Disney: The Renaissance and the Empire

In 1984, the Walt Disney Company was worth more dead than alive. Disney Animation — the heart of Walt's famous flywheel — had stagnated for years, bleeding away talent while corporate raiders circled, salivating over offers to sell off the film library to MGM and offload the parks to hotel operators. But what followed instead was the greatest turnaround in media history under Michael Eisner and Frank Wells. Beauty and the Beast. The Lion King. Broadway. Bringing the Disney Vault home on VHS and DVD. And the greatest media acquisition of all time — ESPN. And then... it all almost fell apart. Again. Euro Disney turned into a money pit. Boardroom and executive infighting ran rampant. Animation descended into a dumpster fire. (Remember Chicken Little? Us neither.) Comcast — Comcast!! — tried to steal the company via a hostile takeover. Out of the chaos, a new generation of Disney management emerged under Bob Iger to stage yet another epic comeback with Pixar, Marvel and Lucasfilm, creating the defining media empire of the 21st century…until the tech companies came along. Tune in for the ultimate Acquired thrill ride: Disney, Part II. *Sponsors:* Many thanks to our fantastic Fall '26 Season partners: - Sierra: https://link.acquired.fm/sierra - Sentry: https://link.acquired.fm/sentry - WorkOS: https://link.acquired.fm/workos - Anthropic: https://link.acquired.fm/claude *Links:* - Sign up for email updates, get our takeaways and research photos from each episode, and vote on future topics: https://www.acquired.fm/email - The Official Acquired Meetup on Sept 17th with our friends at Sentry. Join us!: https://acquired.fm/meetup - The Acquired Disney Part II Companion PDF: https://www.acquired.fm/episodes/disney-the-renaissance-and-the-empire#companion - Worldly Partners' Multi-Decade Disney Study: https://worldlypartners.com/businesshistory - All episode sources: https://www.acquired.fm/episodes/disney-the-renaissance-and-the-empire#sources *Carve Outs:* - Warby Parker Transitions Extra Active: https://www.warbyparker.com/eyeglasses/light-responsive - Michael Arndt's https://youtu.be/FBcwt3QlY_8?si=fp92rR-B46Sz74GG - The Golden State Valkyries: https://valkyries.wnba.com/ *More Acquired:* - Get email updates and vote on future episodes! https://www.acquired.fm/email - Join the Slack http://acquired.fm/slack - Check out the latest swag in the ACQ Merch Store! https://www.acquired.fm/store 00:00:00 Start 00:00:50 Intro 00:05:07 Disney in Chaos (1984) 00:11:33 Eisner, Wells, Katzenberg Arrive (1984) 00:24:30 Animation Renaissance & CAPS Tech (1989) 00:37:33 Flywheel Extensions: Home Video, Retail & Broadway 00:54:32 Challenges & ABC/ESPN Acquisition (1994-1995) 01:05:55 ESPN: Disney's Accidental Goldmine 01:21:26 Eisner's Decline & Save Disney Campaign (2001-2004) 01:34:53 Comcast Hostile Takeover Bid (2004) 01:41:58 Bob Iger's Vision & Pixar Acquisition (2005-2006) 01:52:17 Pixar: From Lucasfilm to Steve Jobs (1979-1995) 02:03:11 Toy Story, IPO & Eisner Conflict (1995) 02:34:30 Disney Acquires Pixar (2006) 02:46:37 Marvel & Lucasfilm Acquisitions (2009-2012) 02:58:01 Streaming Pivot: Cord Cutting & BAMTech (2015) 03:06:30 The Disney+ Strategy & FOX Acquisition (2017-2019) 03:19:01 The Disney+ Launch, COVID, & Chapek's Tenure (2019-2022) 03:42:15 Iger's Return, Challenges & Parks Revival (2022-2026) 03:50:54 The Business Today: Parks & Streaming Focus 03:59:22 Analysis: Disney+ Strategy & The New Media Landscape 04:10:01 Analysis: Bull/Bear Cases 04:21:20 Quintessence 04:24:39 Carve-Outs + Outro _Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions._

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  All right. So David, the real question is, after this episode, it gets released, it becomes this durable IP that is part of an IP franchise. Will we turn this into a musical?

• 0:12David Rosenthal?

  Oh, yes, absolutely. With masks, Dancing in the Isles.

• 0:18Ben Gilbert?

  And I'm thinking, too, we may as well do Acquired on Ice.

• 0:21David Rosenthal?

  Oh, yeah. While we're at it, let's go.

• 0:23Ben Gilbert?

  Yet another adaptation of it.

• 0:25David Rosenthal?

  Can we do acquired in space?

• 0:26Ben Gilbert?

  Ooh, we know a few people who could make that happen.

• 0:30David Rosenthal?

  Yeah, he'll make that happen. All right.

• 0:31Ben Gilbert?

  All right, let's do this.

• 0:49Ben Gilbert?

  Welcome to the fall 2026 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

• 0:58David Rosenthal?

  I'm David Rosenthal.

• 0:59Ben Gilbert?

  And we are your hosts. Disney is so much more than you think it is. It is Mickey and Minnie, and Ariel, and Simba, and Elsa, and Woody, and Buzz, and Nemo, and all the Pixar characters, and of course, it's the Avengers, and Luke Skywalker, and Darth Vader, and Winnie the Pooh, and Disneyland, and Disney World, and Disney Cruises, Disney Hotels. But now it's also The Simpsons, and Avatar, and National Geographic, plus the entire studio of 20th Century Fox, a privately owned government inside the state of Florida,

• 1:40Ben Gilbert?

  a private island in the Bahamas, 10 Broadway musicals, the special effects firm Industrial Light and Magic and Skywalker Sound, one of the four major US broadcast networks, ABC, it is, of course, ESPN.

• 1:55David Rosenthal?

  I was wondering when you were going to get to the worldwide leader here.

• 1:59Ben Gilbert?

  Unexpectedly, a giant amount of the profits of the whole company come from.

• 2:03David Rosenthal?

  Absolutely.

• 2:04Ben Gilbert?

  It is the SEC network. And for a period of time, David, they got even more exotic, owning the NHL team, the Mighty Ducks.

• 2:12David Rosenthal?

  Oh, yeah.

• 2:13Ben Gilbert?

  The Anaheim Angels.

• 2:14David Rosenthal?

  Angels in the outfield, baby.

• 2:17Ben Gilbert?

  And the 1936 British ocean liner, the Queen Mary.

• 2:21David Rosenthal?

  That's right.

• 2:22Ben Gilbert?

  Despite being one of America's most storied and stable brands, the company is going through a time of immense upheaval. They're in the midst of a transition to streaming with Disney Plus and Hulu and ESPN, making giant technology and marketing investments to support that transition that lost billions for half a decade. And they're doing this while their old, fantastically profitable businesses are fading. Consumers don't really go to the movies like they used to. They don't buy movies on VHS or DVD or Blu-ray. And of course, consumers are also cutting the cords to cancel their cable subscription. So those fat profits from cable channels like ESPN are shrinking every year. And Disney,

• 3:04Ben Gilbert?

  despite being over 100 years old, is at the very center of the most interesting business strategy questions that have ever been posed. Can we fight the innovator's dilemma and win? What exactly is enduring about our business as technology and trends change? And can our future be as bright as our past? Today, listeners, we tell the story of how Disney went from Walt's tidy, neat idea of an animation studio turned theme park operator into the global, sprawling, diversified behemoth that Disney acquired and expanded its way to today. And we'll answer that question. What does their future look like from here?

• 3:44David Rosenthal?

  Yes.

• 3:45Ben Gilbert?

  All right. Well, big news from Acquired headquarters. This episode has a companion PDF with visuals, charts, tables, and illustrations of the key concepts we discuss. You can get access and follow along by clicking the link in the show notes or going to library. acquired.fm. You can join the email list at acquired.fm/email. That's where we'll send out behind the scenes photos of research, past episode corrections, and it's where you can vote on future episode topics. Plus, we'll give away a little hint each time at what the next episode is about. That is acquired.fm/email. And if you are in the Bay Area on September 17th, you should join us for the official 2026 Acquired meetup with our friends at Sentry. Details are at

• 4:29Ben Gilbert?

  acquired.fm/meetup.

• 4:31David Rosenthal?

  Woo.

• 4:32Ben Gilbert?

  Before we dive in, we want to thank our brand spanking new presenting partner, Sierra.

• 4:38David Rosenthal?

  Yes. Sierra is not only the very best partner for agents in the enterprise, but also home to the self-proclaimed co-presidents of the acquired fan club, Clay Bavor and Brett Taylor.

• 4:50Ben Gilbert?

  Yes, as Brett and Clay shared onstage with us a few weeks ago when we were in New York together.

• 4:55David Rosenthal?

  Yes, indeed. Thank you, Sierra.

• 4:57Ben Gilbert?

  So with that, listeners, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only.

• 5:07David Rosenthal?

  All right. Well, we start. In 1984, the year I was born, all this was happening. I had no idea. Disney is in chaos. In the 18 or so years since Walt died, Disney's star has faded so badly that it looks like no wish can save it. So Disney Animation, once the shining pillar of the American can-do spirit and the core of Disney's beautiful flywheel business model, has become a rotting carcass of its former self. That's the kindest

• 5:47David Rosenthal?

  way I could think to put it. Epcot has just launched in Florida, not as Walt Disney's utopian dream of a city of the future, but as a massively over-budget and underwhelming World's Fair knockoff that the company has sunk hundreds of millions of dollars deep into debt to build. Family drama among the Disneys runs rampant. Roy Disney's son, Roy E. Disney, has resigned from the company and is scheming to launch a boardroom attack on Walt's once-beloved son-in-law, Ron Miller, who is currently the CEO running the company. The stock is in the dumps. There have been multiple corporate raiders swirling. There

• 6:30David Rosenthal?

  are deals on the table to break up Disney, sell off the Film Library, Snow White, Cinderella, Sleeping Beauty, sell it all off to MGM, sell the theme parks off to hotel operators, maximize shareholder value here in the 1980s. And in the midst of all this, desperate to ward off these corporate raiders, management strikes a series of friendly deals with four oil and gas and real estate brothers in Fort Worth, Texas, the Bass family and their famous investment manager, Richard Rainwater, that results in the Bass family owning about 25% of the Walt Disney Company and becoming Disney's largest shareholders.

• 7:16Ben Gilbert?

  Yeah. How crazy is this? It's quite the introduction that the company was in such bad shape. In 1983, their stock dropped from $82 to $52 that the company was worth more if you sold it for parts than actually running it. And so the only defense that they have against these corporate raiders is to find a corporate raider of their own.

• 7:36David Rosenthal?

  Right.

• 7:37Ben Gilbert?

  Dilute shareholders so much that they're creating all these new shares to give to these new guys.

• 7:45David Rosenthal?

  These Texas guys.

• 7:46Ben Gilbert?

  The Bass family, so they can own 25%, which basically makes them pseudo-controlling shareholders.

• 7:53David Rosenthal?

  More than any of the remaining branches of the Disney family.

• 7:55Ben Gilbert?

  Yes. And that is by far the best option to fend off these corporate raiders. Dark times. And David, things have gotten so bad in the creative core engine that nearly every dollar of profit is coming from the parks and licensing consumer products at this point. Films and TV, the Disney that you know of, the content business, is basically break even. In 1984, Disney generated $1.25 billion of profit from its parks and consumer products, and a mere $2 million from film and TV. The core of the famous Disney flywheel is completely broken.

• 8:34David Rosenthal?

  But, but, there is a spark of hope. A group of young innovators who will ignite a whole revolution in the movie industry come in and save the company. I'm not talking about Michael Eisner, Frank Wells, and Jeffrey Katzenberg.

• 8:54Ben Gilbert?

  Ooh, I thought that's where you were.

• 8:55David Rosenthal?

  You'd think that's where we're going. Rather, the group that I am talking about is a new hope for the core of Disney Animation, the center of the flywheel. All right. So, Ben, what if I told you that during this very same time as everything that I just said, Disney Animation is floundering, all of the following people are being taught the craft of Disney Animation in a small basement room just a half hour's drive north of the Disney Burbank lot, in another institution that Walt Disney himself had created, set up, and endowed in his will.

• 9:34Ben Gilbert?

  Cal Arts.

• 9:35David Rosenthal?

  John Lasseter, Brad Bird, Tim Burton, John Musker, who would do The Little Mermaid, Aladdin, and then many years later, Moana. And then later, after them, Andrew Stanton, of course, writer and director of Finding Nemo, WALL-E, Toy Story 5, Brenda Chapman, head of story for The Lion King, and of course, Pete Docter, who today is chief creative officer at Pixar. All of these people are in a basement classroom, classroom A113, home of the character animation program at the California Institute of the Arts, or Cal Arts.

• 10:12Ben Gilbert?

  Which was basically created as a pipeline for Disney, right?

• 10:15David Rosenthal?

  Yes, exactly. That was why Walt created Cal Arts. He wanted it to be this institution that would keep the pipeline of new animation talent flowing into Disney long after he was gone. And Walt left like half of his estate to fund this institution. And it was that. I mean, so there's people I mentioned, John Lasseter, Brad Bird, Tim Burton, John Musker, Brenda Chapman, all of them were hired directly by Disney and Disney Animation right out of school. And then Disney fired all of them.

• 10:48Ben Gilbert?

  But they all end up back.

• 10:49David Rosenthal?

  But, you know, they all end up back. So there's this amazing story that one day, while John Lasseter is a student there in the late 70s, he and a bunch of these people, they drive down to go spend the day at Disneyland. And John's girlfriend at the time comes along with them and she says to them, just think, someday this park is going to be filled with the characters that you guys are going to create. And she had no idea both how right and how wrong she was.

• 11:13Ben Gilbert?

  Yes.

• 11:14David Rosenthal?

  It would just take a few decades.

• 11:16Ben Gilbert?

  Yes. Okay, so how does this company turn around? Because I was looking at the financials and it looks like 1982 earnings are down 19%. And you sort of expect, oh, maybe that's a hiccup, it'll come back. Then 1983, earnings are down another 7%.

• 11:33David Rosenthal?

  Yep. So in the wake of all that, in 1984, Roy E. Disney decides enough is enough. Together with the Bass Brothers, the new 25% shareholders, Roy and his business partner, Stanley Gold, who's also on the Disney board with him, they gang up and they finally force out Ron Miller as CEO, who again is Roy's cousin by marriage, married to Walt's daughter. And they do this via dramatic boardroom coup that happens on September 7th, 1984. And then, over a period of just 14 days, because Disney now like is without a leader,

• 12:10David Rosenthal?

  is in double crisis here, they go out and they identify, recruit, sell, and hire arguably the greatest two-person management team in media company history, Michael Eisner and Frank Wells. And then Michael quickly brings in his number two from Paramount, Jeffrey Katzenberg, to run the film studios.

• 12:34Ben Gilbert?

  Yep.

• 12:34David Rosenthal?

  All right. So who are these guys? So first, the board goes after Frank Wells. Frank had been the president of Warner Brothers and had since retired. But before that, earlier in his career, he was the mentor of Stanley Gold, Roy E. Disney's, you know, business partner and fellow Disney board member now, back at their old law firm. So Frank is their first call. They trust him deeply. He's eminently qualified. He's recently retired, so he's available. Frank says, I'm interested, but I can't do this alone. There's somebody else you gotta call. You gotta call Michael Eisner. So Michael, until recently, the timing is

• 13:15David Rosenthal?

  just crazy on this, had been probably the hottest Hollywood movie studio executive in town. He had been the number two executive at Paramount under Barry Diller and had architected one of the most legendary runs in Hollywood history. The two of them, Barry Diller and Michael, within a span of seven years, they made Indiana Jones, Star Trek, Saturday Night Fever, Grease, Footloose, Flashdance. The list goes on and on.

• 13:46Ben Gilbert?

  This is when Paramount was number one.

• 13:47David Rosenthal?

  Yep. And the way they did it was this famous strategy that they called the Singles and Doubles strategy. The idea was they would keep their production costs low. They would generally not work with A-list stars and directors. And instead, they would focus on the quality of the scripts and the stories and let that be their guiding judgment as opposed to the typical Hollywood thing of who's attached to the project. Like, do we have the stars?

• 14:13Ben Gilbert?

  And the Singles and Doubles name appealed to shareholders. It didn't exactly appeal to talent. And so the way they build it the other direction was high concept.

• 14:22David Rosenthal?

  Exactly.

• 14:22Ben Gilbert?

  Describing a unique idea whose originality can be conveyed briefly.

• 14:28David Rosenthal?

  Yep. So Michael writes a famous memo in Hollywood history that gets leaked and spread around the rest of Hollywood describing this strategy and he writes-

• 14:37Ben Gilbert?

  Spoiler alert, no memo actually ever leaks in Hollywood. They're all intentionally leaked.

• 14:41David Rosenthal?

  Yes, they're written for publication. Yeah. 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.

• 15:11Ben Gilbert?

  That's right. And there was another memo leaked later by Jeffrey Katzenberg, who, you know, speaking of the lieutenants, you got Barry Diller's lieutenant is Michael Eisner, Michael Eisner's lieutenant is Jeffrey Katzenberg. Jeffrey writes a memo later where he espouses this really great line that celebrity can open a film, but celebrity can't carry a film. So yes, you can pay up to attach these big names, but ultimately, the audience does experience the quality of the story for itself. And you kind of need the, the story and the characters and the emotion to take it from there.

• 15:43David Rosenthal?

  Yep. Yep. Now, on the one hand, this is crazy that these guys are coming in to run Disney. Disney is not a Hollywood company.

• 15:53Ben Gilbert?

  Right? It's a Warner Brothers retired executive and a hotshot Paramount executive. Michael from Paramount has not seen Disney movies. He was not raised on them. He had never seen Snow White or Sleeping Beauty. He wasn't really a Disney guy, despite the fact that as soon as he later gets the job, he was never without his Mickey Mouse tie.

• 16:14David Rosenthal?

  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 was go big and invest tons in technology and animation. And Michael is like, produce things cheap, singles and doubles.

• 16:40Ben Gilbert?

  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?

• 16:47David Rosenthal?

  And then the unthinkable happens. Michael gets forced out of Paramount at the peak of his success.

• 16:55Ben Gilbert?

  Well, sort of. Barry leaves, as we talked to Barry about onstage at Radio City Music Hall.

• 17:01David Rosenthal?

  To team up with Rupert Murdoch and launch Fox.

• 17:04Ben Gilbert?

  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. I'll take the check and get out of here.

• 17:41David Rosenthal?

  Yep. So all of a sudden, Michael's available, right as all this drama is going on at Disney. He was on the board of Cal Arts with Roy E. Disney. So they've been talking for a while, but now it all comes together.

• 17:54Ben Gilbert?

  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 you're number two, because we need to send a signal to the world that Disney is run by a creative executive, of which he was at Paramount. And Frank had always sort of been more the numbers and legal and operations.

• 18:26David Rosenthal?

  Operational, you know, he has a legal background.

• 18:29Ben Gilbert?

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

• 18:55David Rosenthal?

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

• 19:06Ben Gilbert?

  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.

• 19:34David Rosenthal?

  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.

• 19:44Ben Gilbert?

  Yep.

• 19:44David Rosenthal?

  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 gotta make room for all the, you know, movie producers that we're gonna bring in here and make live action films.

• 20:05Ben Gilbert?

  If you're one of these animators who is looking at it from the perspective of what makes this place special, and the very first thing, let's, let's say you were optimistic about change, that happens is they kick the animators out of the building that Walt's office was in. This is like the historic animation building. They clear them out and they say, go to Glendale in this like really rickety rundown building instead.

• 20:27David Rosenthal?

  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 is like, well, Walt wanted this to be accessible to everybody and he set these prices, so like, we shouldn't change them. Never mind that inflation was rampant during the 1970s. So, parking at

• 21:12David Rosenthal?

  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-

• 21:25Ben Gilbert?

  They had so much headroom here. I mean, you can criticize them all you want today for raising prices, but they had, I don't know, five to 10x of you can raise the price and it wouldn't impact demand for a second back then.

• 21:38David Rosenthal?

  Totally. I mean, you, 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.

• 22:14Ben Gilbert?

  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.

• 22:28David Rosenthal?

  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.

• 22:48Ben Gilbert?

  And they would get actors that would go on to be big, big names. I mean, you're naming Robin Williams and Bette Midler-

• 22:55David Rosenthal?

  Julia Roberts.

• 22:56Ben Gilbert?

  And they were basically looking for ways to get deals on talent.

• 23:00David Rosenthal?

  Yes.

• 23:00Ben Gilbert?

  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, uh, in many ways like a young Warren Buffett strategy of looking for cigar butts-

• 23:12David Rosenthal?

  Yes.

• 23:12Ben Gilbert?

  -that they, they knew they could get a guaranteed return on.

• 23:15David Rosenthal?

  Uh, but it works, man. All told, 27 of their first 33 movies that they make are profitable, which in Hollywood, to have a hit rate like that, that's like making 33 venture capital investments and only losing money in six of them.

• 23:31Ben Gilbert?

  Right. Films are, like books or like startups, power a lot distributed-

• 23:35David Rosenthal?

  Yep.

• 23:35Ben Gilbert?

  -normally.

• 23:35David Rosenthal?

  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.

• 23:45Ben Gilbert?

  Well, this is a Roy E. Disney special. Roy views his job as the keeper of Walt's vision and the keeper of the thing that made the company special. And the thing that made the company special was this ridiculous flywheel, for lack of a better term, that they had, where you make amazing, compelling characters on universally relatable stories, told through animation, drawn in a spectacular way that no other studio can do, and then you get to pump that into consumer products and parks and kids passed down to their kids. And it's this like beautiful special business model.

• 24:19David Rosenthal?

  You re-release the classics in theaters from the Disney Vault and you make cash flow on that.

• 24:24Ben Gilbert?

  And Roy's sitting here looking at the current business of singles and doubles and live action and being like, hey, we gotta do the Disney thing.

• 24:30David Rosenthal?

  Yep. So as part of the deal, when they brought Eisner and Wells in, Roy had made them promise not to fully kill animation. And then he had made them make him, Roy, chairman of the animation division, under Katzenberg, who's running all the studios.

• 24:46Ben Gilbert?

  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.

• 25:03David Rosenthal?

  Yeah, brutal.

• 25:04Ben Gilbert?

  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.

• 25:11David Rosenthal?

  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.

• 25:18Ben Gilbert?

  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.

• 25:47David Rosenthal?

  And Michael says, "Neither do I."

• 25:48Ben Gilbert?

  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, uh, 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.

• 26:20David Rosenthal?

  Yep.

• 26:20Ben Gilbert?

  I mean, it is like the most fun, crazy place in animation, and this was quite the clash at first.

• 26:26David Rosenthal?

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

• 26:35Ben Gilbert?

  Well, it was both of them, and it would take a third guy, and that guy is Peter Schneider.

• 26:40David Rosenthal?

  Hmm, yes.

• 26:41Ben Gilbert?

  So his quote when, when accepting the job is, "I knew I could do no worse than The Black Cauldron. You can't fall off the first floor."

• 26:48David Rosenthal?

  That's great.

• 26:51Ben Gilbert?

  So Peter and Jeffrey come in and they start making changes. And Peter had this license to like examine everything. He was 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 wanna make great films, and we wanna debate each other over how good of an idea things are. We wanna iterate, all in service of making a great film. But this is exactly what they needed. New blood, a complete shakeup.

• 27:36Ben Gilbert?

  There was good talent there, but they were just sort of like wasting around, not being led at all. And there was this sort of dichotomy where the, the old guard was stuck in their ways, and the young people who came in with all these fresh ideas were falling on deaf ears, and they'd never been part of anything successful, so they sort of didn't know what success looked like or felt like.

• 27:57David Rosenthal?

  Yep.

• 27:57Ben Gilbert?

  So they slowly start to turn it around in animation. So, you know, at first with films like The Great Mouse Detective in 1986, nothing to write home about. They did Oliver and Company in 1988. That, that gets a little bit more press. There's people sort of saying, "Hey, look, Disney Animation can make good things that are commercially successful." But then the big idea, the crazy one that really worked, was to refine the formula of the Disney animated movie and make them musicals.

• 28:25David Rosenthal?

  Yes.

• 28:25Ben Gilbert?

  These are gonna be Broadway musicals. But animated.

• 28:29David Rosenthal?

  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.

• 28:38Ben Gilbert?

  From story arc to the type of music. I mean, Snow White had some really catchy tunes, Whistle While You Work.

• 28:45David Rosenthal?

  Hi Ho, Baba, yeah, yeah.

• 28:47Ben Gilbert?

  But they weren't musicals.

• 28:48David Rosenthal?

  No.

• 28:48Ben Gilbert?

  And they didn't follow the sort of musical, stage performance, story structure. So Jeffrey Katzenberg recruits a guy named Howard Ashman.

• 28:58David Rosenthal?

  Yes.

• 28:58Ben Gilbert?

  Interestingly, introduced by David.

• 29:00David Rosenthal?

  I was gonna say, yeah, David Geffen connects them, right?

• 29:03Ben Gilbert?

  Yes, Howard, when he hears the word Disney, instantly says, I want to work in animation. I feel there is a connection between animation and musical theater. And I don't think this was obvious to anyone else. This is like a unique Howard insight. So Howard brings along Alan Menken.

• 29:23David Rosenthal?

  Composer Alan Menken.

• 29:24Ben Gilbert?

  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.

• 29:33David Rosenthal?

  Yeah, these guys are geniuses. And we really started to dig into the question of like, the Disney Renaissance, who was responsible? Who created these incredible movies and totally turned around Disney? It's these guys.

• 29:47Ben Gilbert?

  Yeah, they weren't the original story pitch.

• 29:50David Rosenthal?

  No, and they weren't the executives, but they brought the magic.

• 29:53Ben Gilbert?

  So Howard has this great quote where he says, well, in every great Broadway musical, the third song, the leading lady goes and she sits on something, might be a rock, might be a trash can, and she sings a song to the world, telling the audience what she wants. If she could only have this thing in life. And then the whole rest of the film, we root for them. That is the entire crux of the play, is what 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, you know, go where the people are. I want to see them dancing, walking around on, what do you call them? Oh, feet! And this amazing sort of like lyrical explanation of what she feels as a character

• 30:36Ben Gilbert?

  that ends up kind of carrying the whole movie. Howard is also the one who says, hey, that little crab, should we make him Jamaican?

• 30:43David Rosenthal?

  Yep.

• 30:44Ben Gilbert?

  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 watched the films, I'm sure a million times when we were kids.

• 30:58David Rosenthal?

  Yep, and why they survive. I mean, my girls are watching these movies today. So Little Mermaid comes out in 1989, it's a classic.

• 31:05Ben Gilbert?

  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."

• 31:42David Rosenthal?

  Hmm.

• 31:44Ben Gilbert?

  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.

• 31:56David Rosenthal?

  Which, you know, look, trust in Disney Animation had eroded, right? Like, people were used to crap coming out of the studio.

• 32:04Ben Gilbert?

  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.

• 32:13David Rosenthal?

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

• 32:20Ben Gilbert?

  It was my first movie in theaters.

• 32:22David Rosenthal?

  Oh, wow.

• 32:23Ben Gilbert?

  And this is another Howard Ashman special.

• 32:25David Rosenthal?

  Yep, yep, it's so good.

• 32:27Ben Gilbert?

  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.

• 32:44David Rosenthal?

  Man, Disney Animation is back.

• 32:49Ben Gilbert?

  They do it again the next year. I'm telling you, year after year after year, 1992 with Aladdin.

• 32:54David Rosenthal?

  Yep.

• 32:54Ben Gilbert?

  Box office.

• 32:56David Rosenthal?

  500 million is what I saw, right?

• 32:58Ben Gilbert?

  That's right.

• 32:58David Rosenthal?

  A half a billion.

• 33:01Ben Gilbert?

  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.

• 33:10David Rosenthal?

  From Good Morning Vietnam to the genie.

• 33:12Ben Gilbert?

  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.

• 33:23David Rosenthal?

  Yeah, yeah, yeah. Give us the box office. How much money did this thing make?

• 33:26Ben Gilbert?

  This brings in $750 million.

• 33:29David Rosenthal?

  Yeah, unprecedented at the time.

• 33:32Ben Gilbert?

  The most successful traditionally animated, hand-drawn film in history.

• 33:37David Rosenthal?

  In history.

• 33:38Ben Gilbert?

  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.

• 33:47David Rosenthal?

  Yes, back to Burbank.

• 33:49Ben Gilbert?

  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.

• 34:02David Rosenthal?

  Where the new animation building is today. So great, so great.

• 34:05Ben Gilbert?

  So that's the Disney Renaissance.

• 34:06David Rosenthal?

  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 ballooned back up with Lion King, but only to 45 million. How are they making these so cheap?

• 34:21Ben Gilbert?

  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,

• 35:01Ben Gilbert?

  kind of pushing the frontier of technology and how investing in new technology can push the state of the art in storytelling. Computers had advanced a lot by 1990. And so they got to thinking, why are we still using physical paint to color in the lines on every single one of these hand-drawn frames? Also, multiplane cameras were really, really expensive to operate. So they started cheaping out in the dark times, where rather than photographing really complicated, you know, six-plane animation, they would just kind of slap one animation cell down, put a background underneath it, photograph it, and move on to the next one. And so they invested $10 million in fixed costs into software that could do two things.

• 35:46Ben Gilbert?

  One was effectively Microsoft Paint for 2D animation, where you could look at all the lines on a computer, you could select a color, you could bring over your little paint tool and dump your bucket of color into an enclosed area. It sounds like I'm describing something that you'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 multiplane 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 multiplane camera. So The Little Mermaid, which only had three multiplane shots, because it was before CAPS,

• 36:30Ben Gilbert?

  by the time you get to The Lion King, it had hundreds. So it's better, it's faster, and it keeps the budget down.

• 36:35David Rosenthal?

  Yeah, it seems odd that Disney, a, you know, media company, would develop this computer software technology in-house.

• 36:44Ben Gilbert?

  Yes, they relied on a partner for that, who was getting really, really good at early computer graphics, Pixar.

• 36:51David Rosenthal?

  Yeah, hmm, well, put a pin in that.

• 36:54Ben Gilbert?

  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.

• 37:14David Rosenthal?

  Oh, cool.

• 37:15Ben Gilbert?

  And then they composited, using CAPS, a 2D hand-drawn Belle and the Beast dancing. And that is the first time they used any 3D animation in any Disney films.

• 37:27David Rosenthal?

  Oh, that's so cool.

• 37:28Ben Gilbert?

  Yeah, and if you go back and watch it, you're like, whoa, yeah, the background is computer-generated.

• 37:31David Rosenthal?

  Yeah, oh, that's awesome. Okay, so on the back of all these Disney Renaissance animated hits, the flywheel is soaring again at Disney. I mean, really, for the first time since Walt died. The core animated IP at the center of the company is back. It's inspiring new generations of children, their parents. And Eisner and Wells not only embrace all of it, they extend the flywheel even further. So they add three new incredible extensions to the Disney business model, all based on these characters and stories and this timeless IP that Disney Animation is once again creating. So the first, home video.

• 38:17David Rosenthal?

  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.

• 38:31Ben Gilbert?

  Which was the only way to watch movies.

• 38:33David Rosenthal?

  Right.

• 38:33Ben Gilbert?

  My brain sort of can't understand this since home video has existed my entire life.

• 38:37David Rosenthal?

  No Disney Plus back then, baby.

• 38:39Ben Gilbert?

  Nope. And until 1985, there was no way to watch a Disney film outside of a theater.

• 38:44David Rosenthal?

  Yep, yep. So Eisner, Wells and Kansberg, they're like, well, we can do the same thing with home video. You know, VHS exists now. It's a big thing. You know, it's high penetration in US households. None of the old people at Disney want to do it. Roy is opposed. The families oppose.

• 39:01Ben Gilbert?

  It's heresy.

• 39:02David Rosenthal?

  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.

• 39:12Ben Gilbert?

  And they're starting low stakes. I mean, Pinocchio has already been re-released in theaters five times.

• 39:18David Rosenthal?

  Yep.

• 39:19Ben Gilbert?

  Seven years apart. You would think you're not cannibalizing much at this point on the sixth re-release.

• 39:23David Rosenthal?

  Yes, of Pinocchio. So they agree to a very limited 1.7 million unit run of VHS of Pinocchio.

• 39:33Ben Gilbert?

  I'm glad you found this too.

• 39:34David Rosenthal?

  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

• 40:11David Rosenthal?

  $200 million in gross revenue from Cinderella. Oh, man. I mean, it's basically another box office smash, like for free that they're getting here. Yeah.

• 40:23Ben Gilbert?

  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.

• 40:37David Rosenthal?

  Right, right.

• 40:38Ben Gilbert?

  It doesn't make people any less excited to go to the theater.

• 40:40David Rosenthal?

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

• 40:43Ben Gilbert?

  Right. It's not like, oh, you're permanently destroying an asset now that those tapes exist in the world. No.

• 40:47David Rosenthal?

  Yeah.

• 40:48Ben Gilbert?

  It only increases the demand for more Cinderella now that the tapes are out.

• 40:53David Rosenthal?

  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.

• 41:05Ben Gilbert?

  Wow.

• 41:05David Rosenthal?

  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 the doors off.

• 41:34Ben Gilbert?

  Having a home video release channel instantly makes whatever you want to spend on animation worth it.

• 41:41David Rosenthal?

  Yes.

• 41:41Ben Gilbert?

  It is this sudden renewed focus on animation because they realize, oh my God, there's a way to get value out of this.

• 41:49David Rosenthal?

  Yes. So the numbers on this. Aladdin sells 30 million VHS tapes in 1993.

• 41:57Ben Gilbert?

  So that's $900 million in sales.

• 42:01David Rosenthal?

  Yeah, in sales.

• 42:01Ben Gilbert?

  Sales of tapes.

• 42:02David Rosenthal?

  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.

• 42:13Ben Gilbert?

  That's a billion dollars of tapes of The Lion King sold.

• 42:16David Rosenthal?

  Yes, that 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.

• 42:27Ben Gilbert?

  Because these films are already quite profitable from the box office because the budgets are low and the box office is super high.

• 42:34David Rosenthal?

  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?

• 42:49Ben Gilbert?

  Minus distribution and marketing expenses. I don't know, 250?

• 42:52David Rosenthal?

  Yeah, okay, sure. 250. Add a 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.

• 43:07Ben Gilbert?

  And I don't think there was much backend at that point for any of the actors. So I think this is literally just going to Disney.

• 43:13David Rosenthal?

  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. Like, these are very different deals, especially back then for those actors than for the live action films that were starting to get expensive and actors were making real money out of.

• 43:34Ben Gilbert?

  Yep.

• 43:35David Rosenthal?

  So that's home video. Next, they launched Disney retail stores across the country.

• 43:41Ben Gilbert?

  That's right.

• 43:42David Rosenthal?

  Do you remember these? I spent so many weekends at the mall when I was a kid in Disney retail stores.

• 43:47Ben Gilbert?

  Plastered with Disney stuff, giant piles of stuffed animals. It was a hallucinogenic experience to go in there.

• 43:54David Rosenthal?

  Peak 1990s.

• 43:55Ben Gilbert?

  Yes.

• 43:55David Rosenthal?

  So they built 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.

• 44:27Ben Gilbert?

  Yep. I bet people of our generation have a unique relationship with Disney because of this period, because we were there in such a heyday. I bet people that are 10, 15 years older than us don't have the same Disney relationship.

• 44:44David Rosenthal?

  Yeah.

• 44:45Ben Gilbert?

  Since they were sort of grownups by the time the Eisner era hit.

• 44:48David Rosenthal?

  Yeah. I mean, it was the dark period when they were children.

• 44:50Ben Gilbert?

  Yes.

• 44:50David Rosenthal?

  You gotta get children to make this work.

• 44:53Ben Gilbert?

  Yep.

• 44:53David Rosenthal?

  And then they pass it on to their children, 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.

• 45:14Ben Gilbert?

  Right. Oh, it must be like Disney on Ice, some random extension that I'm not really sure how much it contributed, but cool that they did that and very artistic of them.

• 45:21David Rosenthal?

  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.

• 45:32Ben Gilbert?

  Which is spectacular.

• 45:33David Rosenthal?

  Oh, amazing.

• 45:34Ben Gilbert?

  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.

• 45:47David Rosenthal?

  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.

• 46:26Ben Gilbert?

  What?

• 46:26David Rosenthal?

  Lion King the Musical is the highest grossing piece of entertainment ever created in history.

• 46:32Ben Gilbert?

  Of any medium, the highest grossing is a Broadway musical?

• 46:35David Rosenthal?

  Yep. Of a single, like, not episodic, but like a single piece of media, a single story concept. Lion King the Musical.

• 46:44Ben Gilbert?

  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 Endgame. And then if you were to add like an entire home video on top of that, we already said The Lion King home video was a billion.

• 46:59David Rosenthal?

  Yeah, you double it, maybe more, yeah.

• 47:00Ben Gilbert?

  How do they get to 11 for a Broadway musical?

• 47:03David Rosenthal?

  It's been running for 30 years.

• 47:04Ben Gilbert?

  30 years.

• 47:05David Rosenthal?

  And they're packing the house around the world.

• 47:07Ben Gilbert?

  Traveling show, pretty high ticket price to go to a musical.

• 47:11David Rosenthal?

  It's in London, it's in New York, it's got the traveling company.

• 47:13Ben Gilbert?

  Wow.

• 47:15David Rosenthal?

  Yeah. So even spread out over 30 years, Lion King the Musical, on average, that means it has generated $350 million in gross revenue for Disney every single year. That is an extra hit movie every year.

• 47:31Ben Gilbert?

  And they own it outright?

• 47:32David Rosenthal?

  Yeah, I mean, the, they have to share theater revenue with, you know, especially the touring company when they go to theaters around the world. But that's the same as any movie. It's, it's another movie every year.

• 47:41Ben Gilbert?

  Wow, $11 billion.

• 47:44David Rosenthal?

  Yeah.

• 47:44Ben Gilbert?

  Fascinating.

• 47:45David Rosenthal?

  Absolutely incredible.

• 47:46Ben Gilbert?

  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?

• 48:01David Rosenthal?

  Yes.

• 48:01Ben Gilbert?

  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,

• 48:10David Rosenthal?

  Yes, I'm going to Disney World.

• 48:11Ben Gilbert?

  Right after they won the, the Super Bowl.

• 48:13David Rosenthal?

  Well, so, so this is the other big, big thing that Michael Eisner does is he transforms the parks. The parks were obviously Walt's genius and part of the original Walt vision and business model for what Disney would become. But they're just theme parks when Michael takes over.

• 48:32Ben Gilbert?

  Yeah, they're not really resorts.

• 48:33David Rosenthal?

  He makes the parks and especially Florida, a resort. He goes from, ah, yeah, we got Disney World and we got Epcot and sure, come to Florida. They build the Grand Floridian Hotel. They build the Swan, they build the Dolphin. They start the Vacation Club time share program with 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.

• 49:06Ben Gilbert?

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

• 49:30David Rosenthal?

  Yes, yes. And they get into all the real estate all around it. All those hotels that they're developing, having Imagineering develop. It's not just Marriott's that they're throwing in there.

• 49:39Ben Gilbert?

  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.

• 49:58David Rosenthal?

  Totally. I mean, it sets the stage for today. Last year, Disney Parks and Experiences contributed $10 billion in operating profit to Disney. And it starts with this.

• 50:09Ben Gilbert?

  Nuts.

• 50:10David Rosenthal?

  Now, it's not all sunshine and rainbows on the park side during the Eisner era.

• 50:15Ben Gilbert?

  Euro Disney?

• 50:16David Rosenthal?

  There is Euro Disney, uh, 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, but.

• 50:33Ben Gilbert?

  And also I'm not sure that Europeans love being called Euro. If you, if you live in Paris, you consider yourself French or, or Parisian. You don't consider yourself Euro.

• 50:44David Rosenthal?

  Yeah.

• 50:44Ben Gilbert?

  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.

• 50:55David Rosenthal?

  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, you know, almost what's that eight X operating profit in?

• 51:24Ben Gilbert?

  In a decade.

• 51:25David Rosenthal?

  A decade.

• 51:26Ben Gilbert?

  Wow.

• 51:26David Rosenthal?

  I mean.

• 51:26Ben Gilbert?

  And it had been declining. I mean, it fell 25% in two years before they joined.

• 51:30David Rosenthal?

  Yeah, those three guys didn't just save Disney. Like they made Disney flourish in a way that Walt only could have dreamed of.

• 51:39Ben Gilbert?

  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.

• 51:46David Rosenthal?

  Well, I've got the stats to prove it. So by 1994, Disney's market cap hits $22 billion, up 10x from when the Eisner crew took over. And it becomes the highest valued of all the traditional media companies. More valuable than Time Warner, more valuable than Viacom, more valuable than Fox and 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.

• 52:23Ben Gilbert?

  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?

• 52:36David Rosenthal?

  And that's exactly where Sierra comes in and part of why we're so excited to be partnering with them.

• 52:42Ben Gilbert?

  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 Bevore.

• 52:49David Rosenthal?

  Previously, uh, ACQ2 guests?

• 52:51Ben Gilbert?

  Yes, and the ridiculous group of talent that they have assembled there.

• 52:54David Rosenthal?

  Yes, Sierra has built customer facing AI agents that can do a huge range of things. Not just basic support stuff like answering questions, but the kind of hard things that are closer to a company's core value creation. So think about things like helping with a mortgage application, all the way to closing, or a car accident to getting a claim paid, a doctor's referral to handling a specialist appointment, or other use cases like renewing customers at risk of churn, collecting overdue bills, or turning around abandoned shopping carts into completed purchases.

• 53:26Ben Gilbert?

  So the magic is that these are not one-off conversations. These are journeys that unfold over days, weeks, or even months across phone calls, texts, emails, chat. Every interaction teaches your AI something new, which creates knowledge that is uniquely yours as a company and strengthens your competitive advantage over time.

• 53:43David Rosenthal?

  That ambition is what's attracting some of the world's biggest companies as customers. Today, Sierra partners with over 40% of the Fortune 50, one in three of the world's banks, and five of the 10 largest health insurers in the United States. And our favorite part, it's an entirely new business model. Instead of paying for usage or tokens, you pay for outcomes. A subscriber renewed or a claim got paid. So you can focus on growing your business, not choosing models or managing tokens.

• 54:11Ben Gilbert?

  And in fact, we think so highly of Sierra that we invested in the company. So to find out how you can build standout customer experiences that grow your business with AI, visit sierra.ai/acquired and just tell them that Ben and David sent you. Okay, so David, they're flying high. What could possibly go wrong?

• 54:31David Rosenthal?

  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 heli skiing. This is terrible.

• 55:05David Rosenthal?

  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. He absolutely was the ying to Michael's yang. And all of a sudden he's gone. Like one day he's here, one day he's gone.

• 55:34Ben Gilbert?

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

• 55:48David Rosenthal?

  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.

• 55:56Ben Gilbert?

  Yep.

• 55:56David Rosenthal?

  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,

• 56:11David Rosenthal?

  he starts experiencing chest pains and has to be rushed back to LA into emergency quadruple bypass, open heart surgery.

• 56:23Ben Gilbert?

  Yeah, and he's out of commission. I mean, he is recovering from open heart surgery in the hospital while they're feeling the loss of Frank Wells. There's a lot of decisions that need to get made and there's a lot of like personnel clashes that needed to get sorted through. But what can Michael do?

• 56:42David Rosenthal?

  He's in the hospital.

• 56:42Ben Gilbert?

  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.

• 56:52David Rosenthal?

  Yeah, yeah. So then, in the middle of this, Katzenberg quits.

• 56:59Ben Gilbert?

  Well, there's a lot of different sides to this story.

• 57:02David Rosenthal?

  Yep.

• 57:02Ben Gilbert?

  One version of it is that Jeffrey was promised the number two job at the company if Frank ever moved on or, you know, retired or anything.

• 57:12David Rosenthal?

  Yep, that was certainly Jeffrey's understanding that Michael had promised him that.

• 57:16Ben Gilbert?

  Yes, there were other perspectives, including from Roy E. Disney, that, hey, Jeffrey is great in the job that he has, uh, running the studios, you know, animation and the other film studios, but he's by no means ready to be the, the president of the Walt Disney Company.

• 57:31David Rosenthal?

  Which again, at this point is much more than just the film studios. You know, it's all of those other businesses that we talked about.

• 57:36Ben Gilbert?

  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.

• 57:47Ben Gilbert?

  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.

• 57:58David Rosenthal?

  Iconic IP.

• 57:59Ben Gilbert?

  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 gonna go do something else.

• 58:10David Rosenthal?

  Yep.

• 58:10Ben Gilbert?

  So he elects that option and leaves.

• 58:12David Rosenthal?

  Yep. And he doesn't just leave. He leaves and starts a competitor.

• 58:19Ben Gilbert?

  And starts a lawsuit.

• 58:20David Rosenthal?

  Yes, yes. He also sues the Walt Disney Company for bonuses that he was owed. They end up settling that lawsuit many years later for a reported $280 million. But yeah, he leaves and starts a competitor.

• 58:34Ben Gilbert?

  Yes.

• 58:34David Rosenthal?

  DreamWorks.

• 58:35Ben Gilbert?

  Yes.

• 58:35David Rosenthal?

  With Steven Spielberg and David Geffen. And the intention is DreamWorks is gonna be a full stack Disney competitor. They're gonna do live action, they're gonna do animation, they're gonna do music with David Geffen, they're gonna do television, they're gonna do video games, basically the whole Disney flywheel minus the parks. But then they sign up with Universal as their movie distributor and they set up their headquarters on Universal's lot, which is also a theme park. So, yeah.

• 59:07Ben Gilbert?

  Suddenly, a very, very formidable competitor.

• 59:11David Rosenthal?

  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 Cal Arts 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.

• 59:42Ben Gilbert?

  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.

• 59:59David Rosenthal?

  Yeah.

• 59:59Ben Gilbert?

  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.

• 1:00:07David Rosenthal?

  Yep.

• 1:00:08Ben Gilbert?

  So kind of from here, what comes out of Disney Animation is-

• 1:00:11David Rosenthal?

  Next one is Pocahontas, right?

• 1:00:12Ben Gilbert?

  Yep. Then Hunchback of Notre Dame, Hercules, Mulan, Tarzan, Fantasia 2000, a movie called Dinosaur in 2000, which I actually remember fondly.

• 1:00:24David Rosenthal?

  I think that was Disney's first 3D animated movie.

• 1:00:27Ben Gilbert?

  Yeah, exactly. Emperor's New Groove, Atlantis, Lilo and Stitch, and Treasure Planet.

• 1:00:35David Rosenthal?

  Yeah. You know, you know, some of those films, none of them are The Lion King.

• 1:00:42Ben Gilbert?

  Right.

• 1:00:42David Rosenthal?

  So, yeah, in the vacuum left by all of this, Michael decides that the person he's gonna promote to number two, president and chief operating officer of the Walt Disney Company is himself.

• 1:00:57Ben Gilbert?

  Yeah. It's the Michael Eisner company now through and through.

• 1:01:00David Rosenthal?

  Yep. Hey, he was great. Like, he's eminently qualified.

• 1:01:03Ben Gilbert?

  I mean, the last 10 years have been unbelievable, so.

• 1:01:06David Rosenthal?

  Yeah. But it's a big job on top of an already very big job.

• 1:01:11Ben Gilbert?

  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 gonna be the guy.

• 1:01:22David Rosenthal?

  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.

• 1:01:42Ben Gilbert?

  Yes. And wasn't there some regulatory reason why suddenly this was possible?

• 1:01:48David Rosenthal?

  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.

• 1:02:00Ben Gilbert?

  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.

• 1:02:42David Rosenthal?

  Yep.

• 1:02:43Ben Gilbert?

  So of course, the thing that makes sense, which is great. I love it when laws get repealed, when 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.

• 1:02:57David Rosenthal?

  Yep. So, Michael is sniffing around.

• 1:03:01Ben Gilbert?

  He's like interested in CBS first, right?

• 1:03:03David Rosenthal?

  Yeah, sniffing around CBS, NBC isn't for sale. He talks to ABC, does a typical Michael kind of lowball offer.

• 1:03:11Ben Gilbert?

  Lowball, yeah.

• 1:03:12David Rosenthal?

  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.

• 1:03:21Ben Gilbert?

  Right.

• 1:03:21David Rosenthal?

  So he knew everybody there. And then, at the Sun Valley Conference the next year in 1995.

• 1:03:28Ben Gilbert?

  It's always at Sun Valley.

• 1:03:29David Rosenthal?

  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.

• 1:03:51Ben Gilbert?

  The only bigger one was RJR Nabisco.

• 1:03:53David Rosenthal?

  Yes, yes. Which is gonna come up here in a sec.

• 1:03:56Ben Gilbert?

  And I think there's, there's so much great lore around this, but I think this was like a parking lot conversation where Michael had been hoping to run into Warren Buffett.

• 1:04:04David Rosenthal?

  Yep.

• 1:04:04Ben Gilbert?

  And he finally did. And Warren calls over Tom Murphy, who was there too.

• 1:04:08David Rosenthal?

  CEO of Capital Cities, ABC, yep.

• 1:04:10Ben Gilbert?

  And they kind of start talking. And I think within days, maybe a week or something, then they've got a deal hammered out.

• 1:04:15David Rosenthal?

  Yep, yep. Yeah. So Warren Buffett and Berkshire was the largest shareholder in ABC Cap Cities, which had been created a decade earlier in the famous Minnow Swallows Whale transaction.

• 1:04:29Ben Gilbert?

  That's right. A lot of listeners probably won't know this, but ABC is actually not the parent company that Disney was going after to acquire. ABC was owned by something called Capital Cities, which had unbelievably managed to acquire ABC, even though ABC is much bigger than it was.

• 1:04:44David Rosenthal?

  It was like four times bigger.

• 1:04:45Ben Gilbert?

  You might say, how is this possible? Well, they had the financial backing of Warren and-

• 1:04:50David Rosenthal?

  And Berkshire Hathaway.

• 1:04:51Ben Gilbert?

  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.

• 1:05:02David Rosenthal?

  Yep. One of Warren Buffett's many genius deals.

• 1:05:06Ben Gilbert?

  Yep.

• 1:05:07David Rosenthal?

  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, meh, it's kind of like, okay, businesses, because so much of American viewing

• 1:05:49David Rosenthal?

  time and thus advertising dollars had transitioned over to cable. But it just so happened that buried within ABC was the single best cable asset in the history of mankind, the Entertainment and Sports Programming Network, better known as ESPN.

• 1:06:13Ben Gilbert?

  Yes.

• 1:06:14David Rosenthal?

  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.

• 1:06:45Ben Gilbert?

  Why?

• 1:06:46David Rosenthal?

  I guess in theory, like Nabisco was gonna get some advertising synergies for their CPG products. I don't know.

• 1:06:55Ben Gilbert?

  Okay.

• 1:06:56David Rosenthal?

  It doesn't matter because the next year Nabisco gets taken private by KKR in the Barbarians at the Gate, you know, largest deal in history.

• 1:07:05Ben Gilbert?

  The largest acquisition of all time.

• 1:07:06David Rosenthal?

  Yep. 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.

• 1:07:25Ben Gilbert?

  In a complete free ride.

• 1:07:26David Rosenthal?

  Free ride. Doesn't have to lift a finger.

• 1:07:28Ben Gilbert?

  That's right. That's right.

• 1:07:30David Rosenthal?

  But yeah, ESPN became this juggernaut. And they actually invented a whole second revenue line for cable networks in addition to advertising, the affiliate fee business model.

• 1:07:44Ben Gilbert?

  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.

• 1:08:05David Rosenthal?

  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-

• 1:08:11Ben Gilbert?

  They would pay to be included.

• 1:08:12David Rosenthal?

  The cable operators to carry the channel, right?

• 1:08:15Ben Gilbert?

  Yes. And ESPN sort of realizes like, they were buying-

• 1:08:20Ben Gilbert?

  Sports rights.

• 1:08:21David Rosenthal?

  Yeah.

• 1:08:22Ben Gilbert?

  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?

• 1:08:35David Rosenthal?

  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, you know, their thousands or millions of subscribers out there, oh, hey, you know, you wanted to watch those NBA games or those MLB games or those NFL games? Or see those highlights on SportsCenter? Sorry, we're in a carriage dispute with ESPN.

• 1:09:20David Rosenthal?

  We're not going to be able to show those.

• 1:09:22Ben Gilbert?

  A stick that still gets used today.

• 1:09:24David Rosenthal?

  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.

• 1:09:34Ben Gilbert?

  Yep, that is pricing power right there.

• 1:09:36David Rosenthal?

  And so, once ESPN figures out this business model, it just becomes this incredible juggernaut. At first, Ben, like you said, they get the cable operators to pay them a few cents per subscriber that gets the ESPN channel. And it goes up to a dollar, then $2 a month, and then $5 a month. Do you know what ESPN's current affiliate fee average deal is per month with pay TV operators?

• 1:10:05Ben Gilbert?

  I know it's the single highest paid channel by like 3X.

• 1:10:09David Rosenthal?

  4X.

• 1:10:10Ben Gilbert?

  Yeah, much higher than, I'm going to guess, I don't know, $10 per subscriber.

• 1:10:13David Rosenthal?

  $9.42 per month.

• 1:10:17David Rosenthal?

  Per subscriber that the cable operators pay ESPN. This is billions and billions and billions of highly predictable cash money dollars flowing into ESPN.

• 1:10:29Ben Gilbert?

  Contractually guaranteed.

• 1:10:30David Rosenthal?

  Virtually guaranteed every month.

• 1:10:33Ben Gilbert?

  I mean, yeah, sports are the reason, especially today, that people are buying cable.

• 1:10:39David Rosenthal?

  Right.

• 1:10:40Ben Gilbert?

  And ESPN is very aware of that value that they provide to the bundle.

• 1:10:44David Rosenthal?

  They are very good at value capture.

• 1:10:45Ben Gilbert?

  Yes, yes.

• 1:10:48David Rosenthal?

  So, back to the Disney Cap Cities ABC deal here in 1995. I don't think, if they're really honest, that Disney and Michael really knew how, how big ESPN was going to become. At this point, ESPN had 66 million cable subscribers, but they were only just beginning to really ramp their pricing leverage.

• 1:11:15Ben Gilbert?

  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."

• 1:11:28David Rosenthal?

  Yep, yep. At that point, ESPN's average monthly affiliate fee with their cable partners was still less than a buck. So there was so much more room to scale ahead of it. But absolutely quickly after Disney acquires Cap Cities in 1996, ESPN becomes this just crown jewel within the company, almost overnight and almost completely by accident. The business model, once they got it going, was so simple. Just like, call up the cable operators every year or two and say, hey, we're going to raise carriage rates 20%. Oh, you don't like that? Um, okay, we'll pull the plug. You sure you don't like that? All right, 20% it is.

• 1:12:11Ben Gilbert?

  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.

• 1:12:21David Rosenthal?

  Yep, so this is like the heyday of ESPN here in the late 90s into the early 2000s. MLB, NBA, they do a big NFL deal in 1998 to get Sunday Night Football and Monday Night Football rights for ABC. They get three Super Bowls out of that. Meanwhile, they invented the whole sports highlight category.

• 1:12:45Ben Gilbert?

  That's right.

• 1:12:46David Rosenthal?

  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.

• 1:13:05Ben Gilbert?

  Yep.

• 1:13:05David Rosenthal?

  The cost to operate ESPN beyond the sports rights was not that much. They're operating out of Bristol, Connecticut.

• 1:13:12Ben Gilbert?

  Yeah. The cherry on top to all this too. So, so Disney is already in the cable game before acquiring ABC Cap Cities ESPN. They had launched Disney Channel in 1983.

• 1:13:25David Rosenthal?

  Yep, I think that's right.

• 1:13:25Ben Gilbert?

  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 like collectively bargain with the cable companies. So not only could they command premium rates for ESPN, they would also say, oh, the, yeah, you want the Disney Channel and A and E and Lifetime?

• 1:13:49David Rosenthal?

  Yeah, those rates are going up too.

• 1:13:50Ben Gilbert?

  Yep.

• 1:13:51David Rosenthal?

  Exactly.

• 1:13:51Ben Gilbert?

  It's almost like a bundle within a bundle.

• 1:13:53David Rosenthal?

  And that's not even getting into ESPN2, ESPN Classic, ESPN News, ESPN Ocho.

• 1:14:02Ben Gilbert?

  These days, the SEC network, they go nuts.

• 1:14:05David Rosenthal?

  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.

• 1:14:25Ben Gilbert?

  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.

• 1:14:39David Rosenthal?

  Yep.

• 1:14:39Ben Gilbert?

  Mania around that TV show.

• 1:14:41David Rosenthal?

  With ABC.

• 1:14:42Ben Gilbert?

  Bringing it full circle. And all that did become important, it was kind of amazing to have ABC and these cable stations as an outlet to promote Disney stuff, you know, in this kind of flywheel synergistic aligned way that we've been talking about. But to your point, David, what it ended up actually being was just an amazing source of continuous free cash flow that they could do other stuff with. Yeah, it's great that we can promote the Disney brand and it can provide all this alignment. But you know what's even better than that? Just spitting off mountains of cash that we can use in movies, in parks, to sort of expand the, the business.

• 1:15:22David Rosenthal?

  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.

• 1:15:33Ben Gilbert?

  Yes.

• 1:15:33David Rosenthal?

  That really doesn't.

• 1:15:35Ben Gilbert?

  Mickey Mouse and SportsCenter do not meet.

• 1:15:38David Rosenthal?

  I mean, they try to put, uh, what ESPN World of Sports in Disney World and stuff like that.

• 1:15:43Ben Gilbert?

  Wide World of Sports.

• 1:15:44David Rosenthal?

  Yep.

• 1:15:44Ben Gilbert?

  And ESPN Zone.

• 1:15:46David Rosenthal?

  Yeah, that's right. Oh, ESPN Zone. Yeah, yeah, yeah.

• 1:15:48Ben Gilbert?

  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.

• 1:15:56David Rosenthal?

  Yep.

• 1:15:57Ben Gilbert?

  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.

• 1:16:12David Rosenthal?

  Yep.

• 1:16:12Ben Gilbert?

  There's even a quote in Bob Iger's book, which, which we haven't talked about Bob yet, but we will.

• 1:16:16David Rosenthal?

  Comes into Disney via the Cap Cities acquisition.

• 1:16:19Ben Gilbert?

  That's right, he worked at Capital Cities.

• 1:16:21David Rosenthal?

  Bob is COO of Cap Cities.

• 1:16:23Ben Gilbert?

  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.

• 1:16:39David Rosenthal?

  Laid on me.

• 1:16:39Ben Gilbert?

  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.

• 1:16:53David Rosenthal?

  Yep.

• 1:16:54Ben Gilbert?

  That segment accounted for 60% of the entire company's operating income during that 2008 to 2011 period.

• 1:17:04David Rosenthal?

  Yep.

• 1:17:04Ben Gilbert?

  Over $5 billion in profit just from the cable channels. I mean, they evolved into the cable TV affiliate fees company.

• 1:17:14David Rosenthal?

  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.

• 1:17:35David Rosenthal?

  They acquire Starwave, Paul Allen's company after Microsoft.

• 1:17:39Ben Gilbert?

  Right here in Seattle.

• 1:17:40David Rosenthal?

  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. Yeah, you can't make all this stuff up. 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.

• 1:18:09Ben Gilbert?

  Well, the biggest credit to give is the deal that he didn't do.

• 1:18:12David Rosenthal?

  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.

• 1:18:26Ben Gilbert?

  Other than buying ESPN.

• 1:18:27David Rosenthal?

  Other than buying ESPN. But yeah, I was saying, thanks, but no thanks to AOL.

• 1:18:31Ben Gilbert?

  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.

• 1:19:04David Rosenthal?

  Yep. Yep. Yep. While we're on bad decisions during this era, Michael does finally

• 1:19:12Ben Gilbert?

  Hire a number two.

• 1:19:13David Rosenthal?

  Hire a president.

• 1:19:14Ben Gilbert?

  Yeah.

• 1:19:14David Rosenthal?

  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.

• 1:19:27Ben Gilbert?

  Michael, famed past acquired guest.

• 1:19:28David Rosenthal?

  That's right. Founder of Creative Artists Agency. This was huge. This was huge news in Hollywood.

• 1:19:34Ben Gilbert?

  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.

• 1:19:55David Rosenthal?

  And you know what? It also speaks to what Eisner had built and assembled at Disney, especially after Cap Cities. They're like, it was the place to be in media.

• 1:20:07Ben Gilbert?

  And it was almost immediately a horrible decision.

• 1:20:10David Rosenthal?

  Yeah.

• 1:20:10Ben Gilbert?

  On both sides.

• 1:20:11David Rosenthal?

  Ovitz was an agent. Eisner was an executive. This was a bad idea from the start.

• 1:20:18Ben Gilbert?

  You know what the job of a president and COO is? It's to sit in meetings all day, herd cats, make aligned decisions, tell people no, don't people please, make sure that the thing runs and manage processes that take a really long time with tens or hundreds of thousands of employees to carry out. The job of being an agent is being liked, saying yes, wielding your power, making things happen quick, being involved in 15 projects at once, or in Michael Ovitz's case, 500 projects at once. The day to day operations of being the number two at Disney could not have been more different than the skillset he had perfected at CAA.

• 1:21:01David Rosenthal?

  Yep. So Ovitz lasts just over a year at Disney and leaves in December 1996 with a $140 million severance package.

• 1:21:12Ben Gilbert?

  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.

• 1:21:25David Rosenthal?

  Yep. Now, all of this frankly, is just window dressing on what the real problem is. The real problem is Disney Animation.

• 1:21:33Ben Gilbert?

  Hmm. That's interesting.

• 1:21:35David Rosenthal?

  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.

• 1:21:48Ben Gilbert?

  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 sentence. When they bought Capital Cities, it's totally different. Owning TV stations that generate revenue from advertising, from cable subscriptions, mostly using one time use content that is

• 1:22:29Ben Gilbert?

  not evergreen, most of which you don't create yourself in-house. 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.

• 1:22:54David Rosenthal?

  Yep. 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 in 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, you know, put into the parks.

• 1:23:31Ben Gilbert?

  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.

• 1:23:47David Rosenthal?

  Yes. 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.

• 1:24:23Ben Gilbert?

  Yeah.

• 1:24:23David Rosenthal?

  Real bad.

• 1:24:24Ben Gilbert?

  Yep. I mean, for a few weeks, zero planes are in the air. And for years after that, people don't feel safe traveling.

• 1:24:32David Rosenthal?

  Yep.

• 1:24:33Ben Gilbert?

  Not to mention it triggers this like consumer spending impact.

• 1:24:36David Rosenthal?

  Yep.

• 1:24:36Ben Gilbert?

  Not good if you're running a high fixed cost theme park business.

• 1:24:40David Rosenthal?

  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

• 1:25:25David Rosenthal?

  Michael's strongest supporters among the shareholder base, in the days after September 11th, they face a margin call on their other investments. They have to become forced sellers of $2 billion worth of Disney shares, which puts even further downward pressure on the Disney stock, which has already just fallen by 25%. They sell the majority of their Disney holdings in a block transaction. And overnight, Eisner's support in the shareholder base, or at least the biggest bulk of it, is like, gone. Disney is now trading at depressed levels. I mean, it's almost like 1984 or all over again.

• 1:26:05Ben Gilbert?

  I know, right?

• 1:26:05David Rosenthal?

  Could there be corporate raiders showing up to break up the company?

• 1:26:08Ben Gilbert?

  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.

• 1:26:14David Rosenthal?

  Exactly. And even ESPN, for, you know, a short period of time, is shaky. Like, sporting events stop after 9/11? It's a weird time for the country.

• 1:26:23Ben Gilbert?

  Yep.

• 1:26:25David Rosenthal?

  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."

• 1:26:51Ben Gilbert?

  Man, this really is a mirror of 20 years earlier.

• 1:26:54David Rosenthal?

  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 savem company X.com,

• 1:27:35David Rosenthal?

  like an insider resigning from the company, starting a website and a public grassroots campaign, would famously be repeated once more in American corporate history. Do you know what company?

• 1:27:49Ben Gilbert?

  No.

• 1:27:50David Rosenthal?

  SavePapaJohns.com.

• 1:27:52Ben Gilbert?

  No way.

• 1:27:53David Rosenthal?

  Yeah. Save Disney and save Papa John's.

• 1:27:57Ben Gilbert?

  Wow.

• 1:27:58David Rosenthal?

  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.

• 1:28:11Ben Gilbert?

  That's right. That's S E N T R Y, like someone standing guard.

• 1:28:17David Rosenthal?

  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.

• 1:28:35Ben Gilbert?

  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 in the episode.

• 1:28:48David Rosenthal?

  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.

• 1:29:24Ben Gilbert?

  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, SER, 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.

• 1:30:01David Rosenthal?

  Yes. Thanks to Sentry for making sure everyone's favorite stuff, including Disney Plus, which, let me tell you, is our favorite stuff in this household, 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/acquired.

• 1:30:25Ben Gilbert?

  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.

• 1:30:53David Rosenthal?

  So great.

• 1:30:53Ben Gilbert?

  It really is. Space is limited to 500 people only, so grab your spots now at acquired.fm/meetup, and we look forward to seeing you there.

• 1:31:02David Rosenthal?

  Indeed.

• 1:31:03Ben Gilbert?

  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.

• 1:31:16David Rosenthal?

  Which he sent copies to Eisner, the board, and then the Wall Street Journal, the New York Times, and the LA Times.

• 1:31:24Ben Gilbert?

  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. 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.

• 1:31:57David Rosenthal?

  I mean, yeah, well, park attendance was down because of September 11th.

• 1:32:01Ben Gilbert?

  Right. Michael sort of famously had an eye for making the theme parks great, the sort of second only since Walt.

• 1:32:08David Rosenthal?

  Nobody invested in the parks like Michael Eisner.

• 1:32:10Ben Gilbert?

  Right, right. "Four, the perception by all of our stakeholders that the company is rapacious, soulless, and always looking for the quick buck rather than long-term value, which is leading to a loss of public trust." Disney was, by this point, distributing Pixar's early films, but Eisner and Pixar had a very contentious relationship. We'll put a pin in that for now.

• 1:32:30David Rosenthal?

  Yep.

• 1:32:31Ben Gilbert?

  "Five, a creative brain drain from the company due to mismanagement and low morale. Six, a failure to build good relationships with Disney's partners, particularly Pixar. And seven, your consistent refusal to establish a clear succession plan." This is a brutal letter.

• 1:32:49David Rosenthal?

  Yeah. And then Roy ends the letter with, "Michael, it is my sincere belief that it is you who should be leaving, and not me. Accordingly, I once again call for your resignation and retirement." Ooh, man. So what is Roy so upset about? Amazingly, Disney Animation had continued to go downhill.

• 1:33:16Ben Gilbert?

  Right. 2003 had Brother Bear, 2004 had Home on the Range, 2005 was Chicken Little. You've never heard of any of these films, I'm sure. Maybe you've heard 2007, they had Meet the Robinsons, which I guess would have been in development.

• 1:33:29David Rosenthal?

  Yeah, yeah, yeah. Bolt was the end of this misery in 2008.

• 1:33:33Ben Gilbert?

  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.

• 1:33:48David Rosenthal?

  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.

• 1:34:32David Rosenthal?

  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.

• 1:34:45Ben Gilbert?

  And the company's just spread too thin. It's got two completely different business models, doing two completely different things from this merger with ABC.

• 1:34:51David Rosenthal?

  Yep. So what happens next? Roy and Stanley had resigned in a huff from the board at the end of 2003, right at the holidays. Disney's annual shareholder meeting is coming up in March of 2004, where the vote is going to happen to, hopefully in their minds, oust Michael Eisner as CEO of Disney. Disney, in response, schedules an Analyst Day, an Investor Day, for the company in Orlando in February of 2004, ahead of the meeting to sort of shore up support for Michael and shore up support for the stock. And they have good news to share. Pirates of the Caribbean is going to save the company.

• 1:35:33Ben Gilbert?

  The movie did great, based on a Disneyland ride. I mean, you can't write a better story.

• 1:35:37David Rosenthal?

  Can't write a better story. Revenue for the quarter is up 19%. Johnny Depp riding in, going to save Michael Eisner's job. They all wake up the morning of the Investor Day. Eisner's there, Bob Iger is there. By this point in time, he's been promoted to be President and COO of the Walt Disney Company. And they read the news that Comcast, the Philadelphia-based cable company, is making a hostile takeover bid to acquire Disney for $54 billion in Comcast

• 1:36:17David Rosenthal?

  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-

• 1:36:32Ben Gilbert?

  Just offensive.

• 1:36:33David Rosenthal?

  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.

• 1:36:47David Rosenthal?

  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 happen because to many people, they look at this and they're like, how low has the Walt Disney Company fallen?

• 1:37:02Ben Gilbert?

  Yeah.

• 1:37:03David Rosenthal?

  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?

• 1:37:32Ben Gilbert?

  They're constantly going to war with ESPN every year to renegotiate the carriage rates. Be nice to own it.

• 1:37:38David Rosenthal?

  We might be able to get ESPN. Holy crap, let's try it.

• 1:37:41Ben Gilbert?

  Yep.

• 1:37:42David Rosenthal?

  Oh, man.

• 1:37:44Ben Gilbert?

  Just to underscore this ESPN thing, friend of the show, Ben Thompson, has a great reflection on all this. Walt Disney's chart, the famous flywheel one, may have been a very satisfying business model, but the reality of Disney's TV business is that it was scalable in a way that the Disney chart could never be. The beauty of the cable bundle is that nearly every household in America paid for it every single month, regardless of whether or not Disney had a hit TV show or a must watch sporting event. Thanks to its suite of channels anchored by ESPN, Disney received a big chunk of that money and it grew like clockwork. In that world, Walt Disney's model was a nice side business to the real moneymaker.

• 1:38:23David Rosenthal?

  Yep, yep. Man, it's all about ESPN, everything that's happening.

• 1:38:28Ben Gilbert?

  Yep. The cable network's operating income, the profit within the Walt Disney Company at this point was $2 billion. Company wide, they were only making $4.5 billion. So like almost 50% of the company's total profits is just these cable networks.

• 1:38:46David Rosenthal?

  Yeah, which is really.

• 1:38:47Ben Gilbert?

  ESPN.

• 1:38:47David Rosenthal?

  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 funds, they announced that they're going to vote their Disney shares against Eisner and vote for him to resign. So all of this comes to a head on March 3rd, 2004, at the Disney annual shareholder meeting,

• 1:39:31David Rosenthal?

  which hilariously had been scheduled that year to take place in Philadelphia, headquarters of Comcast.

• 1:39:39Ben Gilbert?

  They're like just a few blocks away.

• 1:39:40David Rosenthal?

  At the end of the day, 43% of the shareholder base votes to withhold support for Eisner as CEO, which is a huge number.

• 1:39:50Ben Gilbert?

  You don't renew a CEO's contract when 43% of your shareholders don't want that CEO.

• 1:39:55David Rosenthal?

  Yep. So the Disney board meets in an emergency executive session without management present, during which they decide to remove Michael as chairman, but let him remain CEO of Disney for the moment. They announce this, the Disney stock jumps in response. Meanwhile, Comcast stock has been falling, so a few weeks later Comcast formally withdraws their bid.

• 1:40:23David Rosenthal?

  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, but now there's question, okay, who's going to take over?

• 1:40:45Ben Gilbert?

  Yep.

• 1:40:46David Rosenthal?

  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 gotta be an external candidate that is going to come in and take over Disney, just like Wells and Eisner came in 20 years ago.

• 1:41:07Ben Gilbert?

  Well, do you know what the press release says, who it names?

• 1:41:11David Rosenthal?

  Well, it says that there will be external candidates and that there will be one internal candidate.

• 1:41:17Ben Gilbert?

  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, 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 it's, there's going to be.

• 1:41:41David Rosenthal?

  Otherwise, it's going to be chaos around here.

• 1:41:42Ben Gilbert?

  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. You have to say external candidates and Bob Iger. And they agree and say, okay, that we'll do it.

• 1:41:58David Rosenthal?

  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 Rite 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.

• 1:42:36Ben Gilbert?

  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?

• 1:42:45David Rosenthal?

  And how did you screw up so badly?

• 1:42:46Ben Gilbert?

  Yeah.

• 1:42:47David Rosenthal?

  So he realizes that his only chance is to completely reframe the situation. This isn't about what happened in the past. This is only about the future, which both is the right way to look at this and it is Bob's only chance to win.

• 1:43:02Ben Gilbert?

  Yes.

• 1:43:03David Rosenthal?

  So he proposes to the board in his candidacy, three pillars of his vision and strategy for the future of the Walt Disney Company. Number one, we need to devote most of our time and capital to the creation of high quality branded content, AKA we need to revive Disney animation and along with it, the Disney flywheel. Spot on, especially now because the amount of content in the world is exploding. We're here entering the social media era. There's Facebook, we're about to get YouTube. Consumers have infinite choice for content.

• 1:43:46David Rosenthal?

  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.

• 1:43:55Ben Gilbert?

  And build a brand to be known for that. So people know to look to you for that highest quality tier.

• 1:44:01David Rosenthal?

  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.

• 1:44:12David Rosenthal?

  It's still Disney.

• 1:44:13Ben Gilbert?

  Yep.

• 1:44:14David Rosenthal?

  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.

• 1:44:51Ben Gilbert?

  Both to 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.

• 1:45:07David Rosenthal?

  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.

• 1:45:40Ben Gilbert?

  Yep.

• 1:45:41David Rosenthal?

  And we need to get into those two countries.

• 1:45:43Ben Gilbert?

  Yep.

• 1:45:44David Rosenthal?

  So amazingly, Bob wins on this campaign. In March of 2005, the board announces Bob Iger will be the future CEO of the Walt Disney Company. They accelerate his start date and Michael's departure date to that September 2005, a year ahead of when Michael had initially announced. And the Michael Eisner.

• 1:46:08David Rosenthal?

  Era at Disney comes to an end after 21 years.

• 1:46:12Ben Gilbert?

  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.

• 1:46:26David Rosenthal?

  And acquiring capital cities.

• 1:46:28Ben Gilbert?

  But the ownership of capital cities is sort of that, that whole second era.

• 1:46:31David Rosenthal?

  Yes. Yeah, that I think that's the way I would frame it, too. He and Wells and Katzenberg did an incredible job turning around Disney in the first 10 years. That sort of went sideways in the second 10 years. But also, Michael made one of the greatest acquisitions of all time in the second 10 years. And because of all the drama, doesn't get anywhere near enough credit for it.

• 1:46:56Ben Gilbert?

  Yeah. It's so interesting. When you say the greatest acquisitions of all time, when I look at ABC Capital Cities, it was because it had ESPN, but it also cost the company its strategic clarity.

• 1:47:07David Rosenthal?

  Yes.

• 1:47:08Ben Gilbert?

  Disney never again would get to be just Disney. It's the flywheel business and the

• 1:47:16David Rosenthal?

  ESPN.

• 1:47:17Ben Gilbert?

  Affiliate slash advertising cable business.

• 1:47:21David Rosenthal?

  Yep.

• 1:47:22Ben Gilbert?

  And it's worth it because buying ESPN was this pseudo-infinite wellspring of capital to fund everything else, but it cost the clarity.

• 1:47:32David Rosenthal?

  Yep, that's exactly right.

• 1:47:33Ben Gilbert?

  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.

• 1:47:52David Rosenthal?

  Yep.

• 1:47:53Ben Gilbert?

  That's a 15% compound annual growth rate over his two decades. And net income goes from $97 million to $2.5 billion.

• 1:48:03David Rosenthal?

  Yeah, 26x net income during his tenure.

• 1:48:07Ben Gilbert?

  By the numbers, great. And, you know, ESPN is arguments one, two, and three of why was he a great CEO?

• 1:48:17David Rosenthal?

  Yep, yep, yep.

• 1:48:18Ben Gilbert?

  And also Disney's renaissance, but like, I'd put that at four, below ESPN, ESPN, and ESPN.

• 1:48:24David Rosenthal?

  And then the Disney Renaissance, yeah.

• 1:48:26Ben Gilbert?

  Yes.

• 1:48:26David Rosenthal?

  I don't know, you gotta count Lion King the Musical for something.

• 1:48:29Ben Gilbert?

  That's true. That's very true.

• 1:48:34David Rosenthal?

  So Bob Iger, his name's CEO. One of his first calls after he gets the news on, I think, a Sunday afternoon is to Steve Jobs, the then CEO of Pixar, in addition to being the CEO of Apple. And he writes in Ride of a Lifetime, "I barely knew Steve at that point. He was typical Steve. How long have you worked for Michael?" he asked. "10 years." "Huh," he said. "Well, I don't see how things will be any different, but sure. When the dust settles, be in touch."

• 1:49:09David Rosenthal?

  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.

• 1:49:22Ben Gilbert?

  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.

• 1:49:29David Rosenthal?

  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.

• 1:49:54Ben Gilbert?

  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, 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.

• 1:50:28David Rosenthal?

  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.

• 1:50:40Ben Gilbert?

  Yes. 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 to 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.

• 1:51:02David Rosenthal?

  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

• 1:51:43David Rosenthal?

  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.

• 1:52:03David Rosenthal?

  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.

• 1:52:17Ben Gilbert?

  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, 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.

• 1:52:43David Rosenthal?

  Yep. Pixar is the spiritual successor of Walt Disney's vision for Disney Animation.

• 1:52:52Ben Gilbert?

  Yep. All right. So we're winding the clock back. Let's start with John Lasseter.

• 1:52:57David Rosenthal?

  Yep.

• 1:52:57Ben Gilbert?

  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.

• 1:53:06David Rosenthal?

  That's right.

• 1:53:06Ben Gilbert?

  And David, as you mentioned, he ends up getting into Cal Arts. It's a complete dream come true. Classes are taught by Disney's legendary animators who worked with Walt, the nine old men, as they are affectionately referred to. Now, he does get a job at Disney Animation, but it's unfortunately during those dark times in the early 80s. John gets obsessed with the budding field of computer animation, even though no one else in the department is, although actually Tron was happening elsewhere in Disney. So

• 1:53:35David Rosenthal?

  That's right.

• 1:53:35Ben Gilbert?

  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 gonna use computer animation to do it. Now, remember, this is the early 80s, so computer animation was pretty primitive stuff.

• 1:53:57David Rosenthal?

  The time wasn't actually right yet.

• 1:54:00Ben Gilbert?

  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 gonna push the envelope on what is possible in great storytelling. John is immediately, and I'm not kidding, same day, let go.

• 1:54:17David Rosenthal?

  Wow, I didn't realize it was same day.

• 1:54:18Ben Gilbert?

  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."

• 1:54:28David Rosenthal?

  Thanks for your meeting. You're fired.

• 1:54:29Ben Gilbert?

  Yes. So we'll put a pin in John's story for now while we introduce another co-founder of Pixar. Flashback to 1963. We're at the University of Utah, where we meet Ed Catmull. Ed also wanted to do animation his whole life, but he felt that he didn't have the chops to cut it as an artist. So he got into computers instead. He finds himself in this truly magical program for computer graphics at Utah, though it was sort of just this, like, pocket of an esoteric field that most people did not really care about or appreciate at the time. Ed ends up creating one of the first films ever with computer graphics, a rotating model of his own hand, just a black and white wireframe. His classmates

• 1:55:13Ben Gilbert?

  are famed computer scientist Alan Kay, Jim Clark of Netscape and Silicon Graphics.

• 1:55:19David Rosenthal?

  Yep.

• 1:55:20Ben Gilbert?

  And John Warnock, who founded Adobe.

• 1:55:23David Rosenthal?

  And also, wasn't Nolan Bushnell knocking around there?

• 1:55:27Ben Gilbert?

  Yep. Past Acquired guest Nolan Bushnell, the famous founder of not only Atari, but Chuck E. Cheese.

• 1:55:33David Rosenthal?

  That's right. That's right.

• 1:55:35Ben Gilbert?

  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 era is now 1979, and there's a guy named George Lucas, who is looking for someone

• 1:55:51David Rosenthal?

  Heard of him.

• 1:55:52Ben Gilbert?

  Who can help him, yeah, heard of 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. 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?

• 1:56:32Ben Gilbert?

  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. So unlike other industries, being a filmmaker has this, like, sort of delightful

• 1:57:04David Rosenthal?

  Yeah, you're sort of collaborators slash competitors.

• 1:57:08Ben Gilbert?

  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.

• 1:57:20David Rosenthal?

  Yep.

• 1:57:21Ben Gilbert?

  And really, the goal here is figure out how to do stuff that you couldn't do with traditional live-action techniques. Pretty broad.

• 1:57:29Ben Gilbert?

  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. You've got John Lasseter and Ed Catpole, 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

• 1:58:14Ben Gilbert?

  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.

• 1:58:22David Rosenthal?

  John's like, oh, let me check my calendar. Yeah, I'm free.

• 1:58:26Ben Gilbert?

  Yes, and this is really the first chance that they had to get like a real animator. So the duo is now together, but computer hardware at the time was not capable of doing what they needed. So the group needs to develop hardware. They make the Pixar Image Computer within Lucasfilm. This is the first time they've actually used the Pixar name for anything. So they're making these short films, which there's no, it's not a real market. It's fun to make, but it's not like anyone's buying them. The Pixar Image Computer could do MRIs. Basically, anything where you needed to turn images into 3D renders, they did the first volumetric renders of an MRI. They also would analyze satellite photos for intelligence agencies and build 3D models there. So they're finding these like niche,

• 1:59:10Ben Gilbert?

  interesting markets to try to make some money.

• 1:59:13David Rosenthal?

  For their software and hardware?

• 1:59:14Ben Gilbert?

  Yeah.

• 1:59:15David Rosenthal?

  So it's interesting. All of this is part of Lucasfilm. Is George interested in MRIs or even like making animated films?

• 1:59:28Ben Gilbert?

  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.

• 1:59:52David Rosenthal?

  Which, this is fascinating, by the way. This all happened because George believes so deeply in Star Wars and the movies he was making that he didn't want to give up any equity in Lucasfilm as part of his divorce. So he needed to raise cash to pay his former wife cash instead of giving her any equity in Lucasfilm.

• 2:00:12Ben Gilbert?

  Wild.

• 2:00:12David Rosenthal?

  This is like the butterfly flaps its wings that results in Pixar saving Disney.

• 2:00:17Ben Gilbert?

  So.

• 2:00:17David Rosenthal?

  He finds a buyer.

• 2:00:19Ben Gilbert?

  Yes, enter Steve Jobs.

• 2:00:21David Rosenthal?

  Steve Jobs.

• 2:00:23Ben Gilbert?

  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. He wants to get back at Apple using Pixar as the seeds of the company.

• 2:01:06David Rosenthal?

  He wants Pixar to be next.

• 2:01:07Ben Gilbert?

  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. And 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.

• 2:01:48Ben Gilbert?

  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 freaking Lucas, right in between Star Wars and Empire.

• 2:02:11David Rosenthal?

  Yep.

• 2:02:11Ben Gilbert?

  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.

• 2:02:36David Rosenthal?

  It sounds like a Pixar movie.

• 2:02:38Ben Gilbert?

  Doesn't it? This is like, this is why acquired exists.

• 2:02:42David Rosenthal?

  It's so, it's so great. So they spin off the company. They don't have any customers for the product. So they go out and they recruit someone to come and buy their software as a commercial product.

• 2:02:59Ben Gilbert?

  Yes, and that customer is Disney.

• 2:03:02David Rosenthal?

  Yes.

• 2:03:03Ben Gilbert?

  The first check to Pixar, Inc. is from Disney to work with them and create the CAPS system for improving their 2D animation.

• 2:03:11David Rosenthal?

  Yep, this is the beginning of the Disney Pixar relationship as a vendor.

• 2:03:16Ben Gilbert?

  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.

• 2:03:33David Rosenthal?

  You were texting me. Your dad was at the conference where they showed Luxo Jr.?

• 2:03:39Ben Gilbert?

  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 is going to change the world.

• 2:04:01David Rosenthal?

  Wow, wow.

• 2:04:02Ben Gilbert?

  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.

• 2:04:22Ben Gilbert?

  So full steam ahead, right? Let's, let's go make movies. Well, there's a problem. You need like $30 million to go do that. So first, they start making a bunch of commercials to try to pay the bills. They develop RenderMan as a piece of 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. So here's what happens.

• 2:05:06Ben Gilbert?

  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.

• 2:05:22David Rosenthal?

  Oh, wow. So right as the Disney Renaissance is happening.

• 2:05:26Ben Gilbert?

  That's right.

• 2:05:26David Rosenthal?

  They want him back.

• 2:05:27Ben Gilbert?

  That's right. And instead, he says, no, I, you know, I kind of threw my lot in with these guys in Northern California. We got something cool here. It's a great team. No, I'm turning down multiple offers to be a Disney Animation Director, his lifelong dream. And he says, but here's what I think we should do. Let's do a 30-minute Christmas special based on our Tin Toy short. And he's got a little bit of leverage to kind of ask for stuff here, 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. Let's do it, a whole feature film, Toy Story.

• 2:06:06David Rosenthal?

  Yep, and this is how Toy Story happens.

• 2:06:10Ben Gilbert?

  So why is this such a crazy idea? I mean, why is it going to cost $30 million? Why did the folks at Disney think this was such a kind of nutty idea to make a computer animated film?

• 2:06:22David Rosenthal?

  Yeah, it seems on the surface like this should be easier than 2D animation, right? You're going to 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.

• 2:06:46Ben Gilbert?

  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.

• 2:07:04David Rosenthal?

  Yeah, they're creating the universe, basically. It's not just that you're illustrating a still frame.

• 2:07:09Ben Gilbert?

  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. And as this little animated guide, the Pixar Animation Steps. So here they are. Step one, storyboards. Over 4,000 storyboard drawings are created as the blueprint for the action and dialogue of a feature-length Pixar film. I think the most interesting part of this is they then take the storyboards and put them together in a story reel, where they're able to like, watch it like a movie, even though they're still frames. And they either narrate over it, or they do temp dialogue on top. So in a very inexpensive way, using 2D sort of sketching,

• 2:07:54Ben Gilbert?

  you really can get a true sense of what's going on. This also makes it very iterating 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 gonna work even better. If it's not working in story reels, the animation won't save it." And then Jobs says, "In essence, it lets us beta test and iterate on our films before we actually make it. We believe it's one of

• 2:08:37Ben Gilbert?

  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.

• 2:08:45David Rosenthal?

  Yeah.

• 2:08:46Ben Gilbert?

  And the story and characters all have to work in 2D first.

• 2:08:49David Rosenthal?

  Yep.

• 2:08:50Ben Gilbert?

  All right. So step two, models. Pixar's proprietary animation software, Marionette, is used to create the three-dimensional computer models for characters, props, and sets. Three, layout. Each scene is begun by assembling the models for the required characters' props and sets, and blocking out the action. This is where they really go into the computer for the first time. They take the models, and they lay them out to kind of resemble the 2D paper sketches that they made for the story reels. Now hilariously, you can watch some of these, like you can watch the film when it's only done in the layout stage. The characters don't have any of their limbs that move, their mouths don't move, they're these like, lifeless puppets being dragged around. You kind of get the plot, but you

• 2:09:33Ben Gilbert?

  get no personality or emotion.

• 2:09:36David Rosenthal?

  Yeah, they're like the 3D equivalent of stick figures.

• 2:09:38Ben Gilbert?

  Yeah, they have, the animators haven't really performed the characters yet.

• 2:09:42David Rosenthal?

  Yep.

• 2:09:43Ben Gilbert?

  So then, step four, animation. Pixar's proprietary animation software allows Pixar's animators to choreograph the motion in each scene by defining keyframes 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. But you never want to rely on the facial expressions to do the heavy lifting for you.

• 2:10:28David Rosenthal?

  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.

• 2:10:37Ben Gilbert?

  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

• 2:11:20Ben Gilbert?

  locked together. 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.

• 2:11:33David Rosenthal?

  Yep.

• 2:11:33Ben Gilbert?

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

• 2:12:03David Rosenthal?

  Yep.

• 2:12:03Ben Gilbert?

  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. 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

• 2:12:47Ben Gilbert?

  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.

• 2:12:57David Rosenthal?

  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.

• 2:13:14Ben Gilbert?

  That's exactly right.

• 2:13:15David Rosenthal?

  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.

• 2:13:42Ben Gilbert?

  All right. So back to Toy Story. January 19th, 1993, they get the green light from Disney. And specifically, what they have is a deal to make up to three pictures, just one for now, and Disney has the exclusive option to extend for two more. Where Disney's basically hiring Pixar to make a movie for them. And here are the terms. Disney puts up all the capital for production. It ends up being about $30 million. 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

• 2:14:24Ben Gilbert?

  profits, and that is profit after paying back some of the marketing costs.

• 2:14:28David Rosenthal?

  Yep.

• 2:14:28Ben Gilbert?

  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.

• 2:14:37David Rosenthal?

  Yeah. Oh, by the way, Disney keeps all of the intellectual property rights to Toy Story. All the characters, all the merch, all, et cetera, et cetera.

• 2:14:45Ben Gilbert?

  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, there's 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.

• 2:15:21David Rosenthal?

  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.

• 2:15:45Ben Gilbert?

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

• 2:16:27Ben Gilbert?

  film edgier. And through a combination of Pixar not really feeling their confidence in storytelling, and the notes pushing them this way, Woody ends up very mean. He's got this, like, brand of insult humor. He's so threatened by Buzz that that emotion overshadows every other action he could possibly take in any scene. He's like, actively and intentionally pushing Buzz out windows, and, you know, behind dressers, and stuff like that. So December of 93, the story reel screening happens down in Burbank. They're like, all right, here's all the notes that we've taken, here's the story we've got. It goes over like a lead balloon. Katzenberg hates it. Roy E. Disney hates it. None of the characters

• 2:17:10Ben Gilbert?

  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 multi-dimensional. They come back and it's good enough. There's real tension in the story. Disney, to their credit, looks at it again and says, okay, you're back on.

• 2:17:52Ben Gilbert?

  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.

• 2:18:15David Rosenthal?

  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.

• 2:18:58David Rosenthal?

  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, et cetera, et cetera. Okay, how are we going to get the capital?

• 2:19:21David Rosenthal?

  We need to go public.

• 2:19:23Ben Gilbert?

  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 Toy Story comes out.

• 2:19:37David Rosenthal?

  And this is where Steve was just brilliant because he was like, if it's a success, we'll make a big splash. We'll be the darlings of the media. We'll have a big hit movie. That is the time to go public.

• 2:19:47Ben Gilbert?

  If you're anyone else at Pixar, 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, this is Steve Jobs.

• 2:19:54David Rosenthal?

  Yeah. So Toy Story comes out on November 22nd, 1995, grosses nearly $400 million worldwide.

• 2:20:04Ben Gilbert?

  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 US. And it was the first ever animated film that was a blockbuster that was not created by Disney.

• 2:20:20David Rosenthal?

  And it was the highest grossing film of the whole year.

• 2:20:24Ben Gilbert?

  Not children's movie, like highest grossing, period.

• 2:20:28David Rosenthal?

  Period. So one week later, after Toy Story premieres on November 29th, 1995, Pixar goes public.

• 2:20:36Ben Gilbert?

  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.

• 2:20:46David Rosenthal?

  Well, this is actually a theme that I was 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.

• 2:21:14Ben Gilbert?

  Yes.

• 2:21:14David Rosenthal?

  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.

• 2:21:24Ben Gilbert?

  So that 140 million they raised makes it the largest IPO of the year, larger than Netscape.

• 2:21:30David Rosenthal?

  Yes.

• 2:21:31Ben Gilbert?

  The numbers on Steve, he bought the company for $5 million. 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.

• 2:21:46David Rosenthal?

  So what's that, like 1.2 billion?

• 2:21:48Ben Gilbert?

  Yes. Pixar alone made Steve Jobs a billionaire on IPO day.

• 2:21:52David Rosenthal?

  Yep. Incredible.

• 2:21:54Ben Gilbert?

  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.

• 2:22:10David Rosenthal?

  Then Pixar would have gotten crushed by Disney in the next negotiations.

• 2:22:14Ben Gilbert?

  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. Now Disney also would be doing the distribution of the film.

• 2:22:58Ben Gilbert?

  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.

• 2:23:08David Rosenthal?

  Well, the story I heard was that he did. And like, it makes it like, distribution has real costs and marketing and like, of course Disney should get paid for that. The story I heard is that Steve found out later from George Lucas that the terms of Lucas's distribution deal with Fox were better than the distribution terms that Pixar got with Disney. And that's what he was pissed about.

• 2:23:32Ben Gilbert?

  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

• 2:23:51David Rosenthal?

  deteriorating.

• 2:23:52Ben Gilbert?

  Kind of deteriorating. Yeah, with Steve Jobs. Disney wants to go direct to video with Toy Story 2. This is actually interesting to flashback and think about this. Disney had never done anything except for direct to video for sequels. The thinking was that you make something great once, you put it in theaters and then.

• 2:24:12David Rosenthal?

  You don't over-exploit the IP.

• 2:24:14Ben Gilbert?

  That's exactly right. But also the belief was that sequels can't possibly be as good. You're always making this like lesser second tier thing. And they actually hadn't done a ton of sequels, which is quite funny that it's completely flipped now. Now the goal of creating the first film is to be able to create a franchise so they can exploit the IP more and more after that. Toy Story 2 is where they learned the lesson that, oh, actually, that is a 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. Cause like the A teams on Bug's Life, the B team is clearly working on the thing that's going to be lower budget, lower distribution, direct to video. We don't know how to do it. Disney says, okay.

• 2:24:59Ben Gilbert?

  So in February of 98, Disney says, Toy Story 2, you are greenlit for theatrical release.

• 2:25:05David Rosenthal?

  But the question is, does it count towards the deal or not?

• 2:25:08Ben Gilbert?

  So Steve realizes Toy Story 2 is going to be good. And again, he wants to renegotiate. He goes to Eisner and says, hey, can the five picture deal include sequels? Meanwhile, Michael Eisner is like, why would I do that? The paper says what it says. We negotiated this for a reason. You want to change the terms of the deal. I don't want to change the terms of the deal. So we'll just stick with the deal we have.

• 2:25:29David Rosenthal?

  Yep.

• 2:25:30Ben Gilbert?

  You can see why the relationship starts to deteriorate.

• 2:25:33David Rosenthal?

  Yes, yes. They make Toy Story 2, doesn't count. They release it in theaters. It grosses almost $500 million.

• 2:25:43Ben Gilbert?

  Pixar's highest grossing film yet. And Disney learns all the way to the bank that sequels can be real profitable.

• 2:25:51David Rosenthal?

  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 and the renaissance at Apple. The iPod comes out, iTunes comes out. And one of the big marketing campaigns for the iPod and iTunes is rip, mix, burn.

• 2:26:19Ben Gilbert?

  But you know who doesn't like the word rip is Michael Eisner.

• 2:26:22David Rosenthal?

  So Eisner goes and testifies in front of Congress in 2002 against the technology industry and specifically calls out Apple's rip, mix, burn marketing campaign, saying it encourages theft of intellectual property via digital piracy. And Bob Iger has a quote about this in Ride of a Lifetime. "It was clear that Pixar was gaining swagger as Disney was losing it. And these two strong-willed personalities were destined to battle each other for supremacy." Man, and if you really want to poke Steve Jobs,

• 2:27:04David Rosenthal?

  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.

• 2:27:20Ben Gilbert?

  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.

• 2:27:27David Rosenthal?

  Yep. Yep. So he had good reason to be worried here. But yeah, you probably don't want to come after Steve Jobs and 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 a early screening of one of the reels of Nemo, decides he doesn't like it.

• 2:27:53Ben Gilbert?

  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.

• 2:28:00David Rosenthal?

  Yep.

• 2:28:02David Rosenthal?

  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 gonna flop and it'll be a quote, "reality check" for those guys. And it'll be great for Disney's negotiating leverage for Pixar to fail. Never mind that Disney is getting over 50% of the economics in Nemo. So you should be incentivized to want it to succeed.

• 2:28:36Ben Gilbert?

  The memo leaks, right?

• 2:28:37David Rosenthal?

  The memo gets leaked from the board to the press.

• 2:28:41Ben Gilbert?

  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 gonna actively work to make it fail so we can increase our leverage.

• 2:29:00David Rosenthal?

  Yep. So Nemo comes out in 2003 and Michael could not have been more wrong. It grosses $871 million in theaters, making it the second highest grossing movie of 2003 behind only Lord of the Rings: Return of the King. And then they put it out on home video on DVD.

• 2:29:23Ben Gilbert?

  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.

• 2:29:31David Rosenthal?

  Yeah.

• 2:29:32Ben Gilbert?

  From this film, even before DVD.

• 2:29:34David Rosenthal?

  These were the days, Ben. These were the days. The Finding Nemo DVD was, just like The Lion King, VHS was the high watermark for VHS, the Finding Nemo DVD was the peak, the absolute pinnacle.

• 2:29:54Ben Gilbert?

  Of home video.

• 2:29:55David Rosenthal?

  Of home video in the DVD era.

• 2:29:58Ben Gilbert?

  Cause even Netflix isn't streaming yet at this point. This is 2004.

• 2:30:01David Rosenthal?

  There's no streaming. This, this is the peak. So we heard in the research that Disney and Pixar would sell 65 million copies of the Finding Nemo DVD, all told, you know, across all, all timeframe.

• 2:30:23Ben Gilbert?

  At 30 bucks a pop.

• 2:30:24David Rosenthal?

  30 bucks a 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.

• 2:30:52Ben Gilbert?

  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.

• 2:31:28David Rosenthal?

  Yep.

• 2:31:29Ben Gilbert?

  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.

• 2:32:13Ben Gilbert?

  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.

• 2:32:29David Rosenthal?

  Yep.

• 2:32:30Ben Gilbert?

  Except for ESPN.

• 2:32:31David Rosenthal?

  Yep.

• 2:32:32Ben Gilbert?

  So all this comes to January 2004, where Pixar pulls the plug on the negotiations and they issue a press release. And listeners, we'll 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."

• 2:33:07David Rosenthal?

  Classic Steve Jobs.

• 2:33:10Ben Gilbert?

  That is definitely written by Steve personally.

• 2:33:12David Rosenthal?

  Definitely written by Steve.

• 2:33:13Ben Gilbert?

  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.

• 2:33:40David Rosenthal?

  Yep.

• 2:33:41Ben Gilbert?

  I think they had actually done work on Toy Story 3.

• 2:33:44David Rosenthal?

  Man, you can bet that that is buried pretty deep in the vault these days.

• 2:33:48Ben Gilbert?

  Yes. So all this happens in the last breaths of the Eisner administration.

• 2:33:53David Rosenthal?

  Yeah, this is part of the backdrop, happening during the Save Disney campaign, the Comcast offer, the shareholder proxy vote, the CEO search.

• 2:34:02Ben Gilbert?

  In fact, in that earnings call that blew the doors off.

• 2:34:05David Rosenthal?

  Yeah, it wasn't just Pirates of the Caribbean, it was Nemo.

• 2:34:07Ben Gilbert?

  Exactly, exactly. Both of those movies opened in that quarter.

• 2:34:11David Rosenthal?

  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.

• 2:34:30Ben Gilbert?

  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."

• 2:34:53David Rosenthal?

  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.

• 2:35:10Ben Gilbert?

  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.

• 2:35:30David Rosenthal?

  Yeah.

• 2:35:31Ben Gilbert?

  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.

• 2:35:41David Rosenthal?

  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.

• 2:36:01Ben Gilbert?

  And interestingly, Iger also said, "Hey, Lassiter 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."

• 2:36:20David Rosenthal?

  Yeah.

• 2:36:21Ben Gilbert?

  And Lassiter and Catmull have this like, "We couldn't possibly do that." Like Disney Animation is so important to where we all came from in the world and they fly down and they meet with people and they see, "Oh, there's actually great talent here. They're just not being led well and we think we can apply our process and institute a brain trust and change the physical construction of the building and bring in the Pixar way and make this great again." And they do. I mean, that's the crazy thing is that it was John and Ed's option to look at the enemy and, you know, chop off their head.

• 2:36:51David Rosenthal?

  Decide what to do.

• 2:36:52Ben Gilbert?

  And instead, they said, "No, no, no, we're gonna come in there and we're gonna, we're gonna make this thing great."

• 2:36:55David Rosenthal?

  Yeah. So pretty quickly, they come to terms on a deal. $7.4 billion in Disney stock, newly issued Disney stock, which will make Steve Jobs the largest shareholder in Disney.

• 2:37:09Ben Gilbert?

  7%.

• 2:37:10David Rosenthal?

  Yep. I think it was a 7.7%.

• 2:37:12Ben Gilbert?

  Wow.

• 2:37:13David Rosenthal?

  Stake in the company and he'll join the board.

• 2:37:15Ben Gilbert?

  Which is much larger than the entire Disney family put together by this point.

• 2:37:19David Rosenthal?

  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 gonna 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 gonna live."

• 2:37:59David Rosenthal?

  This is January 2006, right as they're about to announce the acquisition. And Steve says, "I thought about it and I feel I have an obligation to tell you before we announce the deal and I want to give you an option to back out if you want, knowing that. I'm about to become your largest shareholder and I don't know what's gonna happen to my stake after I die." Bob says, "Wow, that's a lot."

• 2:38:24Ben Gilbert?

  And I've got 30 minutes.

• 2:38:27David Rosenthal?

  Yeah, I've got 30 minutes to decide.

• 2:38:29Ben Gilbert?

  And I can tell no one.

• 2:38:30David Rosenthal?

  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.

• 2:38:55David Rosenthal?

  And this is why Steve sold Pixar. One of the questions that we had going into the research for this episode was, could Pixar have actually built a full stack, like flywheel-based competitor to Disney if they'd remained independent? I mean, they had defeated Disney, like, they won on every dimension. And why did they sell?

• 2:39:19Ben Gilbert?

  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.

• 2:39:30David Rosenthal?

  Yep.

• 2:39:31Ben Gilbert?

  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.

• 2:39:55David Rosenthal?

  So I think there's two reasons. One, Pixar is what Walt wanted the Burbank Animation Campus to be when he built it in 1940. It is a utopian, creative artist's paradise. There are no suits at Pixar. It's all about the stories and the art and the films.

• 2:40:24Ben Gilbert?

  And amazingly, by getting acquired, they kept it that way.

• 2:40:26David Rosenthal?

  Yes.

• 2:40:27Ben Gilbert?

  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.

• 2:40:32David Rosenthal?

  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.

• 2:40:47Ben Gilbert?

  Yep.

• 2:40:48David Rosenthal?

  The reason that could happen before they sold to Disney was Steve Jobs.

• 2:40:53Ben Gilbert?

  Right.

• 2:40:53David Rosenthal?

  Like, it was only Steve that could have done it. And I do think if Steve had lived and if he had felt he had the energy to do it alongside Apple, or maybe, who knows, even merge the two companies, he could have done it. He could have built a Disney competitor, but he knew he was, he was gonna die.

• 2:41:13Ben Gilbert?

  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?

• 2:41:20David Rosenthal?

  Yeah, we're not gonna do that.

• 2:41:21Ben Gilbert?

  No, we just wanna keep making unbelievably good stories and delighting audiences and making the very best feature films we can.

• 2:41:27David Rosenthal?

  Yep.

• 2:41:28Ben Gilbert?

  Which does not make a Disney competitor.

• 2:41:30David Rosenthal?

  Yep. So Pixar had to find a home, and...

• 2:41:35Ben Gilbert?

  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.

• 2:41:49David Rosenthal?

  Yes, absolutely. And this leads to the revival of Disney Animation. Princess and the Frog, Tangled, Frozen, Big Hero Six, 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.

• 2:42:16Ben Gilbert?

  In a kitchen.

• 2:42:17David Rosenthal?

  Yeah. Who could do that? What a terrible idea. Oh, amazing movie. Wally 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?

• 2:43:02David Rosenthal?

  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.

• 2:43:18Ben Gilbert?

  Yeah, it is. And to validate the Disney Animation thing, I mean, I really wondered about this. How did Disney Animation turn into that hit factory? They're not Pixar movies, but like, they 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.

• 2:44:03Ben Gilbert?

  Her perspective was like, this actually has a lot to do with why Disney the company works.

• 2:44:08David Rosenthal?

  Yeah, I mean, super validating to hear that now, what is it, 20 years after the acquisition?

• 2:44:14Ben Gilbert?

  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. Toy Story alone did over 4 billion at the box office, which means 1.5 to 2 billion to Disney.

• 2:44:58Ben Gilbert?

  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.

• 2:45:19David Rosenthal?

  Yep.

• 2:45:20Ben Gilbert?

  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.

• 2:45:31David Rosenthal?

  Yep. Or man, any of that sweet, sweet home video revenue back in the day

• 2:45:35Ben Gilbert?

  Right.

• 2:45:36David Rosenthal?

  from Toy Story 1 and Toy Story 2.

• 2:45:38Ben Gilbert?

  So you get at least half, probably 2/3 the purchase price back from the Toy Story franchise alone, even without all of that ancillary sort of flywheel revenue. But really, here, I think, is the most useful way to justify it. We've heard that the vast majority of the top 15 movies viewed every week on Disney Plus are either Pixar or Disney Animation, not live action, not Star Wars, not The Avengers, the stuff that kids watch over and over. And those Disney Animation movies?

• 2:46:10David Rosenthal?

  Are almost all.

• 2:46:11Ben Gilbert?

  All the top ones that they're actually watching, kids these days, are the post-2005 Catmull and Lassiter era films.

• 2:46:19David Rosenthal?

  Yep.

• 2:46:19Ben Gilbert?

  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.

• 2:46:37David Rosenthal?

  Yep, no question. Acquisition absolutely saved the company. So after Pixar, Bob and the Disney board are like, well, that worked well. What can we do next?

• 2:46:52Ben Gilbert?

  And that sure is in line with Bob's point number one in his three-point strategy

• 2:46:56David Rosenthal?

  Absolutely.

• 2:46:57Ben Gilbert?

  of making the very best content.

• 2:46:59David Rosenthal?

  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.

• 2:47:12Ben Gilbert?

  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?

• 2:47:25David Rosenthal?

  Yes. So, we were 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.

• 2:48:02Ben Gilbert?

  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.

• 2:48:43David Rosenthal?

  Which is what let us develop the novel point that we hadn't seen anywhere else. Snow White's profits alone couldn't pay for the Burbank Animation Campus. Walt had to go borrow more money, which created the cascading set of events that we talked about in the rest of the episode.

• 2:48:58Ben Gilbert?

  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/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.

• 2:49:36David Rosenthal?

  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 had been hits, but nobody could see what Marvel would end up becoming under Disney.

• 2:50:05Ben Gilbert?

  Yeah, superhero movies were not obviously formulaically going to work. Like, there had been Batmans many years before. There had been Supremans 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

• 2:50:27David Rosenthal?

  Studios.

• 2:50:27Ben Gilbert?

  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. 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

• 2:51:09Ben Gilbert?

  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. That's more than Star Wars. That's more than James Bond. Anything else? Now, it helps to have 37 films plus

• 2:51:45David Rosenthal?

  Yes, they're quite prolific.

• 2:51:46Ben Gilbert?

  Avengers Endgame, which was the second highest grossing film of all time, second only to Avatar, I think.

• 2:51:52David Rosenthal?

  Yep, I think that's right.

• 2:51:53Ben Gilbert?

  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

• 2:52:13David Rosenthal?

  Early ones, yep.

• 2:52:14Ben Gilbert?

  The Blu-ray era. And then, of course, part of the reason people subscribe to Disney+ So Marvel's also been great.

• 2:52:20David Rosenthal?

  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.

• 2:52:38Ben Gilbert?

  Yep.

• 2:52:39David Rosenthal?

  And it worked incredibly well, incredibly, incredibly well. And then Lucasfilm in 2012 for another $4 billion. I would argue, again, very different dynamics, but a same version of the story. Here is one of, if not, maybe, maybe the greatest story of the last 100 years in humanity, the original Star Wars saga.

• 2:53:06Ben Gilbert?

  Of mythmaking.

• 2:53:07David Rosenthal?

  Of mythmaking, yeah. And let's give that a greater canvas to paint on.

• 2:53:13Ben Gilbert?

  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, you know, stock acquisitions, or many, much of it was. But now they own these things. It's also fun to sort of speculate on why Lucasfilm and Marvel were lower price

• 2:53:57Ben Gilbert?

  tags than Pixar was, like dramatically lower. Lucasfilm seems easy to me in that it certainly hasn't generated as much

• 2:54:07David Rosenthal?

  They didn't have any movies in production.

• 2:54:09Ben Gilbert?

  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.

• 2:54:16David Rosenthal?

  Yep.

• 2:54:16Ben Gilbert?

  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, the

• 2:54:24David Rosenthal?

  Well, we'll get to that in a minute.

• 2:54:25Ben Gilbert?

  Yeah, yeah. Avengers had 37 films. And there's, there's new Star Wars stuff I like. Andor's unbelievably good. Rogue One is unbelievably good, but yeah.

• 2:54:34David Rosenthal?

  Yep. So on the back of these three acquisitions, the Disney flywheel is revived and soaring again. The core film characters and stories are back to all-time heights, not only at Disney Animation, but now Pixar, Lucasfilm, and Marvel, too. The core of Disney is much bigger and more diverse than it used to be. Consumer products, after Frozen comes out, Disney sells 3 million Elsa and Anna dresses in the first year after the movie's released. By 2015, Disney is doing over $50 billion a year in gross sales at retail of merchandise, up almost 2X over the past five years. That is the health of the characters and IP in

• 2:55:19David Rosenthal?

  the company right there. Music, hit songs are back for Disney. Let It Go wins the Oscar for Best Song. And get this, this is wild. The Frozen soundtrack is the best-selling album of 2014, selling 10 million copies with streaming equivalents in there, even beating 1989 from Taylor Swift.

• 2:55:43Ben Gilbert?

  Wow.

• 2:55:43David Rosenthal?

  My girls love Taylor, but they might love Frozen even more.

• 2:55:47Ben Gilbert?

  Wow.

• 2:55:48David Rosenthal?

  The parks are revived. Disney launches Cars Land in LA in 2012.

• 2:55:53Ben Gilbert?

  So fun fact about that, they were originally before the acquisition of Pixar, developing Car Land.

• 2:56:00David Rosenthal?

  Hmm.

• 2:56:01Ben Gilbert?

  And then they bought Pixar and they thought, oh, well, let's just make Cars Land.

• 2:56:06David Rosenthal?

  Yeah.

• 2:56:07Ben Gilbert?

  This is back when the Imagineers independently developed lands that were unrelated to franchise flywheel stuff.

• 2:56:16David Rosenthal?

  Yep. Overall parks revenue nearly doubles and operating income nearly triples in the decade from 2005, when Bob takes over, to 2015. And yeah, overall, during that time period, Disney's market cap is up 4X to $200 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.

• 2:56:47Ben Gilbert?

  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 cables then profit.

• 2:57:14David Rosenthal?

  Right.

• 2:57:15Ben Gilbert?

  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.

• 2:57:26David Rosenthal?

  Yeah.

• 2:57:26Ben Gilbert?

  ESPN kept providing the cash to do all of this.

• 2:57:31David Rosenthal?

  Such a good point. ESPN paid for Pixar, Marvel, and Lucasfilm.

• 2:57:36Ben Gilbert?

  With about four years of ESPN cable profits.

• 2:57:40David Rosenthal?

  Right.

• 2:57:41Ben Gilbert?

  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.

• 2:58:01David Rosenthal?

  Yep. So speaking of ESPN, come 2015, ESPN and all the rest of Disney is really riding high.

• 2:58:10Ben Gilbert?

  The strategy looks completely genius. And then 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.

• 2:58:24David Rosenthal?

  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.

• 2:58:37Ben Gilbert?

  Yep.

• 2:58:38David Rosenthal?

  Unfortunately, the stock hit an all-time high on the very same day as Disney's Q3 2015 earnings call.

• 2:58:52Ben Gilbert?

  Well, an all-time high, except for that weird COVID aberration.

• 2:58:55David Rosenthal?

  That we'll get to.

• 2:58:56Ben Gilbert?

  There was a little, little short-lived moment there where it went even higher there in 2021.

• 2:59:00David Rosenthal?

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

• 2:59:28Ben Gilbert?

  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

• 2:59:36David Rosenthal?

  Basically is all of America.

• 2:59:38Ben Gilbert?

  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

• 2:59:53David Rosenthal?

  Oh, cord-cutting is coming.

• 2:59:55Ben Gilbert?

  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. But the numbers are still up into the right, so we're all good.

• 3:00:05David Rosenthal?

  Yep. This sets off a barely controlled freakout across the entire media landscape with ESPN and this earnings call as like ground zero. People knew that this was coming, like you said, Ben. I mean, Netflix was already a $50 billion market cap company at this point. So shouldn't have been a surprise to anyone. But the very next day, Disney stock drops 10%. And over the next couple of days, Fox, Time Warner and Discovery all experienced similar drawdowns. And Viacom, which people view as even more indexed to cable network landscape, gets whacked over 20%.

• 3:00:50Ben Gilbert?

  And we should say, just so we don't bury the lead, Disney's stock price today is what it was then.

• 3:00:57David Rosenthal?

  Yep.

• 3:00:57Ben Gilbert?

  It's gone up and down, but it is flat to 11 years ago.

• 3:01:01David Rosenthal?

  Yeah.

• 3:01:01Ben Gilbert?

  Meanwhile, the S and P 500, David, what did you tell me is up? How much in that time?

• 3:01:05David Rosenthal?

  Three and a half X over that time period.

• 3:01:07Ben Gilbert?

  Yeah. Now, market cap isn't everything, but it is a measure of what the investment community believes your company's cash flows are worth in the extreme long run. So we're not here saying, you know, Disney's revenue's been flat or profits been flat, although we'll 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.

• 3:01:37David Rosenthal?

  Yep. Well, we're about to talk about what happens to the whole rest of the traditional media landscape after this earnings call.

• 3:01:46Ben Gilbert?

  Yeah, Disney managed to stay independent.

• 3:01:48David Rosenthal?

  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.

• 3:02:33David Rosenthal?

  Viacom remerges with CBS, but none of those brands are any good. So they decide to name themselves Paramount after the studio that they own. Paramount almost collapses under its debt load. And David and Larry Ellison, yes, of course, that Larry Ellison, buy it and merge it into Skydance Media. So it becomes Skydance Paramount.

• 3:02:57Ben Gilbert?

  Which is the thing that David Ellison kind of founded and runs.

• 3:03:01David Rosenthal?

  Yep. And then, of course, this all culminates in what's happening here in 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.

• 3:03:18Ben Gilbert?

  Well, now on hold, pending legal challenges as of recording date. So we'll see.

• 3:03:24David Rosenthal?

  But what's really happening is that all of these traditional media companies, with the exception of Disney, have basically all become kind of serfs in the streaming kingdoms of the technology companies, of which Netflix and YouTube are actually the winners here.

• 3:03:41Ben Gilbert?

  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.

• 3:04:01David Rosenthal?

  Yep. So Disney decides to launch Disney Plus. Bob and the board basically draw a line in the sand and they say, we are not going to just sit around and let ourselves get Netflixed like everyone else. We're going to stand and fight toe to toe. We are going to build our own direct to consumer streaming company. This goes back to Bob's priority number two in his strategy presentation to the board when he became CEO. And like, look, this is totally laudable. It's also arguably necessary. I mean, without Disney Plus and its own streaming service, Disney wouldn't have the ability to control discoverability of its films and shows. And like, that's so important. You want to get people into the parks.

• 3:04:45David Rosenthal?

  They gotta interact with the IP and the characters.

• 3:04:49Ben Gilbert?

  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 parks and parks and everything works better because you're spreading your content across the whole world.

• 3:05:13David Rosenthal?

  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.

• 3:05:22Ben Gilbert?

  That's right. That's right. You have no sort of guaranteed distribution. Having Disney Plus, and we'll talk about all the trade offs involved in this in a minute 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 for 100 years. If you bought a home video, you bought it from a retailer.

• 3:06:06Ben Gilbert?

  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.

• 3:06:13David Rosenthal?

  Yeah. Disney didn't collect revenue directly from consumers, except in the parks.

• 3:06:19Ben Gilbert?

  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.

• 3:06:30David Rosenthal?

  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.

• 3:06:50Ben Gilbert?

  Right.

• 3:06:51David Rosenthal?

  And this is when Disney almost buys Twitter.

• 3:06:55Ben Gilbert?

  The forgotten chapter.

• 3:06:56David Rosenthal?

  The forgotten chapter. Thankfully, the chapter that did not come to pass. So yeah, they start looking around at like, okay, what scaled internet companies are out there that we could buy and use as a base to set up our streaming service? And basically, the only ones within reach are Twitter and Snapchat.

• 3:07:13Ben Gilbert?

  Everything else is just too big. I mean, these are giant market cap companies.

• 3:07:17David Rosenthal?

  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.

• 3:07:30Ben Gilbert?

  I think it was all papered and they were going to sign Monday morning and announce it, right?

• 3:07:33David Rosenthal?

  Yep.

• 3:07:34Ben Gilbert?

  It was like Sunday night that he bailed on it.

• 3:07:36David Rosenthal?

  Yep, something like that. It was very last minute. So once the Twitter deal falls apart, they turn to a far more logical candidate, although a more hidden one, BAMTech.

• 3:07:47Ben Gilbert?

  Yes.

• 3:07:47David Rosenthal?

  BAMTech is this incredible story. It is a streaming technology platform that was part of Major League Baseball. They began a streaming service for baseball games all the way back in 2002. Initially, I remembered this from the research when I went back and looked at it, to start streaming Seattle Mariners games to Japan.

• 3:08:09Ben Gilbert?

  That's right.

• 3:08:10David Rosenthal?

  Because Ichiro had come to MLB and was a phenomenon back in Japan.

• 3:08:15Ben Gilbert?

  And I think Nintendo owned the Mariners at this point.

• 3:08:17David Rosenthal?

  That's right. That's right. Nintendo of America owned the Mariners.

• 3:08:21Ben Gilbert?

  This group actually started advanced media by making websites.

• 3:08:24David Rosenthal?

  Yes.

• 3:08:25Ben Gilbert?

  For MLB baseball teams.

• 3:08:26David Rosenthal?

  And then they got into streaming for Japan and Ichiro.

• 3:08:30Ben Gilbert?

  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.

• 3:08:40David Rosenthal?

  Yes, yes. And they also had taken on the NHL. So they were doing the NHL's streaming service. So it's kind of perfect. They can do sports streaming. They've run HBO Now, a streaming service for HBO. Like, it's perfect. So August 2016, Disney buys a 33% stake in BAMTech from Major League Baseball with an option to increase that to a majority stake over the next couple of years. The next year in 2017, they announced that they're going to accelerate that option to purchase a controlling stake in BAMTech. 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, and then a Disney streaming service in 2019.

• 3:09:22David Rosenthal?

  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.

• 3:09:44Ben Gilbert?

  Yep. And that's just pure profit.

• 3:09:48David Rosenthal?

  Yeah, no expenses associated with that.

• 3:09:50Ben Gilbert?

  Which Disney at that point was generating about $15 billion in Disney-wide operating income at that time. So that's 2-ish percent of the company's profits are coming from that one Netflix deal. And they're just saying, all right, we're gonna, we're gonna 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.

• 3:10:14David Rosenthal?

  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.

• 3:10:26Ben Gilbert?

  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-

• 3:10:39David Rosenthal?

  Kind of a nothing burger?

• 3:10:40Ben Gilbert?

  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 gonna leave it there. Thank you very much.

• 3:10:50David Rosenthal?

  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 gonna get paid by the people who want to watch this.

• 3:11:12Ben Gilbert?

  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-

• 3:11:40David Rosenthal?

  The non-consumers.

• 3:11:41Ben Gilbert?

  That's right. That's right.

• 3:11:43David Rosenthal?

  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

• 3:12:27David Rosenthal?

  Disney and lend its scale, its content, and its efforts to Disney's first-party streaming service to compete with Netflix.

• 3:12:36Ben Gilbert?

  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. Let's try to fetch a high value for people who do and who need that library content.

• 3:13:21Ben Gilbert?

  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.

• 3:13:42David Rosenthal?

  Yep. Now, you said Rupert and Fox ran some analysis on their library, vis-à-vis streaming. 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.

• 3:14:05Ben Gilbert?

  Come on, how often are people rewatching Avatar?

• 3:14:08David Rosenthal?

  Exactly. Simpsons are rewatchable, maybe.

• 3:14:11Ben Gilbert?

  Family Guy? Family Guy's rewatchable?

• 3:14:12David Rosenthal?

  Yep.

• 3:14:13Ben Gilbert?

  The National Geographic Channel?

• 3:14:15David Rosenthal?

  But you know, it's a lot of live-action film IP.

• 3:14:18Ben Gilbert?

  We do have the FX Network, which has Always Sunny and a bunch of great shows.

• 3:14:22David Rosenthal?

  Right. It's not zero, but it's not anywhere near enough to be compelling on its own.

• 3:14:27Ben Gilbert?

  And its synergy value is actually a lot higher than the value is just a 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.

• 3:14:42David Rosenthal?

  Exactly. Bingo. So December 2017, they announce 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.

• 3:15:06Ben Gilbert?

  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.

• 3:15:27David Rosenthal?

  Yep.

• 3:15:28Ben Gilbert?

  During the regulatory approval process, there's a different ruling that happens around AT&T's merger-

• 3:15:37David Rosenthal?

  That's right.

• 3:15:38Ben Gilbert?

  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.

• 3:15:58David Rosenthal?

  Comcast, once again. Disney ends up getting bid up to $71.3 billion.

• 3:16:07Ben Gilbert?

  A full $19 billion more than they had originally signed the deal on. It's a free $19 billion for Fox shareholders because Comcast lobbed in the bid.

• 3:16:16David Rosenthal?

  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.

• 3:16:52Ben Gilbert?

  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.

• 3:17:09David Rosenthal?

  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 gonna drive that many signups or retentions for the service.

• 3:17:31Ben Gilbert?

  Wolverine and Deadpool had a big box office win. Avatar now has lands in the parks.

• 3:17:36David Rosenthal?

  Yep. True. Yeah, it's not nothing.

• 3:17:39Ben Gilbert?

  They did get a third of Hulu-

• 3:17:40David Rosenthal?

  Yep.

• 3:17:41Ben Gilbert?

  As a part of this deal. So they already owned a third. This gave them a third. So then they had a controlling interest.

• 3:17:46David Rosenthal?

  Yep. Another big part of the strategic rationale for the deal and for the increased price was that Fox had a lot of India assets-

• 3:17:55Ben Gilbert?

  That's right.

• 3:17:55David Rosenthal?

  Both content and distribution. And this is back to Bob's strategic pillar number three for the company. Great, we need to enter India. This is a great way to do it. Those assets end up not performing for Disney nearly as well as they thought they would. They end up merging them with Reliance in 2024 in a deal that values them at only a fraction of what they valued them in the Fox acquisition.

• 3:18:17Ben Gilbert?

  Yeah. But the general philosophy of we're gonna go buy a deep library and we're gonna 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.

• 3:18:55David Rosenthal?

  Yep.

• 3:18:55Ben Gilbert?

  But certainly, it's the worst of the four big acquisitions, five if you include BamTech.

• 3:19:01David Rosenthal?

  Yep. Either way, the deal closes in March 2019, right in time before Disney launches the long-awaited Disney streaming service the very next month in April 2019, at an Investor Day that they hold to announce Disney Plus. The vault is now open.

• 3:19:24Ben Gilbert?

  I loved this.

• 3:19:25David Rosenthal?

  It was great.

• 3:19:26Ben Gilbert?

  The clarity of product vision of the original Disney Plus is incredibly laudable.

• 3:19:32David Rosenthal?

  Totally. It was a very compelling product. All of Disney IP, Pixar, Lucasfilm, Marvel, the Fox assets coming in. And then they announce the price, $6.99 a month for the initial price.

• 3:19:50Ben Gilbert?

  Consumers go nuts. I mean, they beat every early projection that they had to sign up for this thing.

• 3:19:55David Rosenthal?

  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 2/3 of the way through the new Star Wars trilogy. Plus, they've made Rogue One, which is an amazing, amazing movie.

• 3:20:32Ben Gilbert?

  High art.

• 3:20:32David Rosenthal?

  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.

• 3:20:46Ben Gilbert?

  $2.8 billion in box office gross just from that film.

• 3:20:50David Rosenthal?

  Yep. But unfortunately-

• 3:20:53David Rosenthal?

  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.

• 3:21:08Ben Gilbert?

  I'd call them fully exploited.

• 3:21:09David Rosenthal?

  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 IX is in trouble, like major trouble.

• 3:21:49Ben Gilbert?

  Well, Episode VIII and IX did not have a cohesive vision between the two and had different directors. So Episode VIII went in this interesting, but somewhat not Star Wars-y direction. And then Episode IX 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.

• 3:22:14David Rosenthal?

  It was bad.

• 3:22:15Ben Gilbert?

  A little foresight and vision would have been nice.

• 3:22:18David Rosenthal?

  Yeah, yeah. But nobody knows this yet because the film doesn't come out until December of that year.

• 3:22:23Ben Gilbert?

  Episode VIII was so different than the films around it. It's like no one was talking to each other.

• 3:22:28David Rosenthal?

  And there was no plan for Episode IX. 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.

• 3:22:49Ben Gilbert?

  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 endgame is the endgame.

• 3:23:21David Rosenthal?

  Right. Really inelegant if you're about to follow it up by increasing production 50% in the studio.

• 3:23:31Ben Gilbert?

  Yes.

• 3:23:32David Rosenthal?

  Yeah, which they do.

• 3:23:33Ben Gilbert?

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

• 3:24:14Ben Gilbert?

  pathetic little thing called the MCU. So that, you know, like I just spent a decade of my life investing in that 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.

• 3:24:38David Rosenthal?

  That was great. That was great. Yeah. But all of this and everything you're saying highlights the strategic trade off that Disney made in pursuing the streaming strategy to go toe to toe with Netflix. Operating a tier one, direct to consumer streaming business is yet another wholly and completely different business model than either the core Disney flywheel or the ESPN affiliate fee model.

• 3:25:10Ben Gilbert?

  Yep.

• 3:25:11David Rosenthal?

  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 gotta feed the beast.

• 3:25:30David Rosenthal?

  You need to feed the beast.

• 3:25:32Ben Gilbert?

  Those existing subscribers content or they're going to churn.

• 3:25:35David Rosenthal?

  Exactly. So I want to quote Ben Gilbert here.

• 3:25:41Ben Gilbert?

  Oh, God. When?

• 3:25:42David Rosenthal?

  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? No. If I ever want to re-watch 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.

• 3:26:28Ben Gilbert?

  Oh, man.

• 3:26:29David Rosenthal?

  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

• 3:26:41Ben Gilbert?

  Yes.

• 3:26:41David Rosenthal?

  the flywheel strategy of only the best content very infrequently.

• 3:26:47Ben Gilbert?

  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, 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.

• 3:27:26David Rosenthal?

  Yep.

• 3:27:26Ben Gilbert?

  The biggest issue really is that Disney had something to lose. They had two things to lose. They had an existing content library that was highly differentiated. And when you bolt things onto a universe of a differentiated library, it makes the original content less valuable.

• 3:27:45David Rosenthal?

  Yep.

• 3:27:45Ben Gilbert?

  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.

• 3:27:55David Rosenthal?

  Yeah, it's not as cool as I thought it was.

• 3:27:57Ben Gilbert?

  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 by.

• 3:28:09David Rosenthal?

  This is such a good point. In a top tier, high quality content, stories and characters world, every time you make a sequel, you're taking a big risk. And this is the risk.

• 3:28:23Ben Gilbert?

  This is why Disney didn't make sequels prior to the 90s.

• 3:28:26David Rosenthal?

  Yep. Now Pixar proved to them that you can make sequels and they can be great.

• 3:28:29Ben Gilbert?

  You can do it well.

• 3:28:30David Rosenthal?

  But you need to put that same amount of care and effort and time into it.

• 3:28:33Ben Gilbert?

  Yeah, Pixar does one every seven years.

• 3:28:35David Rosenthal?

  Yep. You can't increase the production line.

• 3:28:37Ben Gilbert?

  The second thing is that the Disney brand itself means something.

• 3:28:42David Rosenthal?

  Yes.

• 3:28:42Ben Gilbert?

  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. Whereas if you release a bunch of great things in a row, even if they're more spaced out over time and you're really judicious with it, which is not congruent with the streaming operating model, then it can really add to the, the brand bucket of the Disney brand. So Disney sort of has this compounding asset that is at risk when going head to head with Netflix.

• 3:29:24David Rosenthal?

  Yep. Yep. Yep. So that's all the strategic trade offs on the Disney film and TV side. Then there's the whole cable ESPN side of the house.

• 3:29:36Ben Gilbert?

  Yes. Like what is going on there in this 2018, 19 period?

• 3:29:42Ben Gilbert?

  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

• 3:29:59David Rosenthal?

  Cancellations are happening.

• 3:30:01Ben Gilbert?

  Exactly. But later on, around 2023, even this would come to a head. The declines were happening too rapidly and affiliate fee increases could no longer outpace subscriber losses and revenue then would start to decline 23 into 24. So

• 3:30:16David Rosenthal?

  Basically, cable and ESPN entered the end game, to use an Avengers term.

• 3:30:21Ben Gilbert?

  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 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 that the NFL, the NBA, I think they just didn't fully extract everything that they could have for decades.

• 3:31:00David Rosenthal?

  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 economies power where because they were getting the most cash and affiliate fees, they could pay the biggest prices for sports rights and block everybody else out, except for the like, really, really big stuff that the broadcast networks would come after, too. Now, other bidders show up in the form of the tech companies.

• 3:31:32Ben Gilbert?

  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.

• 3:31:40David Rosenthal?

  Building data centers.

• 3:31:41Ben Gilbert?

  Yes. But they have more ways to monetize the consumer. So they can afford to bid more for the same consumer than any ESPN or that a TV network could, because Amazon can get you as a Prime subscriber.

• 3:31:56David Rosenthal?

  This is Amazon's NFL deal right here.

• 3:31:58Ben Gilbert?

  Yes. Yeah. So any, any student of economics will kind of see the writing on the wall here. The price is set by the highest bidder. And if somebody has a business model that structurally can out monetize what you can, then they're going to win and the price is going to be set by them.

• 3:32:13David Rosenthal?

  Yep. This is why ESPN won for many years, and this is why the tech companies are winning now.

• 3:32:18Ben Gilbert?

  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.

• 3:32:48David Rosenthal?

  Right. There's a trickle down effect.

• 3:32:49Ben Gilbert?

  Exactly, exactly. So in 2006, just look at the Monday Night Football package that ESPN buys. Oh, six, 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.

• 3:33:16David Rosenthal?

  Yep.

• 3:33:17Ben Gilbert?

  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.

• 3:33:48David Rosenthal?

  Yep. And to be clear, we've probably undersold ESPN's creativity and innovation in this episode. I mean, Highlights, SportsCenter, everything they did was

• 3:34:01Ben Gilbert?

  Even more recently, Pat McAfee Show, or my God, Manning Cast. I cannot wait for fall to watch Manning Cast and Monday Night Football. It is the thing I look forward to from, I don't know, July 15 onward.

• 3:34:14David Rosenthal?

  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. You know, sure, you can with like 30 for 30 and stuff like that, but that's so small and niche at ESPN. The vast majority of the production that ESPN is making has very, very limited shelf life.

• 3:34:53Ben Gilbert?

  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.

• 3:35:18David Rosenthal?

  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.

• 3:35:28Ben Gilbert?

  Right.

• 3:35:29David Rosenthal?

  I'm just making the point that it's not like, as ESPN has come under this pressure, that they could start building their own flywheel here. It's like, no, no, this is a declining asset.

• 3:35:38Ben Gilbert?

  Right, right, right, right. All right. So take us forward. How does Disney Plus go? How does ESPN Plus go?

• 3:35:43David Rosenthal?

  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.

• 3:36:03Ben Gilbert?

  Yep.

• 3:36:04David Rosenthal?

  Disney Plus launches in November 2019.

• 3:36:07Ben Gilbert?

  It's unbelievable that was just sitting there, right on app stores and in TVs the moment COVID hit.

• 3:36:14David Rosenthal?

  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.

• 3:36:58Ben Gilbert?

  I mean, Disney's net income that year was actually negative.

• 3:37:02David Rosenthal?

  Yeah. Yeah. And then the roller coaster goes up. 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.

• 3:37:42Ben Gilbert?

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

• 3:37:48David Rosenthal?

  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.

• 3:38:08Ben Gilbert?

  And worth noting, it hit that peak right around January 1 of 21. And by October of 21, it had begun its fall right back down to where it started.

• 3:38:18David Rosenthal?

  Yep. So that December of 2021, Bob Iger fully retires. As we head into the next year,

• 3:38:27David Rosenthal?

  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 gotta not only provide the content to people every month, but you gotta 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.

• 3:39:05Ben Gilbert?

  Yeah, you gotta advertise a new movie. So they.

• 3:39:07David Rosenthal?

  Sure, sure.

• 3:39:08Ben Gilbert?

  You spend tens of millions or hundreds of millions of dollars advertising the new film.

• 3:39:11David Rosenthal?

  But there is no concept of churn.

• 3:39:13Ben Gilbert?

  Right.

• 3:39:13David Rosenthal?

  You're not trying to, you know, keep everybody.

• 3:39:15Ben Gilbert?

  Right. So the interesting thing, they're all in on this Disney Plus and Hulu, this streaming strategy. And the question is, is there actually a pile of gold worth chasing in streaming? It's structurally a worse business, as you were just mentioning, than the old cable bundle where you just got checks. Consumers can cancel easily. They do so every few months. It's expensive to make the amount of content you need to make, especially now with the quality that people expect out of streaming content. They expect like cinema.

• 3:39:46David Rosenthal?

  Theatrical quality.

• 3:39:47Ben Gilbert?

  TV shows, yeah. Consumers don't want to have a zillion services. You have to build your own technology and keep the user experience great as platforms add new features and change the UI and everything, which is very expensive to hire and pay good engineers, good designers, good product people. You have to acquire your own customers directly, expensive. You have to retain your own customers directly, expensive.

• 3:40:10David Rosenthal?

  When they churn, you have to reacquire them.

• 3:40:11Ben Gilbert?

  That's right. And critically, you don't get a second exploitation window, the way that a limited edition home video re-release has. Theatrical re-releases followed by home video windows? That, ah, muah! That was the business to be in.

• 3:40:28David Rosenthal?

  That was the best, yeah.

• 3:40:28Ben Gilbert?

  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.

• 3:40:50David Rosenthal?

  Yep. So heading into 2022, Bob Chapek does a reorg, basically reorging the entire company around the streaming strategy, consolidates all the studios all together into one reporting segment, Disney Media, I think, DMed. Meanwhile, losses at Disney Plus are just piling up as they're spending all of this money in production and customer acquisition cost and churn management and technology development. It culminates in November 2022 in Disney's fiscal Q4 earnings call when investors start asking a lot of questions about these losses at Disney Plus and Bob Chapek and the company's

• 3:41:35David Rosenthal?

  strategy for addressing them. And it does not go well.

• 3:41:39Ben Gilbert?

  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.

• 3:41:56David Rosenthal?

  Oh, yes.

• 3:41:57Ben Gilbert?

  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 wanted to see it.

• 3:42:07David Rosenthal?

  You would have paid it, yeah.

• 3:42:08Ben Gilbert?

  And then they promptly closed it. It felt like a company in complete disarray, even streaming challenges and losses aside.

• 3:42:15David Rosenthal?

  After the earnings call, the board meets and fires Bob Chapek as CEO of Disney, two and a bit years into his tenure. And Bob Iger returns out of retirement to come be CEO again and stabilize the ship.

• 3:42:35Ben Gilbert?

  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?

• 3:42:44Ben Gilbert?

  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.

• 3:42:57David Rosenthal?

  Yeah.

• 3:42:58Ben Gilbert?

  A time where it needed like a caretaker and it needed the exact opposite.

• 3:43:02David Rosenthal?

  It's like, ah, yeah, all the pieces are in place. Disney Plus, it's doing great.

• 3:43:06Ben Gilbert?

  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 was 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, the company is cared for time.

• 3:43:38David Rosenthal?

  Yep. And then things got crazier. 2023 was the year of the Hollywood strikes.

• 3:43:42Ben Gilbert?

  Yeah.

• 3:43:42David Rosenthal?

  And then there's another proxy shareholder fight, this time with Ike Perlmutter, who was the previous owner and chairman of Marvel and his friend and activist investor Nelson Pelts. 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.

• 3:44:11Ben Gilbert?

  It's so funny. I've, I've 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.

• 3:44:20David Rosenthal?

  Right, right.

• 3:44:21Ben Gilbert?

  I mean, this is like, is this still this cash gusher?

• 3:44:25David Rosenthal?

  I'll take that declining asset. Thank you very much.

• 3:44:27Ben Gilbert?

  Right. And when you say declining, I mean, it 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.

• 3:44:43David Rosenthal?

  Which actually sort of explains Wall Street agitation to spin it out. Ooh, it's not any good in Disney anymore. I would like that, please.

• 3:44:49Ben Gilbert?

  Right.

• 3:44:50David Rosenthal?

  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.

• 3:45:06Ben Gilbert?

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

• 3:45:20David Rosenthal?

  All right, well, we'll, 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.

• 3:45:35Ben Gilbert?

  I love this deal in so many ways.

• 3:45:36David Rosenthal?

  Great deal for everybody.

• 3:45:38Ben Gilbert?

  The NFL gets 10% of ESPN, uh, which is great if you're ESPN, honestly. It's like, woo, good, they're invested in our success. And then what is the NFL doing in this like content production and distribution business? Made no sense. So having NFL Network and Red Zone and all that live over in ESPN, which their core competency, what they're good at, love it.

• 3:45:57David Rosenthal?

  And for the NFL, they want ESPN to continue to be a viable bidder for their rights. So.

• 3:46:04Ben Gilbert?

  Right.

• 3:46:04David Rosenthal?

  It's in their interest to prop up ESPN.

• 3:46:06Ben Gilbert?

  Yep.

• 3:46:07David Rosenthal?

  Finally, at the end of the year, they launched the long awaited full direct to consumer ESPN service, ESPN Unlimited. So 30 bucks a month, full unlimited access to all ESPN channels. They aggressively bundle it with Disney Plus and Hulu. Basically, if you subscribe to ESPN Plus, you can add Disney and Hulu for only an extra $6 a month.

• 3:46:29Ben Gilbert?

  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, eh, even if I'm not that big of a Disney Plus fan, I'll just subscribe to this whole bundle and that, that way you get subscribers that you wouldn't have otherwise, that the casual fan. The second that I didn't realize that Disney has really keyed into is churn mitigation.

• 3:46:53David Rosenthal?

  Yep.

• 3:46:54Ben Gilbert?

  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?

• 3:47:06David Rosenthal?

  Yeah, I mean, there was just so much that Disney had to learn about operating direct to consumer streaming services.

• 3:47:12Ben Gilbert?

  Yep.

• 3:47:13David Rosenthal?

  The real story of the last couple of years, though, has been the parks. Man, coming out of COVID, the parks have just been crushing it. And there's all sorts of criticisms that you could levy at them and people do, like they're charging too much, they're nickel and diming. But especially as ESPN has been declining and as Disney Plus streaming has had a rocky go at best over the last couple of years, the parks have totally filled that gap.

• 3:47:44Ben Gilbert?

  David, it's so funny you say they've been crushing it. Visitors are actually down.

• 3:47:47David Rosenthal?

  On a financial basis.

• 3:47:48Ben Gilbert?

  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.

• 3:48:05Ben Gilbert?

  But of course, the amount that they make per visit is, is way up and has climbed, I don't know, 5% per year for decades now.

• 3:48:15David Rosenthal?

  Yep. Which, yeah, maybe that is a double edged sword.

• 3:48:18Ben Gilbert?

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

• 3:48:25David Rosenthal?

  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. And it doesn't keep people away.

• 3:48:38Ben Gilbert?

  And if it did, they would stop doing it.

• 3:48:40David Rosenthal?

  Yep.

• 3:48:40Ben Gilbert?

  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 in a year, you want it more dispersed because you want all 200 of those people imbuing Disney fandom into their core childhood memories.

• 3:49:03David Rosenthal?

  Yep. So Parks is now almost 60% of the company's operating income, while ESPN and Sports is down to 16%. So it's a total reversal from the situation 10 years ago. Wow. And all that leads to February of this year, 2026, where Josh Demaro, 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.

• 3:49:46David Rosenthal?

  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.

• 3:49:53Ben Gilbert?

  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, you know, that second decade, like we talked about, flat, but that first decade had 5X growth in it. Revenue tripled from $31 billion in 2005 to $94 billion 20 years later. And net income went from $2.5 billion to $12.4 billion. So interestingly, net income outpaced revenue. They became five times more profitable, while generating three times more revenue.

• 3:50:37David Rosenthal?

  Interesting, which also is the same thing that happened under Eisner.

• 3:50:40Ben Gilbert?

  Right. So it's been an exercise for two big CEO stretches, making the company more profitable.

• 3:50:46David Rosenthal?

  Which probably says more about the company back in 1984 than it does over the last 40 years. But yeah.

• 3:50:53Ben Gilbert?

  I think that's right. Okay. So should we talk about the business today?

• 3:50:56David Rosenthal?

  Yep.

• 3:50:56Ben Gilbert?

  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,

• 3:51:39Ben Gilbert?

  which is around a quarter of the company's revenue and their single largest source of revenue. We've been talking about Disney Plus in this like, oh, it's low margin, or oh, it costs a lot of money to build it out. But the revenue is huge. They have transitioned revenue sort of from other places into Disney Plus now.

• 3:52:01David Rosenthal?

  And as of now, it is still subscale compared to Netflix. Netflix has 325 million subscribers around the world.

• 3:52:12Ben Gilbert?

  That's the last time they reported. It's up since then. So it's nearly triple Disney Plus.

• 3:52:17David Rosenthal?

  Yep. And last year generated $45 billion in revenue. So what, almost twice as much as Disney's $25 billion that they're doing in streaming revenue?

• 3:52:28Ben Gilbert?

  Yeah. And that's Hulu and Disney Plus combined.

• 3:52:31David Rosenthal?

  Yep.

• 3:52:32Ben Gilbert?

  How much operating income does Netflix generate?

• 3:52:35David Rosenthal?

  13 and a half billion compared to negative for Disney, right?

• 3:52:41Ben Gilbert?

  No, Disney is now positive on their direct-to-consumer segment, but for a long time it was negative. But so Netflix's operating income on streaming, their entire business, is the same as Disney's entire company operating income.

• 3:52:59David Rosenthal?

  Yep. Yep.

• 3:53:00Ben Gilbert?

  That is a completely new phenomenon. Just to go back in time, in 2017, Netflix's operating income was under a billion.

• 3:53:12David Rosenthal?

  Wow.

• 3:53:13Ben Gilbert?

  Disney's was $14 billion.

• 3:53:17David Rosenthal?

  Right.

• 3:53:18Ben Gilbert?

  Disney had that severe dip from COVID, parks closing, investing in Disney Plus, massive losses from investing in Disney Plus, 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.

• 3:53:37David Rosenthal?

  Yep. And look, I mean, streaming is a scale economies business. So like, the more scale you have, the more operating leverage you should have.

• 3:53:45Ben Gilbert?

  Yep. So to put numbers on the investment into Disney Plus, 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 $1 billion 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 Plus, acquire, retain subscribers, all that stuff.

• 3:54:17David Rosenthal?

  Yep. And really, this is what Bob Iger spent the last couple of years, since coming back from retirement, doing.

• 3:54:24Ben Gilbert?

  Moving over to the parks, like we had said earlier, there's 145 million people who visit the parks each year. They have 12 parks across six locations. They're designing a new park in Abu Dhabi. They have eight cruise ships, which is growing to 13, bringing on a new cruise ship almost every year for the next several years.

• 3:54:44David Rosenthal?

  Yeah, cruises, we didn't talk about, but has been a big success for the company.

• 3:54:47Ben Gilbert?

  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.

• 3:55:03David Rosenthal?

  That was clearly a strategy not devised by people who actually have young kids.

• 3:55:08Ben Gilbert?

  But people love the cruises.

• 3:55:09David Rosenthal?

  They're awesome. I've done them. They're great.

• 3:55:11Ben Gilbert?

  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 US, 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. 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,

• 3:55:54Ben Gilbert?

  the original one, for, I don't know, $200, $300 billion, and then gross a billion and a half at the box office.

• 3:56:00David Rosenthal?

  Yep.

• 3:56:00Ben Gilbert?

  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. Wow. That'll come out this December. And of course, Disney, along with the whole world, has shifted to streaming, which has proved to not be as profitable of a business that they sort of had 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.

• 3:56:46Ben Gilbert?

  So that's why they turned to charging more per guest, since they really can't cram 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 and make it worth it.

• 3:57:00David Rosenthal?

  Yep.

• 3:57:01Ben Gilbert?

  So that's like how you can kind of wrap your mind to this giant investment and the price increases in the parks.

• 3:57:06David Rosenthal?

  Yep.

• 3:57:06Ben Gilbert?

  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.

• 3:57:39David Rosenthal?

  Yeah.

• 3:57:40Ben Gilbert?

  So despite comparable revenue between entertainment and Experiences, the parks and the cruises are generating twice as much profit.

• 3:57:47David Rosenthal?

  Yep. And this is Disney Plus. Like, it should not be the case, in theory, that a media content product is a lower-margin product than a physical theme park product. Except when you're investing heavily into a streaming service.

• 3:58:01Ben Gilbert?

  Yep. Almost 60% of the profits of the entire company come from parks and cruises.

• 3:58:07David Rosenthal?

  This is why Josh is CEO.

• 3:58:08Ben Gilbert?

  Right. Yes. And when I say the entire company, that includes the $3 billion a year of profits from ESPN, and it's still 60% come from parks and cruises.

• 3:58:18David Rosenthal?

  Yep.

• 3:58:19Ben Gilbert?

  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.

• 3:58:37David Rosenthal?

  In revenue.

• 3:58:38Ben Gilbert?

  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.

• 3:58:53David Rosenthal?

  Yep.

• 3:58:53Ben Gilbert?

  It's streaming's world, and Disney is just living in it.

• 3:58:56David Rosenthal?

  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?

• 3:59:22Ben Gilbert?

  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.

• 3:59:31David Rosenthal?

  Right. Right.

• 3:59:32Ben Gilbert?

  Enjoy the wonderful profits of the past was not an option.

• 3:59:36David Rosenthal?

  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.

• 3:59:51Ben Gilbert?

  Yep. It's funny, the 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.

• 4:00:27David Rosenthal?

  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.

• 4:00:51Ben Gilbert?

  And to lay around on Saturday and throw on a Marvel movie thing.

• 4:00:53David Rosenthal?

  Yeah, exactly. But I don't think it's realistic.

• 4:00:57Ben Gilbert?

  Yeah.

• 4:00:57David Rosenthal?

  And the reason I don't think it's realistic, people just don't go to the movie theater anymore.

• 4:01:02Ben Gilbert?

  Yep.

• 4:01:02David Rosenthal?

  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.

• 4:01:29Ben Gilbert?

  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. 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.

• 4:01:41David Rosenthal?

  Thanks. Yeah, I'll go see that too. But they're probably not going to go see a film like Ratatouille. And they're-

• 4:01:46Ben Gilbert?

  Oh, that's interesting.

• 4:01:47David Rosenthal?

  Yep. They're not gonna go see Encanto, and they're not gonna 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.

• 4:02:11Ben Gilbert?

  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.

• 4:02:24David Rosenthal?

  Yep.

• 4:02:25Ben Gilbert?

  The only record setters and real smash hits are these sequels.

• 4:02:30David Rosenthal?

  Yep. Toy Story 5 is gonna be a banger, but again, five.

• 4:02:33Ben Gilbert?

  I don't think Pixar's 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 200, 300, 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 Ratatouilles when they enter the movie theater anymore.

• 4:02:59David Rosenthal?

  And so what is gonna 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.

• 4:03:20Ben Gilbert?

  Even though you can't be that profitable by running said service.

• 4:03:23David Rosenthal?

  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.

• 4:03:33Ben Gilbert?

  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.

• 4:04:01David Rosenthal?

  That's the only other viable strategy that I could think of. Sounds like you ended up in the same spot.

• 4:04:08Ben Gilbert?

  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

• 4:04:50Ben Gilbert?

  is only reaching 40% of the people that it could if it were on Netflix, or whoever the biggest streaming service of the day would be. Yeah, you'd be subservient to them in actually showing it to people, but you are hamstringing yourself by not giving your content the most reach that you possibly can. In the theatrical world, you'd come out with a Disney movie. It would go to every theater. Everyone would see it. You know, you had reach. In the Disney Plus world, Disney Plus doesn't actually give you the reach that being on the biggest streaming services would give you.

• 4:05:21David Rosenthal?

  Yep. I still think it probably doesn't work, and the reason is the algorithms. Netflix is not the movie theater.

• 4:05:31Ben Gilbert?

  Yeah, but if your content is unbelievably compelling, it will rise to the top.

• 4:05:35David Rosenthal?

  Sure, for people that Netflix 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.

• 4:05:46Ben Gilbert?

  No, I disagree with that. 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 gonna talk about it, and they're gonna tell their friends, and it's gonna get more popular, and it's gonna bubble up in the algorithms.

• 4:06:12David Rosenthal?

  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 stalls that are showing a reel.

• 4:06:32Ben Gilbert?

  It's not power law distributed enough where like the big content each month gets 70% of people to watch it. You're saying any given piece of content tops out at like 10% of viewers, or something like that.

• 4:06:42David Rosenthal?

  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 theaters in the megaplex.

• 4:06:51Ben Gilbert?

  Yeah. Yeah, it's interesting.

• 4:06:53David Rosenthal?

  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.

• 4:06:59Ben Gilbert?

  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.

• 4:07:11David Rosenthal?

  Yep.

• 4:07:11Ben Gilbert?

  The one thing 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.

• 4:07:21David Rosenthal?

  Yep.

• 4:07:21Ben Gilbert?

  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.

• 4:07:43David Rosenthal?

  Yep.

• 4:07:44Ben Gilbert?

  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 gonna 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.

• 4:08:16David Rosenthal?

  Yep, yep, yep. And that's what Netflix is.

• 4:08:20Ben Gilbert?

  And that's how bundles work. I mean, the winning thing in TV was the kitchen sink, the cable bundle.

• 4:08:25David Rosenthal?

  Yep.

• 4:08:25Ben Gilbert?

  That's a kitchen sink. That's what Hulu is.

• 4:08:27David Rosenthal?

  Yep. Again, I don't know that I actually could come up with a different, better strategy, but the world that Disney and all the traditional media companies entered, starting in 2015, is just a fundamentally worse one for their content.

• 4:08:43Ben Gilbert?

  To run content businesses, yes.

• 4:08:45David Rosenthal?

  Yeah. And specifically for Disney, because they gotta increase their production output so much. And the whole brand promise of the company is founded on scarce content that's always great.

• 4:08:57Ben Gilbert?

  Yep. Kind of interesting. Is it a worse world for content businesses, but we actually live in the best world ever for consumers of content?

• 4:09:09Ben Gilbert?

  Like, consumers have an immense amount of choice. 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.

• 4:09:26David Rosenthal?

  Right. Immense amount of choice for a miniscule amount of money compared to the old world.

• 4:09:31Ben Gilbert?

  Right, right. It's the best deal ever for consumers.

• 4:09:35David Rosenthal?

  Yeah, YouTube is free.

• 4:09:37Ben Gilbert?

  All these services combined cost approximately the same price as a cable bundle.

• 4:09:41David Rosenthal?

  Right. And compare that to going to the movie theater every weekend.

• 4:09:44Ben Gilbert?

  The only case I can possibly make that we live in a worse environment is the over-exploitation of IP franchises and sequelitis.

• 4:09:56David Rosenthal?

  Yep.

• 4:09:56Ben Gilbert?

  But we live in a pretty amazing content time.

• 4:10:00David Rosenthal?

  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-

• 4:10:21David Rosenthal?

  Compromised and perhaps permanently impaired.

• 4:10:24Ben Gilbert?

  Yes.

• 4:10:25David Rosenthal?

  That's the core of the bear case to me.

• 4:10:27Ben Gilbert?

  Yes. Illustrated by this question, has Disney produced a single new franchise in the last decade that has been a commercial success? Everything I can think of that did big dollars after 2016 at the box office, and I picked 2016 because that's when Wanda and Zootopia came out. Everything after that that was big box office for the company is harvesting existing IP.

• 4:10:51David Rosenthal?

  Yep, yep. And coincides exactly with when streaming kind of became king.

• 4:10:59Ben Gilbert?

  Yeah. 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, those did not have big box offices. And so you sort of have to rely on streaming to tell you that it's big, the number two to kind of carry it.

• 4:11:23David Rosenthal?

  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.

• 4:11:35Ben Gilbert?

  Hmm. 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.

• 4:11:56David Rosenthal?

  Yep.

• 4:11:56Ben Gilbert?

  I mean, where does Star Wars go next? And is Marvel fully exploited now? And, and the company has bet so big on these IP flywheels that like, you know, every new thing in the park is tied to one of them. All the sequels are tied to them. And when you run out of sequels, I 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.

• 4:12:22David Rosenthal?

  I know, I know.

• 4:12:23Ben Gilbert?

  And I just have a feeling in my stomach like I'm just not anymore.

• 4:12:26David Rosenthal?

  I'm barely even aware that it's coming, which is even a worse place to be.

• 4:12:31Ben Gilbert?

  Which says a little bit more about the cultural importance of theaters. Although I bet you knew The Odyssey was coming.

• 4:12:37David Rosenthal?

  Yep.

• 4:12:37Ben Gilbert?

  I bet you knew Dune 3 is coming.

• 4:12:39David Rosenthal?

  Yep, yep. So, okay, bull 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.

• 4:13:24Ben Gilbert?

  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, 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 eighties? And you know what? None of us have ever seen and never affected any of the myth making.

• 4:13:52David Rosenthal?

  The Star Wars holiday special? Yep. 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 then these characters and stories are going to live forever.

• 4:14:08Ben Gilbert?

  Yep. All right. I've got a few reasons for optimism here.

• 4:14:11David Rosenthal?

  Great.

• 4:14:12Ben Gilbert?

  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, 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. So yeah, for, for all the headwinds that we described, they're going to continue to set new financial records. Now, it's not growing at the speed

• 4:14:53Ben Gilbert?

  that you'd want for a business to justify a high multiple or a fast growing stock price. But in many ways, Disney is a scale company that has kind of accomplished its mission. So I don't, I don't know that I want it to be a 20% year over year grower. As a consumer, I quite like that it's a 3% or a 5% growth company.

• 4:15:12David Rosenthal?

  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. The parents take their kids. And it's just always going to be that way.

• 4:15:28Ben Gilbert?

  Yep. The parks are amazing. No competitor has the sort of brand affinity they have, the flywheel infrastructure they have. Yeah, a lot of reason to be optimistic.

• 4:15:37David Rosenthal?

  All right. Then I've got one more point to the bull case for Disney.

• 4:15:41Ben Gilbert?

  Are you going to pitch Josh tomorrow on doing an acquisition?

• 4:15:44David Rosenthal?

  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.

• 4:16:19Ben Gilbert?

  Right. It's, it's got placement in the parks. It's got a deal with Disney Plus.

• 4:16:24David Rosenthal?

  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.

• 4:16:51Ben Gilbert?

  Yep.

• 4:16:52David Rosenthal?

  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. You know what Nintendo's market cap is right now? 50 billion, but down 50% from last year.

• 4:17:05Ben Gilbert?

  Whoa.

• 4:17:06David Rosenthal?

  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.

• 4:17:15Ben Gilbert?

  Japan would not let it. There's no way.

• 4:17:19David Rosenthal?

  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, Star Fox, Animal Crossing. I mean, there are movies for decades to be made here, plus the video games. And then the parks. I took my girls to Nintendo Land

• 4:18:00David Rosenthal?

  at Universal Studios in LA. It was amazing. And it's like 1/50th the size of Disney World. With the bigger Disney canvas, Nintendo physical experiences could be so much more.

• 4:18:14Ben Gilbert?

  Hmm.

• 4:18:15David Rosenthal?

  There you go. That's my pitch.

• 4:18:16Ben Gilbert?

  I like it. Seven powers?

• 4:18:17David Rosenthal?

  Powers. Yes.

• 4:18:19Ben Gilbert?

  All right. So listeners, this is the part of the episode where we use Hamilton Helmer's framework to discuss why a company gets to be more profitable than its nearest competitor. And there are seven of them. Scale economies, network economies, counter positioning, switching costs, branding, cornered resource, and process power. Man, how do we do this this time?

• 4:18:43David Rosenthal?

  I think we do it this time for the streaming era.

• 4:18:46Ben Gilbert?

  Disney Plus versus streaming competitors?

• 4:18:48David Rosenthal?

  Yep, yep, yep.

• 4:18:50Ben Gilbert?

  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.

• 4:19:06David Rosenthal?

  Yep. Cornered resource. Yep.

• 4:19:08Ben Gilbert?

  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.

• 4:19:28David Rosenthal?

  Yeah. Well, I think it's really simple. It all just comes down to scale economies in the streaming business. This is why Netflix has, what did we say, 45 billion in revenue and 13 and a half 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.

• 4:19:51Ben Gilbert?

  Yeah. Hmm. 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?

• 4:20:30David Rosenthal?

  Yeah, I think Disney's best bet here is to be a clear number two.

• 4:20:35Ben Gilbert?

  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.

• 4:20:41David Rosenthal?

  Yep. Yep. They need enough of a content kitchen sink to be superior to Peacock, et cetera. But frankly, they're already there.

• 4:20:51Ben Gilbert?

  Right.

• 4:20:51David Rosenthal?

  They can dial back content production a lot and let the flywheel heal itself a little bit.

• 4:20:57Ben Gilbert?

  Agree.

• 4:20:58David Rosenthal?

  And still be just fine.

• 4:20:59Ben Gilbert?

  Keep Hulu Hulu.

• 4:21:00David Rosenthal?

  Yeah.

• 4:21:00Ben Gilbert?

  Hulu and Disney Plus keep getting closer and closer together the more they bundle it and put the content in each other's apps.

• 4:21:07David Rosenthal?

  Are you starting a Make Hulu Great Again campaign here?

• 4:21:10Ben Gilbert?

  I'm starting a spinco 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.

• 4:21:30David Rosenthal?

  Yep.

• 4:21:31Ben Gilbert?

  My quintessence is that the environment changed.

• 4:21:33David Rosenthal?

  Yep.

• 4:21:33Ben Gilbert?

  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.

• 4:22:02David Rosenthal?

  Yeah.

• 4:22:03Ben Gilbert?

  You had everything going for you.

• 4:22:04David Rosenthal?

  That was peak traditional media.

• 4:22:06Ben Gilbert?

  Then the modern environment is the exact opposite. Cable bundle is getting destroyed. Disney could no longer realize those profits. People stop going to movie theaters, so box office gross dries up. Streaming turns out to be expensive to build, expensive to maintain, expensive to acquire customers, harder to create events around. People don't rally around them like they did movie theaters. It's expensive to retain customers. It's far less profitable, and it's not a replacement for the theatrical revenue. And ultimately, because of all of this, there's just not as much cushy surplus everywhere. And you have to make a lot of really shrewd business decisions if you want to keep generating the same or more profits each year. So where does this leave us? Disney's going to be fine, and if managed very carefully, thrive. They're still going to produce beloved characters and stories we all love,

• 4:22:51Ben Gilbert?

  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.

• 4:23:08David Rosenthal?

  Yep. 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.

• 4:23:32Ben Gilbert?

  You know what it is? You could make money in media then.

• 4:23:34David Rosenthal?

  Yeah. Yeah. Yeah.

• 4:23:35Ben Gilbert?

  Like, you had to do clever stuff, but like, there was money to be made.

• 4:23:40David Rosenthal?

  There was room for creativity to thrive.

• 4:23:41Ben Gilbert?

  There's much less of that now.

• 4:23:44David Rosenthal?

  Totally agree.

• 4:23:45Ben Gilbert?

  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.

• 4:23:59David Rosenthal?

  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 bookcase.

• 4:24:14Ben Gilbert?

  Unkillable.

• 4:24:14David Rosenthal?

  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.

• 4:24:25Ben Gilbert?

  And the early 2010s.

• 4:24:26David Rosenthal?

  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.

• 4:24:38Ben Gilbert?

  Love it. Carvouts?

• 4:24:40David Rosenthal?

  Carvouts. Let's do it.

• 4:24:42Ben Gilbert?

  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.

• 4:24:50David Rosenthal?

  Ooh, fun.

• 4:24:51Ben Gilbert?

  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. 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.

• 4:25:33Ben Gilbert?

  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.

• 4:25:45David Rosenthal?

  Indoor/outdoor.

• 4:25:45Ben Gilbert?

  Indoor/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.

• 4:25:57David Rosenthal?

  Nice. Nice.

• 4:25:58Ben Gilbert?

  At some point, this is like my fifth sunglasses carve-out. My carve-outs will exclusively be forms of eyewear.

• 4:26:04David Rosenthal?

  We should start a acquired retail.

• 4:26:06Ben Gilbert?

  Yes.

• 4:26:07David Rosenthal?

  Sunglasses?

• 4:26:08Ben Gilbert?

  Yep.

• 4:26:09David Rosenthal?

  All right. Moving on, I have three carve-outs. So my first one that I was sure you were going to take is Michael Arndt's Toy Story 3.

• 4:26:18Ben Gilbert?

  Oh, my God. It's so good.

• 4:26:19David Rosenthal?

  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.

• 4:26:35Ben Gilbert?

  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.

• 4:26:47David Rosenthal?

  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.

• 4:26:58Ben Gilbert?

  Yep.

• 4:26:58David Rosenthal?

  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 there in New York at the flagship, they might have Princess Peach costumes. They did not have Princess Peach costumes. As far as I can tell, Nintendo does not make first-party Princess Peach costumes. This is why Disney needs to acquire Nintendo because the fruit is just laying there, right hanging off the trees.

• 4:27:38Ben Gilbert?

  Josh, David wants to come in and do strat planning with you, so bring him in.

• 4:27:44David Rosenthal?

  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.

• 4:28:08Ben Gilbert?

  Yeah, she's so great. Actually, at the Sentry event that we did, what, last year?

• 4:28:11David Rosenthal?

  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 $1 billion 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. It's really awesome. If you're in San Francisco, go to a game.

• 4:28:56Ben Gilbert?

  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/acquired. To WorkOS, start selling to enterprise customers with just a few lines of code and build authentication in minutes instead of months. That's workos.com. To Sentry, application monitoring software considered not bad by millions of developers. That's sentry.io/acquired. And also Sentry is our partner for the annual Acquired meetup this year,

• 4:29:36Ben Gilbert?

  happening on September 17th. More info at acquired.fm/meetup. And to Anthropic, Claude is a truly incredible AI product that thinks with you, just like it thought with me in preparing for this episode, claude.ai/acquired. You can click the link in the show notes to learn more about any of our partners. And as always, all the sources and books and everything for this episode are linked in the show notes. So some thank yous. First, as always, to Arvind Navarathanam at Worldly Partners for his great write-up on Disney, linked in the show notes. Check out worldlypartners.com.

• 4:30:12David Rosenthal?

  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 Demaro, to Pete Docter, Jim Morris, and all the incredible folks who hosted us for the day at Pixar, including Danielle Feinberg, Catherine Sarafian, and the incredible people who run the Pixar archives. That was an experience like none other. To Kristen Bell, the voice of Anna in Frozen, who helped us think about Disney Animation and Pixar. To our friends, Ravi Nandan at A24, Chase Carey at Liberty Media and Fox,

• 4:30:56David Rosenthal?

  and to Mitch Lasky at Benchmark. To Robbie Whelan at The Wall Street Journal, who has a book on Disney coming out later this year. Also to Ben Fritz and Emily Nelson at The Wall Street Journal. And I know you have a list, too.

• 4:31:09Ben Gilbert?

  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 Strategery 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 liked this episode, go check out Disney Part One on Walt's Life. Some other episodes you may like, the NFL, Coca-Cola, Vanguard. Or if you're willing to dive very deep into the acquired back catalog,

• 4:31:54Ben Gilbert?

  we've got Pixar, Marvel, Lucasfilm, ESPN, BAMTech, a Disney Plus episode from 2019. I may be forgetting some, but there's plenty of Disney sprinkled around in the back catalog.

• 4:32:08David Rosenthal?

  Yep.

• 4:32:09Ben Gilbert?

  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/email to get access to all the photos that we talked about and to learn a hint at what next episode will be. That's acquired.fm/email. Join the Slack at acquired.fm/Slack. And with that, listeners, we'll see you next time.

• 4:32:35David Rosenthal?

  We'll see you next time.