creative executive, while Wells' background was legal, financial and operational. Ben says Wells' response "tells you everything about who Frank is." Wells agreed to be president and number two, provided both men reported directly to the board. They were introduced as CEO and president on September 21st, 1984.

Ben sees the speed of the search as a measure of how desperate the company was. In a matter of weeks it hired two outsiders with no history at Disney and made one of them chairman of the board. The deal included a large compensation package tied to performance, with "massive profit sharing" and big stock option grants. Ben calls it "a complete reboot."

David explains the strategy Eisner brought from Paramount, known as "singles and doubles." Keep production costs low, generally avoid A-list stars and directors, and judge projects on the quality of the script and story rather than on who is attached. Ben adds that this label appealed to shareholders but not to talent, so it was pitched to creatives as "high concept," a unique idea whose originality can be conveyed briefly.

The philosophy was spread through a memo that circulated around Hollywood. Ben jokes that no Hollywood memo leaks by accident, and David agrees they are written for publication. David reads from Eisner's memo:

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.

Ben adds a line from a later Katzenberg memo: "celebrity can open a film, but celebrity can't carry a film." His reading is that stars can be paid to draw an audience, but in the end viewers judge the story, characters and emotion for themselves.

The hosts see both a mismatch and a fit. Ben points out that Disney was not a Hollywood company and that Eisner had never seen Snow White or Sleeping Beauty, even though once he got the job he was "never without his Mickey Mouse tie." David says the newcomers knew nothing about running a theme park. Still, David argues Eisner's philosophy was "pretty simpatico" with Disney's. Walt went big and invested heavily in technology and animation while Eisner made things cheaply, but, as Ben puts it, both were story first.

Early moves alarmed animation loyalists. David says the new team exiled Disney Animation from the Burbank lot to Glendale to make room for live-action producers. Ben describes it from an animator's view: they were moved out of the historic building that had held Walt's office and into what Ben calls a rickety, rundown building.

David argues that the parks gave the first big lift. Ticket prices had been roughly flat since Walt's death because management thought Walt wanted the parks to be accessible, even through the high inflation of the 1970s, and parking still cost a dollar. Ben guesses there was "I don't know, 5 to 10x" of pricing headroom with no effect on demand. David's example is raising parking from $1 to $5. Since operations stayed the same, he notes, the extra money went "right to the bottom line."

David says park profits paid for building the live-action studio. Ben qualifies this: the parks did not generate enough cash for the full slate, so all 75 films made over the next eight years were financed by a partner called Silver Screens.

David argues the strategy worked even better at Disney than at Paramount. He cites Down and Out in Beverly Hills, Three Men and a Baby, Good Morning, Vietnam, Dead Poets Society and Pretty Woman as hits made on modest budgets. Ben says the studio looked for discounted talent, such as actors returning from rehab or up-and-comers, and compares this to a young Warren Buffett's cigar-butt investing. David's main number is that 27 of the first 33 films were profitable. He likens that to making 33 venture investments and losing money on only six. Ben notes that film returns, like books and startups, are normally power-law distributed.

Ben calls the return to animation "a Roy E. Disney special." Roy saw himself as the keeper of Walt's vision and of the flywheel. Great characters in universally relatable animated stories feed consumer products and parks, and the films pass from parents to children. David adds that the company could also re-release classics from the Disney vault for steady cash flow. As part of the deal that brought in Eisner and Wells, Roy made them promise not to fully kill animation and to make him chairman of the animation division under Katzenberg.

Ben describes the state of the division. Disney Animation released only three films between 1971 and 1984, The Black Cauldron had been in development for nearly a decade, morale was low, and even the current animators felt they were not matching the company's past work.

Ben tells a story Katzenberg shared with him at breakfast while he prepared for the episode. On Katzenberg's first day, Eisner pointed to the ink and paint door and asked if he knew what happened there. Katzenberg said no. David supplies Eisner's reply, "neither do I." Ben continues that Eisner said that was where the animated movies were made, "And that's your problem." Ben describes the culture clash: animators saw an "invasion from Hollywood," with suits arriving in a culture he calls "a bunch of wackadoos."

Ben says it took a third person, Peter Schneider, to turn things around. He quotes Schneider on accepting the job:

I knew I could do no worse than The Black Cauldron. You can't fall off the first floor.

In Ben's account, Schneider and Katzenberg questioned every process. Why make their own paint, why use these animation pegs, why not use computers? That sent a message in '84, '85 and '86 that things were changing and that ideas would be debated and refined to make great films. Ben's diagnosis is that the talent existed but was not being led. The old guard was stuck in its ways, and the young staff's ideas were ignored, and none of them had ever been part of a success.

Ben describes the recovery as gradual. The Great Mouse Detective (1986) was "nothing to write home about," and Oliver & Company (1988) got more press and showed the studio could be commercially successful. The breakthrough was to rework the formula and make the films musicals. David puts it this way: "we're going to turn these things from cartoons with music to musicals that are cartoons."

Ben draws a line between earlier films and musicals. Snow White had catchy songs like Whistle While You Work, but it did not follow a stage musical's story structure. Katzenberg recruited lyricist Howard Ashman through an introduction from David Geffen. Ben says that when Ashman heard "Disney" he wanted to work in animation, saying, "I feel there is a connection between animation and musical theater." Ben calls this a unique insight he doesn't think was obvious to anyone else. Ashman brought composer Alan Menken, his partner on Little Shop of Horrors, and their first Disney film together was The Little Mermaid.

David credits these two above everyone else. When the hosts asked who was responsible for the Disney Renaissance, his answer was, "It's these guys." Ben notes they did not make the original story pitch, and David notes they were not executives, but in his words, "They brought the magic."

Ben paraphrases a principle from Ashman. In every great Broadway musical, around the third song, the leading lady sits on something and sings to the audience about what she wants, and the rest of the show has the audience rooting for her to get it. Ben ties this to The Little Mermaid's song about wanting to be where the people are. He also credits Ashman with suggesting the crab be Jamaican, which led to Under the Sea.

The hosts close this section on how long the films have lasted. Ben says these songs stuck with his and David's generation and are why they watched the films so often as kids. David adds that his daughters watch the same movies today. The Little Mermaid came out in 1989, and David calls it "a classic." Here the hosts' memories and family experience stand in for evidence of the films' lasting appeal; no sales or viewing figures are given in this part of the conversation.

Ben opens this stretch by tempering the Little Mermaid story. The film did not blow the doors off at the box office, and it had a fairly large budget. What did change was capacity and morale. Animation, once left for dead with about 150 people, grew its headcount to 550. To show how modest the theatrical result was, Ben cites a piece by Ben Cohen of the Wall Street Journal.

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.

According to that same account, the film only became truly massive when it reached home video in 1990 and kids could watch it on VHS whenever they wanted. Ben's reading is that the box office showed green shoots and real audience love, but it did not magically make the company or produce a pile of profits. David adds context: trust in Disney Animation had eroded because audiences were used to weak output from the studio. The next release, The Rescuers Down Under (1990), was in Ben's words fine, but not one of the great Renaissance films.

Beauty and the Beast is where the theatrical numbers turn. David calls it his favorite of these films, and Ben notes it was the first movie he saw in a theater. Ben credits it as another Howard Ashman project that built on a team that trusted each other and on the new musical style of animation. It grossed $330 million at the box office on a $25 million production budget.

The pattern repeated. Aladdin (1992) grossed around $500 million, a figure David offers and Ben confirms, on a $28 million production budget. Disney was now bringing in stars, including Robin Williams as the Genie. Two years later, The Lion King (1994) had a larger $45 million budget, very sophisticated animation and James Earl Jones in the cast. It brought in $750 million, which Ben describes as the most successful traditionally animated, hand-drawn film in history.

Off the back of this success, Michael Eisner announced a new animation building that would bring all the animators back onto the Disney lot in Burbank. Ben points out a historical echo: the plot of land is where Disneyland was originally meant to go, back when it was planned as a small park of around 15 acres next to the lot, before it grew into a much bigger project.

David raises a puzzle. The Little Mermaid cost $40 million, Beauty and the Beast and Aladdin were cheaper, and even The Lion King only reached $45 million. Ben's explanation is production technology. Everything was still hand-drawn, but the process had already dropped the manual inking step through xerography, which transferred paper sketches directly onto transparent cels for photographing.

The bigger change was CAPS, the Computer Animated Production System, which started in 1990. Ben says Roy E. Disney pushed it hard and saw it as part of his Uncle Walt's legacy of using new technology to advance storytelling. Disney put $10 million in fixed costs into software that did two things. First, it replaced physical paint with digital coloring, where an artist could select a color and fill an enclosed area on screen. Second, it acted as a virtual multiplane camera with an unlimited number of planes. Physical multiplane cameras had been so expensive that during the dark years the studio often shot a single cel over a background instead of complex six-plane setups.

It sounds like I'm describing something that you're like, yes, we've all used MS Paint, but this was rocket science at the time.

Ben cites one result. The Little Mermaid, made before CAPS, had only three multiplane shots, while The Lion King had hundreds. His summary is that the system was better, faster and kept budgets down. When David notes it seems odd for a media company to build software in-house, Ben explains that Disney relied on a partner that was getting very good at early computer graphics: Pixar. David flags this as a thread to return to later.

Ben adds one technical detail. The background of the ballroom dance in Beauty and the Beast, with its sweeping camera pan, was 3D-rendered using Pixar software. Hand-drawn 2D Belle and Beast were then composited over it using CAPS. Ben describes this as the first time any 3D animation appeared in a Disney film.

David frames the Renaissance hits as restarting the flywheel. For the first time since Walt died, the core animated IP at the center of the company was back, and Eisner and Frank Wells extended the model in three new directions. The first was home video. Disney already ran the Disney Vault strategy, re-releasing classics like Snow White and Cinderella in theaters roughly every seven years for a new generation of children. Ben notes that until 1985 there was no way to watch a Disney film outside a theater.

VHS was by then widespread in U.S. households, but according to David the old guard resisted. Roy was opposed and so was the family. Ben calls it heresy. Eisner had to convene the Disney family to approve releasing Pinocchio as the first classic on VHS in 1985. Ben describes it as a deliberately low-stakes choice: Pinocchio had already been re-released in theaters five times, seven years apart, so a sixth release seemed unlikely to cannibalize much.

The test went well. Disney agreed to a limited run of 1.7 million VHS units at a high $29.95 retail price, and they sold out instantly. David puts that at about $50 million in gross merchandise sales with almost no incremental cost beyond a couple of dollars per cassette. The next year, Cinderella confirmed the result. A scheduled theatrical re-release grossed $34 million, and the VHS sold 6 million units. David estimates about $200 million in combined gross revenue and calls it basically another box office smash for free.

The surprise was that home video did not seem to dampen demand. Ben relays Michael Eisner's later point that people buy tapes, then the tapes break or get lost, and audiences are no less excited to return to theaters six or seven years later. Ben argues that the tapes increased demand instead of destroying the asset, and David calls this the core philosophy of Walt Disney's flywheel.

You know what kids are really good at? Losing VHS tapes.

David gives the unit economics with a hedge. He had read that Disney kept between $17 and $20 in profit per tape, which he attributes, tentatively, to its leverage over retailers. Home video quickly became a billion-dollar business and, by David's account, the company's second-largest profit center after the theme parks. That was before Disney began releasing the new hits on tape. Ben argues that having a home video channel made almost any spending on animation worth it and renewed the company's focus on the medium.

The new-release numbers were larger still. Aladdin sold 30 million VHS tapes in 1993, which Ben works out to about $900 million in sales. The Lion King sold 32 million units on VHS in 1995, which David calls the best-selling VHS of all time, and Ben puts at about $1 billion in tapes. David estimates that Disney earned roughly 50% or more in cash flow margin, so each release meant about half a billion dollars for Disney.

The hosts then make a rough, explicitly speculative estimate for The Lion King's first year. On $750 million at the box office against a $45 million production budget, David floats $300 million in theatrical cash flow. Ben, after allowing for distribution and marketing and saying he doesn't know, suggests $250 million. Adding about half a billion from home video gives David roughly three quarters of a billion dollars in cash within a year of release. Ben believes there was little backend for the actors at the time. David agrees that star voice actors like Robin Williams were not paid much compared with live-action stars, which he says fit Eisner's cost discipline.