Disney: The Renaissance and the Empire

14:41Ben Gilbert:Yes, they're written for publication. That's the way this town works. 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.

15:11David Rosenthal: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 story and the characters and the emotion to take it from there. Yep.

15:43Ben Gilbert: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.

15:53David Rosenthal: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.

16:14Ben Gilbert:Of course, of course. But yeah, I 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 would go big and invest tons in technology and animation. And Michael is like, produce things cheap, singles and doubles.

16:40David Rosenthal: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?

16:47Ben Gilbert:And then the unthinkable happens. Michael gets forced out of Paramount at the peak of his success.

16:54David Rosenthal:Well, sort of. Barry leaves, as we talked to Barry about on stage at Radio City Music Hall.

17:02Ben Gilbert:To team up with Rupert Murdoch and launch Fox.

17:04David Rosenthal:Yes, Fox the TV network, because 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.

17:39David Rosenthal:I'll take the check and get out of here. Yep.

17:42Ben Gilbert: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.

17:53David Rosenthal: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 chairman, I think is even what he says. and year 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.

18:27Ben Gilbert:Operational. He has a legal background. Right.

18:29David Rosenthal: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 the company would work for the next decade. Frank says, okay, 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.

18:55Ben Gilbert:Yep. So on September 21st, 1984, Michael Eisner and Frank Wells are introduced as the new CEO and president of the Walt Disney Company.

19:05David Rosenthal:Can we just talk about what dire straits this company was in that they had to go and 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.

19:34Ben Gilbert: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. 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 movie producers that we're going to bring in here and make live action films.

20:05David Rosenthal: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 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 rundown building instead.

20:27Ben Gilbert: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 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 have basically been flat since Walt died. Like the spirit around the company and the ethos of management. It's like, well, Walt wanted this to be accessible to everybody and he set these prices.

21:03Ben Gilbert:So like we shouldn't change them. Nevermind 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 they had so much headroom here.

21:27David Rosenthal:I mean, you can criticize them all you want today for raising prices. But they had, I don't know, five to 10 X of you can raise the price and it wouldn't impact demand for a second back then.

21:38Ben Gilbert:I mean, you can raise the price of parking from$1 to$5 said 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 because 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.

22:14David Rosenthal: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.

22:28Ben Gilbert: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 sized budgets.

22:48David Rosenthal:And they would get actors that would go on to be big, big names. I mean, naming 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, or it was these up and comers. But it was in many ways like a young Warren Buffett strategy of looking for cigar butts that they knew they could get a guaranteed return on.

23:15Ben Gilbert:But it works, man. And 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.

23:31David Rosenthal:Right. Films are like books or like startups power law distributed normally.

23:35Ben Gilbert: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.

23:46David Rosenthal: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.

24:19Ben Gilbert:Re-release the classics in theaters from the Disney vault and you make cash flow on that.

24:24David Rosenthal: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.

24:30Ben Gilbert:Yeah. 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.

24:46David Rosenthal: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.

25:11Ben Gilbert:And this is when all that young talent that's coming in from Cal Arts, Disney's either firing or they're leaving because they're just like, hey, this place is cooked.

25:18David Rosenthal: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. Because, you know, Jeffrey's background is live action, paramount stuff with Michael.

25:47Ben Gilbert:And Michael says, neither do I.

25:49David Rosenthal:He goes, that's where they made the animated movies. And that's your problem. 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 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.

26:26Ben Gilbert:Yep. But at some point, and I don't know, was it Katzenberg? or was it Eisner and Wells who realized like, hey, there actually is an opportunity here?

26:35David Rosenthal:Well, it was both of them and it would take a third guy and that guy is Peter Schneider.

26:40Ben Gilbert:Yes.

26:41David Rosenthal:So his quote when accepting the job is, I knew I could do no worse than the Black Cauldron. You can't fall off the first floor.

26:50Ben Gilbert:That's great.

26:51David Rosenthal:So Peter and Jeffrey come in and they start making changes. And Peter had this license to like examine everything. He's not afraid to break any process. So 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.

27:29David Rosenthal:We want to iterate all in service of making a great film. But this is exactly what they needed. New blood, a complete shakeup. There was good talent there, but they were just sort of like wasting around not being led at all. and there was this sort of dichotomy where 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. So they slowly start to turn it around in animation. You know, at first with films like The Great Mouse Detective in 1986, nothing to write home about.

28:06David Rosenthal:They did Oliver and Company in 1988. 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.

28:29Ben Gilbert: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.

28:38David Rosenthal:from story arc to the type of music. I mean, Snow White had some really catchy tunes, Whistle While You Work.

28:45Ben Gilbert:Hi-ho, ba-ba, yeah, yeah.

28:47David Rosenthal:But they weren't musicals. No. And they didn't follow the sort of musical stage performance story structure. So Jeffrey Katzenberg recruits a guy named Howard Ashman. Yes. Interestingly introduced by David Geffen.

29:00Ben Gilbert:I was going to say, yeah, David Geffen connects them, right? Yes.

29:04David Rosenthal: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.

29:33Ben Gilbert:Yeah. These guys are geniuses. When we really started to dig into the question of the Disney Renaissance, who was responsible? Who created these incredible movies and totally turned around Disney? It's these guys.

29:47David Rosenthal:Yeah, they weren't the original story pitch.

29:50Ben Gilbert:No, and they weren't the executives, but 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.

30:01David Rosenthal: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 does the leading lady want, and 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 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.

30:39David Rosenthal:Howard is also the one who says, hey, that little crab, should we make him Jamaican? And 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 generation's head forever and why we watch the films, I'm sure, a million times when we were kids. Yep.

30:58Ben Gilbert:And why they survive. I mean, my girls are watching these movies today. So Little Mermaid comes out in 1989. It's a classic.

31:05David Rosenthal:But it's not like it blew the doors off at the box office. And it had a pretty big budget. Animation grew its headcount 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.

31:43David Rosenthal:So if you're just looking at box office, you're kind of like, okay, I see green shoots here. We're really on to 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.

31:57Ben Gilbert:Which, you know, look, trust in Disney animation had eroded, right? Like people were used to crap coming out of the studio.

32:04David Rosenthal: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.

32:13Ben Gilbert:And then Beauty and the Beast. I know Lion King's bigger, but like Beauty and the Beast is my favorite of these movies.

32:20David Rosenthal:It was my first movie in theaters. Oh, wow. And this is another Howard Ashman special. Yep.

32:26Ben Gilbert:Yep. It's so good.

32:27David Rosenthal: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 production budget.

32:44Ben Gilbert:Man, Disney animation is back.

32:48David Rosenthal:They do it again the next year. I'm telling you, year after year after year. 1992 with Aladdin. Yep. Box office. $500 million is what I saw, right? That's right. Half a billion. On a$28 million 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. 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. It's very sophisticated animation. You've got James Earl Jones.

33:25Ben Gilbert:How much money did this thing make?

33:26David Rosenthal:This brings in$750 million.

33:29Ben Gilbert:Yeah. Unprecedented at the time.

33:32David Rosenthal: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.

33:47Ben Gilbert:Yes, back to Burbank.

33:48David Rosenthal: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.

34:02Ben Gilbert: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 to make. and then Beauty and the Beast and Aladdin were cheaper. And you said like, oh, production budgets balloon back up with Lion King, but only to 45 million. How are they making these so cheap?

34:21David Rosenthal:Yes. So the process of actually doing the hand-drawn animation, and it all was still hand-drawn in this era, had progressed from the actual inking and painting to kind of skipping the inking step because 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 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.

35:08David Rosenthal: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, multi-plane 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.

35:59David Rosenthal: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. 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 multi-plane camera that could do an unlimited number of planes, not just limited to whatever you could actually do in Walt's era. So you could do it faster and cheaper without actually operating the multi-plane camera. So the Little Mermaid, which only had three multi-plane shots because it was before Caps, by the time you get to the Lion King, it had hundreds.

36:32David Rosenthal:So it's better, it's faster, and it keeps the budget down.

36:35Ben Gilbert:Yeah. Seems odd that Disney, a media company, would develop this computer software technology in-house.

36:44David Rosenthal:Yes. They relied on a partner for that who was getting really, really good at early computer graphics, Pixar.

36:51Ben Gilbert:Yeah. Well, put a pin in that.

36:54David Rosenthal:Yes. And one other just fun, just because 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. Oh, cool. And then they composited, using caps, a 2D hand-drawn bell and the beast dancing. And that is the first time they used any 3D animation in any Disney films.

37:27Ben Gilbert:Oh, that's so cool.

37:28David Rosenthal:Yeah. And if you go back and watch it, you're like, whoa, yeah, the background is computer generated.

37:31Ben Gilbert:Yeah. Oh, that's awesome. Okay. So in 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 timeless IP that Disney Animation is once again creating. So the first, home video.

38:17Ben Gilbert:Man, this is a banger. So the Disney vault already existed. Disney would take their classic movies like Snow White or Cinderella and re-release them in theaters every seven years or so to get a new generation of children exposed.

38:31David Rosenthal:Which was the only way to watch movies. My brain sort of can't understand this since home video has existed my entire life.

38:37Ben Gilbert:No Disney Plus back then, baby.

38:39David Rosenthal:Nope. And until 1985, there was no way to watch a Disney film outside of a theater.

38:44Ben Gilbert:Yep. Yep. So Eisner and Wells and Katzberg, 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 U.S. households. None of the old people at Disney want to do it. Roy is opposed. The family's opposed. It's 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.

39:12David Rosenthal: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 of Pinocchio.

39:25Ben Gilbert:So they agree to a very limited 1.7 million unit run of VHS of Pinocchio. priced at the very high$29.95 at retail per copy. It sells out like instantaneously. So that's$50 million in gross merchandise sales, basically zero incremental production costs except for the couple bucks of printing the cassette tapes. And then they do it the next year with Cinderella, which proves the exact same thing. So they do a theatrical re-release on schedule of Cinderella. does$34 million in box office revenue. And then they put out the VHS home video, 6 million units. So between the two of them, that is$200 million in gross revenue from Cinderella.

40:17Ben Gilbert:Oh man. I mean, it's basically another box office smash like for free that they're getting here.

40:23David Rosenthal:So it's this crazy thing they discovered where it seems to not hurt anything. not dampen any demand because Michael Eisner would sort of later famously point out people buy these tapes, but they break, they lose them. Right, right. It doesn't make people any less excited to go to the theater. You know what kids are really good at?

40:42Ben Gilbert:Losing VHS tapes.

40:43David Rosenthal:Right. 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.

40:53Ben Gilbert: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 because 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

41:32David Rosenthal: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

41:46Ben Gilbert: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.

41:57David Rosenthal:So that's$900 million in sales? Yeah, in sales.

42:02Ben Gilbert: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.

42:13David Rosenthal:That's a billion dollars of tapes of The Lion King sold.

42:16Ben Gilbert:Yes, Disney is getting roughly 50 % or greater cash flow margin out of that. You should think each of those is half a billion dollars in Disney's bank account.

42:27David Rosenthal:Because these films are already quite profitable from the box office because the budgets are low and the box office is super high.

42:34Ben Gilbert:I mean, Lion King is just ridiculous, right? Like$750 million at box office on a$45 million production. So let's say, what does Disney make? $300 million in cash flow out of that theatrical?

42:49David Rosenthal:Minus distribution and marketing expenses. I don't know,$250? Yeah, okay.

42:53Ben Gilbert:Sure. 250. Out of half a billion from home video, you're at three quarters of a billion in cash out of The Lion King within a year of release. And then, well, we'll get to what else comes out of The Lion King in a second.

43:08David Rosenthal: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.

43:13Ben Gilbert: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 is the genie, et cetera, et cetera, they weren't getting paid much. So 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 making real money out of. Yep. So that's home video. Next, they launched Disney retail stores across the country. That's right. Do you remember these? I spent so many weekends at the mall when I was a kid in Disney retail stores.

43:47David Rosenthal:Plastered with Disney stuff, giant piles of stuffed animals is a hallucinogenic experience to go in there.

43:54Ben Gilbert:It was peak 1990s. Yes. So they build more than 750 Disney stores, retail stores 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. And 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.

44:28David Rosenthal: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 since they were sort of grownups by the time the Eisner era hit. Yeah.

44:48Ben Gilbert:I mean, it was the dark period when they were children. Yes. And you got to get children to make this work. Yep. And then they pass it on to their children and et cetera, et cetera. So, okay. Home video, Disney retail. And then three, Broadway. This is an absolute masterstroke. When we first started the research, we were like, oh, 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.

45:15David Rosenthal: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.

45:21Ben Gilbert:Okay. So first they do Beauty and the Beast. That's a big success on Broadway. They end up buying the new Amsterdam Theater. Disney owns that in New York now. Then they put on the Lion King musical. Which is spectacular.

45:33David Rosenthal: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.

45:47Ben Gilbert:It's art. It's back to Walt Disney. It's art and commerce. Like, right? 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 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.

46:32David Rosenthal:Of any medium, the highest grossing is a Broadway musical?

46:35Ben Gilbert:Yep. Of a single, like non-episodic, but like a single piece of media, a single story concept. Lion King the musical.

46:44David Rosenthal:How is it$11 billion? Because even the biggest box office films do$2.8,$2.9 billion. I mean, that's avatar that's avengers end game 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 you double it maybe more yeah how do they get to 11 for a broadway musical it's been 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 london it's in new york it's got the traveling company wow yeah so even spread out over 30 years

47:18Ben Gilbert: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.

47:31David Rosenthal:And they own it outright?

47:32Ben Gilbert:Yeah. I mean, 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 another movie every year. Wow.

47:42David Rosenthal:$11 billion. Yeah. Fascinating.

47:45Ben Gilbert:Absolutely incredible.

47:46David Rosenthal: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? Yes. 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 Super Bowl.

48:13Ben Gilbert: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.

48:32David Rosenthal:Yeah, they're not really resorts.

48:33Ben Gilbert: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 timeshare 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.

49:06David Rosenthal: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 change 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.

49:30Ben Gilbert: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 Marriott's that they're throwing in there.

49:40David Rosenthal: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.

49:58Ben Gilbert: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, which costs$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. There's more to it than that.

50:33David Rosenthal:And also, I'm not sure that Europeans love being called Euro. 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 right 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.

50:55Ben Gilbert: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 almost what's that? 8X operating profit in a decade. A decade.

51:26David Rosenthal:Wow. And it had been declining. I mean, it fell 25 % in two years before they joined.

51:30Ben Gilbert:Yeah. Those three guys didn't just save Disney. They made Disney flourish in a way that Walt only could have dreamed of.

51:39David Rosenthal: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.

51:46Ben Gilbert:Well, I've got the stat to prove it. So by 1994, Disney's market cap, it's$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 Viacom, more valuable than Fox and News Corp. Disney is on top of the world and it's all about to fall apart. 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.

52:23David Rosenthal: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?

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52:41David Rosenthal:Well, that and the fact that it's built by basically the super group of tech from the last two decades with Brett Taylor and Clay Bevor.

52:49Ben Gilbert:Previously, ACQ2 guests?

52:51David Rosenthal:Yes. And the ridiculous group of talent that they have assembled there.

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54:11David Rosenthal: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 slash acquired and just tell them that Ben and David sent you. Okay, so David, they're flying high. What could possibly go wrong?

54:31Ben Gilbert:Oh, man. Well, 1994 is a great year for Disney as a business because 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 hella skiing. This is terrible. Um, on every level for the company and the management team, for all that Michael Eisner was Ben, as you said, like the creative executive and had to be the public face of the Walt Disney Company and the Disney Renaissance. Frank was like the guy behind the scenes holding it all together.

55:25Ben Gilbert:He absolutely was the yin to Michael's yang. And all of a sudden he's gone. Like one day's here, one day's gone.

55:34David Rosenthal:And there's big personalities at the table. Michael's a big personality. Jeffrey's a big personality. And Frank was kind of the peacekeeper, the one who could always relate to everyone, be the intermediary calm people down when they were hot about something.

55:48Ben Gilbert: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 three months later, while Michael is at the annual Allen and 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.

56:27David Rosenthal: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 sort of 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.

56:52Ben Gilbert:Yeah. So then in the middle of this, Katzenberg quits.

57:00David Rosenthal: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 retired or anything.

57:12Ben Gilbert:That was certainly Jeffrey's understanding that Michael had promised him that.

57:16David Rosenthal:Yes. There were other perspectives, including from Roy E. Disney, that, hey, Jeffrey is great in the job that he has running the studios, animation and the other film studios. But he's by no means ready to be the president of the Walt Disney Company.

57:30Ben Gilbert:Which again, at this point is much more than just the film studios. It's all of those other businesses that we talked about.

57:36David Rosenthal: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. And 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 Beauty and the Beast and all these. If you don't think I have 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.

58:12David Rosenthal:Yep. And he doesn't just leave. he leaves and starts a competitor and starts a lawsuit yes yes he also sues the walt disney

58:23Ben Gilbert:company for bonuses that he was owed they end up settling that lawsuit many years later for a reported 280 million dollars 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.

59:05So yeah.

59:07David Rosenthal:Suddenly a very, very formidable competitor.

59:10Ben Gilbert: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, member from CalArts and room A113, who is 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.

59:42David Rosenthal: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 of 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.

1:00:07Ben Gilbert:Yep.

1:00:08David Rosenthal:So kind of from here, what comes out of Disney animation is...

1:00:11Ben Gilbert:Next one is Pocahontas, right?

1:00:12David Rosenthal:Yep. Then Hunchback of Notre Dame, Hercules, Mulan, Tarzan, Fantasia 2000, a movie called Dinosaur in 2000, which I actually remember fondly.

1:00:24Ben Gilbert:I think that was Disney's first 3D animated movie. Yeah, exactly.

1:00:29David Rosenthal:Emperor's New Groove, Atlantis, Lilo and Stitch, and Treasure Planet.

1:00:35Ben Gilbert:Yeah. You know, some of those films, none of them are The Lion King. 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 the Walt Disney Company is himself.

1:00:57David Rosenthal:Yeah. It's the Michael Eisner Company now, through and through.

1:01:00Ben Gilbert:Yeah. So, hey, he was great. Like, he's eminently qualified.

1:01:03David Rosenthal:I mean, the last 10 years have been unbelievable.

1:01:05Ben Gilbert:So, yeah, but it's a big job on top of an already very big job.

1:01:11David Rosenthal:And really what he's saying is, look, 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 just going to be the guy.

1:01:23Ben Gilbert: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 of years. He's been sniffing around the TV networks.

1:01:43David Rosenthal:And wasn't there some regulatory reason why suddenly this was possible?

1:01:48Ben Gilbert: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.

1:02:00David Rosenthal:Right, because the thinking behind this, I think in the 70s when it was enacted, is that these TV broadcast networks, 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 because 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.

1:02:57Ben Gilbert:Yep. So, Michael is sniffing around.

1:03:01David Rosenthal:He's like interested in CBS first, right?

1:03:03Ben Gilbert:Yeah. 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.

1:03:28David Rosenthal:It's always at Sun Valley.

1:03:29Ben Gilbert:Always at Sun Valley. Michael strikes a deal for the Walt Disney Company to acquire ABC Capital Cities for$19 billion, which was the second largest acquisition in history to that point. Man, crazy. $19 billion. That's like quaint today.

1:03:50David Rosenthal:The only bigger one was RJR Nabisco.

1:03:53Ben Gilbert:Yes, yes, which is going to come up here in a sec.

1:03:56David Rosenthal:And I think 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 was there too. CEO of Capital Cities ABC. And they kind of start talking. And I think within days, maybe a week or something, then they've got a deal hammered out.

1:04:15Ben Gilbert:Yep, yep. Yeah, so Warren Buffett in 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.

1:04:29David Rosenthal: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. Yeah, it's like four times bigger. You might say, how is this possible? Well, they had the financial backing of Warren Buffett and Berkshire Hathaway. That's right. That's right. So it's basically using Berkshire Hathaway's capital and the small company of capital cities to sort of jointly buy and control ABC.

1:05:02Ben Gilbert:Yeah. One of Warren Buffett's many 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 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 it's kind of like OK businesses because so much of American viewing time and thus advertising dollars had transitioned over to cable.

1:05:53Ben Gilbert: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. I guess in theory, like Nabisco. Nabisco was going to get some advertising synergies for their CPG products.

1:06:54Ben Gilbert:I don't know. Okay. It doesn't matter because the next year Nabisco gets taken private by KKR in the Barbarians at the gate. The largest acquisition of all time. 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.

1:07:25David Rosenthal:In a complete free ride. Free ride.

1:07:27Ben Gilbert:Doesn't have to lift a finger.

1:07:28David Rosenthal:That's right. That's right. But yeah, ESPN became this juggernaut.

1:07:34Ben Gilbert:And they actually invented a whole second revenue line for cable networks in addition to advertising, the affiliate fee business model.

1:07:44David Rosenthal:Because before 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.

1:08:05Ben Gilbert: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.

1:08:11David Rosenthal:They would pay to be included.

1:08:12Ben Gilbert:Cable operators to carry the channel, right?

1:08:15David Rosenthal: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?

1:08:35Ben Gilbert:The money to buy the sports rights. That may have been how it started. But pretty quickly, though, ESPN and then within ABC, once ABC owns it, they 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 on any given cable operator and say to 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.

1:09:22Ben Gilbert: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.

1:09:34David Rosenthal:Yep. That is pricing power right there. And so once ESPN figures out this business model, it just becomes this incredible juggernaut.

1:09:43Ben Gilbert: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?

1:10:04David Rosenthal: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.

1:10:13Ben Gilbert:$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 flowing into ESPN. Contractually guaranteed. Virtually guaranteed every month.

1:10:33David Rosenthal: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 are very good at value capture. Yes. Yes.

1:10:48Ben Gilbert:So back to the Disney Cap City's ABC deal here in 1995. I don't think, if they're really honest, that Disney and Michael really knew 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.

1:11:15David Rosenthal: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 involved in it in any way ever would have thought that.

1:11:28Ben Gilbert: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? Okay, we'll pull the plug. You sure you don't like that? All right, 20 % it is.

1:12:11David Rosenthal:And they had locked up the sports rights for like a decade for any of the sports they were bidding on. They realized that, oh, we should go get the longest contracts we can so we have the most leverage over these cable companies.

1:12:22Ben Gilbert: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 highlight 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.

1:13:10Ben Gilbert:They're operating out of Bristol, Connecticut.

1:13:12David Rosenthal:Yeah. The cherry on top to all this, too. So Disney is already in the cable game before acquiring ABC Cap City's ESPN. They had launched Disney Channel in 1983.

1:13:25Ben Gilbert:Yep, I think that's right.

1:13:25David Rosenthal:And it was super rocky at first, expensive to get off the ground, way over budget. It 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 collectively bargain with the cable companies. So not only could they command premium rates for ESPN, they would also say, oh, yeah, you want the Disney Channel and A &E and Lifetime. Yeah, those rates are going up too.

1:13:50Ben Gilbert:Yep. Exactly.

1:13:51David Rosenthal:It's almost like a bundle within a bundle.

1:13:53Ben Gilbert:And that's not even getting into ESPN2, ESPN Classic, ESPN News, ESPN Ocho, you know.

1:14:02David Rosenthal:These days, the SEC network, they go nuts.

1:14:05Ben Gilbert: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.

1:14:25David Rosenthal: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 cashflow that they could do other stuff with.

1:15:09David Rosenthal: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 spinning off mountains of cash that we can use in movies, in parks to sort of expand the business.

1:15:22Ben Gilbert: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 that really doesn't.

1:15:35David Rosenthal:Mickey Mouse and SportsCenter do not meet.

1:15:38Ben Gilbert:I mean, they try to put ESPN World of Sports in Disney World and stuff like that. Wide World of Sports. Yep.

1:15:45David Rosenthal:And ESPN Zone.

1:15:46Ben Gilbert:Yeah, that's right. Oh, ESPN zone. Yeah, yeah, yeah.

1:15:48David Rosenthal: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 was 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, which we haven't talked about Bob yet, but we will.

1:16:16Ben Gilbert:Comes into Disney via the Cap Cities acquisition.

1:16:19David Rosenthal:That's right. He worked at Capital Cities.

1:16:21Ben Gilbert:Bob is COO of Cap Cities.

1:16:23David Rosenthal: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.

1:16:39Ben Gilbert:Lay it on me.

1:16:39David Rosenthal:So we're flashing forward. But later on in the 2008 to 2011 timeframe, Disney's cable networks segment, of which analysts believe that three quarters of the cable network segment is ESPN. Yeah. 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.

1:17:14Ben Gilbert: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. Disney does all sorts of crazy dot com stuff. They acquire Starwave, Paul Allen's company after Microsoft. Right here 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 publicly. What? Publicly? Yeah. You can't make all this stuff up.

1:18:01Ben Gilbert:It's, you know, dot-com insanity. And like, hey, okay, great. Give Eisner a pass because 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.

1:18:26David Rosenthal:Other than buying ESPN.

1:18:27Ben Gilbert:Other than buying ESPN. But yeah, I was going to say thanks, but no thanks to AOL.

1:18:31David Rosenthal: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.

1:19:04Ben Gilbert:Yep. Yep. Yep. While we're on bad decisions during this era, Michael does finally hire a president and a 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. That's right. Founder of Creative Artist Agency. This was huge. This was huge news in Hollywood.

1:19:34David Rosenthal:Earth-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 CAA said a lot.

1:19:55Ben Gilbert:And you know what? It also speaks to what Eisner had built and assembled at Disney, especially after Cap Cities. It was the place to be in media.

1:20:07David Rosenthal:And it was almost immediately a horrible decision.

1:20:10Ben Gilbert:Yeah.

1:20:10David Rosenthal:On both sides.

1:20:11Ben Gilbert:Ovitz was an agent. Eisner was an executive. This was a bad idea from the start.

1:20:18David Rosenthal: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 Lovitz'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 skill set he had perfected.

1:21:00David Rosenthal:at CAA.

1:21:01Ben Gilbert:Yep. So Ovitz lasts just over a year at Disney and leaves in December 1996 with a$140 million severance package.

1:21:12David Rosenthal:Because 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$140 million extra dollars. Yep.

1:21:26Ben Gilbert: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 downhill slide. And by the time you get to the end of that period, Atlantis, Treasure Planet, these are bad movies.

1:21:48David Rosenthal:Yeah, and with Capital Cities, ABC, ESPN coming in, it's a little bit confusing how to think about and organize the company. Because before, you had this nice, tidy flywheel business. You make films with characters that people love on these universally relatable journeys. You make money at the box office, home video parks, consumer products, and then you recycle the IP every seven years. It's articulatable in one sense. 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.

1:22:33David Rosenthal:I mean, it can be profitable 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 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 very different things. Yep.

1:22:55Ben Gilbert:Yep. So all this and you know in animations now without Katzenberg 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 of 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 put into the parks.

1:23:32David Rosenthal: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.

1:23:48Ben Gilbert:Or until something happens to the parks, which is exactly what happens in September 2001 with September 11th, obviously national tragedy. But Disney's parks business basically instantly falls off a cliff. I mean, it's like COVID for Disney parks for the few weeks and months after September 11th. All of a sudden, this crown jewel asset within the empire just goes to, you know, close to zero.

1:24:23David Rosenthal:Yeah.

1:24:23Ben Gilbert:Real bad. Yeah.

1:24:25David Rosenthal:I mean, for a few weeks, zero planes are in the air. And for 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.

1:24:40Ben Gilbert:Yep. Yep. So Disney stock falls nearly 25 % in the days after the September 11th attacks. Fairly quickly thereafter, they're forced to close the vast majority of the Disney retail stores that they had opened in malls across America. the operating profit from the whole consumer products division had already been slowly ticking down as no new good ip was coming out of disney animation to sell dolls and costumes now it's down to like a trickle the worst part of all of this for michael eisner at least is that the bass family which to this point are still disney's largest shareholders and michael's strongest supporters among the shareholder base.

1:25:29Ben Gilbert: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 gone. Disney is now trading at depressed levels. I mean, it's almost like 1984 or all over again. Could there be corporate raiders showing up to break up the company?

1:26:08David Rosenthal: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.

1:26:14Ben Gilbert:Exactly. And even ESPN for a short period of time is shaky, like sporting events stop after 9-11. It's a weird time for the country. Yep. And then just when it seemed that things couldn't get any worse at Disney in the years after 9-11, on November 30th, 2003, Roy E. Disney announces that he is resigning from the Disney board of directors, citing, quote, serious differences of opinion about the direction and style of management.

1:26:51David Rosenthal:Man, this really is a mirror of 20 years earlier.

1:26:54Ben Gilbert: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. Ben, 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.

1:27:45Ben Gilbert:Do you know what company?

1:27:47David Rosenthal:Hmm.

1:27:49Ben Gilbert:No. SavePapaJohns.com. No way. Yeah. Save Disney and Save Papa John's. Wow. 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.

1:28:11David Rosenthal:That's right. That's S-E-N-T-R-Y, like someone standing guard.

1:28:17Ben Gilbert: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-unquote, not bad by millions of developers out there.

1:28:35David Rosenthal: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.

1:28:48Ben Gilbert: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 email started.

1:29:25David Rosenthal: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, Sear. 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.

1:30:01Ben Gilbert:Yes, thanks to Sentry for making sure everyone's favorite stuff, including Disney +, which let me tell you, is our favorite stuff in this household, 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 Sentry.io slash acquired.

1:30:25David Rosenthal:And one last thing. Sentry 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 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 slash meetup, and we look forward to seeing you there. Indeed.

1:31:03David Rosenthal: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's 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.

1:31:41David Rosenthal: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.

1:31:57Ben Gilbert:I mean, yeah, well, park attendance was down because of September 11th. Right.

1:32:02David Rosenthal:Michael sort of famously had an eye for making the theme parks great. The sort of second only since Walt.

1:32:08Ben Gilbert:Nobody invested in the parks like Michael Eisner.

1:32:10David Rosenthal:Right, right. For 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. 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.

1:32:47David Rosenthal:This is a brutal letter. Yeah.

1:32:49Ben Gilbert: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. Oh, man. So what is Roy so upset about? Amazingly, Disney animation had continued to go downhill. Right.

1:33:16David Rosenthal: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.

1:33:28Ben Gilbert:Yeah, yeah, yeah. Bolt was the end of this misery in 2008.

1:33:33David Rosenthal: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.

1:33:48Ben Gilbert:Totally. But yeah, back to Roy and this Save 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.

1:34:46David Rosenthal:And the company just spread too thin. It's got two completely different business models doing two completely different things from this merger with ABC.

1:34:51Ben Gilbert: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 gonna save the company 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 gonna save michael eisner's job they all wake up the morning of the investor day eisner's there bob eiger is there by this point in time he's been promoted to be president and COO of the Walt Disney Company.

1:36:00Ben Gilbert: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 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.

1:36:57Ben Gilbert: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?

1:37:32David Rosenthal: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.

1:37:41Ben Gilbert:Yep. Oh, man.

1:37:44David Rosenthal: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.

1:38:18David Rosenthal:In that world, Walt Disney's model was a nice side business to the real moneymaker.

1:38:23Ben Gilbert:Yep, yep. Man, it's all about ESPN, everything that's happening. Yep.

1:38:28David Rosenthal: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.

1:38:46Ben Gilbert:Yeah, which is really ESPN. So on the back of this narrative of how low the Disney company has sunk under leadership of Michael Eisner, which gets ridiculous, but it's the narrative out there. The two major shareholder advisory services back the Save Disney campaign and Roy, and they advise shareholders to vote to withhold their support of Michael Eisner as CEO at the March shareholder meeting. CalPERS, the big California pension fund, they 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.

1:39:38Ben Gilbert: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.

1:39:50David Rosenthal:You don't renew a CEO's contract when 43 % of your shareholders don't want that CEO. Yep.

1:39:56Ben Gilbert: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 announced this. The Disney stock jumps in response. Meanwhile, Comcast stock has been falling. So a few weeks later, Comcast formally withdraws their bid. But this doesn't 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.

1:40:40Ben Gilbert:But now there's a question. Okay, who's going to take over? Yep. 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.

1:41:07David Rosenthal:Well, do you know what the press release says, who it names?

1:41:11Ben Gilbert:Well, it says that there will be external candidates and that there will be one internal candidate.

1:41:17David Rosenthal:Initially, it actually said internal and external candidates. and Bob Iger was reviewing the press release because 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 can't really do this. Are there other internal candidates or is it just me? And they say, it's just you. And he said, well, then you need to put me in the press release because there's going to be a power. Otherwise it's going to be chaos around here. Right. People will need someone to look to for leadership because 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.

1:41:52David Rosenthal:You have to say external candidates and Bob Iger, and they agree and say, okay, then we'll do it.

1:41:58Ben Gilbert: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.

1:42:36David Rosenthal: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?

1:42:44Ben Gilbert:And how did you screw up so badly?

1:42:46David Rosenthal:Yeah. So he realizes that his only chance is to completely reframe the situation.

1:42:52Ben Gilbert: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, a.k.a. 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.

1:43:41Ben Gilbert: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 a brand to be known for that.

1:43:57David Rosenthal:so people know to look to you for that highest quality tier.

1:44:01Ben Gilbert: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 in silicon valley viacom is about to launch a lawsuit against youtube to try and sue it out of existence everybody remembers what just happened to the music industry and napster bob is saying no we are going to embrace technology both to

1:44:52David Rosenthal:produce fresh, new, cutting-edge content the way that Walt did, but also embrace technology as a distribution medium and figure out how to use that to our advantage, not let technology be the reason for our downfall.

1:45:07Ben Gilbert: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.

1:45:47Ben Gilbert: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.

1:46:11David Rosenthal: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 whole second era. Yes.

1:46:31Ben Gilbert:Yeah. 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.

1:46:56David Rosenthal: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. Yes. Disney never again would get to be just Disney. It's the flywheel business and the ESPN affiliate slash advertising cable business. And it's worth it because buying ESPN was this pseudo infinite wellspring of capital to fund everything else. But it cost the clarity.

1:47:32Ben Gilbert:Yep, that's exactly right.

1:47:33David Rosenthal: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. 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, great. And, you know, ESPN is arguments one, two, and three of why was he a great CEO.

1:48:18Ben Gilbert:Yep, yep, yep.

1:48:18David Rosenthal:And also Disney's Renaissance, but like I put that at four below ESPN, ESPN and ESPN.

1:48:24Ben Gilbert:And then the Disney Renaissance. Yeah. Yes. I don't know. You got to count Lion King the musical for something.

1:48:29David Rosenthal:That's true. That's very true.

1:48:33So Bob Iger is named CEO.

1:48:37Ben Gilbert: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.

1:49:22David Rosenthal: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.

1:49:29Ben Gilbert: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.

1:49:54David Rosenthal: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.

1:50:28Ben Gilbert: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.

1:50:41David Rosenthal:And that is why OpenAI, Cursor, Perplexity, Friend of the Show, 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.

1:51:01Ben Gilbert: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 and he's watching all the floats go by and he sees 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.

1:52:02Ben Gilbert: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.

1:52:16David Rosenthal: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, you know, a 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.

1:52:43Ben Gilbert:Yep. Pixar is the spiritual successor of Walt Disney's vision for Disney animation.

1:52:52David Rosenthal: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.

1:53:31David Rosenthal:Although actually, Tron was happening elsewhere in Disney. 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.

1:53:57Ben Gilbert:The time wasn't actually right yet.

1:54:00David Rosenthal:He gets asked if it's going to be faster and cheaper than traditional animation because 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.

1:54:16Ben Gilbert:Wow, I didn't realize it was same day.

1:54:18David Rosenthal: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.

1:54:27Ben Gilbert:Thanks for your meeting. You're fired.

1:54:29David Rosenthal: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.

1:55:11David Rosenthal:His classmates are famed computer scientist Alan Kay, Jim Clark of Netscape and Silicon Graphics, and John Warnock, who founded Adobe.

1:55:23Ben Gilbert:And also, wasn't Nolan Bushnell knocking around there?

1:55:27David Rosenthal:Yep. Past acquired guest, Nolan Bushnell, the famous founder of not only Atari, but Chuck E. Cheese.

1:55:33Ben Gilbert:That's right.

1:55:34David Rosenthal:That's right. 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 push 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 firsthand 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.

1:56:14David Rosenthal: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 one, two, three years. But you want an audience who's used to always going to the movies every week or every month and has a great experience. So if you are a filmmaker, you're rooting for all the other filmmakers to make amazing films to sort of condition your customer set that your product is good and they should have a habit of going to the movies.

1:56:58David Rosenthal:So unlike other industries, being a filmmaker has this like sort of delightful.

1:57:04Ben Gilbert:Yeah, you're sort of collaborators slash competitors.

1:57:08David Rosenthal: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. 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. So this is now where the two paths collide.

1:57:48David Rosenthal:You got John Lassner and Ed Catball, 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.

1:58:22Ben Gilbert:John's like, oh, let me check my calendar. Yeah, I'm free.

1:58:26David Rosenthal: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.

1:59:02David Rosenthal: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.

1:59:14Ben Gilbert:Yeah. So it's interesting. All of this is part of Lucasfilm. Is George interested in MRIs or even like making animated films?

1:59:27David Rosenthal: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 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.

1:59:52Ben Gilbert:This is fascinating, by the way. This all happened because George believed 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 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.

2:00:19David Rosenthal:Yes. Enter Steve Jobs. Steve Jobs. Amazingly, they are first introduced by 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, 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.

2:01:02He wants to get back at Apple using Pixar as the seeds of the company.

2:01:06David Rosenthal:He wants 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 Lucasfilm. 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.

2:01:47David Rosenthal: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 in the future. Then he finds a kindred spirit who happens to be working for George Lucas. George Freaky Lucas, right in between Star Wars and Empire. 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.

2:02:35Ben Gilbert:It sounds like a Pixar movie.

2:02:38David Rosenthal:Doesn't it? It does. This is like, this is why Acquired exists.

2:02:42Ben Gilbert: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.

2:02:59David Rosenthal:Yes, and that customer is Disney. Yes. The first check to Pixar Inc. is from Disney to work with them and create the CAPS system for improving their 2D animation.

2:03:11Ben Gilbert:Yep. This is the beginning of the Disney-Pixar relationship as a vendor.

2:03:16David Rosenthal:As a vendor. So Pixar decides they need to show the world who they are. They make this short little film about a lamp and a baby lamp, and they're playing with a ball, and they show it to industry conferences, because that's what you did with computer graphics back then. And people go nuts.

2:03:33Ben Gilbert:You were texting me. Your dad was at the conference where they showed Luxo Jr.?

2:03:39David Rosenthal: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 saw this at a conference, and I just, 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.

2:04:22David Rosenthal:Yep. So full steam ahead, right? 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 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 someone needs to fund it.

2:05:03So here's what happens.

2:05:06David Rosenthal: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.

2:05:22Ben Gilbert:Oh, wow.

2:05:23David Rosenthal:So right as the Disney Renaissance is happening. That's right. They want him back. That's right. And instead, he says, no, 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 because they just really want him to direct something. And Disney, really it's Peter Schneider who works with Jeffrey Katzenberg, says, hey, forget the 30-minute TV special.

2:06:02David Rosenthal:Let's do it. A whole feature film, Toy Story.

2:06:06Ben Gilbert:Yep. And this is how Toy Story happens.

2:06:10David Rosenthal:So why is this such a crazy idea? I mean, why is it going to cost$30 million? dollars why did the folks at disney think this is such a kind of nutty idea to make a computer

2:06:21Ben Gilbert:animated film yeah it seems on the surface like this should be easier than 2d animation right you're gonna just get computers to do all of it 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.

2:06:46David Rosenthal: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.

2:07:03Ben Gilbert:Yeah, they're creating the universe, basically. It's not just that you're illustrating a still frame.

2:07:09David Rosenthal:Yes. So hilariously, the best explanation of this, the best sort of seven step process is on the inside cover of their S1 IPO prospectus. We'll put it in the email. It has this little animated guide, the Pixar animation steps. So here they are. Step one, storyboards. Over 4 ,000 storyboard drawings are created as the blueprint for the action and dialogue of a feature-length Pixar film. I think the most interesting part of this is they then take the storyboards and put them together in a story reel where they're able to watch it like a movie, even though there's still frames. And they either narrate over it or they do temp dialogue on top.

2:07:49David Rosenthal: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 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.

2:08:29David Rosenthal: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.

2:08:45Ben Gilbert:Yeah.

2:08:46David Rosenthal:And the story and characters all have to work in 2D first.

2:08:49Ben Gilbert:Yep.

2:08:50David Rosenthal: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.

2:09:23David Rosenthal:The characters don't have any of their limbs that move. Their mouths don't move. There are these like lifeless puppets being dragged around. You kind of get the plot, but you get no personality or emotion.

2:09:36Ben Gilbert:Yeah, they're like the 3D equivalent of stick figures.

2:09:38David Rosenthal:Yeah, the animators haven't really performed the characters yet. Yeah. 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 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.

2:10:23David Rosenthal:But you never want to rely on the facial expressions to do the heavy lifting for you.

2:10:28Ben Gilbert: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.

2:10:37David Rosenthal:Yeah. And to your point, they use the same thing here that the animators used in 1938 with Snow White where they film 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.

2:11:21David Rosenthal:So 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. 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.

2:12:00David Rosenthal:And oh my God, suddenly they're gorgeous and emotional. 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. 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.

2:12:37David Rosenthal:In those days, each frame would take an hour or two to render, and they could only render like three and a half 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.

2:12:57Ben Gilbert:Yeah, this last step 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.

2:13:42All right.

2:13:42David Rosenthal: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. 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.

2:14:24David Rosenthal: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.

2:14:38Ben Gilbert:Oh, by the way, Disney keeps all of the intellectual property rights to Toy Story. All the characters, all the merch, etc., etc.

2:14:45David Rosenthal:Disney also will have the right to make sequels if they choose. They will offer Pixar to make 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's Disney. You do it.

2:15:21Ben Gilbert: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. 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.

2:15:45David Rosenthal:Yep. So 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 because 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 it to harken 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 because Pixar doesn't really know what they're doing yet and contractually required.

2:16:23David Rosenthal: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 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 notes that we've taken.

2:17:02David Rosenthal: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, crap. Like, that's our whole company. 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 multidimensional.

2:17:43They come back and it's good enough.

2:17:46David Rosenthal: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.

2:18:15Ben Gilbert:Yeah. So 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 in time, are going to realize that they actually just created their worst nightmare. A true animation competitor to Disney that 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

2:19:21David Rosenthal:we need to go public and we can't go public now because the last four 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

2:19:38Ben Gilbert: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

2:19:48David Rosenthal:You have to be thinking, no, no, no, no. Can't we just do this one and see how it works out? But this is Steve Jobs.

2:19:54Ben Gilbert:Yeah. So Toy Story comes out on November 22nd, 1995, grosses nearly$400 million worldwide.

2:20:04David Rosenthal:It is the Thanksgiving movie for families to see. It made$29 million in its opening weekend, went on to become the number one film in the U.S., And it was the first ever animated film that was a blockbuster that was not created by Disney.

2:20:20Ben Gilbert:And it was the highest grossing film of the whole year.

2:20:24David Rosenthal:Not children's movie, like highest grossing period.

2:20:28Ben Gilbert:Period. So one week later, after Toy Story premieres, on November 29th, 1995, Pixar goes public.

2:20:36David Rosenthal:Right. Which means Steve had been like flying around doing a roadshow, meeting with all these investment bankers. as Toy Story is finishing production and getting ready to go out. It's unbelievable.

2:20:47Ben Gilbert: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 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

2:21:24David Rosenthal:that 140 million they raised makes it the largest ipo of the year larger than net scape yes the numbers on steve he bought the company for five million dollars he actually did dump 54 million into it over nine years. He was like wiring money for payroll and stuff like that. And on IPO day, he owned 78 % of the company.

2:21:46Ben Gilbert:So what's that like 1.2 billion?

2:21:48David Rosenthal:Yes. Pixar alone made Steve Jobs a billionaire on IPO day.

2:21:52Ben Gilbert:Yep. Incredible.

2:21:55David Rosenthal: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...

2:22:10Ben Gilbert:Then Pixar would have gotten crushed by Disney in the next negotiations.

2:22:14David Rosenthal: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 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 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.

2:22:54David Rosenthal: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 I don't actually think Steve realized that at the time.

2:23:08Ben Gilbert:Well, the story I heard was that he did, and it makes sense. Distribution has real costs and marketing, and 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.

2:23:32David Rosenthal: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 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, the relationship with Michael Eisner is... Deteriorating. Kind of deteriorating. Yeah, with Steve Jobs. Disney wants to go direct to video with Toy Story 2. This is actually interesting to flash back 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...

2:24:12David Rosenthal:You don't overexploit the IP. That's exactly right. But also the belief was that sequels can't possibly be as good. You're always making this 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 learn the lesson that, oh, actually, that is a valuable 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 because like the A team's on Bugs Life.

2:24:50David Rosenthal: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 says, OK. So in February of 98, Disney says, Toy Story 2, you are greenlit for theatrical release.

2:25:05Ben Gilbert:But the question is, does it count towards the deal or not?

2:25:08David Rosenthal: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. well, 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.

2:25:33Ben Gilbert:Yes, yes. They make Toy Story 2. Doesn't count. They release it in theaters. It grosses almost$500 million.

2:25:43David Rosenthal:Pixar's highest grossing film yet. And Disney learns all the way to the bank that sequels can be real profitable.

2:25:51Ben Gilbert:Yes, they do. So meanwhile, the backdrop to all of this is Steve Jobs had come back to Apple. By this point in time, Apple had bought Next. Steve is now CEO of Apple, leading the turnaround in 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? is Michael Eisner. So Eisner goes and testifies in front of Congress in 2002 against the technology industry and specifically calls out Apple's RipMix Burn marketing campaign saying it encourages theft of intellectual property via digital piracy.

2:26:47Ben Gilbert:And Bob Iger has a quote about this in Rite 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...

2:27:19David Rosenthal:And regardless, at this point, everyone's sort of banding together and realizing, like, what's going to happen to music is happening to movies next.

2:27:27Ben Gilbert:Yeah, yeah. So he had good reason to be worried here. But, yeah, you probably don't want to come after Steve Jobs in Apple, one of your most important partners at Pixar. So then it gets even worse. Finding Nemo is the next movie in the deal. And as Nemo is coming together, Eisner sees an early screening of one of the reels of Nemo, decides he doesn't like it.

2:27:54David Rosenthal: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.

2:28:00Ben Gilbert:Yep. So Pixar has become a board-level 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. Nevermind 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.

2:28:41David Rosenthal: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. Yeah.

2:29:01Ben Gilbert: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.

2:29:23David Rosenthal:And so even before this, let's say the theaters get, I don't know, 400 million of that. So that's$470 million to Disney Pixar from this film, even before a DVD.

2:29:35Ben Gilbert: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

2:29:57David Rosenthal:era because even netflix isn't streaming yet at this point this is 2004 there's no streaming this this is the peak so we heard in the research that disney and pixar would sell 65 million copies

2:30:16Ben Gilbert: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. Steve and Pixar did get a reality check, and the reality check is that they don't need Disney at all.

2:30:52David Rosenthal: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 counterproposal. 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.

2:31:29Ben Gilbert:Yep.

2:31:29David Rosenthal: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.

2:32:13David Rosenthal: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. 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 will link to this in fact 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.

2:33:08Ben Gilbert:Classic Steve Jobs. That is definitely written by Steve personally. Definitely written by Steve.

2:33:13David Rosenthal: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 7 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.

2:33:44Ben Gilbert:Man, you can bet that that is buried pretty deep in the vault these days. Yes.

2:33:48David Rosenthal:So all this happens in the last breaths of the Eisner administration.

2:33:53Ben Gilbert: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.

2:34:07David Rosenthal:Exactly. Exactly. Both of those movies opened in that quarter.

2:34:11Ben Gilbert: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.

2:34:30David Rosenthal: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 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.

2:34:53Ben Gilbert: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.

2:35:10David Rosenthal: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 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. 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.

2:35:41Ben Gilbert:So Bob calls Steve back and floats this idea. Disney will buy Pixar, keep it fully intact as an independent studio up in the Bay Area, its own email addresses, its own culture, nothing will change. John and Ed will still run it, and they'll also commute down to LA two days a week and take over and run Disney animation.

2:36:01David Rosenthal:And interestingly, Iger also said, hey, Lasseter and Catmull, you can also tell us you think Disney animation is unrescuable or that you think that you'd kill both things by splitting your time and you can just tell us you want to shut down Disney animation and instead Pixar will just become our one studio. 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.

2:36:43David Rosenthal: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 head. And 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.

2:36:55Ben Gilbert:Yeah.

2:36:55David Rosenthal:Yeah.

2:36:57Ben Gilbert: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 % stake in the company, and he'll join the board.

2:37:15David Rosenthal:Much larger than the entire Disney family put together by this point.

2:37:19Ben Gilbert: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 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.

2:38:05Ben Gilbert: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's going to happen to my stake after I die. Bob says, wow, that's a lot. 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. But he makes the decision that the deal is still on. But, oh man, it's devastating. So Steve would end up living another five and a half years after this. But he and Bob and Apple and then eventually the rest of the world knows soon it's just all borrowed time.

2:38:55Ben Gilbert: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 flywheel based competitor to Disney if they'd remained independent? I mean, they had defeated Disney. Like they won on every dimension.

2:39:17David Rosenthal:And why did they sell? And we asked all the Disney people this. 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.

2:39:30Ben Gilbert:Yep.

2:39:31David Rosenthal: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.

2:39:57Ben Gilbert:One, Pixar is what Walt wanted the Burbank Animation Campus to be when he built it in 1940. It is a utopian, creative artist's paradise. There are no suits at Pixar. It's all about the stories and the art and the films.

2:40:23David Rosenthal:And amazingly, by getting acquired, they kept it that way. Yes. I mean, there were no suits in the early days, but all the suits are in Burbank. It just gets to be creative in Emeryville.

2:40:32Ben Gilbert: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 yeah 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 Like 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.

2:41:13David Rosenthal:Right. But without Steve, you could imagine the rest of the Pixar folks looking at each other like who of us has any interest in doing that? We just want to keep making unbelievably good stories and delighting audiences and making the very best feature films we can. Which does not make a Disney competitor.

2:41:30Ben Gilbert:Yep. So Pixar had to find a home.

2:41:35David Rosenthal: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.

2:41:49Ben Gilbert:Yes, absolutely. And this leads to the revival of Disney animation, Princess and the Frog, Tangled, Frozen, Big Hero 6, Utopia, 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.

2:42:17David Rosenthal:Yeah.

2:42:18Ben Gilbert: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 Lorraine have one last dinner with Bob Iger and his wife Willow. And during it, Steve raises a glass and 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 gonna 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.

2:43:20David Rosenthal: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 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.

2:44:03David Rosenthal:Her perspective was like, this actually has a lot to do with why Disney the company works.

2:44:08Ben Gilbert:Yeah. I mean, super validating to hear that. Now, what is it, 20 years after the acquisition?

2:44:14David Rosenthal: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 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.

2:44:51David Rosenthal:Toy Story alone did over$4 billion at the box office, which means$1.5 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$3.5 billion conservatively in very high margin revenue to Disney before you even start thinking about the contribution to Disney parks. Yep. 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. Yeah.

2:45:32Ben Gilbert:Or man, any of that sweet, sweet home video revenue back in the day from Toy Story 1 and Toy Story 2.

2:45:37David Rosenthal:So you get at least half, probably two thirds 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 all the top ones that they're actually watching kids these days are the post 2005 Catmull and Lasseter era films.

2:46:19David Rosenthal: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.

2:46:37Ben Gilbert:Yep. No question. Acquisition absolutely saved the company. So after Pixar, Bob and the Disney board are like, well, that worked well.

2:46:50David Rosenthal:What can we do next? And that sure is in line with Bob's point number one in his three point strategy. Absolutely. Making the very best content.

2:46:59Ben Gilbert: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.

2:47:12David Rosenthal: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?

2:47:24Ben Gilbert:Yes. So, we are in the middle of recording Part 1, and recording days are always very time crunched. 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$4.5 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.

2:48:01David Rosenthal: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 distributors share after the theaters take their cut. That is the$4.5 million number. All the sources we found saying$8 million in revenue to Disney were actually wrong, and Claude figured that out.

2:48:43Ben Gilbert:Which is what led us to 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.

2:48:58David Rosenthal:So 20 minutes later, we were back to recording and we were able to finish the episode both on time and be factually correct, 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 slash acquired. And 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.

2:49:36Ben Gilbert: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 nobody could see what Marvel would end up becoming under Disney.

2:50:05David Rosenthal: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 best characters to other studios. And so the acquisition was weird because it was kind of buying all these leftover characters. You couldn't use X-Men because Fox already had that. You couldn't use Spider-Man because Sony already had that. They already made a film out of Iron Man. And the big dogs, Superman and Batman, were over at DC.

2:50:48David Rosenthal: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, generating nearly$32 billion at the box office.

2:51:37David Rosenthal:That's more than Star Wars. That's more than James Bond. Anything else. Now, it helps to have 37 films plus Avengers Endgame, which was the second highest grossing film of all time, second only to Avatar, I think.

2:51:52Ben Gilbert:Yeah, I think that's right.

2:51:52David Rosenthal:And it's pretty difficult to estimate the profitability on this because 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 Blu-ray era. And then, of course, part of the reason people subscribe to Disney Plus. So Marvel's also been great.

2:52:20Ben Gilbert:Yeah. Marvel's also been fantastic. 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 the greatest story of the last hundred years in humanity, the original Star Wars saga.

2:53:06David Rosenthal:Of myth-making. Of myth-making, yeah.

2:53:09Ben Gilbert:And let's give that a greater canvas to paint on.

2:53:12David Rosenthal:Yeah. It's pretty interesting reflecting back on these, what a tear Iger was on, of identifying tier A plus intellectual property franchises that had running room ahead of them and building the stable. Because now 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. These were stock acquisitions or much of it was, but now they own these things.

2:53:52David Rosenthal: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 returns. Yeah, 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. Because 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, Avengers. Well, we'll get to that in a minute. Yeah, yeah.

2:54:26David Rosenthal:Avengers had 37 films. And there's new Star Wars stuff I like. Andor's unbelievably good. Rogue One is unbelievably good. But, yeah.

2:54:34Ben Gilbert:Yeah. 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 to the core of Disney is much bigger and more diverse than it used to be. Consumer products after Frozen comes out, Disney sells three 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 five years. That is the health of the characters and IP in the company right there.

2:55:21Ben Gilbert: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. Wow. My girls love Taylor, but they might love Frozen even more. Wow. The parks are revived. Disney launches Cars Land in L.A. in 2012.

2:55:53David Rosenthal:So fun fact about that, they were originally before the acquisition of Pixar developing Car Land. And then they bought Pixar and they thought, oh, well, let's just make Cars Land. This is back when the Imagineers independently developed lands that were unrelated to franchise flywheel stuff. Yep.

2:56:16Ben Gilbert: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 billion, up from the$50 billion when Bob took over. Overall revenue grows from$32 billion to$52 billion. Operating income goes from$4.7 to$14.7 billion. Incredible.

2:56:47David Rosenthal: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 two and a half years of cable's then profit. Right. Marvel at$4 billion, that's less than one year in 2009 of cable profits. And Lucasfilm in 2012, their$4 billion was well under a year of cable profits. ESPN kept providing the cash to do all of this.

2:57:30Ben Gilbert:Such a good point. ESPN paid for Pixar, Marvel, and Lucasfilm.

2:57:36David Rosenthal:With about four 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.

2:58:01Ben Gilbert:Yep. So speaking of ESPN, come 2015... And ESPN and all the rest of Disney is really riding high.

2:58:10David Rosenthal:The strategy looks completely genius 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.

2:58:24Ben Gilbert: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.

2:58:52David Rosenthal:Well, an all-time high except for that weird COVID aberration.

2:58:55Ben Gilbert:Right, that we'll get to.

2:58:56David Rosenthal:There was a little short-lived moment there where it went even higher there in 2021. Yep.

2:59:01Ben Gilbert: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 three million subscribers that year, which still meant it had 92 million in total.

2:59:28David Rosenthal:But still, they'd only ever grown. I mean, I think they hit around 100 million and kind of stayed flat for a while because 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. 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. But the numbers are still up into the right, so we're all good.

3:00:05Ben Gilbert: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 dollar 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 index to the cable network landscape gets whacked over 20%.

3:00:50David Rosenthal:And we should say, just so we don't bury the lead, Disney's stock price today is what it was then. It's gone up and down, but it is flat to 11 years ago.

3:01:01Ben Gilbert:Yeah.

3:01:01David Rosenthal:Meanwhile, the S &P 500, David, what did you tell me is up how much in that time?

3:01:05Ben Gilbert:Three and a half X over that time period.

3:01:08David Rosenthal: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 profit's been flat, although 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.

3:01:37Ben Gilbert:Yep. Well, we're about to talk about what happens to the whole rest of the traditional media landscape after this earnings call.

3:01:46David Rosenthal:Yeah, Disney managed to stay independent.

3:01:48Ben Gilbert: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 any industry's 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 of years, Time Warner sells itself to AT &T. AT &T changes its mind, spins out Time Warner, which then merges with Discovery. Viacom re-merges with CBS, Yes, but none of those brands are any good. So they decide to name themselves Paramount after the studio that they own.

3:02:44Ben Gilbert: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.

3:02:57David Rosenthal:Which is the thing that David Ellison kind of founded and runs.

3:03:01Ben Gilbert: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.

3:03:18David Rosenthal: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,

3:03:29Ben Gilbert:with the exception of Disney, have basically all become kind of surfs in the streaming kingdoms of the technology companies, of which Netflix and YouTube are actually the winners here.

3:03:41David Rosenthal: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.

3:04:01Ben Gilbert: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 gotta interact with the ip and the

3:04:48David Rosenthal: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.

3:05:13Ben Gilbert: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.

3:05:23David Rosenthal:That's right. You have no sort of guaranteed distribution. Having Disney +, and we'll talk about all the trade-offs involved in this in a minute because God are their 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 parks can use, which creates these merchandising opportunities, spinoff 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.

3:06:01David Rosenthal:for a hundred 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.

3:06:13Ben Gilbert:Yeah. Disney didn't collect revenue directly from consumers, except in the parks.

3:06:19David Rosenthal: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.

3:06:30Ben Gilbert: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 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. 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?

3:07:09Ben Gilbert:And basically, the only ones within reach are Twitter and Snapchat.

3:07:13David Rosenthal:Everything else is just too big. I mean, these are giant market cap companies.

3:07:16Ben Gilbert: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.

3:07:30David Rosenthal:I think it was all papered and they were going to sign Monday morning and announce it, right?

3:07:33Ben Gilbert:Yep.

3:07:34David Rosenthal:It was like Sunday night that he bailed on it.

3:07:36Ben Gilbert: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. bam tech yes bam tech 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 remembered 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 had come to MLB and was a phenomenon back in Japan.

3:08:15David Rosenthal:I think Nintendo owned the Mariners at this point.

3:08:17Ben Gilbert:That's right. That's right. Nintendo of America owned the Mariners.

3:08:20David Rosenthal:This group actually started advanced media by making websites for MLB baseball teams.

3:08:26Ben Gilbert:And then they got into streaming for Japan and Ichiro.

3:08:30David Rosenthal:Yep. And then their first, when they spun out of baseball, they, I think, stood up the streaming backend for the then fledgling HBO Now.

3:08:40Ben Gilbert: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. It's perfect. So August 2016, Disney buys a 33 % stake in BAM Tech from Major League Baseball with an option to increase that to a majority stake over the next couple of years. The next year in 2017, they announced that they're going to accelerate that option to purchase a controlling stake in BAM Tech. And they announced publicly that they will be launching an over-the-top direct-to-consumer streaming service for ESPN the next year in 2018.

3:09:18Ben Gilbert: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.

3:09:50David Rosenthal:Which Disney at that point was generating about$15 billion 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 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.

3:10:15Ben Gilbert: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.

3:10:26David Rosenthal: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 was like nothing burger. Yeah. All the content that almost no one wants to watch because 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.

3:10:50Ben Gilbert: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.

3:11:12David Rosenthal: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 for all the channels. You're missing out on all of those sort of casual fans or the -

3:11:40Ben Gilbert:The non-consumers.

3:11:41David Rosenthal:That's right.

3:11:42Ben Gilbert: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. 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.

3:12:36David Rosenthal:Well, to combine some of its assets. Basically, Fox did an analysis and looked at everything that had a library value, you know, 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 because 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.

3:13:16David Rosenthal: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.

3:13:42Ben Gilbert:Now, you said Rupert and Fox ran some analysis on their library vis-a-vis streaming. Like, I suspect part of that analysis also led them to the conclusion that, hey, our library just isn't strong enough 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.

3:14:11David Rosenthal:Family Guy. Family Guy is rewatchable. 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.

3:14:22Ben Gilbert:Right. It's not zero, but it's not anywhere near enough to be compelling on its own.

3:14:26David Rosenthal: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.

3:14:42Ben Gilbert: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.

3:15:06David Rosenthal: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. During the regulatory approval process, there's a different ruling that happens around AT &T's merger.

3:15:37Ben Gilbert:That's right.

3:15:38David Rosenthal:That causes Comcast to go, huh, 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.

3:15:58Ben Gilbert:Comcast once again. Disney ends up getting bid up to$71.3 billion. dollars.

3:16:07David Rosenthal: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.

3:16:16Ben Gilbert: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

3:16:52David Rosenthal:Yeah, 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 hurdle to overcome in trying to make this acquisition payback.

3:17:09Ben Gilbert:Yep. And they probably don't get anywhere near$44 billion 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 signups or retentions for the service.

3:17:31David Rosenthal:Wolverine and Deadpool had a big box office win. Avatar now has lands in the parks. Yep. True. Yeah, it's not nothing. 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 had a controlling interest.

3:17:46Ben Gilbert:Yep. So another big part of the strategic rationale for the deal and for the increased price was that Fox had a lot of India assets. That's right. 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 value them in the box acquisition.

3:18:16David Rosenthal: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.

3:18:55Ben Gilbert:Yep.

3:18:55David Rosenthal:But certainly it's the worst of the four big acquisitions, five if you include BamTech.

3:19:01Ben Gilbert: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+. The vault is now open.

3:19:24David Rosenthal:I loved this. It was great. The clarity of product vision of the original Disney Plus is incredibly laudable.

3:19:32Ben Gilbert:Totally. It was a very compelling product. All of Disney IP, Pixar, Lucasfilm, Marvel, the Fox assets coming in. And then they announced the price. $6.99 a month for the initial price.

3:19:50David Rosenthal:Consumers go nuts. Nuts. They beat every early projection that they had to sign up for this thing.

3:19:55Ben Gilbert: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 signups 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 two thirds of the way through the new Star Wars trilogy. Plus they've made Rogue One, which is an amazing, amazing movie.

3:20:32David Rosenthal:High art.

3:20:32Ben Gilbert: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.

3:20:46David Rosenthal:$2.8 billion in box office gross just from that film.

3:20:50Ben Gilbert: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 nine is in trouble, like major trouble.

3:21:49David Rosenthal:Well, episode eight and nine did not have a cohesive vision between the two and had different directors. So episode eight went in this interesting but somewhat not Star Wars-y direction. and then episode nine 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

3:22:17Ben Gilbert:would have been nice yeah yeah but nobody knows this yet because the film doesn't come out until

3:22:22David Rosenthal:december of that year episode eight was so different than the films around it it's like Like no one was talking to each other.

3:22:28Ben Gilbert:And there was no plan for episode nine. 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 ends right as Disney is now saying, oh, hey, Marvel, we need you to start pumping out even more content for the streaming service.

3:22:49David Rosenthal:And it ends in this beautiful cinematic fashion. Like 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 handled the snap. 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.

3:23:21Ben Gilbert:Right. Really inelegant if you're about to follow it up by increasing production 50 % in the studio.

3:23:31David Rosenthal:Yes.

3:23:32Ben Gilbert:Yeah, which they do. And if you do flash forward, the post-2021 movie slate might actually be negative on a theatrical return.

3:23:43David Rosenthal: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. 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 I just spent a decade of my life investing in that.

3:24:20David Rosenthal:And now you're telling me it didn't even matter. 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.

3:24:39Ben Gilbert: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 up.

3:25:28Ben Gilbert:You got to feed the beast. You need to feed the beast.

3:25:32David Rosenthal:Those existing subscribers content or they're going to churn.

3:25:35Ben Gilbert:Exactly. So I want to quote Ben Gilbert here. Oh God, when? From the end of Acquired's 2019 Disney Plus episode, 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?

3:26:16Ben Gilbert: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. You summed it up. This is the problem. That whole strategy of a fire hose of content is completely orthogonal to the flywheel strategy of only the best content very infrequently.

3:26:47David Rosenthal: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 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 gotta 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 consumer way. The biggest issue really is that Disney had something to lose. They had two things to lose.

3:27:32David Rosenthal:They had an existing content library that was highly differentiated. And when you bolt things onto a universe of a differentiated library, it makes the original content less valuable.

3:27:45Ben Gilbert:Yep.

3:27:45David Rosenthal: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.

3:27:56Ben Gilbert:Yeah. It's not as cool as I thought it was.

3:27:57David Rosenthal:Yeah. Because you have something to lose, you actually risk destroying the stuff you had that's great by sort of corrupting it and destroying the competitive advantage that you have in the marketplace.

3:28:09Ben Gilbert: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. Totally. And this is the risk.

3:28:23David Rosenthal:This is why Disney didn't make sequels prior to the 90s.

3:28:26Ben Gilbert:Yep. Now, Pixar proved to them that you can make sequels and they can be great. And you can do it well. But you need to put that same amount of care and effort and time into it.

3:28:33David Rosenthal:Yeah, Pixar does one every seven 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 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.

3:29:06David Rosenthal: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 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.

3:29:24Ben Gilbert:Yep, yep, yep. So that's all the strategic tradeoffs on the Disney film and TV side. Then there's the whole cable ESPN side of the house. Yes.

3:29:36David Rosenthal:Like 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... And cancellations are happening. 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.

3:30:16Ben Gilbert:So basically cable and ESPN enter the end game to use an Avengers term.

3:30:22David Rosenthal:Yes. Yes. So that's on ESPN's revenue side. On the cost side, there's another big problem. Sure, people are churning off cable, but I don't know, that's manageable as long as 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. And the NFL, the NBA, I think they just didn't fully extract everything that they could have for decades.

3:31:00Ben Gilbert:That probably is true. But they were hamstrung because there really weren't any other bidders except ESPN for so much of these rights. because ESPN had this whole scale economy's 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 really, really big stuff that the broadcast networks would come after too. Now other bidders show up in the form of the tech companies.

3:31:32David Rosenthal: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.

3:31:56Ben Gilbert:This is Amazon's NFL deal right here. Yes.

3:31:58David Rosenthal:Yeah. So 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.

3:32:13Ben Gilbert:Yep. This is why ESPN won for many years, and this is why the tech companies are winning now.

3:32:18David Rosenthal:The other thing driving the prices up is as you get a more and more abundance of content online and online-ness, 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.

3:32:48Ben Gilbert:There's a trickle down effect.

3:32:49David Rosenthal:Exactly. Exactly. So in 2006, just look at the Monday night football package that ESPN buys. 06, it was a 1.1 billion. 2011, it was at 1.9 billion a year. And by 2021, it went up to$2.7 billion a year now. And the viewership for Monday Night Football is actually going up, even amidst all this cord cutting. Like, 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.

3:33:47Yep.

3:33:49Ben Gilbert:And to be clear, we've probably undersold ESPN's creativity and innovation in this episode. I mean, highlights, SportsCenter, everything they did was absolutely incredible.

3:34:02David Rosenthal:Pat McAfee show or my God, Manning cast. I cannot wait for fall to watch Manning cast at Monday Night Football. It is the thing I look forward to from, I don't know, July 15th onward.

3:34:14Ben Gilbert: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 Manning cast episodes from last season. The flywheel does not apply here. So you can't build long term value around that original content. And, you know, sure you can with like 30 for 30 and stuff like that, but that's so small a niche at ESPN. The vast majority of the production that ESPN is making has very, very limited shelf life.

3:34:53David Rosenthal:That's so interesting because 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.

3:35:18Ben Gilbert:Oh, yeah. The beauty that we've talked about on this episode that Iger ended up realizing of having these two businesses together was take that stable cash flow and use it to invest in the Disney flywheel.

3:35:28David Rosenthal:Right.

3:35:28Ben Gilbert: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. Right. It's like, no, no, this is a declining asset.

3:35:38David Rosenthal:Right, right, right, right. All right. So take us forward. How does Disney Plus go? How does ESPN Plus go?

3:35:44Ben Gilbert: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.

3:36:03David Rosenthal:Yep.

3:36:03Ben Gilbert:Disney Plus launches in November 2019.

3:36:07David Rosenthal:It's unbelievable that was just sitting there right on app stores and in TVs the moment COVID hit.

3:36:14Ben Gilbert:Yeah. February 2020, Bob Iger retires as CEO. 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 of weeks before we reopen everything here. 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 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.

3:36:58David Rosenthal:I mean, Disney's net income that year was actually negative. Yeah. Yeah. And then the roller coaster goes up.

3:37:07Ben Gilbert:Ben, 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 five years. All of a sudden, COVID happens. Everybody's sitting at home. Disney gets 100 million subscribers within 16 months. March of 2021, they announced they've passed 100 million subscribers, blown way past even their most aggressive projections. The stock goes to the moon.

3:37:42David Rosenthal:Well, that's the other thing. It was zero interest rates. So any good sign the market's amplitude is higher than normal.

3:37:48Ben Gilbert:Yes. Disney's market cap in March of 2021 on this announcement hits$360 billion 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.

3:38:07David Rosenthal: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.

3:38:19Ben Gilbert: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.

3:39:05David Rosenthal:Yeah, you got to advertise a new movie. So they spend tens of millions or hundreds of millions of dollars advertising. But there's no concept of churn. Right. You're not trying to 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.

3:39:44David Rosenthal:They expect like cinema-like TV shows. 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 turn, you have to reacquire them. That's right. And critically, you don't get a second exploitation window the way that a limited edition home video re-release has.

3:40:20David Rosenthal:Theatrical re-releases followed by home video windows, that, oh, that was the business to be in. And sitting here grumbling about it and wishing that that could come back 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 haven't had to deal with before. Yep.

3:40:50Ben Gilbert:So heading into 2022, Bob Chapek does a reorg, basically reorging the entire company around the streaming strategy, consolidates all the studios altogether into one reporting segment, Disney Media, I think, D-Med. 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 JPEG and the company's strategy for addressing them.

3:41:37David Rosenthal: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 cancel 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 oh yes 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 really want to see it. You would have paid it, yeah. And then they promptly closed it. It felt like a company in complete disarray, even streaming challenges and losses aside.

3:42:15Ben Gilbert:After the earnings call, the board meets and fires Bob J. Beck 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.

3:42:35David Rosenthal:Yeah, you and I have been kind of going around and around 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 time where it needed like a caretaker and it needed the exact opposite.

3:43:02Ben Gilbert:Like, oh, yeah, all the pieces are in place.

3:43:04David Rosenthal: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.

3:43:38Ben Gilbert: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 is the previous owner and chairman of Marvel, and his friend and activist investor Nelson Peltz. They launched 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.

3:44:10David Rosenthal:It's so funny. 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 still this cash gusher.

3:44:25Ben Gilbert:I'll take that declining asset. Thank you very much. Right.

3:44:27David Rosenthal: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.

3:44:43Ben Gilbert: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.

3:45:06David Rosenthal:If that's the thinking, then I want them to make a segment for general streaming entertainment, like Hulu with Fox-like assets on it. That should be its own non-Disney company.

3:45:19Ben Gilbert: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.

3:45:34David Rosenthal:I love this deal in so many ways. Great deal for everybody. The NFL gets 10 % of ESPN, which is great if you're ESPN, honestly. It's like, whew, good. They're invested in our success. And then what is the NFL doing in this content production and distribution business? Made no sense. So having NFL Network and Red Zone and all that live over an ESPN, which their core competency, what they're good at, I love it.

3:45:57Ben Gilbert: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 launched the long-awaited full direct-to-consumer ESPN service, ESPN Unlimited. So$30 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.

3:46:29David Rosenthal:No brainer, which actually is done for two reasons that 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 way you get subscribers that you wouldn't have otherwise, the casual fan. The second that I didn't realize that Disney has really keyed into is churn mitigation. The bundle subscribers churn at a much lower rate than any individual streaming service because you're not thinking that hard about how much value am I getting out of this particular app this month.

3:47:06Ben Gilbert: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 quirks. 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.

3:47:44David Rosenthal:David, it's so funny you say they've been crushing it. Visitors are actually down.

3:47:47Ben Gilbert:On a financial basis.

3:47:48David Rosenthal: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 six years after the pandemic. But of course, the amount that they make per visit is way up and has climbed, I don't know, 5 % per year for decades now.

3:48:15Ben Gilbert:Yep. Which, yeah, maybe that is a double-edged sword.

3:48:18David Rosenthal:But maybe it's not. On the other hand, every time I go to Disneyland, it's super full. It doesn't seem to be keeping people away.

3:48:25Ben Gilbert: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. Yeah. And it doesn't keep people away.

3:48:38David Rosenthal: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, if you could get the same amount of revenue from 200 million visitors a year or 100 million visitors a year, you want it more dispersed because you want all 200 of those people imbuing Disney fandom into their core childhood memories.

3:49:03Ben Gilbert: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.

3:49:18David Rosenthal:Wow.

3:49:19Ben Gilbert:And all that leads to February of this year, 2026, where Josh DeMauro, the head of Disney Parks and Experiences, is announced as the next Disney CEO, effective six 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.

3:49:53David Rosenthal: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'd by the time he left. So 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.

3:50:37Ben Gilbert:Interesting, which also is the same thing that happened under Eisner. Right.

3:50:41David Rosenthal:So it's been an exercise for two big CEO stretches, making the company more profitable.

3:50:46Ben Gilbert:Which probably says more about the company back in 1984 than it does over the last 40 years.

3:50:52David Rosenthal: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've stopped reporting it individually, which is around a quarter of the company's revenue and their single largest source of revenue.

3:51:45David Rosenthal: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.

3:52:01Ben Gilbert:And as of now, it is still subscale compared to Netflix. Netflix has 325 million subscribers around the world.

3:52:12David Rosenthal:That's the last time they reported it. It's up since then. So it's nearly triple Disney+. Yep.

3:52:18Ben Gilbert: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?

3:52:28David Rosenthal:Yeah. And that's Hulu and Disney Plus combined.

3:52:31Ben Gilbert:Yep.

3:52:32David Rosenthal:How much operating income does Netflix generate?

3:52:35Ben Gilbert:$13.5 billion. compared to negative for Disney, right?

3:52:41David Rosenthal:No, Disney is now positive on their direct-to-consumer segment, but for a long time it was negative. So Netflix's operating income on streaming, their entire business, is the same as Disney's entire company operating income. Yep, yep. That is a completely new phenomenon. Just to go back in time, In 2017, Netflix's operating income was under a billion. Disney's was 14 billion.

3:53:17Ben Gilbert:Right.

3:53:18David Rosenthal:Disney had that severe dip from COVID, parks closing, investing in Disney +, massive losses from investing in Disney +, and they're almost back to where they were. whereas Netflix over that eight-year stretch has taken their operating income from sub-billion to now equal to Disney.

3:53:37Ben Gilbert:Yep. And look, I mean, streaming is a scale economies business. So the more scale you have, the more operating leverage you should have.

3:53:45David Rosenthal:Yep. So to put numbers on the investment into Disney +, cumulatively, there were$13 billion or so of losses that Disney incurred in building it out in that segment. But David, 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 writing of the ship versus how expensive it used to be to run Disney +, acquire, retain subscribers, all that stuff. Yep.

3:54:17Ben Gilbert:And really, this is what Bob Iger spent the last couple years since coming back from retirement doing.

3:54:24David Rosenthal:Moving over to the parks, like we 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.

3:54:44Ben Gilbert:Yeah, cruises we didn't talk about, but has been a big success for the company.

3:54:47David Rosenthal: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.

3:55:03Ben Gilbert:A strategy not devised by people who actually have young kids.

3:55:08David Rosenthal: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 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 U.S., get excited because 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.

3:55:46David Rosenthal: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,$200,$300 million 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 between production and marketing. Well, that'll come out this December.

3:56:21David Rosenthal: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 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 turn 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 yep so that's like how you can kind of wrap your mind to this giant investment and the price increases in the parks.

3:57:06Ben Gilbert:Yep.

3:57:07David Rosenthal:So overall business,$94 billion in revenue,$13 billion 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. So despite comparable revenue between entertainment and experiences, the parks and the cruises are generating twice as much profit.

3:57:47Ben Gilbert:Yep. And this is Disney+. It should not be the case in theory that a media content product is a lower margin product than a physical theme park product, except when you're investing heavily into a streaming service.

3:58:02David Rosenthal:Yep. Almost 60 % of the profits of the entire company come from Parks and Cruises.

3:58:07Ben Gilbert:This is why Josh is CEO.

3:58:08David Rosenthal: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. And my last observation, I could not believe this. I thought I was misinterpreting their annual report. Disney does report sub-segments of their business. Their segment for theatrical distribution, that's movies released in theaters, is$2.6 billion.

3:58:37Ben Gilbert:In revenue.

3:58:37David Rosenthal:That is 3 % of their overall revenue. 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. It's Streaming's World, and Disney is just living in it.

3:58:56Ben Gilbert: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?

3:59:22David Rosenthal: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. Like enjoy the wonderful profits of the past was not an option.

3:59:36Ben Gilbert: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.

3:59:51David Rosenthal:Yep. It's funny. One thing that 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 gems as the special gems that they are. I don't think that's a business, even though I like the product.

4:00:27Ben Gilbert: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 in the history of humankind.

4:00:50David Rosenthal:And the laying around on Saturday and throwing on a Marvel movie thing.

4:00:54Ben Gilbert: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.

4:01:29David Rosenthal:I'm going for the Odyssey on Saturday. And the reason I haven't gone before is because I've been prepping for this episode and I don't have time. Exactly. 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.

4:01:41Ben Gilbert:Nice. Yeah, I'll go see that too. But they're probably not going to go see a film like Ratatouille.

4:01:45David Rosenthal:Oh, that's interesting.

4:01:47Ben Gilbert: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 and the maximum number of generations get exposed to those franchises is to have a widely available streaming service.

4:02:11David Rosenthal:You know, it's interesting. It is backed up by the numbers. If you look at the new Pixar films developed in the last 10 years, nine, 10 years, none of them have set new records.

4:02:24Ben Gilbert:Yep.

4:02:25David Rosenthal:The only record setters and real smash hits are these sequels. Yep. Toy Story 5 is going to be a banger, but again, you know, 5. I don't think Pixar has gotten any worse at doing the Pixar thing. I think these have been great films, the original ones that have come out but only generated two, three, 400 million box office. It's that the bogey has moved. Product market fit is an evolving thing, not just because the product is changing, but the market is changing. And the market is not one that goes and sees Ratatouille's when they enter the movie theater anymore.

4:02:59Ben Gilbert: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.

4:03:20David Rosenthal:Even though you can't be that profitable by running said service.

4:03:23Ben Gilbert:Yep. But when you're making$10 billion out of the parks and that's the IP that's feeding the parks, you damn sure need a way to make sure people see it.

4:03:33David Rosenthal: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 do release it on Netflix to their 350-ish million people.

4:04:01Ben Gilbert:That's the only other viable strategy that I could think of. Sounds like you ended up in the same spot.

4:04:08David Rosenthal: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 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.

4:04:58Yeah, you'd be subservient to them in actually showing it to people, but you are hamstringing yourself by not giving your content the most reach that you possibly can.

4:05:08David Rosenthal: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

4:05:18Ben Gilbert:that being on the biggest streaming services would give you yep i still think it probably doesn't work and the reason is the algorithms netflix is not the movie theater yeah but if

4:05:31David Rosenthal:your content is unbelievably compelling it will rise to the top sure for people that netflix

4:05:37Ben Gilbert:knows will be interested in that content again it's not like the movie theater the movie theater it rises to the top for everybody. People go to the movies. No, I disagree with that.

4:05:47David Rosenthal: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.

4:06:10Ben Gilbert:I yes but even a top 10 top 5 top 3 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

4:06:31David Rosenthal:are showing a it's not power law distributed enough where like the big content each month gets 70 percent of people to watch it you're saying you know any given piece of content tops out at like 10 % of viewers or something like that.

4:06:42Ben Gilbert:You're competing with Seinfeld on Netflix. You go to the movie theater, you're competing with whatever else is out that week and the seven other, you know, theaters in the movie, in the megaplex. Yeah.

4:06:52David Rosenthal:Yeah, it's interesting.

4:06:53Ben Gilbert: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.

4:06:59David Rosenthal: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.

4:07:11Ben Gilbert:Yeah.

4:07:11David Rosenthal:The one thing that I, uh, 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. Yep. 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 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.

4:07:43Ben Gilbert:Yeah.

4:07:44David Rosenthal: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.

4:08:16Ben Gilbert:Yep, yep, yep. And that's what Netflix is.

4:08:19David Rosenthal:And that's how bundles work. I mean, the winning thing in TV was the kitchen sink, the cable bundle. That's a kitchen sink. That's what Hulu is. Yep.

4:08:28Ben Gilbert: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. 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.

4:08:58David Rosenthal:Kind of interesting. Is it a worse world for content businesses, but we actually live in the best world ever for consumers of content? 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.

4:09:25Ben Gilbert:Right. Immense amount of choice for a minuscule amount of money compared to the old world. Right. Right. It's the best deal ever for consumers. Yeah. YouTube is free.

4:09:37David Rosenthal:All these services combined cost approximately the same price as a cable bundle.

4:09:41Ben Gilbert: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 over exploitation of IP franchises and sequel-itis.

4:09:55David Rosenthal:Yep. But we live in a pretty amazing content time.

4:10:00Ben Gilbert: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.

4:10:28David Rosenthal: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 I picked 2016 because that's when Moana and Zootopia came out. Everything after that that was big box office for the company is harvesting existing IP.

4:10:51Ben Gilbert:Yep. Yep. Yeah. And coincides exactly with when streaming kind of became king. Yeah.

4:11:00David Rosenthal:If you wanted to have a big concern, I think that's sort of it. What's the Lion King of tomorrow or the toy story of tomorrow or the Avengers of tomorrow? Coco and Kanto are probably the best shots at it, maybe elemental. but it's interesting because 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.

4:11:23Ben Gilbert: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. Hmm.

4:11:37David Rosenthal: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.

4:11:56Ben Gilbert:Yep.

4:11:56David Rosenthal:I mean, where does Star Wars go next? And is Marvel fully exploited now? 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 gotta 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.

4:12:26Ben Gilbert:I'm barely even aware that it's coming, which is even a worse place to be.

4:12:31David Rosenthal:Which says a little bit more about the cultural importance of theaters. Although, I bet you knew The Odyssey was coming.

4:12:37Ben Gilbert:Yep. I bet you knew

4:12:38David Rosenthal:Dune 3 is coming.

4:12:39Ben Gilbert:Yep. Yep. So, okay. Bold 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 up times and they will have down times, 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.

4:13:24David Rosenthal: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. 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?

4:13:52Ben Gilbert:The Star Wars holiday special. Yeah. 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 these characters and stories are going to live forever. Yep.

4:14:09David Rosenthal: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, five, six years in the middle, had a pandemic in the middle of it that shut down all their parks. But 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 five years ago, it was negative during COVID and really kind of dug out of that hole after losing all this money in streaming.

4:14:43David Rosenthal:So yeah, 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 know that I want it to be a 20 % year-over-year grower. As a consumer, I quite like that it's a 3 % or a 5 % growth company.

4:15:12Ben Gilbert: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 that parents take their kids. And it's just always going to be that way. Yep.

4:15:29David Rosenthal: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.

4:15:37Ben Gilbert: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. 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.

4:16:19David Rosenthal:It's got placement in the parks. It's got a deal with Disney+.

4:16:23Ben Gilbert: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 stored 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. 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.

4:17:06Ben Gilbert:Whoa. Yeah, I mean, you could pick up Nintendo for less than the cost of Fox now. Now, I don't know that Nintendo would ever sell.

4:17:15David Rosenthal:Japan would not let it. There's no way.

4:17:18Ben Gilbert: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 pokemon and then they've got a whole slew of other great stuff donkey kong metroid kirby starfox 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 one 50th the size of disney world with the bigger disney canvas nintendo physical experiences could be so much more.

4:18:14There you go.

4:18:15Ben Gilbert:That's my pitch.

4:18:16David Rosenthal: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, counterpositioning, 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

4:19:07Ben Gilbert:resource.

4:19:08David Rosenthal: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 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 Netflix. Yeah.

4:19:28Ben Gilbert: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$13.5 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.

4:19:53David Rosenthal: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 because 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.

4:20:30Ben Gilbert:Yeah, I think Disney's best bet here is to be a clear number two.

4:20:35David Rosenthal:And they probably shouldn't lean into that. Because if you're trying to be number one, then you're going to chase the content kitchen sink all the way there.

4:20:41Ben Gilbert:Yep. Yep. They need enough of a content kitchen sink to be 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. Agree. And still be just fine.

4:20:59David Rosenthal:Keep Hulu Hulu. Yeah. Hulu and Disney Plus keep getting closer and closer together. The more they bundle it and put the content in each other's apps.

4:21:07Ben Gilbert:Are you starting a Make Hulu Great Again campaign here?

4:21:10David Rosenthal: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.

4:21:33Ben Gilbert:Yep.

4:21:33David Rosenthal: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. You had everything going for you. That was peak traditional media. Then the modern environment is the exact opposite. Cable bundle is getting destroyed.

4:22:11David Rosenthal: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.

4:22:42David Rosenthal: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.

4:23:09Ben Gilbert:Yep. And frankly, the management team in that era just knocked it out of the park in terms of seizing those opportunities 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.

4:23:32David Rosenthal:You know what it is? You could make money in media then.

4:23:34Ben Gilbert:Yeah. Yeah. Yeah.

4:23:35David Rosenthal:Like you had to do clever stuff, but like there was money to be made. There was 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 you can't even see a path to it.

4:23:59Ben Gilbert:Yep. And that leads right into my quintessence. I guess I'm 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.

4:24:25David Rosenthal:And the early 2010s.

4:24:26Ben Gilbert: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.

4:24:38David Rosenthal:Love it. Carve-outs. Carve-outs. Let's do it. This is the part where we talk about products that we have 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. I mean, 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.

4:25:17David Rosenthal:So Warby Parker has a product called their Transitions Extra Active, 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, outdoor, 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 extra active from Warby Parker. Nice. At some point, this is like my fifth sunglasses carve out. My carve outs will exclusively be forms of eyewear.

4:26:04Ben Gilbert:We should start a acquired retail. Yes. Sunglasses. Yeah. All right. Moving on. I have three carve outs. So my first one that I was sure you were going to take is Michael Arntz's Toy Story 3 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.

4:26:35David Rosenthal: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.

4:26:47Ben Gilbert: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. 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 they're in New York at the flagship. They might have Princess Peach costumes. They did not have Princess Peach costumes.

4:27:26Ben Gilbert: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 is just laying there, right, hanging off the trees.

4:27:38David Rosenthal:Josh, David wants to come in and do strat planning with you. So bring him in.

4:27:44Ben Gilbert:I don't care if it's Disney or Nintendo or Universal or whoever. Just make some Princess Peach costumes for my almost five-year-old. 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.

4:28:08David Rosenthal:Yeah, she's so great. Actually, at the Century event that we did, what, last year?

4:28:11Ben Gilbert: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've 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.

4:28:53Ben Gilbert:It's really awesome. If you're in San Francisco, go to a game.

4:28:56David Rosenthal:All right, off 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 slash 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 slash acquired. And also Sentry is our partner for the annual acquired meetup this year happening on September 17th.

4:29:38David Rosenthal:More info at acquired.fm slash 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 slash 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 this episode are linked in the show notes. So some thank yous. First, as always, to Arvind Navaratnam at Worldly Partners for his great write-up on Disney linked in the show notes. Check out worldlypartners.com.

4:30:12Ben Gilbert: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 DeMauro, to Pete Docter, Jim Morris, and all the incredible folks who hosted us for the day at Pixar, including Danielle Feinberg, Catherine Serafian, 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.

4:30:58Ben Gilbert: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. I know you have a list too.

4:31:09David Rosenthal: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 Sean 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, Sean. If you like this episode, go check out Disney Part 1 on Walt's Life.

4:31:46David Rosenthal: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, film ESPN, BAM tech, uh, a Disney plus episode from 2019. I may be forgetting some, but the, 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 acquired.fm slash email to get access to all the photos that we talked about and to, uh, learn a hint at what next episode will be.

4:32:27David Rosenthal:That's acquired.fm slash email. Join the Slack at acquired.fm slash Slack. And with that, listeners, we'll see you next time.

4:32:34Ben Gilbert:We'll see you next time.