Steve Jobs, Movie Mogul

Can he build Pixar into a major studio?

The euphoria in the air is as thick as the fog in nearby San Francisco. One by one, employees of Pixar Animation Studios jump onto a makeshift stage on the company's outdoor patio to compete in the annual Halloween costume contest. A Roller Derby team cavorts to a 1970s' disco beat as Pixar's 400-plus employees hoot and holler. A decrepit John Glenn look-alike in a space suit canes his way onstage, waves weakly, and shuffles off. And, natch, Francis the Ladybug, a character from Pixar's upcoming movie A Bug's Life, waddles up for a moment in the spotlight. Nice try, but first prize--free airplane tickets to Europe or Hawaii--goes to A.J. Riebli. At 295 pounds, with a shaved head and clad only in diapers, he flops around in a perfect imitation of the infant star of Pixar's 1988 Academy Award-winning short film, Tin Toy.

So how did Pixar's real larger-than-life character, Chairman and Chief Executive Steven P. Jobs, dress? Silicon Valley's numero uno visionary was attired in jeans, a plaid shirt, and New Balance running shoes because, well, he just didn't have time to get all gussied up. No problem, he's wearing what really matters anyway--a grin that stretches from ear to ear.

He has reason to be gleeful. After years of Pixar chasing its dream of making full-length movies using computers, the company is preparing to release what's expected to become its second box-office hit. Pixar's first feature film, 1995's Toy Story, became the third-highest grossing animated film of all time, with $350 million in worldwide box-office revenues. On Nov. 25, Pixar will debut A Bug's Life, the story of a courageous ant named Flik who fights back against extortionist grasshoppers. The movie is not expected to reach the extraordinary box-office highs of Toy Story--analysts peg A Bug's Life at $250 million worldwide--but it could be a gold mine for Pixar.

Thanks to a cushy deal that Jobs cut with Walt Disney Co. last year, Pixar will get an equal share of the profits, after Disney's 12.5% distribution fee, and the full backing of Disney's unbeatable marketing and distribution clout. That has drawn merchandising deals like bees to honey: Everyone from Mattel Inc. to McDonald's Corp. is churning out A Bug's Life paraphernalia--toothbrushes, candy bars, even bed sheets. There will be caterpillar Beanie Babies modeled after the movie's Heimlich, $30 voice-activated Fliks, and no less than 65 million Happy Meal toys. The bottom line: After spending $45 million on its half of the production costs, Pixar could reap as much as $200 million in merchandising royalties, video sales, and box-office receipts, vs. $53.8 million so far from Toy Story.

Wall Street is clearly starstruck. Pixar's stock has soared to 48 from 23 a year ago based on the high expectations for A Bug's Life and two other movies in the works. Indeed, Pixar's revenues are projected to rocket from $11.5 million this year to $193 million in 2001, with profits soaring from $3.9 million to $87 million, according to Merrill Lynch & Co. analyst Jessica Reif Cohen. That has earned Jobs membership in the billionaires' club, with his 73% stake worth $1.4 billion.

INDENTURED SERVANTS. But Jobs is after much more than money. What he's planning is nothing less than building Pixar into a movie studio for the 21st century--one that will rival Disney for the hearts and minds of families around the world. In a sense, the influence he's seeking is as pervasive as what he sought when he founded Apple Computer Inc.: He wants Pixar to tell the stories that children grow up with--the Snow Whites, Mary Poppinses, and Lion Kings for future generations. "I think Pixar has the opportunity to be the next Disney--not replace Disney--but be the next Disney," he says.

That's quintessential Jobs--sweeping, bold, and, as always, audacious. While Disney has built its reputation over 70 years with gobs of talent and billions of dollars, Pixar has made all of two feature films so far--counting A Bug's Life. Credit Jobs for cutting a sweet deal with Disney in which Pixar has a shot at rich profits. Still, it's Disney that controls the future use of all the Pixar characters and films that they develop together. And it is Disney that possesses the marketing might to transform Flik from a mere image on the big screen into a household name.

So how will Jobs achieve his dream? Not surprisingly, he's tapping into his Silicon Valley roots and using computers to forge a unique style of moviemaking. In A Bug's Life, Pixar has developed computer animation that allows more lifelike backgrounds, texture, and movement than ever before--from the stars of the show right down to a simple leaf. Since real leaves are translucent, Pixar's engineers developed special software algorithms that both reflect and absorb light, creating luminous scenes among jungles of clover. As for the characters in A Bug's Life, they have up to 3,900 potential movements, vs. 700 in Toy Story's characters.

What's more, films using computer animation are very lucrative. They cost 30% to 40% less to make than traditional animated films because only one third as many staffers are needed. And the process yields digitally stored characters and backdrops that can be recast inexpensively into sequels.

Of course, films that touch our hearts require far more than great technology. They depend upon the creative spark. To get that, Jobs has fostered a campuslike environment at Pixar similar to the freewheeling, charged atmosphere in the early days of his beloved Apple, where he has returned as acting CEO. Instead of just computer experts, the company hires an eclectic mix, including landscape artists, puppeteers, even a Danish rock star. And no one is more essential to stoking the creative fires than John Lasseter, Pixar's Academy Award-winning vice-president of creative. The 41-year-old Lasseter, known for his Hawaiian shirts and irrepressible playfulness, was director of Toy Story and A Bug's Life. "He is to animation what Steven Spielberg is to live-action films," gushes Disney Studios Chairman Joe Roth.

SETTING THE PACE. With Pixar's unique combination of technology and creativity, Jobs could become Silicon Valley's first movie mogul. Should A Bug's Life approach the box-office success of Toy Story, Pixar will have made the two most popular animated films since Disney's 1994 megahit The Lion King. "In Hollywood, there are very few brands--really just two--Disney and Spielberg," says Jobs. "We want to be one, too." To do that, Pixar must churn out hits at an aggressive pace--Jobs aims to make roughly one movie a year. "They will emerge as a leading digital animation studio--a filmmaker that parents and children will appreciate and trust," says analyst Paul W. Noglows of Hambrecht & Quist, which does investment banking for the company.

But many in Hollywood think Jobs is living in Fantasyland. The industry's cognoscenti consider the computer exec another movie-industry wannabe, and Pixar, they say, acts as little more than a well-paid subcontractor to Disney. Indeed, some say Pixar's fate rests almost entirely in the hands of Disney--its partner but also a potential competitor. The Hollywood powerhouse holds script approval on Pixar films and is doing some of the heavy lifting on the creative end. All the casting, music production, and some of the screenwriting for A Bug's Life was handled by Disney. Sure, Pixar will be able to reap royalty checks, but that's far from operating as an independent studio. "There is no such thing as a great deal with Disney," says David Geffen, co-founder of Pixar rival DreamWorks SKG. "They control the property, and they are just giving [Pixar] some of the profits."

Already, Disney is hard at work ginning up its own technical wizardry--100 of its employees are quietly honing their computer-animation skills at a former Lockheed Martin Corp. airplane plant near Burbank Airport. Their task: to produce Disney's first completely computer-animated film by 2000, called Dinosaurs, which will mix photorealistic, computer-generated tyrannosaurs and brontosaurs with real-life backgrounds. Disney also has invested in Tippett Studio, a Berkeley (Calif.) special-effects house that is developing a computer-animated space adventure for adults, code-named Expedition. And Disney bought the rights to a claymation script about animals escaping from a zoo from writers Mark Gibson and Phil Halprin.

These ventures could cause a rift in the seven-year-old Pixar-Disney marriage. Should Disney develop other sources of top-notch computer-animation fare, Pixar may find it tough to land another lucrative deal with the Hollywood giant after the current five-film deal expires--especially if Pixar produces any mediocre movies. That could leave the upstart with a smaller slice of profits, less guaranteed financial support from Disney--or no deal at all.

As dire as that sounds, Pixar executives aren't fretting. They say they will have options beyond Disney--especially if they continue making blockbusters. Under the five-film deal, Jobs can start talks with other studios after completion of a third movie, probably in 2002. With a few hits to its name, Pixar could either go it alone or turn to players like Paramount Pictures Corp. that are eager to get into the kid-flick market. There is a precedent. Jobs, for example, points to filmmaker George Lucas, who has remained independent and still gotten strong distribution from studios by making supernova hits like Star Wars. "If we're as successful as we hope we'll be, we should have that kind of clout," says Pixar CFO Lawrence Levy.

Besides, Jobs says he's not planning on leaving the Magic Kingdom anytime soon. "I hope we're doing business with them for another 20 years," he says. He may get his wish--and more. Analysts say that if Pixar stays at the top of its game, Disney may try to snap it up. "If they paid $19 billion for ABC, they can probably afford us," quips Jobs. But he points out he doesn't have to sell unless it's an exceptional offer because he owns almost three quarters of the stock. For Disney's part, execs say they have no plans to make a bid for Pixar.

If there's tension about what the future may hold, there's no evidence of it today. Lasseter's moviemaking is in line with Disney's penchant for heartwarming fare. And the companies developed a considerable amount of trust during the development of Toy Story--when Disney taught Pixar how to handle production and budgeting and Pixar proved its artistic mettle. Lasseter, for example, had to convince Disney that Toy Story could succeed without being a musical like Disney's other animated hits. And while Disney closely monitors Pixar's spending and progress via weekly videoconferences and visits every two weeks or so, the relationship seems more collaborative than contractual. "We act like partners are supposed to act," says Peter Schneider, president of Walt Disney Feature Animation. "We look every day at what they are doing, we demand, we push, we talk, and the end result is a better product. Who gets the credit really is never the issue for us, although I know sometimes it is for Steve."

Pixar will need all the help it can get. An increasing number of studios are cranking out children's films to try to get a piece of what's long been considered the most lucrative part of Hollywood. Witness the crowded schedule this fall. On Nov. 20, Paramount will release a movie based on the popular Rugrats TV show. Universal Studio Inc.'s live-action Babe: Pig in the City debuts Nov. 25, and The Prince of Egypt, the story of Moses as told by DreamWorks, will open on Dec. 18.

INFESTATION? Worse, Pixar's days as the only computerized show in town are over. Industrial Light & Magic is working on a Frankenstein remake. Fox will do Planet Ice, a computerized futuristic look at space travel that's also pegged for 2000. And then there's archrival DreamWorks, the talented and well-funded partnership of Geffen, Steven Spielberg, and Jeffrey Katzenberg that brought Antz to the screen on Oct. 2.

How the DreamWorks film was released sparked something of a Bugs War between the two rival studios. DreamWorks was concerned A Bug's Life would overshadow its own The Prince of Egypt, originally scheduled for movie theaters about the same time. So it tried a maneuver Jobs flatly labels "extortion." According to Jobs, Katzenberg told Pixar to delay the release of A Bug's Life or DreamWorks would make its similarly insect-filled Antz. When Jobs said he couldn't control Disney's schedule, Katzenberg suggested that Pixar not deliver the film on time, says Jobs. "I said to him, `Don't even go there."' Katzenberg declined to comment. Antz beat A Bug's Life into theaters and already holds the record for a non-Disney film, with nearly $75 million in revenues.

How will Jobs and Pixar stay ahead of DreamWorks and the rest of the pack? So far, the company's powerful mix of technology and talent is probably two years ahead of competitors. Employees have published more than 50 papers on computer graphics, earned 18 patents, and won 14 Academy Awards since 1986. "We're not jumping on the bandwagon, we're making it," says Pixar's founder and Chief Technologist Edwin E. Catmull. Jules Engel, head of the experimental animation department at the Disney-supported California Institute of the Arts, the nation's top animation training ground, agrees. "They're the best when it comes to producing computer-animated films," he says.

Pixar has earned such kudos not just because of its technology but also because of its heartwarming storytelling. When it's time to start a project, Lasseter isolates his eight or so writers and directs them to forget about the constraints of technology. While many studios try to rush from script to production, Lasseter takes up to two years just to get the story right. "It's not simply the technology that makes Pixar," says Dick Cook, president of Walt Disney studios. Once the story is done, artists create storyboards and copy them onto videotapes called reels--a standard industry practice. "A sequence has to play great in reels, and then it'll be gangbusters," says Lasseter. "That's our No. 1 rule."

MOUSE POWER. Once a story is approved by Lasseter and Disney, Pixar's creative staffers go to work. Landscape artists paint lush backgrounds, sculptors create 3-D models of characters, and animators set about giving the characters life. But that doesn't mean the creative process is done. Everything can change right up to the last minute--taking full advantage of the fact that, unlike live-action films or even traditional hand-drawn animated films, the director can change sets, characters, or story lines with a few clicks of a mouse.

In A Bug's Life, the story was totally revamped after more than a year of work had been completed. Originally, it was about a troupe of circus bugs run by P.T. Flea that tries to rescue a colony of ants from marauding grasshoppers. But because of a flaw in the story--why would the circus bugs risk their lives to save stranger ants?--co-director Andrew Stanton recast the story to be about Flik, the heroic ant who recruits Flea's troupe to fight the grasshoppers. "You have to rework and rework it," says Lasseter. Indeed, one scene was rewritten 30 times.

Only after the basic story is set does Lasseter begin to think about what he'll need from Pixar's technologists. And it's always more than the engineers expect. Lasseter, for example, demanded that the crowds of ants in the movie not be a single mass of look-alike faces. To solve the problem, engineer William T. Reeves developed software that randomly applied physical and emotional characteristics to each ant. In another instance, writers brought a model of a butterfly named Gypsy to researchers, asking them to write code so that when she rubs her antennas, you can see the hairs press down and pop back up.

That attention to detail keeps Pixar on the cutting edge. It has turned out ever more lifelike short films, including 1998's Oscar-winning Geri's Game, which used a technology called subdivision surfaces. This makes realistic simulation of human skin and clothing possible. "They're absolute geniuses," gushes Jules Roman, co-founder and CEO of rival Tippett Studio. "They're the people who created computer animation really."

To achieve such feats, Pixar tends to the care and feeding of its creative stable. Each new hire spends 10 weeks at Pixar University, an in-house training program that includes courses in live improvisation, drawing, and cinematography. The school's dean is Randall E. Nelson, a former juggler known to perform his act using chain saws so students in animation classes have something compelling to draw.

Pixar is different from big studios in another way: There's an undercurrent of nearby Silicon Valley. Other than Lasseter, no one has long-term, Hollywood-style contracts. Everyone instead gets stock options. "We're blessed to be 600 miles apart from Hollywood," says Lasseter.

If Pixar has arrived, it certainly wasn't an easy trip. The roots of the company stretch back to 1975 and a vocational school in Old Westbury, N.Y., called the New York Institute of Technology. It was there that Catmull, a straitlaced Mormon from Salt Lake City who loved animation but couldn't draw, teamed up with the people who would later form the core of Pixar. "It was artists and technologists from the very start," says Alvy Ray Smith, who worked with Catmull and is now at Microsoft Corp. "It was like a fairy tale."

EARLY LOSSES. But there was no happy ending. In 1979, Catmull and his team grew disillusioned with New York Tech and went to work at Lucas' Industrial Light and Magic in San Rafael, Calif. Catmull decided to leave there after seven years when it became apparent Lucas only wanted computer animation for special effects, not feature-length films.

That's when Jobs appeared on the scene. Less than a year after being ousted from Apple in 1985, Jobs bought what then became known as Pixar from Lucas for just $10 million--one third of Lucas' asking price. Still, it was hardly a bargain. As losses mounted over the next five years, Jobs invested an additional $50 million--more than 25% of his total wealth at the time. "There were times that we all despaired, but fortunately not all at the same time," says Jobs.

Still, Catmull's team of technologists was making major breakthroughs, and in 1991, Disney gave Pixar a three-film contract that included Toy Story. As the film neared completion in early 1995, Jobs decided to take a bold step. Since it was clear Pixar couldn't prosper selling its technology to others, it was time to recast the company as a moviemaker. A novice in Hollywood, he and CFO Levy visited moguls, including Universal parent Seagram CEO Edgar M. Bronfman, then superagent Michael Ovitz, investment banker Herbert A. Allen, and Disney CFO Robert Moore.

Pixar's luck began to change--fast. Rather than the nice little film Disney expected, Toy Story became the sensation of 1995. Within days, Pixar went public. When the shares, priced at $22, shot past $33, Jobs called his best friend, Oracle CEO Lawrence J. Ellison, to tell him he had company in the billionaires' club.

With Pixar's sudden success, Jobs returned to strike a new deal with Disney. In March, 1996, at a lunch with Walt Disney Co. chief Michael D. Eisner, Jobs made his demands: an equal share of the profits, equal billing on merchandise and on-screen credits, and guarantees that Disney would market Pixar films as they did its own. Disney, particularly worried about losing Lasseter, agreed. "[Jobs] had the brains, energy, and chutzpah to protect Pixar's interests. He enabled us to negotiate as equals," says former Pixar marketing executive Pamela J. Kerwin, who is now COO of GeoVector Corp., a maker of handheld computing devices.

Pixar's future now rests on how its partnership with Disney plays out. As long as Jobs and his team provide the types of films Eisner wants on schedule, Pixar will prosper. With Disney's help, Pixar could find that A Bug's Life is just the first of many rich paydays ahead. "They're in the most profitable part of the film business and are partnered with the most powerful company in that industry," says Merrill Lynch's Cohen. "They're in a very good position."

BACK DOOR. Indeed, with Disney as a partner, Pixar almost can't lose money so long as it keeps the movies coming. Morgan Stanley Dean Witter analyst Richard Bilotti figures Pixar breaks even so long as its films do $70 million at the box office--and no Disney film has failed to bring in that much since Oliver and Company in 1988.

And Pixar's upside is tremendous. In a business where the best moviemakers are lucky to get a 15% share of box-office receipts from stingy studios, Pixar will get 50% of total profits. That's defined as what's left of the ticket sales, video sales, and merchandising royalties after production costs and Disney's reimbursement for marketing and distribution fees.

Still, something as nebulous as "artistic differences" could get in the way. Disney has a back door that could leave Pixar on its own--and vulnerable. It's simple: If Disney doesn't get a Pixar pitch it likes within a contractually prescribed time, it can abandon the partnership. "The risk is the creative risk--that they become wedded to something we're not crazy about," says Disney's Roth, who adds he doubts the two studios will have such differences.

Still, the fiery, opinionated Jobs typically doesn't go for very long without creating controversy. He did elicit warnings from Disney execs for going public with his beefs that DreamWorks' Antz was a rip-off from Pixar. "We talked about it," says Roth. "We knew we had a great film. We didn't have to [have Jobs] go around talking about anyone else's film."

Investors had better hope that's as rough as relations with Disney ever get. For now, Disney and Jobs say they have a good thing going, and Jobs is clearly enjoying his second career as a movie mogul. Maybe the Pixar-Disney drama will have a happy ending, after all.

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