This Day in Pixar History: Development of the First Cars Film

Pixar's next film, Cars 3, will be in theaters exactly 4 months from today, and the marketing for the film is definitely heating up! We've had that shocking teaser trailer plus the special preview that took place at the Detroit Auto Show (check out the great write-up from the Pixar Post). I can't wait!

While waiting for Cars 3 to arrive, I've been spending time watching the two earlier Cars films and their bonus features. I've previously written about my love for the original Cars, including a couple of my own trips along the Main Street of America, but I thought it would be good to explore one specific aspect of the film's development. I very briefly mentioned this in the last line of a post back in 2013 but only recently thought about the impact it must have had on the company and employees.

The development of Cars can be traced back to 1998 near the end of production for A Bug's Life, when story artist Jorgen Klubien began development on a concept referred to as The Yellow Car. The story really took off in 2001 after director John Lasseter took his family on a cross-country road trip that included driving on Route 66. As with all Pixar films, there was plenty of research done. For Cars, that included a couple of road trips along Route 66, which were highlighted in the Route 66 Memory Lane bonus feature on the Cars DVD and Blu-Ray. In the feature, you can hear John's passion as he recounts many of the people and locations they saw as they traveled the Mother Road, and I loved seeing how much of the design, look, characters and even the pacing of the film were influenced by what they experienced. At the end of the feature, John states that Cars is the most personal movie he's ever made. I don't think there's any doubt that these films are a labor of love.

So imagine what it must've been like for Lasseter and the rest of the crew that as they were pouring their heart and soul into this film, they were on the verge of losing the rights and access to not only the characters in this film but all the characters they'd brought to life in their previous 6 films.

To elaborate, during the time Cars was being developed, Steve Jobs and Pixar had tried to renegotiate their 10 year, 5 film Co-Production agreement with Disney. Cars was the last of the 5 films to be delivered under the agreement. The negotiations started in early 2003, and 10 months later, on January 29, 2004, Pixar announced they had terminated the negotiations and would find a new partner to distribute their films.  According to their existing agreement, Disney retained rights to all films and characters created under the agreement. In addition, Disney could create sequels or use the characters in their theme parks. Pixar would have the opportunity to participate in, and receive compensation for, any sequels, but if they declined to participate, the final decision to move ahead resided solely with Disney. In fact, near the end of 2004 Disney announced they were moving ahead with a Toy Story 3 sequel without the involvement of Pixar.

This had to be one of the most nerve-racking times for the employees at Pixar. Throughout the last 2 years of production, they were working on a film knowing that once complete, they would hand it over to Disney and lose the rights to their work. I can't imagine how difficult it must have been to come into work knowing this and still being able to keep their focus, and produce a film full of fun and heart, one with great messages of loyalty and the importance of slowing down and enjoying life.

I think for many companies this would have been too much. The devastation of losing all of your creations of the past 15 years, and the uncertainty of what the future held would've torn them apart. But in Pixar's case, it seems it had the opposite effect. I think it solidified the company and brought everyone together. They may not have known what was ahead, but they put all their passion and focus into their work and each other, committing to come up with better stories and characters. They maintained their optimism for the future.

I just love this segment of old Route 66, near Auburn, IL.

In the end, things turned out well. In the fall of 2005, Disney CEO Michael Eisner resigned from the Walt Disney Company, and President and Chief Operating Officer Bob Iger took over. Immediately, relationships between Disney and Pixar began to improve. And in late January, 2006, almost exactly 2 years after announcing they were terminating their agreement with Disney, Pixar announced it would be merging with its larger partner, which took place 4 months later, just one month before the release of Cars.

I think as proof of the positive impact these events had on the company, just look at the domestic box office totals (from Box Office Mojo) and critical success (from Rotten Tomatoes) of the 4 films Pixar released after Cars:

Ratatouille (2007) - $206M, 96%
WALL•E (2008) - $224M, 96%
Up (2009) - $293M, 98%
Toy Story 3 (2010) - $415M, 99%

As you can see, each consecutive film had higher results than its predecessor. This is how one turns adversity into success, and is another example of the strength of Pixar's people and culture.

Toy Story Theatrical Release, Pixar's IPO and the Brilliance of Steve Jobs

In honor of the 20th anniversary of the theatrical release of Toy Story (which occurred exactly 20 years ago today), I want to do some historical looks at Pixar and its employees back around the time of Toy Story's release. This post is one I've wanted to write for quite a while.

I don't think there's any argument that Steve Jobs was a marketing genius. I think on his return to Apple in 1996, he had a well thought out strategy for the company and its products and services. To me it's clear he knew exactly where he wanted the company to be in the future and he laid it out perfectly.

But his genius went beyond marketing, which he demonstrated at Pixar. Perhaps his most brilliant and boldest move was taking the company public only a week after the release of their first feature film, Toy Story. To understand, companies usually don't try to access the public markets until they are on firm ground and have a history demonstrating that their business plan is working. Without this confidence, investors will not give the company a high valuation and likely shy away from investing.

Pixar's situation in late 1995 couldn't be farther from solid ground. This was a company that had already lost approximately $50 million. They were going to release their first ever film, never having made anything longer than commercials and some short films. In addition, they were using this new technology called computer generated animation. Everything screamed "Stay Away!"

But Jobs had reasons for his timing, much of which was explained in Ed Catmull's excellent book, Creativity, Inc. To take a step back, Jobs wanted to turn Pixar into a world-class studio. To do this would require a lot of money, more than the 10%-15% of profits they were receiving under the current Feature Film Agreement with Disney. He knew they would need a new agreement with Disney that evenly shared profits between the 2 partners. But he also knew that Disney wasn't going to just hand Pixar such generous terms - Jobs needed the financial footing necessary so that they could leave Disney and go it alone if the 2 companies couldn't come to agreement.

Jobs knew he had the best artists and computer animation engineers assembled at Pixar. He'd also seen how strong of a story John Lasseter and the creative team had constructed.  Then, in the spring of 1995, Jobs saw the power of Disney marketing with the release of Pocahontas. With that knowledge, all the pieces were in place to give him confidence that Toy Story would be a success.

He knew if Toy Story was as big of a success as he expected, Michael Eisner would immediately want to extend their agreement rather than risk Pixar going independent and becoming a formidable competitor. With the film's success he knew an IPO would also be a success, giving him the financial footing he could utilize in his negotiations with Eisner. In his mind, Jobs knew Eisner would have no choice but to agree to his terms.

The Pixar management team in 1995: Lawrence Levy, CFO; Ed Catmull, CTO; Steve Jobs, CEO;
John Lasseter, VP of Creative; Sarah McArthur, VP of Production

By the fall of 1995 the board was set and the game played out exactly as Jobs envisioned. Toy Story was the #1 film its opening weekend and for the year, going on to make almost $362 million worldwide and garnering a 100% score on Rotten Tomatoes. A week after its release, Pixar went public in a very successful IPO, raising almost $140 million for the company and valuing Pixar at close to $1.5 billion. Within weeks, Eisner called to renegotiate their agreement, which led to Disney and Pixar signing the Co-Production Agreement, a 10 year, 5 film agreement entitling Pixar to 50% of all theatrical and merchandise revenue.


I marvel at how Steve Jobs was able to so clearly see the future and predict how Michael Eisner would respond. This demonstrates a deep insight not only in business logic but also human behavior, something I don't think Jobs gets enough credit for. Because of his vision, he was able to put Pixar on the path of stability and accomplish his goal of creating a world-class animation studio.

Pixar News Articles for January 13, 2015

I'm thinking of starting a new series of posts to highlight cool and interesting Pixar-related news articles, interviews and other events. There's so much going on with Pixar, I'm hoping these posts will capture a good portion of the interviews and technology events that are occurring. If this works out I hope to have a post every week or two.

To start with, Fortune has had a couple of excellent posts recently. As part of their recent cover story on The Walt Disney Company, they interviewed Disney and Pixar president Ed Catmull, which covered Pixar's spin-out from Lucasfilm, their merger with Disney and the use of technology in animated films. They also did an in-depth piece on Disney CEO Bob Iger and his role as CTO, which not only covered Pixar but Marvel, Star Wars and technological changes in their theme parks.

Pixarian Colin Levy tweeted a link to an article on short films that launched the careers of famous directors. The article included John Lasseter for the short film Luxo, Jr., which was released in 1986, the year Pixar spun out of Lucasfilm and became a standalone company. The article itself linked to an interview Entertainment Weekly did with Lasseter which went into more detail of the making of Luxo, Jr. and other early short films like Red's Dream and The Adventures of André and Wally B.


Did you see the pre-production artwork for the Toy Story 3 film that never got made? Former Disney artist Jim Martin has released a number of pieces of concept art from when he was at Circle 7 working on the sequel. This was back before Disney bought Pixar and there was a lot of animosity between the 2 CEOs. Fortunately Bob Iger became CEO, purchased Pixar, and put Lasseter and Catmull in charge of animation of both companies. The new leaders immediately put a halt to the sequel and closed down the division.

There have been a couple of recent videos demonstrating the story process at Pixar. First, CGMeetUp posted a video of Monsters University Head of Story Kelsey Mann showing how to pitch a movie scene. The post contains a number of links to other behind-the-scenes clips from Monsters University.

Second, Story Supervisor Matthew Luhn posted an old video of Andrew Stanton and the late Joe Ranft demonstrating the pitch process, with Ranft pitching an entire scene from Toy Story. Note how Joe is pitching the "old fashion" way, standing up at a board with story cards pinned to it, while Mann does his pitch digitally using a computer.

Although Luhn has only been on Twitter for a short time, he has quickly become one of my favorite people to follow. Many of his tweets contain great behind-the-scenes videos and helpful tips. I highly recommend following him!

There are a couple of cool auctions going on at the moment. The first, which I wrote about this weekend, is the Art to Heart fundraiser to raise money for helping those impacted in the Philippines by Typhoon Haiyan. Many of the original art pieces were created by past and current Pixarians such as Ronnie del Carmen, Ricky Nierva, Matt Jones, Dice Tsutsumi, Robert Kondo, Chris Sasaki, John Hoffman and others. This is beautiful artwork and it's going for a great cause.

The second isn't Pixar related but is still wonderful. Cartoon Brew recently posted about an auction that the stop-motion studio Laika is holding on February 12. It doesn't sound like this is an online auction but will include puppets and props from all 3 of their films - Coraline, ParaNorman and The Boxtrolls. A portion of the proceeds will go to The Art of Elysium organization.

And for something fun to end on, David Lally tweeted some simulation bloopers from the making of Brave!

If you come across any Pixar-related interviews or news articles, please send them my way and I'll include them in a future post.

Disney Animation, Frozen and the Influence of Pixar

@Disney

A few days ago, I received a tweet from a follower. We had both recently seen Disney's latest animated film, Frozen, and had been singing its praises. It has a strong story with great characters, stunning effects and really good music, for me rivaling the music from The Lion King. One of the tweets in our conversation was:

Do you see how Pixar’s mentality/mindset is creeping into Disney? :)

I was a bit guarded in my response. Yes, since Disney bought Pixar in 2006 and put John Lasseter and Ed Catmull in charge of both Pixar and Disney Animation, we have seen a steady improvement in the films coming from Disney Animation. Besides the first film released after the merger, Meet the Robinsons (which was released in 2007 and was too far into production for the new management to have much impact), all the other films have Rotten Tomatoes ratings of 83% or higher:

Film	Year	Rating
Meet the Robinsons	2007	66%
Bolt	2008	88%
The Princess and the Frog	2009	83%
Tangled	2010	89%
Winnie the Pooh	2011	90%
Wreck-It Ralph	2012	86%
Frozen	2013	85%

For comparison, the last film released by Disney Animation prior to the merger, Chicken Little, has a Rotten Tomatoes rating of only 36%.

So yes, I think it's safe to say that Pixar has had a positive affect on the quality of Disney films, especially in a couple of areas, such as coming up with fully developed stories and focusing on the characters and their relationships, researching the topics and environments of their films, and advancing the technical quality of the films (Along these lines, I think Big Hero 6 is going to be stunning). I also think Lasseter and Catmull have introduced the collaborative, director-led culture that has played such a critical part in Pixar's success.

Chris Buck, Jennifer Lee
and Peter Del Vecho

But I don't want to sound like the recent success at Disney Animation is all Pixar's doing. I think the talent and ability was already there at Disney. Folks like Chris Buck, Jennifer Lee, Lino DiSalvo and Lisa Keene, plus all the other animators, effects artists, engineers and production crew had the passion and energy to deliver quality products, they just needed the spark to release them. So while Lasseter and Catmull have provided the appropriate environment, the artists and animators have stepped into that environment and delivered in a big way. I think we have entered a new Disney Animation renaissance that will last a long time. Combined with the strength of Pixar, The Walt Disney Company has become an animation powerhouse that I don't see any other animation studio being able to compete with.

As an aside, I recently listened to episode 452 of Inside the Magic podcast, where a large portion of the podcast covered Frozen with a number of clips from interviews with the filmmakers. I had a blast listening to the clips; it reminded me a lot of listening to the interviews during a Pixar film press day. It was so enjoyable listening to the directors, producer and artists share their excitement for the film and discuss the research they did by going to Norway, building in themes like the power of happiness over fear, and the technical and artistic challenges of designing and lighting Elsa's castle. If you're into behind-the-scenes details I recommend listening to this episode, and keep abreast of future episodes as it sounds like Ricky has a lot more of these interviews that he plans on releasing.

This Day in Pixar History: Pixar and Disney Film Agreements

In this look at Pixar history, I wanted to dig into the two film agreements between Pixar and The Walt Disney Company. These agreements launched Pixar from being a money-losing software and animated commercial company into creating Toy Story and all its other animated feature films.

Discussions surrounding the first agreement began in late 1990 when Peter Schneider, head of Disney Feature Animation, met with Pixar management to discuss the possibility of creating a feature film. As an aside, this was not the first interaction between Disney and Pixar. Back in the late 1980s, when Pixar was primarily a hardware company, Disney purchased a large number of the Pixar Image Computers for their Computer Animated Production System (CAPS). Disney was extremely happy with the system and this success likely helped pave the way for the feature film deal (If you'd like to hear more about this early Pixar history and the Pixar Image Computer, you should listen to The Pixar Post's episode 14 podcast where TJ, Julie and I discuss these and many other topics).

Discussions continued throughout the rest of 1990 and into 1991, when John Lasseter made his buddy movie pitch to Disney Studios chairman Jeffrey Katzenberg. Katzenberg loved the idea, and the Feature Film Agreement was finalized and announced in the spring of 1991. This agreement was for the development of 3 full-length computer animated feature films and would last through the end of the decade. Pixar would develop and produce the films while Disney was responsible for marketing and distributing them. The agreement called for Disney to reimburse Pixar for almost all production and development costs of the film. In return, when the film was released, Disney would initially receive the majority of all revenue to recover the amounts paid to Pixar, plus its marketing and distribution costs. Once production and marketing costs had been reimbursed, Disney would continue to receive the bulk of any additional revenue from the distribution of the film and associated merchandise such as toys and home videos, while Pixar would be eligible to receive approximately 10% - 15% of the remaining profits. Finally, Disney owned the rights to the characters developed under the agreement, plus controlled the development of any sequels.

Cover of Pixar's first annual report,
which covered the Co-Production
agreement in detail

This agreement was in place until February 24, 1997, when Disney and Pixar announced a new 10 year, 5 film Co-Production Agreement, starting with A Bug's Life. This new agreement split all costs and profits equally between Disney and Pixar, after Disney received a small distribution fee. The agreement covered revenue from the theatrical and international releases plus home video and merchandise sales. In addition, the films would be equally branded as Disney-Pixar and co-owned by both Disney and Pixar, while Disney would have exclusive rights to market and distribute the films. Disney would become an investor in Pixar, purchasing 1 million shares with the option of buying up to 5% of Pixar. As for ownership of the films and characters, the Co-Production Agreement called for Disney and Pixar to mutually agree to any derivative works, but if an agreement couldn't be reached, Disney had the final say. Pixar had no rights to use or distribute any characters or elements from any of the films without first receiving a license from Disney. The 5 films that were produced under this agreement were A Bug's Life, Monsters, Inc., Finding Nemo, The Incredibles and Cars (Toy Story 2 was also produced under the Co-Production Agreement, but since it was a derivative of Toy Story, it was not counted as one of the 5 Co-Production films).

To see how much Pixar gained from the new agreement, let's look at revenue and costs for their first two films, Toy Story and A Bug's Life. From numbers in Pixar's annual reports, the studio made approximately $55M from Toy Story through 1998, while the film earned $362M worldwide, not including home video and other merchandise sales. This film was developed under the original Feature Film Agreement, and Disney was responsible for paying almost all development costs. So we can estimate almost all of the $55M was profit. In comparison, A Bug's Life, which had $363M in worldwide revenue and was  accounted for using the Co-Production Agreement, had brought in almost $115M by the end of 2000. While Pixar was responsible for half of all production costs for A Bug's Life, that amounted to less than 30% of film revenue, meaning Pixar's net income from A Bug's Life was over $80M. So while the original agreement was a breakthrough for Pixar, given it was an unknown and untested studio teaming up with the leader in the animated film industry, it is obvious the new Co-Production Agreement was a much better arrangement in terms of economics.

The Co-Production Agreement was announced just weeks before Pixar's 1996 annual report (their first as a public company) was released, and in the report CEO Steve Jobs did an excellent job explaining why Pixar made the new agreement. The first reason for the new agreement was better economics, which from the previous paragraph we can see worked out perfectly.

The second reason was even more important to the long-term strategy of Pixar. As Jobs explained in the annual report, their goal was to build a world-class studio. In the eyes of Steve Jobs, there were only 2 significant brands in the film industry at the time - Disney and Steven Spielberg. Jobs wanted Pixar to become the third. To accomplish this goal, the new agreement gave Pixar more brand recognition than the first agreement. All products would be equally branded Disney and Pixar, including feature films, home videos, derivative works (sequels), toys and merchandise.

Storyboards of how the new co-branding in films will occur, © Disney/Pixar

I was fascinated to also read that Pixar had contemplated going it alone once the original 3 film agreement expired in 2000, but in the end decided against this direction. As Jobs writes in the annual report,

Going it alone was certainly tempting, especially in the heady atmosphere surrounding Toy Story's success. But it would have been an exercise in hubris.

He goes on to explain the costs and risks of taking on the marketing and distribution functions, noting that marketing can be as expensive as, if not more than, the development of a film. He also points out that Pixar had little experience in marketing, and it was far from their core capabilities of creating memorable animated films. Jobs realized that they would have to grow the company and bring on people with completely different skill sets than the current environment of artists, engineers and production experts. Doing so would have diverted management attention, possibly causing a loss of focus and destroying the unique culture they had built (I have a whole series of posts regarding Pixar's culture stuck in my head, I hope to get it written down someday). Steve Jobs is often referred to as egotistical and arrogant, but I think this gives a much different picture, someone who is savvy, humble and understands the importance of business focus and company culture.

The Co-Production Agreement was in place until 2006, when Pixar was bought out by Disney, just months before the last film of the agreement, Cars, was released. By then, the relationship between Disney and Pixar had soured dramatically to the point where Pixar was looking for a new distribution partner and Disney had plans to move ahead with development of Toy Story 3 without the support of Pixar. That was not a happy time, and is good material for a future blog post!

This Day in Pixar History: Pixar Earnings Report, 2nd Quarter 1997

I noticed that The Walt Disney Company will be announcing their quarterly earnings in a couple of weeks. If you were a Pixar shareholder when the Pixar/Disney merger was completed, you would have become a Disney shareholder as I explained in my previous post on the merger.  For a large company, I think Disney stock has done well, more than doubling from the upper $20s to the mid $60s, and a tripling of the dividend. Of course, the question for those of us who were Pixar shareholders, would we have done better if Pixar had remained independent? We will never know the answer to that question. At some point I hope to write a post on the benefits and disadvantages of the merger.

But for today, I'd like to continue my series on previous Pixar earnings reports, this time going back to the second quarter of 1997. From all accounts, Pixar had a blowout quarter! Revenue increased over 100% to $14.4M from $6.9M in 1996. The majority of this revenue came from Toy Story home video and other related merchandise income, which more than doubled to $11.6M vs. $5.0M in the second quarter of 1996. In addition, their software division did well, bringing in $1.1M vs. $722,000, primarily due to more RenderMan licenses being sold. They also continued to benefit from their patent license agreement with SGI, which contributed $1.5M. Only the animation services group saw a year-over-year decrease, which was expected as Pixar had mostly exited that business in mid-1996. The $269,000 in animation services revenue was due to projects related to A Bug's Life.

As I've said in prior posts, Pixar's gross margins were very high, and this quarter was no exception. Gross margin increased from about $5.7M (or 82.5% of total revenue) in the second quarter of 1996 to $13.4M (over 93%) in 1997. A large part of the increase was due to the decrease in animation services, which had a higher cost of service. Also, film gross margins increased from 92% in 1996 to almost 93.5% in 1997. I have also mentioned that Pixar's operating expenses had been increasing as competition for animation and technical people was rising, and the company was bringing more staff on board. So it may surprise you to learn that their operating expenses decreased this quarter versus the year ago period! This was due to the new Co-Production agreement Disney and Pixar signed earlier in 1997, which required Disney to pay half of all film production costs plus certain R&D and other general/administrative expenses. R&D expenses did increase 18% to $1.4M, primarily for RenderMan research and support. General and administrative expenses stayed roughly even at $1.0M and sales and marketing expenses dropped over 40% to $353,000 due to Pixar exiting the television commercial business. Given the increase in revenue and good expense control, Pixar's net income increased over 86% from $4.8M in 1996 to $8.9M in 1997!

Pixar's balance sheet was also very strong, with cash and short-term investments of almost $179M vs. $161M at the beginning of the year. The majority of the cash increase was due to the 1 million shares of Pixar stock that Disney purchased as part of the new Co-Production agreement. Other items of interest on the balance sheet was the $7.5M Pixar had accrued in film costs, which represented Pixar's share of costs in the development of A Bug's Life. This amount would be paid to Disney by the end of the year. Pixar had also accumulated $19.6M in capitalized film production costs for A Bug's Life and Toy Story 2, which was still being developed as a direct-to-video sequel. These production costs would need to be offset by future revenue for Pixar to show a profit on these films.

Once again, Pixar was very cautious in their expectations for the rest of 1997 and 1998. They stated they did not expect any future revenue from Toy Story home video sales, and did not expect any revenue from A Bug's Life or Toy Story 2 until 1999, thereby causing a significant decline in operating results. Of course, they said similar things in the first quarter 1997 report, and look at how good the results were!

I found two other very interesting tidbits in this quarterly report. The first was that in May, 1997, Pixar paid $5.8M to purchase land in Emeryville for their new headquarters (I wrote about the land purchase in more detail in May, 2012). Pixar stated in the report they would spend over $10M in 1997 and over $12M in 1998 on the construction of the studio, which wouldn't be finished until the end of 2000. Fortunately, with $179M in cash, Pixar would probably be able to fund the construction plus ongoing operating expenses without having to resort to a secondary stock offering or taking on debt.

The other interesting note, from what I can tell, was the first mention that the second theatrical release was being developed. In the Co-Production agreement, Pixar agreed to develop 5 new theatrical films, with the first being A Bug's Life. Therefore, there would have to be four more films produced. But this was the first time I found information that the second film, which would become Monsters, Inc., was actually in development. I should mention that if you're interested in hearing more about Monsters, Inc. you need to listen to The Pixar Post's episode 15, where TJ, Julie and I discuss its development plus other interesting notes like the lawsuits that were brought against it. If you're curious as to why Toy Story 2 wasn't considered the second film, it's because it was a sequel to Toy Story, so it was developed under the original Feature Film agreement.

I will return in 3 months or so with a look at Pixar's 3rd quarter, 1997 earnings.

This Day in Pixar History: Pixar Earnings Report, 1st Quarter 1997

I'm back with another post reviewing Pixar's quarterly earnings reports from when they were a public company. I started about a year ago with the first quarter of 1996, their first quarterly report as a public company. In this post I'm covering the first quarter of 1997, another positive if uneventful quarter except for the big, new film agreement with Disney that was announced after the end of the quarter (discussed at the end of this post).

Total revenue for the quarter was almost $7.9 million. As Pixar warned in their annual report earlier in the year, revenues decreased from $8.3 million in the first quarter of 1996 due to a number of reasons. In the first quarter of 1996 Pixar received a large ($6.5 million) patent royalty payment from Silicon Graphics. In addition, Pixar had significantly reduced their commercial animation services business during 1996 to focus on developing feature films, which had a negative impact on the 1997 earnings. On the positive side, Pixar did receive $6.3 million from home video sales of Toy Story, compared to only $76,000 in film revenue in the year ago period. They also increased software sales (mostly from RenderMan licenses) from $911,000 to $1.4 million. But the increases in film and software revenue were not enough to make up for the losses in the other segments.

Cost of revenue as a percentage of revenue continued to be very low. For software sales, cost of revenue was 1% in 1997 compared to 6% in 1996 due to the higher margins received for RenderMan. Cost of film revenue also decreased (as a percentage of revenue) from 12% in 1996 to 9% in 1997. There were no costs for the patent licensing revenue. Therefore, gross margins for the 1997 quarter were $7.3 million, and on a percentage of revenue basis, were 92.7% vs. 90.5% in 1996.

Operating expenses stayed fairly constant, increasing 2% to $2.6 million. Expenses were held in check partially due to the new Co-Production agreement with Disney, who was now paying half of all expenses associated with film production.

Net Income for the first quarter of 1997 was $5.1 million versus $6.3 million in 1996, primarily due to the decrease in revenues from Toy Story. Diluted earnings per share were $0.11 versus $0.13.

In usual Pixar style, management gave a plethora of reasons why future revenues and earnings would be decreasing and why losses should be expected, especially in the 1998 fiscal year. They pointed out that since 1990, about 40 animated films had been released and only 2 of those films had generated more revenue than Toy Story, and both of those films were produced solely by Disney. And in the 5 year period prior to early 1997, no animated feature film produced by any studio other than Disney had generated domestic revenue of more than $25 million, other than Toy Story. The point Pixar was trying to make was that even if their next film, A Bug's Life, was a critical and box-office success, generating results similar to Toy Story would be very unlikely. But as we know, A Bug's Life was a hit, generating almost $163 million in domestic revenue and over $363 million worldwide. As an investor I appreciated Pixar's conservative outlooks - it helped keep the stock price stable and avoided large price drops. It also helped keep analyst estimates in check, and as became a regular occurrence, Pixar would exceed these estimates which would help drive the price up.

The biggest news of the quarter was the announcement on February 24 by Pixar and Disney of a new film agreement between the 2 companies. The new agreement, which was expected to run 10 years, expanded the original 3 film agreement to 5 films. With the new agreement, both Pixar and Disney would have equal billing on the films, home videos and other merchandise.  It also greatly increased the risk and reward for Pixar, as they would now evenly split all costs and revenue with Disney from the films and merchandise (in the original agreement, Disney paid for almost all film development costs and Pixar only received a small percentage of the profits). A Bug's Life was to be the first film developed under the new agreement, and it would run through 2006 and the release of Cars.

In addition, as part of the new agreement Disney bought 1,000,000 shares of Pixar stock at $15/share and committed to hold the stock for at least 3 years. This was a strong signal to the market of the confidence Disney had in Pixar, and Pixar's stock price reacted positively, jumping almost $7 to $21. The higher stock price did not last long though, as investors realized the new agreement wouldn't do anything to increase revenue or profits, at least until A Bug's Life was released about 20 months later. But for patient investors, the future was set and looked extremely promising. We'll find out how the 1997 fiscal year proceeded when I look at second quarter earnings in a couple of months.

This Day in Pixar History: Pixar IPO

How many of you remember 1995? I would guess there are a few of you who weren't even born! But 1995 had a number of significant events including Finland winning the ice hockey world championship, Microsoft releasing Windows 95, Netscape becoming a public company and the final original Calvin and Hobbes comic strip being published! Of course, it was a big year for Pixar as they released Toy Story, their first and the first ever full length computer animated feature film! You might think the folks at Pixar would be nervous leading up to the film's release, but CEO Steve Jobs must have been confident as he scheduled Pixar's IPO exactly one week after the theatrical release, on November 28, 1995.

Just like the Netscape IPO a few months earlier, the Pixar IPO was highly anticipated. The IPO brought 6.9 million shares to the public market at $22/share. The proceeds from it provided Pixar with almost $140 million which was used to expand the studio as they worked on producing A Bug's Life and Toy Story 2. The stock opened at $47/share, more than double its offering price, and closed its first day of trading at $39, valuing the company at almost $1.5 billion! As Steve Jobs owned approximately 30 million shares, he became an instant billionaire that day.

Looking back, Steve Jobs was right to be confident. Toy Story ended up becoming an immediate classic, earning a perfect 100% rating on Rotten Tomatoes and becoming the highest grossing film of 1995, earning close to $362 million worldwide.

This Day in Pixar History: Pixar/Disney Merger

On this day in 2006, Pixar shareholders gathered at the Wattis Theater at the San Francisco Museum of Modern Art and overwhelmingly voted to merge with The Walt Disney Company. The merger gave Pixar CEO Steve Jobs 138 million shares of Disney, instantly making him Disney's largest shareholder (with over 7% of the outstanding shares) and placing him on Disney's board of directors. In addition, Ed Catmull, who was Pixar's president, became president of the combined Pixar and Disney Animation Studios. John Lasseter, Pixar Executive Vice President, was named Disney's Chief Creative Officer, overseeing not just the studios but also Disney Imagineering.

Disney and Pixar originally announced the merger on January 24, 2006. According to the agreement, Pixar shareholders would receive 2.3 shares of Disney stock for each share of Pixar stock they owned. Given that Disney's stock was priced at $25.99 prior to the announcement, the agreement valued each Pixar share at $59.77, for a total company value of approximately $7.4 billion (of which half belonged to Jobs). I would say Jobs did well with his Pixar investment - he bought the company from George Lucas for only $5 million!

At the time of the announcement, Pixar had not released information on any future films besides Cars, which was being released in June of that year. But there were rumors for a film about a rat living in a fancy French restaurant to be released in 2007, and other rumors that Toy Story 3 was in the works. At the same time, Disney had 2 films in production - American Dog and Rapunzel Unbraided, which we know were released as Bolt and Tangled, respectively.

Below are photos of stock certificates from both Pixar and Disney. Notice Steve Jobs signature on the Pixar certificate.

A good question is, was the merger a good thing for Pixar? What about for Disney? And what about Pixar's shareholders? These are complex questions and deserve their own blog posts. That will have to wait for another day!

This Day in Pixar History: Ollie Johnston (1912 - 2008)

This will be remembered as a sad day across the animation world. Ollie Johnston, the last of Walt Disney's Nine Old Men, passed away on this day in 2008 at the age of 95. Johnston started at The Walt Disney Company in 1935 and worked on such classics as Snow White and the Seven Dwarfs, Pinocchio, Bambi, The Jungle Book and The Fox and the Hound. He brought life to such memorable characters as Thumper, Pinocchio, Baloo and Mr. Smee. He was an inspiration and mentor to many animators, not just within Disney but artists at Pixar and throughout the industry. With his long time friend and fellow Disney animator Frank Thomas, they wrote what is considered the bible for animation, Disney Animation: The Illusion of Life. One of Johnston's favorite sayings (as told by Andreas Deja, a leading animator at Disney) was "Don't animate drawings, animate feelings."

Like Walt Disney, Johnston loved steam trains and owned many throughout his life. One of these, a steam locomotive he named "Marie E.", was later sold to John Lasseter, who continues to maintain and operate it. Brad Bird also worked with and admired both Johnston and Thomas, so much so that he gave them both cameo parts in The Iron Giant and The Incredibles.

Related posts:

• The official Disney Studios press obituary (via Cartoon Brew)
• Brad Bird's thoughts on the passing of Ollie Johnston (via Cartoon Brew)