Have I ever shown you my Mickey Mouse impression?
You've done your Mario impression for me in the past, but I'm not.
They're a little similar.
All right. All right. Give me Mickey. Give me Mickey.
Oh, boy. Will you look at that?
That is really good. You sound like Walt himself doing Mickey, right? Didn't he do Mickey for like 20 years?
Yep. Yep. Yep. He didn't at the very first, and then one of the animators convinced him to do it, and then yeah, he did it for 20 years.
Have I ever given you my Donald Duck impression?
Oh wow. Okay. Well, now do I need to sit down for this one?
You might need to. All right. Here we go.
That's about right. That's about right. I have a great Donald Duck impression for you coming up. Save it.
All right. Save it. Save it.
You're going to be blown away. I'm pretty sure you didn't find it.
Great. All right. On to the episode. Let's do it.
Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the way.
Welcome to the spring 2026 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.
And we are your hosts today. Listeners, we finally tell the story of the Walt Disney Company. Unbelievably, in 11 years of doing Acquired, we have never told Walt's story, and it's been a glaring omission. It is the entertainment company different than all the rest. It's over a hundred years old, and it has played a prominent role in almost all of your childhoods, and if you're a parent, likely your parenting journey, too.
I'm looking at you, David Rosenthal. Oh yes, and it has played a prominent role in Acquired history too. Our very first episode, Pixar, done Lucasfilm, we've done Marvel, done ESPN, although those are a whole different version of Acquired, we may need to decanonize those and redo them the proper way as part of this.
Listeners, since there are tons of biographies and documentaries and places analyzing Walt's psyche, we're going to focus today on Acquired's sweet spot, which is the business. What is it that Walt's merry band did from the 1920s onward that made them succeed uniquely well in Hollywood? And when you look at Disney's profits today, it is in a whole different league than Paramount or Universal or Warner Brothers or any of the other sort of classic Hollywood studios. The business of feature film production is a mediocre one, especially by the standards of what we study on this show here with Acquired, except for Disney.
Yes, exactly. And I will say I am a huge Disney fan. I grew up on Aladdin and The Lion King. My first movie in theaters was Beauty and the Beast. I'm a huge Star Wars nerd, and my wall was plastered with Toy Story posters growing up. But somehow I knew nothing about the company's early history before starting this research. For example, it started in Kansas City. There was a character that was supposed to be Mickey Mouse before Mickey Mouse but was lost in a contract dispute, or that many of the movies I watched in my childhood are actually from 50 years before I was even born. Snow White was produced before World War II. Pinocchio, Bambi, these films are from the 30s and 40s. They even predate the existence of televisions in people's homes.
Yep. And importantly for Acquired's roots, this really is a technology story. Giant innovations that often bet the whole company on things like synchronized sound, or the crazy idea of a feature-length animated movie at all, or the multiplane camera to photograph the whole thing and turn it into a movie. And of course, building a giant theme park in Anaheim when nothing else like it existed. And they really did invent the entire concept of the flywheel business model that so many entrepreneurs are trying to copy.
So today, listeners, is the Walt Disney Company, Part One: Walt's Era. Woo.
Well, big news from here at Acquired HQ. This episode has a companion PDF with visuals, charts, tables, and illustrations of key concepts, including Acquired's version of the Disney flywheel. We did a pilot of the idea after our Vanguard episode, and we got such overwhelming positive response that we are doing it again. So, you can get access and follow along by clicking the link in the show notes.
You might say we're building out our own flywheel here.
We are eating our own episode cooking, and we're taking this timeless IP that we are developing and figuring out even more things to do with it.
That's right.
All right. So, you can join the Acquired email list at acquired.fm/e. That's where we'll send our big takeaways from each episode, past episode corrections, exclusive behind-the-scenes photos that we found at our research, and it's where you can vote on future episode topics. Plus, we will give away a little hint each time about the next episode topic. That's acquired.fm/e. Come talk about this episode with us in the Slack. That's acquired.fm/slack. And before we dive in, we want to thank our presenting partner, JP Morgan. Yes, just like how we say every company has a story, every company's story is powered by payments, and JP Morgan is a part of so many of their journeys from seed to IPO and beyond. So with that, the 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. David, take us in.
Well, first a thank you to my main source for facts and Walt quotes on this episode: Neil Gabler's biography, Walt Disney: The Triumph of the American Imagination. Gabler, I think, was the only author who had full access to the Disney archives, and all the research he did for that book is just incredible.
Yes. Well, with that, we start in Chicago in December 1901, where Walter Elias Disney is born. And the family lore is that the Disneys are descended from the French Disneys of Normandy.
D'Isigny of Normandy, who came over to England with William the Conqueror in 1066. That's family lore, unverifiable.
Yes. At this point, lost to history.
Yes. So, Walt's father, Elias, was sort of a frustrated entrepreneur. He was variously a carpenter, landlord, farmer, newspaper route owner, and eventually a failed jelly factory investor. But Elias's younger brother, Robert, Walt's uncle Robert, was the successful one in the family. He was a real estate speculator among other things, and that is what brought the family to Chicago at the turn of the century. He had invested in a bunch of real estate in Chicago and the Midwest, and so Elias came also to seek his fortune there. Now, when Walt is four, Elias moves the family out of Chicago to an idyllic farm town, also in the Midwest, where Robert had just purchased another tract of real estate: Marceline, Missouri. And Lillian Disney, Walt's future wife, would say about Marceline, 'It was the most important part of Walt's life. He didn't live there very long. He lived in Chicago and Kansas City much longer. But there was something about the farm that was very important to him.'
And Elias moved the family because it was kind of like, let's get out of the dangerous city of Chicago and raise the kids, right? So sort of somewhere small town. I think Marceline was actually created because they needed somewhere for the Santa Fe Railroad's division point.
Like when it was going to maybe Chicago and Kansas City, and they were like, and this place on the map looks good, and they started the town of Marceline.
Exactly. Exactly. And Robert, the uncle, had bought real estate there, kind of speculating again that Marceline's gonna grow.
So Marceline was like basically a Disney movie. There's orchards and ponds and animals and farmhouses. There's also this charming little town that the railroad had created with a main street, a Main Street USA, you might say. But that's getting ahead of ourselves.
So, while the family's living there, Uncle Robert's wife, Walt's aunt Maggie, every time that they would come visit Marceline to check up on their real estate investments, she would bring Walt gifts. And one year, when Walt is probably six or seven years old, Aunt Maggie brings him a Big Chief drawing tablet and pencil set. And Walt is enraptured. He starts sketching all the time, drawing, sketching everything he can see. And as the legend goes, one day Walt's retired neighbor asks the young boy to draw him a picture of his favorite horse. And the neighbor loves what Walt draws so much that he pays him a nickel for it. And he hangs it in a frame in his house. And Walt, his mind is blown, young Walt. He's like, 'My hobby, my art, it can make me money.' Now, whatever the exact truth of that story is, there is no doubt that somewhere in Marceline, in prepubescent Walt's mind, a connection is forged between these two great forces: art and commerce. And that would go on to drive not only the rest of his life, but the company, the studio, the movies. I mean, change America.
Absolutely. The thing about Marceline, though, you said it's idyllic and like it's out of a Disney movie. The reality of living in Marceline and life on the farm is that it was very hard. All the kids are involved. There's not, you know, magical economic prosperity everywhere. It's sort of a tough life. Even though he can sort of remember it as an idyllic childhood, which I also think is quite the foreshadow of kind of the Disney versionification of things in the future, it is both remembered as idyllic but also was hard as the real world is.
Yes. And I think it's because of the age Walt was when he was there. So they lived in Marceline only from when he was like four to eight or nine years old before he gets really put to work. So he gets to just enjoy, you know, all this bliss around him. Yeah. The reality is it's pretty tough for the family to make a living. And in fact, they can't. So Elias adds farming to his list of entrepreneurial failures. And when Walt is nine years old, they have to move the family again out of Marceline to Kansas City, where Elias decides he's going to purchase a paper delivery route for the Kansas City Star newspaper, and he's going to put the family to work delivering papers.
There are so many protagonists that we study on Acquired who started their career as newspaper boys. I was going to say just like Jack Bogle from Vanguard delivering papers in his youth and having to get up at four in the morning and falling asleep at school because he has to work so hard. Like this is quite the reversal here for Walt from Marceline.
But he never stops drawing, and he never stops making money from it. In Kansas City, he would draw frames for the local barber shop, who would pay him either a nickel or a free haircut for each. And that would, you know, be Walt's spending money growing up that he would earn from his art.
Yep. So later, when Walt enters high school, Elias moves the family back to Chicago again, this time for the jelly factory, which ends up failing, where Walt becomes the cartoonist for his high school newspaper. But he's not there long before he leaves high school to go join the Red Cross and get shipped off to France as an ambulance driver during World War I, where unfortunately he would acquire a chain-smoking habit that he would keep up for the rest of his life and eventually would kill him way too young.
Yep. But Walt's not in France for long before the war ends. And in the fall of 1919, he lands back in Kansas City, where Roy Disney, his older brother, who is, I think, eight years his senior.
Yep. Is living. And Walt has a plan that he's going to seek his fortune finally as a true professional cartoonist. So, through Roy, he gets introduced to an advertising art shop that's looking for apprentices to help draw like flyers for the upcoming holiday rush. And Walt works there for six weeks through Christmas time and then gets unceremoniously laid off. But he gets two things out of this brief experience as an employee. One, he gets a credential. He can now say that he is a professional artist.
All you have to do is get paid to do something, and then you become a professional.
Exactly. Exactly. And you get something else: a co-founder, another young apprentice from the art shop named Ub Iwerks.
I sort of think of him as the Steve Wozniak of Disney.
Yes, absolutely. Walt is like the original Steve Jobs. And I think you can definitely make the case that Ub is the Steve Wozniak.
Although I think Walt was more hands-on.
Yes, Walt was also an animator. Ub was just a better animator, and Walt was a camera operator, and Walt was building stuff, doing things with his hand, and he was in the primary technology and artistic trade that his business was in. So after the two of them get laid off, Walt suggests that rather than go look for jobs again, they should just start their own studio together. I mean, hey, they're professional artists. Like, why not? So, they create Iwerks-Disney Commercial Artists Incorporated, supposedly in that naming order so that it didn't sound like an optometrist shop like Disney-Iwerks.
How amazing is this? In the first Iwerks and Disney partnership, in Walt Disney's first business, he was not the main name on the door. At least he was not the first one.
Yes. Not the main name on the door, but he is the driving force behind the business. So he goes out to pitch prospective clients around Kansas City for the services of this new Iwerks-Disney commercial artist firm, and one of the clients that he goes to pitch is an up-and-coming company called the Kansas City Slide Company, which happens to have become the country's largest producer of advertising slides and short commercials that would get shown in movie theaters before feature films. And the Slide Company has so much work at this point in time, as films and movie theaters are taking off around the country, that they say, 'Hey, you guys seem talented. We don't want to just contract with you. Why don't you come work here full-time?' So Walt and Ub's first entrepreneurial venture quickly comes to an end, and they go join the Slide Company. Now, the reason that they specifically wanted Walt and Ub is that they have a relatively new business line at the Slide Co., which is producing animated commercials to run in movie theaters before films. And this is what Walt and Ub end up getting put to work doing, and they both just fall in love with this new art form of animation. It's like everything that Walt and Ub loves about drawing, but it's more than just art. It's technology. You know, you need cameras, you need film, you need all these new inventions to make animation happen.
Yep. And at this point, animation was really primarily used in advertising, right? There wasn't really a successful, thriving industry yet as entertainment of its own based on animation. It was like very, very early, and to the extent that it did exist as entertainment in shorts, short films, cartoons on its own, it was all based in New York, like not in Kansas City, right?
But the whole industry is only like barely 20 years old at this point in time because you couldn't produce animation on any sort of scale until you had widespread, commercially available film cameras and film projectors. Like this whole art form is brand new. It couldn't exist before the technological innovation of film.
So, part of the reason that cartoons are working well in advertising right now for the Slide Co. is that it's this novelty, you know, almost gimmick. It captures people's attention.
Even though they have no color, no sound, no story, it's just a series of like visual novelties.
It's something they've never seen before. Of course, it's interesting.
Yep. And in Walt's mind, who really is always thinking about how can I, you know, make a business out of this, a career out of this, this is also what makes it super attractive to him, because the whole industry of animation is so new, he figures that he can quickly become as good or better than anyone else in the world at it. Unlike if he's going to try and be the best commercial artist in the world, you know, good luck, young Walt Disney in Kansas City, Missouri.
Oil painting is thousands of years old.
Right. Right. Right. But becoming the best cartoon animator,
small pool. Yeah, he might have a shot here.
Yep.
So, Walt and Ub start experimenting on nights and weekends with their own work, just trying out creating their own animations using the Slide Co. equipment and cameras. And Walt puts together a few short cartoons that he creates all himself. He brands them as, quote, 'Laugh-O-Grams,' and he ends up selling them on the side to a local movie theater chain to run before features. And the Laugh-O-Grams become a hit in Kansas City. Audiences love them.
I love that the thing that led to the Walt Disney Company is called Laugh-O-Gram. It reminds me of what was the Rolex watch? The Turn-O-Graph.
Oh yeah. Yeah. Yeah. That's such a like hokey name for, you know, what ends up becoming... well, this doesn't become Disney, but the spirit of which becomes Disney here.
And the thing that they're doing, they're so primitive. There's no sound, there's no voices, there's no color, there's barely backgrounds.
Yeah. It's so different from what you're used to today. Because of those limitations, you can't create a story or a real sense of character for any of the characters that are in there. Like you can't build a relationship with the cartoons that are being made at this time like you can with Mickey Mouse or Donald or Goofy or Minnie.
The only emotion you can invoke is humor. And the only real way to do humor is slapstick. So it's just these like super exaggerated, they call them gags, like things that a character does that isn't necessarily consistent with anything else that they've done within a few minutes of starting, a gag happening and ending, or sometimes even a few seconds.
Yep. And honestly, that's actually not that different than film itself overall at this point in time. Like Charlie Chaplin is the big star in America and around the world, the big movie star right now in the silent era.
And most of his movies are exactly what you described, Ben.
Honestly, it's all physical comedy, sort of slapstick. It's the stuff that my toddler laughs at. You could resummarize every scene of every comic and most movies by going, 'Oh, he fell down.' Exactly.
Ah, so in May of 1922, at 20 years old, Walt decides that these Laugh-O-Grams that he's making are having enough success that he's ready to leave the Slide Company, go out on his own again, and he founds Laugh-O-Gram Films, Inc. And once again, he convinces Ub Iwerks to quit and come along too, along with a few other animators from the Slide Company. And it's another failure because despite the Laugh-O-Grams' local popularity there in Kansas City, by the time we get into 1922, 1923, animation and cartoons in general around the country are starting to lose their appeal. The novelty is wearing off. The fad is dying down. There's actually a survey of theater managers right around this time, in like 1922 or 1923, where one of the questions is, what filler options do your audiences like to see around the feature film that you're showing? Because it also would be newsreels or live comedies or short serials. Remember, there's no television. There's not even really radio at this point in time. If you want to get news or any kind of entertainment, you go to the movie theater.
All right, I got a stat on this. In the 1920s, the average American went over 40 times per year to the theater.
This is what you did every week for entertainment.
Wow. Yeah. Compare that to today where like maybe you go once a year.
It's two. The average American goes to a movie theater twice a year now.
Yeah. I mean, back then it was like you could go to the movie theater or you could go see a live show, ballet or opera or like a sporting event like a baseball game, or you go to the movie theater. That's it. And when you go to the theater, it was a bundle. I mean, yeah, you were there for a production, but I think the point you're trying to make is there were also these cartoons with gags. There were newsreels. There was the feature you're there to see, but it's sort of this like bundle of all, right, let's see what the theater has in store for me today.
Yeah, exactly. So, this survey of theater managers, only 23% of respondents say that they show cartoons as part of the bundle and that their audiences like it, which is by far the lowest of any of the other filler options. So, Laugh-O-Gram can't really find a market outside of their local popularity in Kansas City. And in 1923, the company goes bankrupt and shuts down. And Walt is now this sort of 1.5 times disgraced entrepreneur here in Kansas City.
Right in his dad's footsteps.
Yeah. Yeah. Yeah. Exactly.
And he raised money from people in Kansas City, friends, family. He went and lost people's loan capital that they gave him.
Yep. So Walt goes to rich uncle Robert for advice on what to do given his failure. And Robert says, 'You know, kid, best thing to do if I were you, I would just skip town. Get out of there.' Which actually is really sound advice for back then. You know, people's reputations did not travel with them.
Nope. Your credit was the credit locally that you had with the people in your town and no other way to find you otherwise.
Now, it just so happens that both Robert and Walt's older brother, Roy, have just also skipped town from Kansas City and moved out west to Los Angeles. So, Walt packs his belongings, which is basically nothing at this point in time, hops aboard the Santa Fe train bound for LA, and joins them in Hollywood. And when he arrives there in the summer of 1923, he's 21 years old. He stays with Uncle Robert, and initially, you really can't make this up. I couldn't believe this when I read it. Walt at first thinks that he's come to Hollywood, he's going to get a directing job in Hollywood at one of the studios there.
Well, yeah, he has abandoned the idea of animation. He basically thinks he's too late. He's seen some of the stuff that comes out of the New York cartooning scene, and he's like, 'Well, I'll never be as good as them, so I need to go start over something completely new, right?' Which is sort of, you know, silly and wrong in and of itself. But also like the hubris that he thinks that he could just show up in Hollywood with no directorial experience and become the next D.W. Griffith. That is Walt for you.
Do you know the story of the Universal lot?
So, he rolls up to the Universal lot after getting there, having no job, no money, borrowing a bed, and he goes and has fake business cards made that says he is with Universal. He's just the Kansas City representative, so no one at Universal would really know who he is. And he gives it to the receptionist on the Universal lot. And he walks in. And so he spends at least a day, from what I could tell, roaming around and learning as much as he could about film production and like internalizes a lot of those lessons. And then he tries to come back in future days and say like, 'Oh yeah, I'm sort of like with Universal, and now I have experience, and can you give me a job?' And he ends up running out of money and doesn't get a job.
That is amazing. I didn't know that story.
So once he inevitably gets rejected at all the major Hollywood studios, he says later, 'When things began to look hopeless, I got my cartoon things out again.' And he sets up shop animating again. He's like, 'Well, as you said, Ben, this is the one thing I know how to do. I should try that.' And at this point, pretty much the only popular cartoon left in the industry is Felix the Cat.
Which is created by Pat Sullivan out of New York and distributed by the pioneering Margaret Winkler, also in New York. So Walt has one thing, one asset left over from his failed Laugh-O-Gram days, which is a reel of a hybrid live-action cartoon short that he had created with Ub right before he left Kansas City called Alice's Wonderland, about a real-life little girl who interacts on screen with cartoons that they've drawn over the film, which is like completely pioneering technology. The other people who were doing animation at this time were just doing cartoons. These Alice comedies, as they came to be called, were a new process by which you could go and film a real-life actor and then have them interact on screen with cartoon characters and put them in the cartoon.
Yes. Very cool. And also had the unique property of being cheaper to produce than full animation because you only had to animate the characters, not all the backgrounds and everything.
Right. Yeah. There is this funny counterintuitive thing that live production is much faster and cheaper than animation. You just have a film camera and you point it at something in the world that exists and you kind of get everything that you're pointing it at for free, like the interesting things around you and you taking these exposures in a video camera.
Yep.
So, Walt sends Alice's Wonderland off to Winkler and she likes it. So, she commissions Walt to create 12 more Alice comedies for like $1,500 to $1,800 each.
She does. And David, did you know we have seen this contract?
Was this in the documents that we saw in the Disney archives?
Yes. So, listeners, for this episode, David and I went and spent a few days down in Burbank looking through the corporate archives. And one of the things that the archivist pulled for us was this contract. And I have a photo of it. I'm looking at it right now. 'Agreement entered into this 16th day of October 1923 between Walt Disney of 4406 Kingswell Avenue, Hollywood, California, blah blah blah blah blah.' And yeah, you're exactly right, for 12 negatives of subject series, and then in all caps, Alice Comedies.
And this, I also have a picture of this on the last page of this contract because this is effectively the contract that puts Disney in business. I mean, this becomes the Walt Disney Company.
Yeah, this is the moment. This is the beginning of Disney. You can see his signature, which is much less flowery than the version that you see in the Disney logo. He would sort of evolve it over time.
But yeah, this is the moment. Disney, Walt is in business. It's his first actual commercial big-time deal.
Yes. And I think when Walt sort of gets word from Margaret, he runs into his brother's room. His brother Roy actually has tuberculosis at this time. He is in like a hospital ward. And he sort of runs in, shows him the contract, and says, 'We got it. We got it. We got it. We're in business. We're doing it.' And, you know, $1,500 to $1,800 a film is a lot of money at this time. And Roy talks through with him, and says, 'Okay, let's get right to work.' And he literally stands up and leaves the hospital ward. He's like, 'All right, my tuberculosis is behind me.'
And the two of them found the Disney Brothers Cartoon Studio right there in October 1923, as a true partnership between the brothers. Roy manages the business and the finance. Walt manages the creative, and they get to work.
Yep.
So Walt, of course, writes Ub Iwerks back in Kansas City and several of the other talented animators that they knew there and says, 'All right, guys, I got it this time. Come on out to California. We finally got a deal. We're going to build a real company and a real animation studio.'
And they do. The behemoth we know as Disney today is the Disney Brothers Cartoon Studio and a whole bunch of Kansas City guys that moved out to join Walt to start cranking away.
Yep. And the Alice comedies become a moderate success in the marketplace. Again, I think the novelty of cartoons plus live animation, and audiences are entertained for a few years. Ultimately, the Disney Brothers Studio produces 57 of the Alice comedies from 1923 to 1927. And then in 1927, Winkler's relatively new husband, Charles Mintz, who actually got to start working for her in the business, by this point in time he has taken over as sort of head of the business. He is no longer getting along with Pat Sullivan, the creator of Felix the Cat.
Big opportunity. And he has brokered a little arrangement with Universal Pictures, the big New York film distributor, to on the sly create a new character to rival Felix. Now, mind you, he and Winkler are still the distributor for Felix, for Sullivan, and they're creating a new character to compete with him on the side.
Sort of like they're building their own chips while still buying Nvidia.
Yeah. And so he turns around and taps Disney and says, 'Hey, Walt, can you make us a new series and a new character? You know, like Felix, but not Felix. Like maybe not a cat, right?'
We needed to be plausibly different while still having everything that made Felix successful.
Yes. So, Walt and Ub cast about what can we come up with that's like a cat but maybe shares a lot of the same recognizable attributes, like, you know, a lot of white fur, a tail, some big ears, easy to draw in black and white. And they come up not with Mickey Mouse, but with Oswald the Lucky Rabbit. And Oswald is a big hit. It's got the backing of Universal distribution behind it. It's a big hit for Universal, a big hit for Winkler and Mintz, and a big hit for the Disney Brothers Cartoon Studio. And it's not surprising because if you give the creative brief to Walt and take something that's kind of working, but apply your style. Their style was great. I mean, they were emotional animators. There's a great quote in the book Walt Disney: An American Original by Bob Thomas that says, 'Before Disney, cartoons were slapdash. Two-dimensional characters in bizarre movement before elemental backgrounds. Disney insisted on rounded humanized figures. He wanted the humor to come out of the character, not the outrageous action.' So, it's sort of like, hey, here's the template, but Disneyify it or Iwerksify it in a way that really can speak to people.
Well, I think it really was the partnership of the two of them. I think Ub Iwerks had like immense artistic talent as an animator and was able to do that, and Walt had taste, like he recognized it and he knew when and where to apply it.
Yep. So on the back of the Oswald success, the Disney Brothers Cartoon Studio grows pretty quickly from this ragtag group from Kansas City to like a real operation, like a real, you know, at this point bordering on major animation studio. They hire about 25 employees and start churning out Oswald cartoons.
They move into a real studio building on Hyperion Avenue in the Silver Lake neighborhood of Los Angeles. And when they move there, Walt and Roy decide, at unclear which brother's instigation, that they need to rename the company and the studio from the Disney Brothers Cartoon Studio to the Walt Disney Studio. So, there's two stories about this.
I was going to say I've seen both.
One is that it was actually Roy's idea.
Because he's like, 'Hey, you know, we need to start building a brand, and like people need to know who is making these Oswalds, and it should be the Walt Disney Studio.'
And you're very clearly the frontman. You know, you're selling. You're the visionary. You're the sort of creative talent, and this is a creative company. Of course, it should be you.
Yep. The other story is that Walt always had a dream since he got to Hollywood of having his name up on a neon sign. Now that they have their own real studio, he wants a neon sign constructed that says the Walt Disney Studio, which I think does happen.
Yes, we'll put the photo in the email. The Hyperion Avenue studio has this really cool sign, or did for a long time before it got knocked down, and I think it's a strip mall or something today.
And in that vein, now that the studio has become a real operation, Walt moves from actually doing a lot of the animation and camera work mostly to overseeing the studio, which you have to with an operation of 25 artists and creative people and camera folks. You need someone who has an overall vision and taste to drive everything.
Now, as Walt is transitioning from, you know, sort of doer to really studio head,
and worth knowing, the ownership of Walt Disney Studios that would become Walt Disney Productions that would become the Walt Disney Company was at this point 60% owned by Walt and his wife and 40% owned by Roy and his wife.
Yep. So Mintz, the husband of Winkler back in New York, who has, you know, sort of already proved his stripes by his dealings with Felix the Cat and Pat Sullivan, he senses another opportunity. He thinks that Walt has become superfluous and that it's actually just the animators who really matter. And because the Walt Disney Studio doesn't actually own the IP of Oswald the Lucky Rabbit, Universal does,
although the Walt Disney Studio was acting like this was sort of their creation that they owned.
Yeah. I don't think Walt or Roy really read the fine print on the contracts here. So, in early 1928, Walt and his wife Lillian, who Lillian also was an early studio employee,
in the Ink and Paint Department. That's right.
We'll get to that.
They make a fateful trip as a couple to New York, where one of the items on the agenda is for Walt to go meet with Mintz and ask for a raise in the amount that the studio is getting paid per Oswald short. So Walt sits down with Mintz, and Mintz is like, 'Well, I don't know about paying you more. I don't think I like that idea. In fact, I'm not even really sure, Walt, what you are doing around here any longer. But I tell you what, I'm a nice guy. I'm willing to let you and your little studio stay involved here and keep making the Oswalds, but we're going to have to pay you less, not more. Like $500 per cartoon less.'
Which my understanding is that basically wiped out the margin, and they were saying we'll pay you cost to make these Oswald cartoons.
Yeah, I think Mintz had basically calculated, okay, if Walt takes this, then I'm willing to let his studio keep making it, and if he doesn't take it, then it's all equal to me. I'm just going to steal his animators and go make it myself. And crucially, before this meeting even happens,
he's already stolen the animators.
Mintz has an ace in the hole. He has, I think, signed contracts with nearly all the animators except Ub Iwerks. He has sort of through an act of subterfuge gotten in touch with each of them individually and brought them over.
Yeah. Only, and I think maybe two or three other animators refused to sign these secret deals with Mintz and stayed loyal to Walt and to Roy. Once Walt realizes this, there's nothing he can do. Like, it's a free country. He can't force his animators to stay. He doesn't have employment contracts with them. And he also doesn't have any control or rights to the actual Oswald IP. So, he has no leverage. He's got nothing. He's got no customer contract. He's got no employees. He's got no intellectual properties. Suddenly, the enterprise value, so that the entire value of Walt Disney Studios is effectively zero.
Yep. It is an extremely bitter lesson for Walt and for Roy. And it is one that you can bet they never forget for the rest of their lives. And really like everything in Disney's history and all of the enterprise value that Disney has built that we will see all across the rest of this episode traces back to this moment.
It's a hard reaction to this lesson.
Totally. I have a fun bit of trivia for you, Ben.
So, as I think you know, Disney eventually does get the rights to Oswald back.
This is gonna be my trivia for you,
right? Actually, ask your question. We might have different takes on it. Disney eventually does get the rights to Oswald back in 2006.
Bob Iger, one of his first acts as CEO, did the deal.
Yes. Do you know how Bob got Oswald back for Disney?
So, let's see. By this point, Disney had acquired ABC.
And who owned Oswald at this point? It was Universal, which was owned by NBC, which is now owned by Comcast.
Correct. So, there's an ABC asset that Bob effectively trades in exchange for Oswald. And I think that ABC ESPN Monday Night Football asset is Al Michaels.
Al Michaels, the Monday Night Football commentator, like a sports team trade to NBC in exchange for the IP rights to Oswald the Rabbit.
And Oswald is repatriated and NBC gets Al Michaels and all is right in the world. Amazing.
So, back to 1928. Walt and Roy are basically back at square one here. They have not really just nothing. They actually have less than nothing because Mintz, ever the... well, really just kind of weasel is the right word.
He makes Walt and Walt Disney Studios finish out the current Oswald contract, which still had a few cartoons left to animate on it, and pay all of the animators who had all betrayed him and were all about to defect. Mintz is like, 'No, no, you've got a contract. You're going to keep paying these folks while they finish up the last couple shorts on this brutal contract.' Just brutal.
Absolutely humiliating for Walt.
And so then, as legend has it, on the long, long train ride back home from New York, Walt is struck by a bolt of inspiration. And he scribbles a sketch for a new cartoon character right there on his drawing pad on the train trip, a character that wouldn't just reverse all the woes of the Oswalds and turn around the company's fortune, but would maybe become one of, if not the most recognized figure in all of human history. But before we tell the story of Mickey Mouse, now is a great time to thank our friends at JP Morgan.
Yes, our presenting partner. So today we are sharing a story from one of JP Morgan's partners and a company that you may know, Bill, which is formerly Bill.com. Right. Bill is the financial operations platform for half a million small and midsize businesses, what they call the Fortune 5 million. They help manage and maximize cash flow for SMB companies. And Bill's Divvy product is what employees at those businesses use to fund their operations day-to-day. So, here's a scenario that many listeners may have experienced. Someone on your team maxes out the credit line on their corporate card with an unexpected purchase. You send a wire to pay off the card so you can continue using it, but it takes two to three days to clear. Meanwhile, your team can't transact. Yeah, Bill solved that for its half a million customers using an embedded payment solution from JP Morgan. With API-based subledgering, they can manage millions of payments in real time on any platform, all with one bank account. Every Bill customer gets a unique virtual account number. So the moment a payment is received, the credit line is restored. The result is a way simpler way to receive and route payments at scale. And the actual numbers are awesome. Payment posting went from two to three days to seconds. Inquiries dropped 83%. Even Bill's own Treasury team reclaimed 20 hours a week from manual reconciliation. For decades, these were Fortune 500-only capabilities. But Bill and JP Morgan figured out how to deliver that same infrastructure to the Fortune 5 million while also improving Bill's internal operations. You can read the full case study as always at jpmorgan.com/acquired. And something else, if you want to join us and JP Morgan in person, we'll be on stage at the We Are Developers World Congress in San Jose this September. Click the link in the show notes to learn more.
Okay, so David, how does this Oswald catastrophe lead to Mickey Mouse? All right. So, here's the story of Mickey Mouse, as Walt would tell it. It's March 1928. He and Lillian are on the long train ride back home to LA from New York. He's struck by the bolt of inspiration for a new cartoon scenario about a plucky mouse named Mortimer who is attempting to fly an airplane just like his hero Charles Lindbergh. And this would go on to become the Mickey cartoon Plane Crazy. So Walt shows his sketches that he's making to Lillian, and Lillian says, 'I like it, but Mortimer, that's too a name. How about Mickey?' And thus Mickey Mouse is born. Now, the real story is more likely that Walt and Lillian get back to LA and Walt is like sweating. So he and Roy and the couple other animators who stayed loyal to them hole up and they start brainstorming ideas for some kind of new idea or new character that they can create to replace Oswald and turn around the studio's fortunes.
And also when you see Mickey and you see Oswald, it's not hard to imagine where Mickey Mouse came from. It's like kind of like shorten the ears, make them circles, you know, they both kind of have this white face and the black outline.
I mean, it's really just the same brief that created Oswald. It was like, 'Hey, take Felix and'
do something like Felix. Except this time it's
take Oswald and do something like Oswald
and make damn sure we own it.
Yes. Exactly. So, they land on the idea of a mouse.
And didn't Walt claim that he sort of like always had a fondness for mice because there were mice that would like jump in his trash can in Kansas City while he was animating. And
You know, it's all just part of the Walt myth.
Yes. And at least according to the Neil Gabler book, most likely Ub Iwerks is the one who first draws Mickey, not Walt on the train. But
Ub definitely was the primary animator of the first Mickeys, for the whole first series of Mickeys, including Steamboat Willie. So, by the summer of 1928, we've finished out the Oswald contract, and Walt and the small little merry crew have gotten two Mickey shorts ready for
Production. Plain crazy and the Gallop and Gala show. And Walt takes them around to distributors. You know, the Walt Disney Studio is well known at this point. This seems like it would be promising new IP. And none of the major distributors are interested. They're like, "Yeah, I don't know. This is Mickey. It's like Oswald, but without all the, you know, thousands or hundreds of thousands of raving fans for it." So, exactly. Exactly. And then comes the Eureka breakthrough idea. One of the gang recalls that the Jazz Singer, the famous first popular talky, you know, movie with dialogue and sound that had just come out the previous fall, when they went to see it, that there was a cartoon screened alongside it. And Walt, when he hears this, puts the two ideas together in his mind of a cartoon and sound. And supposedly he says, "That's it. That's it. That's what we've got to do. Stop all these silent pictures." Now, at this point, people had made cartoons with sound, but nobody had ever made a cartoon with sound like the Jazz Singer had sound.
Synchronized. Yes. Exactly. Where what was happening in real time in the cartoon was then played in sound. Exactly. Synchronized in the movie theater.
Yeah. The concept before was there's music that plays, but it's only loosely attached. And this is to the frame and to the beat of the music. Like if you see Mickey on screen bop into something, then you might hear a xylophone on the exact same downbeat play a note.
Yeah. It's not just that like there's some music accompanying this cartoon that you're watching. It's that what is happening in the cartoon feels like it is producing the sound.
Yes. There's a great business model lesson in this, which is with the first two Mickeys flopping, if you just do the same thing as an existing competitor who already has distribution, brand, customers, it's not enough. You need to go do something leveraging a new piece of technology or a new platform. You got to come at it from an orthogonal way in order to leapfrog and make people pay attention to you. Otherwise, you're just a like smaller, worse also-ran.
Totally. And and that could be anything. I mean, the only reason that the Oswalds worked, even though they were a ripoff of Felix, was because they came built in with the Universal distribution. But yeah, Walt taking out the Mickeys before bringing sound. Like, he's got nothing to bring to the table here.
So, Walt lines up access to the Cinephone sound recording system from a character named Pat Powers, who had actually helped create Universal, you know, some number of decades earlier, and then had gone on to become a sound entrepreneur developing a sound system for this new movie technology. And so Walt and crew animate a test sequence of a Mickey with sound, and they screen it for all their wives and girlfriends. And writes later of what happened next when they screened the synchronized sound Mickey for the first time: "I never saw such a reaction in an audience in my life. The scheme worked perfectly. The sound itself gave the illusion of something emanating directly from the screen. Walt kept crying, 'This is it. This is it. We've got it.'" It turned out that sound was the critical enabling technology for animation to go beyond a novelty and allow the characters that are on screen to actually have personality that audiences connect with.
So interesting. And it's not obvious at first. It's obvious in retrospect, but you can totally see how when Walt had this insight and then they made the investment, because doing a test animation and synchronizing the sound, like even to show a little screener, must have been really hard at the time because none of the tools existed. They sort of had to invent the way to synchronize the drawings with the music and the systems. It's sort of a big bet even to try and see if that creates personality.
Right. Right. And sound did the same thing for live-action movies, but it's not that big a leap to have humans talking. Like humans talk, you know, sound just made it way better. Sound for cartoons was this giant leap. These characters, this art can now be actual characters with personalities.
In a way that they couldn't before.
Non-obvious at the time, completely obvious in retrospect.
Yep. So, they make Steamboat Willie as the third Mickey, but the first with synchronized sound, which we're going to skip over the whole headache nightmare of creating this thing. But it was like Walt constantly going back and forth to New York, betting every last dollar that he had, inventing all these new processes, trying different ways to get an orchestra synced to the sound.
Oh, yeah. They like animated a little ball on the screen that would sync to the orchestra as they were playing.
Yes. And he couldn't get the original conductor of the orchestra to actually use his method. The orchestra guy was like, "Ah, trust me." And then it was all out of sync with the screen. The net of it is it's a giant painful operational struggle to get this thing out, but my god does it hit.
Yes. Well, you know, this is the nature of the New York distributors. They get it made. Walt takes it and shops it around all the big folks in New York. And they're so conservative. They're like, "Well, this is cool, but um I don't know how audiences are going to react to this. We kind of want to see a test first."
I don't want to be first in line.
Yeah. Exactly. Exactly. Kind of like VCs. So Walt decides that he's going to take matters into his own hands and he goes directly to the manager of the Colony Theater in New York City and cuts a deal for $1,000 to run Steamboat Willie before the features that they're showing in the Colony Theater. So going around distributors just to get this in one theater as a test.
Yep. And so Steamboat Willie premieres in New York City on November 18th, 1928 before the film Gang War. Nobody really remembers Gang War because Steamboat Willie is a revolution. Critics love it. Audiences love it.
Yeah. Isn't there some famous story of people sort of standing up and screaming, "We want Steamboat Willie again" instead of playing the main feature?
Yeah. Yeah. Exactly. Exactly. But still, you know, Disney now needs to find a distributor. And now he's got the proof point. These New York distributors, they're still so conservative. They're like, "Well, you had one hit. I don't know that like we can really trust that this isn't just a fad, that the future sounds are also going to be a hit and that you can repeat the magic." And famously, one distributor while Walt is meeting with him here and he's trying to explain to Walt why he's going to pass again on the Mickey deal, picks up a package of Lifesavers candy. And he says to Walt, "The public knows the Lifesavers brand. They know what these are. They don't know Walt Disney and they don't know your mouse."
I can only imagine Walt sitting here just seething.
Yeah. But this makes a huge impression on him. I think this is an important thing about Walt. He definitely has a huge ego, right? But he is very willing to learn even from pretty obnoxious people. He's like, "You know what? You're right."
Oh, I think he's motivated by learning. He's motivated.
I think he's an engineer. I think he loves picking things apart and learning the way they work. I think he's motivated to make the best art he can in addition to making the best business he can. So, if someone's going to offer him a lesson, a way to learn something, yeah, he'll take it. He'll take it even if he might be mad at the person. So he writes about this moment later: "From now on, the audience was going to know if they liked the picture, they were going to know Walt Disney's name." Ultimately, what Walt does is he turns to Pat Powers, his partner in the sound technology, who had been one of the, you know, original Universal executives, and they cut a deal where Powers will be Disney's direct distribution agent in return for just 10% of the gross revenue on the Mickeys, which seems like a pretty good deal.
Yeah. And indeed, it was kind of a too good to be true deal because Powers, like all these New York guys, was basically plotting to do the exact same thing as Mintz to Disney. He wanted to start working with Walt, give him a sweetheart deal, and then lure away the animation talent because Powers, remember, has the sound technology that he's given to Walt. So he's thinking, if I get the animators, right, what do we need Walt for?
So this explains the sweetheart deal on distribution because that wasn't the real prize he was after. And just a year later in 1930, Powers does the unthinkable. He convinces Iwerks to quit and leave Disney. He says, "We're going to get you set up with your own studio. You're going to work with me. We're going to create new characters." It's the exact same thing that Mintz did to Disney last time.
Except it plays out the exact opposite way.
Because Walt's learned his lesson.
Walt has learned his lesson. By the time this happens, over a dozen Mickey shorts with sound have come out. Every single one of them branded prominently up front and at the end a Walt Disney comic. And they had become huge hits. So even though Powers steals Iwerks away, nobody cares. Everybody still wants the Mickeys. Everybody still wants Walt Disney comics. Disney has made himself the Lifesavers of animation.
Disney first switches to Columbia for distribution and then to United Artists. And audiences just keep loving Mickey. In fact, they love him so much that it leads to the discovery of a whole new business model for Disney and the company, the intellectual property flywheel. And it starts with the Mickey Mouse Club. This is wild. I had no idea about the origins of the Mickey Mouse Club.
Basically discovered by Disney by accident, right?
Totally by accident. So, in the summer of 1929, just a few months after Steamboat Willie and the first sort of nationally distributed Mickeys, the manager of the Fox Dome Theater in Ocean Park, California, contacts Walt with an idea. "Why don't we partner to start a Mickey Mouse club for kids? I've got like a thousand kids who keep showing up here at the theater every weekend and all they want to do is watch the Mickeys again and again and again. I think we should capitalize on this. We can create a club, like a kids club, and we can charge parents a membership fee. The kids will love it. The parents will get them out of the house every weekend. It'll be great. And we can pilot it here at the Fox Dome Theater and then if it works I think we can franchise this nationally." And so this is exactly what Walt and this theater manager do. The way it works when they take it national is that theaters would buy a quote Mickey Mouse Club charter from the company, from the Walt Disney Studio.
Yeah, like a franchise, right, for $25. And then as part of the club, the kids and their parents would gain the right to buy exclusive Mickey merchandise.
I mean, it's kind of amazing, right? Pay to become a member of a club to dedicate yourself to fandom. So, you have the right to buy more things.
The right to buy more things. Yes. So, like hats, buttons, banners, etc. And all of this revenue is getting split back with Disney. The $25 club charter and then all the merchandise revenue. Pretty quickly, there are 800 Mickey Mouse clubs across the country with more than 1 million total members. That is more members than the Boy and Girl Scouts of America combined at this point in time.
That's insane scale and insane speed of adoption pre-internet.
Right. Right. Pre-internet, pre-cable, pre-broadcast TV, the ability to get a million Americans doing something within a few years is like, how did that even work? I mean, I'm trying to think how word could even spread that quickly. I guess through theaters, Disney's distributors to the theaters.
Well, this is like a no-brainer proposition for a movie theater operator. You're going to take your Saturday or Sunday afternoons, which are probably reserved mostly for kids anyway, all your matinee showings, right? You're going to convert it into a Mickey Mouse club. Kids are going to love it. They're going to buy a bunch of stuff that you otherwise wouldn't have the opportunity to sell to them. Parents are going to love it because they get rid of the kids. And then for Disney, they're just getting this turbocharged distribution and brand recognition of Disney the company and Mickey Mouse the character.
Yeah, it's amazing. Okay, so they take the learnings from the Mickey Mouse Club, right? And they kind of lean into Mickey in a big way at the corporate level.
Totally. So just a few months after the Mickey Mouse Club kicks off in January 1930, they launch a daily Mickey comic strip with King Features Syndicate in newspapers around the country. It gets published daily in 60 US newspapers and then also internationally in 20 more countries around the world. So Disney is getting paid to produce a Mickey comic strip, which only cost them the salary of the one animator that they have making it every day, a 24-year-old named Floyd Gottfredson, who would do it every day for 45 years.
Wow. Wild. So, not only are they getting revenue for this, they're getting free daily advertising and IP exposure to probably 100 million plus people through this newspaper comic distribution every single day.
And even if they weren't getting paid for it, the marketing on that so that people go see Mickey films.
Exactly. Yeah. It never becomes a huge revenue or profit driver for them, but like that free daily marketing in most major newspapers around the country is incredible.
Yep. Interesting to know Oswald actually was on a candy bar back in the day, but when Walt, who at the time thought he owned Oswald, had the opportunity to monetize it, he was like, I didn't even consider it. It doesn't need to be an additional revenue stream. It's just really good for me if Oswald is on the candy bar. Right. So, that's sort of they're getting the seeds of like, okay, we're making some money on the comics, but it really is like a massive marketing engine.
Well, you're teeing up the big one here, which is merch and consumer products.
Yep. So pretty quickly after Steamboat Willie, Walt is walking the street in New York and a man comes up to him, like comes up to Walt Disney on the street and offers Walt $300 to license the Mickey character to put it on a series of children's writing workbooks that he's producing there in New York. And this is like really early days. Mickey's just starting to work. The studio still needs money. So Walt's like, "Sure. Yeah, I'll take 300 bucks. Why not?"
And 300 bucks in 1929, it's a lot of money. I mean, this is the beginning of the Great Depression.
Yes. Yes. Mickey takes off during the depression. In fact, he sort of becomes like a national champion. It's part of his success that people view Plucky Mickey's success as a mouse, as the underdog, as like something that Americans can identify with through the depression.
And life is hard. I mean, having a sort of way to disassociate a little bit and then just enjoy a like fun-loving, problem-free cartoon. I don't think people know this. Mickey's role in these early comics is exactly what you're saying, the underdog. He's getting himself into these tricky situations by someone that seems bigger and stronger and he's able to figure it out and emerge. It's the American spirit.
Yep. Yep. Yep. So, back to the writing tablets, they take off and do huge, huge sales. Disney doesn't even know how much sales because all they have is 300 and a handshake from this guy. So, Walt and Roy figure, "All right, we need to get smarter about merch." So, they contact an adman in Kansas City that Walt admired named Kay Kamen who had owned an advertising firm and they agree to do a deal where Kay becomes the exclusive commercial products agent for all Disney merchandise licensing beginning in 1933. And the deal they do is that Disney would get 60% of the first $100,000 in royalties that Kay is able to generate from licensing Disney brands and mascots. And then after the first 100k, they would split every dollar of licensing revenue 50/50, and there would be a lot of dollars after the first 100k. This is a huge moment. I mean, there is a real case to be made that besides Walt and Roy and Iwerks too, but at least on the business side besides Walt and Roy, Kay Kamen was the third most important person in the first, you know, half century of Disney.
All right. So, make your case. What goes on to happen here?
So, within 6 months, Kay takes Disney merchandising from this hodgepodge of random licenses of guys that Walt met on the street, and many of which were a lot more than $300, to a real professional operation doing $6 million of gross merchandise sales within six months. That then grows over the next two years to $70 million annually of gross merchandise sales all around the globe from over 40 separate super high quality consumer product partners. So the most successful and famous example of this is the deal that Kay does in 1933 right after he takes over with the Ingersoll-Waterbury company.
This is crazy that within just a few years they can be at a $70 million level in 1935 of merch. I mean, there's so much pent-up demand to buy Mickey Mouse stuff that you can sort of explode out of the gate. I don't even really understand how Kay lined up 40 merchants and got all this stuff manufactured and distributed in such a short period of time.
Well, I think part of it though is that he's like a real professional and well respected in the industry with contacts. But yeah, to your point, Ben, there's just so much demand for Disney merch. So the $70 million is a like gross sales to the end consumer number. So most deals that Kay would do would be for 5% royalties on the wholesale price of the goods and the $70 million was retail. So if you assume 100% retail markup, that's $35 million in wholesale revenue. Disney and Kamen are splitting 5% of that number between them, but even that is $1.75 million split 50/50 between Disney and Kay. This is like an astronomical number and it is a way, way bigger and better business than the cartoons themselves at this point in time.
It's funny. I found the comment on the Disney Family Museum site that by the late 1930s, royalty income from merchandise had exceeded revenue from film rentals. But it wasn't even by the late 1930s, it was 1934. It was quick and it was by a lot.
Yes. Yes. So, just to illustrate the difference, the distribution deal that Disney does with United Artists for the Mickey films and for the Silly Symphonies, which is the second cartoon series that Disney starts in the 30s, Disney gets an advance of $15,000 per film, but Walt is always investing ever more and more in the production of the cartoons themselves. By this point in time in the mid-30s, he's investing like $30,000 plus per cartoon. He's only getting a $15,000 advance. So, it's not even guaranteed that each individual cartoon would be profitable. Usually, they were, but they would have to earn out on the back end. Compare that to, you know, half of basically $2 million in pure margin, almost pure margin revenue coming in from Kay every year. It doesn't even matter that Walt is investing everything back into the cartoons. He's got this money spigot coming in.
Right. So, summarizing that, films are tens or low hundreds of thousands of dollars of profit coming in and the merch is on the order of a million dollars.
Yep. And film profitability is highly dependent on a film by film basis. It's got to play out in theaters, etc., etc.
All right. So, I cut you off on the Ingersoll-Waterbury company.
Yeah. Just as one example of like the deals that Kay is doing, in 1933, right after he takes over, he does a deal with the Ingersoll-Waterbury company to manufacture the famous Mickey Mouse watch. That watch would sell 2 and a half million units over the next two years. The Ingersoll-Waterbury company was about to go bankrupt during the depression. It saves the company.
Hm. And wasn't it the most popular watch in America?
I think that's right. At least for some point in time during the 30s.
It's fascinating. And of course, the modern Apple Watch Mickey watch face is a reference to this because he's using his arms to point to the times on that original Ingersoll watch.
This is a whole different shape of a business than has ever existed before. I mean, it's funny. We started the episode comparing Disney to other Hollywood studios, but this is not a Hollywood studio. They're not shooting live-action films. They're making these cartoons. The rest of the industry is kind of doing slapdash ones. They're doing like really high production value sound synchronized cartoons and they're actually making more of their money from merchandise. They've got these Mickey Mouse clubs.
Like this is a new thing that no one else is doing.
Yep. This is the birth of the Disney flywheel and nobody else has it. So, is this a point where David, I could make my pedantic aside that I've been telling you about?
Yes. Yes. Yes. Go for it.
We had a great email from a listener a couple months ago about how flywheel, this term that everybody uses in business, is actually completely the wrong term for what you want to describe.
So, Disney is famous for this concept, as is Amazon, and it inspired a zillion other founders to try and articulate their own flywheel and draw it out. But hilariously, David, as you say, it is a misnomer. It describes the wrong physics phenomenon. People are trying to describe a system that has a positive feedback loop where inputs into one element of the system are amplified and add energy to other parts of the system. But that is not actually what a flywheel is. A flywheel is a primitive battery. It is a way to store energy to be deployed later.
Yeah. It's like a version of the same mechanism that a spring serves in a mechanical watch.
Right. Exactly. But in reality, there's not really a better shorthand for system of integrated components that creates positive feedback loops. So we will continue, alas, to use the phrase flywheel. But the important thing here is that Walt really did sort of either discover or invent this business model of the intellectual property flywheel that we see replicated all over the place today. I mean, I think it really revealed itself to him and Roy in these early years of Mickey. And it's probably worth taking a moment to talk about why this works so well. So the most important thing, and I don't think this was premeditated in any way by Walt, but it was just something he innately cared so deeply about, is to make the highest quality, genuinely most compelling new IP as possible that audiences can build a deep relationship with. This is like what Walt was building to and through all of his early years in animation. All the technical innovations, every step was getting to a character that audiences can fall in love with.
Now, critically for Disney, and again, I think completely accidentally discovered by Walt, the IP that works best for flywheel dynamics almost has to be animated, i.e. not live action. Because with live action characters, the characters are too bound up in the actors that play them. And that creates all sorts of problems. Like one, especially today, it makes your economics as a studio just like way worse because you got to pay the stars so much, right? There's wholesale transfer pricing. A huge amount of the margin you could get ends up getting paid out to effectively your partner in creating the character, the actual actor.
Whereas Mickey works for free. No, like you got to like pay the animators and they get paid very well to animate them. It's that's on the value capture side, but on the value creation side, which I think is the more important thing, Mickey is always available to work.
Yes. Exactly. You can create an eternal character through animation in a way that you just can't when you're using real people. I mean, Star Wars, as great as Star Wars is, and we'll talk about it later in the episode, is going to have a problem when Mark Hamill and Harrison Ford die. I mean, I guess unless AI gets really good.
And live action is sort of dated to a time and place in a way that cartoons can sort of transcend. Like Mickey can always exist in the present in a way that we're going to talk about Davy Crockett later, but at some point it became completely uninteresting to watch Davy Crockett. Even though he was like a complete heartthrob obsession that was great IP for the moment, it just wasn't as durable.
Yeah. Live action IP with very few exceptions tends not to have the staying power over decades and generations that animation does.
Yeah. Few exceptions being like James Bond, but god have they tried to do all sorts of crazy stuff in order to let that IP keep living. I mean, like there's been six, seven James Bonds, you know, and they have to keep rebooting the story over and over.
Exactly. Okay, so that's step one. Genuinely great IP that audiences fall in love with has to be at the core. Then step two, you need to maximize the distribution for that IP as wide and as far as possible in its primary delivery vehicle. So like Mickey in those films, get those films into as many theaters as possible to just completely saturate the world. It's sort of a scale economies thing. If you're going to invest a whole bunch in making it the very best you can, then you need to distribute it everywhere in order to maximize the impact from that huge upfront investment.
Which of course applies to any film and any IP. But for Disney in the flywheel business model, they're willing to make every sacrifice possible to maximize distribution because they know that they're going to monetize through the flywheel in a way that nobody else can. If they saturate all of America or all of the English speaking world with a character, then that character, that movie can become a shared cultural memory.
So then that leads right into the third thing, which is the ancillary nodes of the flywheel itself. Once you've got the great IP, once you've distributed it as widely as possible, then you want to get that IP into as many other arenas as possible. And this is exactly what Disney was doing, right? Other mediums, merch, clubs, comics, books, magazines. The beauty here and the discovery that Disney makes is that when you put the IP into these other ancillary nodes, it doesn't cannibalize the core IP. Like you're not going to oversaturate Mickey by having a Mickey comic strip and daily exposure in the way that if you released a new Mickey film every single day, people would get tired of Mickeys.
If you structure the nodes of the flywheel, right, the additional exposure reinforces the core IP. That's really interesting. So you do need some scarcity of the character in its main medium where you need like a really high quality bar and not oversaturate there, but in your secondary mediums then you can cover the earth and be like everywhere all the time.
Exactly. And so then if you flash forward to today and like the problems that Hollywood and most other studios have and Disney too, especially with Marvel, if you come out with sequels all the time at this like ever-increasing cadence of the core IP and the core delivery vehicle, people get tired of it.
That's super interesting.
But the flywheel lets you get that constant exposure without oversaturating the core IP. It's like absolutely brilliant. Not to mention releasing films is actually not and never has been a great business model. It's just not that high margin. It's not that repeatable or predictable in its success. So you kind of you have to invest years ahead in production before you get any payout.
Right. Right. That and any studio that is purely a studio is in for a rough go. But if you're trying to basically create this like durable platform of profit with all of these ancillary businesses, then you can focus on scarcity, quality, innovation in the kind of primary medium.
Yep. Because you know you're going to drive revenue basically in perpetuity out of it through the flywheel.
Do you think I'm thinking about this as it pertains to Acquired, we're so obsessed with quality and just being in one medium. Do you think that it is okay to lower the quality bar outside the primary medium? Like, can Disney throw Mickey Mouse on all sorts of crap without diminishing the brand of Mickey Mouse as long as the primary medium of film stays really high quality?
Basically, I think the answer to that is yes.
At least for Disney. I don't know about Acquired.
Yeah. I don't know if it applies to premium brands or luxury brands, but you got to be really careful about what the mediums are. This is why comics is so perfect for the flywheel because people are used to consuming a daily bit of content in a comic strip and they don't have expectations that it's going to be, you know, a great masterpiece like Snow White or Steamboat Willie each time.
Right. And when you read the non-canon Star Wars books, it doesn't detract from the canon.
That's exactly right. But it does deepen your fandom.
Huh. So all of this as Walt starts to understand the business model power of what they've created leads him right to the natural conclusion that Disney should basically always invest as much time and money as possible in the creation of new core IP. And Walt is starting to get a crazy idea of how he might be able to do that, which is to create Hollywood's first full-length animated feature film, Snow White.
Yeah. And David, you put it in such a capitalist way there that it's to maximize the amount of dollars that you sink into making the quality so that it federates onto this flywheel. I'm sure there was an element of that. There also is an artist with Walt where he's been creating these cartoons. He's starting to like really identify with the artistic community, with the fine artists of the time, build a lot of those relationships. And he wants to create something that is sort of seen as not only a technology breakthrough but like an art breakthrough. Can he create a masterpiece in this new medium and can he play with your emotions? I mean, we know that cartoon characters in a slapstick way can make you laugh, but there is this like total open question in the world of can you create animation so realistic and characters so compelling that you can make audiences cry.
Yeah, that's the other side of the ludicrously capitalist big investment into Snow White.
You're totally right. I'm looking at it through like a business model, capitalist lens. And I don't think Walt was thinking about it that way specifically.
He did want to build the most successful company that he possibly could that could take bigger and bigger swings.
So listeners, before we tell you the story of Snow White and how it came to be, now is a great time to tell you about one of our favorite companies, Vercel. So building software in the agentic AI era demands a completely different kind of infrastructure. So that's exactly what Vercel has been building. Their tools in their agent stack have been huge for companies like Notion, Brex, and Neon for shipping agents to production. And they just made some really big announcements on stage at their annual conference called Ship, which David and I actually spoke at last year. Yes. One of the biggest announcements is Eve, Vercel's open-source agent framework.
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Vercel's your one-stop shop for the agentic era. Tools, frameworks, infrastructure, all engineered to work together and built for enterprises. And one last cool thing, their Ship conference is hitting more cities worldwide. So you can find out more at vercel.com/acquired. That's vercel.com/acquired. And just tell them that Ben and David sent you.
All right. So, David, before we tell the story of how Snow White came to be, we got to tell the nickname of Snow White, the project that was going around Hollywood. Do you know what that was?
Yes. Yes. I think it was maybe Walt's folly, but either way, it's the exact same thing that people said about Trip Hawkins when he was working on Madden, about Jack Bogle with Bogle's folly with creating the Vanguard index funds. We got to like start a folly tracker here on tracker.
But yeah, I mean even for Walt Disney, as successful as he and the studio have become, the idea of a feature-length animated film was crazy in 1930s Hollywood.
And it had never been tried before.
I mean, Roy tried to persuade him not to do it. He argues that it's going to bankrupt the studio.
Yeah, this is a multi-million dollar undertaking. When David, as you were talking about before, the shorts were like $15,000, $30,000 undertakings.
Yep. Walt would say later about Snow White, "We had decided there was only one way we could successfully do Snow White, and that was to go for broke, shoot the works. There would be no compromise on money, talent, or time. We did not know whether the public would go for a cartoon feature, but we were darn sure that audiences would not buy a bad cartoon feature." So good. It had to be a masterpiece or the whole thing was going to fall apart.
Okay. So, why was this so expensive? Why was such a giant undertaking to create an animated feature full-length film? Listeners, I thought it'd be fun on this episode to dive into the process and give everyone a little primer on what are the steps to create an animated film.
Yes, it's a true technical wonder and you and I got to actually do it when we went to visit the Disney studio. It was so fun.
Well, one part of one frame of it. Yes.
One tiny part of inking and painting.
Listeners, we'll include some behind-the-scenes ink and paint photos of David and I in the email. So, let's start with the goal. The goal is to create the illusion of motion with a series of still frames. Like a ton of still frames, 24 still frames per second. So that requires a lot of clever tricks to make it economically possible, to make it consistent, and to make it enjoyable. And if you really do your job, to make it emotional for the viewer.
And to be clear, live-action film is the same thing. It's an illusion, but as we talked about earlier, it doesn't cost anything to animate the humans, and you get physics for free. So believability comes for free. You don't have to do clever things like figure out how do things stretch and squish when someone bounces on the ground. It all just sort of happens because you're shooting it in the real world. Yep.
So, where does it all start? It starts with a good story. So, there's something called the story department that kicks off the process with little sketches that are sort of pinned to corkboards. And so, these story meetings are great. You have people acting out alongside the drawings to illustrate their idea, how the characters move and interact and talk. And Walt was famously amazing to watch when he did this acting. So this then gets put into a story reel of static sketches just kind of illustrating the main flow of the story. At this point, it is super easy to edit, reorder, change dialogue, anything.
I see where you're going with this at this point.
At this point. So then the sound department gets involved and that's both music and voice. So first you'll have oftentimes a temp voiceover so the animators have something to animate to if you don't have the real actors laying down the vocal track yet. You also have the music scored and recorded at this phase. And the way that animation and sound are synced at this point is through something called bar sheets or exposure sheets where the entire film, this is going to sound insane, is broken down by frame, by syllable of dialogue and by beat of the music and these are mapped together. So this way the animator can do their drawings exactly to the music and dialogue. Now you can kind of understand the insanity of what Steamboat Willie was trying to do and why that was so difficult. The Disney studio kind of had to invent this process.
Yeah. And that was what, 7, 8 minutes long.
Yes. Meanwhile, you have the layout department who is doing the staging, the camera framing, the composition of these shots, the lighting for every scene. Now, when I say things like staging, there's no stage. Camera framing, there is a camera, but that's not even the camera this is referring to. This is where the synthetic camera is aiming in the synthetic action composition, lighting. This isn't like lighting the way you think of lighting. This is this very abstract art of imagining what it would look like if these characters were real and there were real lights and figuring out how to draw that scene. Then this gets forked into two parallel processes where background painters are doing their work on these gorgeous watercolors on paper and oil paintings on these super wide panes of glass to allow for the panning across the scene. Whenever you go into the Disney archives, you can see these, I don't know, 4 foot wide by something like 8 in tall backgrounds because the camera has to pan around as the characters move around against the background. And then the other side of the fork is the animators who are doing their work on the characters themselves.
Yep. Yeah. The backgrounds are just beautiful when you see them in person. That was my favorite part about the archive to get to see the backgrounds of Snow White or Cinderella or the other great Disney classics. You just look at them and think, "Oh my god, these are right up there with Rembrandts or Picassos or Da Vincis. They should be in a museum."
And they are basically in a museum. Disney has 11 rooms in the animation research library which are temperature controlled and humidity controlled. And they've got all these UV filters all over everything. And there's these drawers and drawers and drawers inside. It almost looks like data centers where they have all of these old background paintings and all the drawings we're about to talk about.
Yep. So, the animation department then develops what's called a character model sheet that shows the character from several different angles and positions they're likely to be in throughout the film. This is distributed to each animator who works on that character because often and by necessity there are multiple since that character is going to exist on film for, you know, 80, 90, 100 minutes. There's a lot of drawing to do. Then there's the model department who makes something called a maquette. The animators who are drawing a character hundreds and hundreds or thousands of times or tens of thousands of times need a consistent physical reference that they can hold and rotate and examine under a lamp. So these are, you know, 8 in tall versions of the characters that are little statues, right? They're perfect so that you can kind of say how would they look from that angle? How would they look if I stood 8 ft away? Then you have animation itself. So, it starts with sketching on paper with a pencil or with charcoal, and they're literally sketching one frame at a time. And they are flipping pages on their pad of paper back and forth, back and forth, over and over again to get a feel for how the emotion of the drawing is coming through frame to frame. Does this character move like I think they should move? Are they consistent in their motion? Is their clothing sort of twirling the right way when they turn left? It's an insane art.
Are their mouths speaking correctly? Yeah.
Right. As the character drifts closer to the synthetic camera, are they getting big in a way that feels consistent with the laws of physics? My mind is so blown by the skill and talent of these people. So 24 frames per second means 12 to 14 drawings per second. So think a thousand-ish per minute. That's around 80,000 in a feature-length film of this era. And of course that's if there's only one character doing one thing on one layer.
Yes. There's usually about what? Double that.
So there's two ways that this can happen. One is the most clean and obvious one, straight ahead, which is where an animator draws every frame in order. Or there's something called inbetweeners where lead animators draw
The key frames with the essential poses or major character movements, and then the assistants or the inbetweeners go to the drawings and they sort of bridge between those frames. And the goal of doing this is to make the most efficient use of the skilled artist's time on the film. Now, over time, a division of labor started to emerge, which kind of makes sense. A super skilled animator would do work kind of fast and loose with sketches that had little extra lines hanging off everywhere. There'd be like revisions on top of their original drawing without actually cleaning up the mistakes underneath. And then it was handed over to a cleanup artist to trace their drawings with a single line versus the hairy mess to kind of get it ready for the next stage, but again preserving the same correct emotion, flow, bounciness, shape, form of the lines. Both the inbetweeners and the cleanup artists were kind of a result of the industrialization of the animation process versus the early days in the early Mickey ones of a single artist animating the entire thing.
Yeah. By this point, as they're heading into Snow White, this had become a real scale production process. I mean, it wasn't quite like an assembly line. This is still art here, but it's a lot closer to Henry Ford than it is to Picasso in his studio, right? At least you do need to sort of synchronize and coordinate teams and make the highest use of the most valuable scarce resources, stuff like that.
Yep. So then there's ink and paint. So let's talk about inkers. Back in 1914, Earl Hurd had invented a concept known as cell animation, CEL, where you would draw with ink on the front of a piece of transparent plastic or cell in the business, short for celluloid. And that way you could keep redrawing just the character in each frame and the background could stay static. That essentially made animation possible at all. In 1914, you could imagine if you had to just redraw every line on every frame every time. One, it would look crappy because things would sort of wiggle all over the place when the film was actually playing, but two, it just was economically infeasible to draw every line every time.
Yeah. It was not scalable. So it had evolved since then where there were now armies of people who were almost exclusively women at this point in history who would literally duplicate every line that the animators drew on paper with pencil and they would trace over their entire drawing with ink on cell every single frame.
Yes. So what you would see on screen in a film is actually not the direct work of an animator, but it's the painstaking work of an inker who traces over the animator's line on the transparent celluloid instead of on paper.
Yep. And then the inkers would flip the cells over and pass them off to the painters.
Yes. So this is how they get color in. You want your outlines on the front so it masks any colors that sort of overflow out of, you know, the dwarf's shirt or Mickey's shoe. And then on the back, that's where you do your painting. You put all the colors on. And David, what you were referring to is you and I did some painting on a pre-inked Mickey Mouse.
Hey, we did a little bit of inking on the first.
We did a little bit of inking. Inking is hard.
Inking is harder than painting.
Yeah. But Disney has this room with thousands and thousands of colors of handmade on-site paint that is a production facility for paint color and applying that color to animation cells.
It used to be called the Rainbow Room. Those colors, that paint went into Snow White, Cinderella, Peter Pan, Alice in Wonderland.
Thousands of people each making thousands of drawings. It multiplies fast. So then you've got your special effects layer. So like Tinkerbell's wings use effectively spray paint like a little paint gun so it can be partially translucent or the dwarf's glasses or sparkles. Or another thing in special effects is like water effects. What if you want to make it look like there's a little bit of a ripple in the water or some depth of field on some leaves that are closer to the camera? So before any of this inking and painting, which was super expensive and time-consuming, they would do something called a pencil test where they would take the pencil sketch drawings on paper and put them all through the camera so the animators and Walt could look at the rough action and see if it felt right. See if it had the right physics correctly represented, each character's tone and emotions. It's almost like a higher fidelity prototype than the one that we first talked about that came out of the story meetings. It was a way to catch things that weren't working before you got all the way to full fidelity. Then camera. This is like the coolest part of the whole thing.
The multiplane. This is incredible.
So Disney and Bill Garity took the idea of a multiplane camera that had existed before Disney. Ub Iwerks actually built one of the first advanced multiplane cameras back in '33 while he was away from the company doing his own thing using parts from an old Chevy.
Yes. Yes. And then Walt rehired Iwerks later to come back and lead within Disney.
Yep. Like process improvement for how we do animation. So Disney created the first one to be used in a feature film. It is unbelievably cool. It has an entire massive room to itself. There's a team of operators to make it work. You had to climb a ladder to get all the way to the top. So here's how it works. There's a still-frame photo camera mounted on the top of this thing pointed straight down.
Yeah, it's like what? Probably 15 feet tall.
That feels high. 10, 12, yeah, but something like that. There were up to seven planes that you could use. So you've got these horizontal planes between the floor and where the camera is mounted, you know, up 12 feet in the air. Typically with the character on the celluloid almost all the way close to the top of the camera, unless you had like special effects or some foreground obscuring the character or something like that. And then all the elements of the background at various sort of different depths away from the character are painted on panes of glass and paper below that. And you'd want the background broken out onto multiple panes so you could do things like a parallax effect if they were sort of panning by. Or if you wanted to do like an establishing shot to zoom in on a subject from far away, you could progressively in every single photo that the camera took, every frame, bring the panes of glass closer to the camera at different calculated rates. So the distance between the planes could be adjusted to really sell the animation. David, you and I saw one of these in the corporate archives in Burbank. You've actually seen two of the three that exist, right?
Yes. Yes. One of the other ones is at the Walt Disney Family Museum in the Presidio in San Francisco, which is an incredible museum and resource that informed a lot of this episode.
Worth calling out, this is a photo camera, not a movie camera. So it would just photograph one frame at a time, and then all the technicians would adjust all the knobs and layer placements for the next frame. So when you look at the level of invention required to create a multiplane camera and operate it, you kind of start to understand how these guys in the animation department could evolve into Imagineers.
Like this. There's a lot of physicality involved in animation that I don't think I really understood until diving into this process.
You know what? What's happening at Disney isn't just the intersection of art and commerce. It's the three-way intersection of art and commerce and engineering, and always has been.
Yep, I think that's right. All right, so that's the animation process. That is why this is such a giant, difficult undertaking to create something like Snow White.
Absolutely enormous undertaking. So when all is said and done, it takes $1.5 million of investment over three years of studio work to create Snow White. Remember, this is at the same time as Disney is making short cartoons for like, I don't know, $20,000, $30,000. And even that is way above what anybody else in the industry is spending. This is $35 million inflation-adjusted. And yeah, movies are like $300 million budgets today, but imagine nobody's doing that. And you have the first idea to create an animated movie and you're like, I'd like $35 million of budget to make that, right? When Roy said that he was worried it was going to bankrupt the studio, like Roy was being the rational one here.
They have to take out a whole series of loans from Bank of America in order to finance production. Even with all the money they have coming in from the flywheel and consumer products and the Mickey Mouse Club, etc. Ben, as you were saying, all the art and the work that goes into it, 2 million sketches and 250,000 finished drawings and cells go into Snow White. This is at a scale so beyond what anybody else in the entire entertainment industry is doing. Gabler in his book uses the analogy of it was like a gothic cathedral in animation. That is like the only kind of analogy that makes sense here. They staffed up to 750 studio artists and did three years of non-stop work on production.
They actually went so far as to hire actors to play each of the roles and put them in full costumes so they could film them for inspiration, just so the animators could watch and see the natural motion so it would look as lifelike as possible to sell the illusion. This is so much different than animating a cartoon mouse. The massive investment in all the little details just to make the viewer buy in emotionally to these characters. My favorite one of these little tidbits is that the actress who played Snow White even wore a hair helmet since the drawn character's proportions were actually pretty different than a real-life woman so that they could kind of get a sense from watching the test footage how the character moved around in the world.
Yeah. Yeah. I mean, you made the point a few minutes ago, Ben, that Walt Disney wasn't doing this because he was some capitalist. I think he really did recognize the incredible flywheel business model that he had sort of accidentally created and leaned into it. But like that's not going to motivate him to film a whole live-action version in costume just so that they can make sure they get the spirit right. Like this is art that they're creating.
An obsession with quality.
Absolutely. So the movie finally premieres in Hollywood on December 21st, 1937. And I mean, it's one of the greatest films ever made. The Academy Awards creates a special Oscar for Snow White, a special award.
Yeah, because they didn't think it could be eligible for Best Picture. This movie, I don't want to bury the lead. It was the highest-grossing film, not only of the year, but ever. It did $8 million of rental revenue on a $1.5 million production cost. And like the category was so new and different that they were like, uh, instead of being eligible to be nominated for Best Picture, let's just create a special new category for it. So the Oscar statue that they give Walt and Disney for Snow White is the only one that's ever been made. It is a large Oscar. It is Snow White and then seven little Oscars below it. Walt personally would go on to win more Academy Awards than anyone in history. Walt has 26 Academy Awards. The next highest is 13.
Yes. I mean, the audience reception was incredible. Like you said, Ben, it was the highest-grossing film ever made of any kind, animated or otherwise, in history to that point. The critics' reception is equally glowing. Time magazine writes prophetically that Snow White is an authentic masterpiece to be shown in theaters and beloved by new generations long after the current crop of Hollywood stars, writers, and directors are sleeping where no prince's kiss can wake them. Of course, foreshadowing the Disney vault. Snow White is alive and well today, as my two young daughters will attest.
Yeah. An interesting thing about this story, I'm curious since you have daughters who watch it, David, is it's kind of dark and Walt did meaningfully change the Brothers Grimm stories that he sort of adapted it from. It's very interesting that all of these early Disney cartoon movies, animations, are adapted fairy tales or adapted existing lore that Disney sort of changes. The film was not really made as a children's movie.
No. Yes, it was animated, but it's dark.
No. And in fact, a lot of those decisions, like giving each of the seven dwarves personalities, in part were motivated to soften the darkness of the fairy tale. And Walt would always say that he didn't make movies for children, but of course, he wanted children to be able to watch them, too. But some of the decisions were actually made with the flywheel in mind. And the dwarves' personalities is one of these.
They wanted to sell a lot of seven dwarves merchandise. And what better way to do that than to give them all distinct personalities.
It's true. When you go to Disneyland, there's a lot of people walking around with like Dopey and Grumpy.
Exactly. Exactly. So, as we said, the movie itself extremely profitable. It does $8 million in film rental revenue against the $1.5 million production cost just in its first theatrical run, which dramatically changes the studio's financial position.
Yes. Yes. Now, it is a bit of a misconception that the profits from Snow White, the film itself, would end up paying for the new Burbank studio that it's about to construct. That's not entirely true. I think most of the film profits from Snow White went to repay all the loans to Bank of America.
Yes. So listeners, it's worth diving into a little bit of the complexity of how each of the parties in the value chain of making and distributing movies work. There's the studio like Disney who makes the actual movie. There's a distributor like United Artists or RKO who does a lot of stuff. They take the finished film. They create all the prints that'll go to theaters. They have the salesforce that sells the film to theaters. They plan the film's marketing. They also ship the films and handle all of the billing and payments. And then of course there's the theater or the exhibitor as they're called. And so Disney has this 1944 annual report for employees that David actually found when we were in the archives. We were flipping through annual reports and you were like, "What is this? There's two reports for 1944. What's going on here?" And they actually did a different one for employees than for shareholders. The annual report for employees has this great graphic that says where does the money come from and has a breakdown of if for a dollar getting spent at the box office, what are the splits? And so 65% actually gets retained at the exhibitor or the theater, 13% goes to the distributor, and 22% goes to the studio. And so when we've been saying rentals, here's the interesting thing about that. The distributor and the studio come together and they actually rent their collectively owned film.
Yes. To the exhibitor. So this $8 million is actually even higher than you think it is. The gross box office would be significantly higher than $8 million, like 2.5x or something. And that $8 million is the 13% plus the 22%.
Right. It's the share of Disney the studio plus their distributor.
That's exactly right. And so then I know I'm doing some financial gymnastics here.
Well, hey, all of this Hollywood accounting, even through to this very day, is so obscure and arcane. I think on purpose so that neophytes to the business don't really understand the deals that they're making. If you go look at what is really the source of truth here, the 1940 IPO prospectus, which we are going to get to, you can very clearly see that over a one-year and nine-month period, they make $4.5 million in film rental income, the producer's share, so this is just Disney's from Snow White and the Seven Dwarfs. So that's our real source of truth that we know, $4.5 million. Now, they had about $2.3 million of debt from the $1.5 million of production costs plus the interest that they owed Bank of America.
Yep. So a huge portion of the net that they're taking home just from the box office of Snow White is going to repay the debt, let alone operating expenses for the studio, etc., etc. So yes, it's like great for the company, but it's not quite as transformative from the box office alone as people would think, right? So they effectively have $2.2 million left over after paying the theater, paying the distributor, paying back the principal on the loan, and paying the interest. Okay. $2.2 million in 1937. Still a lot of money, but they want to go build a gigantic campus.
Yes, but Ben, of course, Disney isn't just making $2.2 million in profits from Snow White. There's all that good, good flywheel revenue to come along with it. So, you know, if Walt thought that the flywheel worked well for Mickey Mouse, Snow White is like a whole another level. So before the film is even widely released around the country, they have their next major flywheel node, their next business model innovation already in market, the movie soundtrack. I couldn't believe this when I learned it. Snow White was the very first movie soundtrack ever created and sold to the public. It all started with Snow White. There were no sound movie soundtrack albums before then and it is a huge hit both because you know it's a great soundtrack but like before this album there was never anything that audiences could take home actually of the picture that they saw in theaters. There's no home video, right? There's no streaming. There's no television. You go to see something in the movie theater. Sure, you could buy a piece of merch like a doll or a costume and there were a lot of those out there for Snow White, but you couldn't take home the movie except in the form of the soundtrack.
And the songs are quite catchy. Whistle. So the soundtrack is huge. Beyond that, there supposedly, I read, are 2,183 separate SKUs of Snow White merchandise that get pumped into the global markets by Kay Kamen's consumer products organization. Unreal. The New York Times actually writes this that quote, "Sales of Snow White products might be America's path out of the depression."
That's how successful it was. I mean, this movie was such a grand success artistically for Walt, film-wise, for the studio, for the whole medium of animation and legitimizing it right alongside live action, and for the flywheel business model of Disney. So all of this enables Walt to pursue his next dream, which is that he wants to build a brand new state-of-the-art animators' paradise. Ben, as you alluded to, the new Disney Burbank animation studio, still the corporate headquarters of the company to this very day, right? He basically sees the success of Snow White and thinks, "Oh, yeah. We're going to do a lot, lot more of these. Let's build all the infrastructure to like really do that, right?"
Yes. So Walt's goal with the new Burbank studio was to be able to house 1,200 plus animators and staff up from call it 300 before Snow White and then Ben, what did you say, 750 that the ranks had swelled to during Snow White?
Yep. And he thinks that with this new campus, everything that they're going to install there, and all the additional staff, that Disney will now be able to produce two new feature animated releases every single year, plus shorts. So, like, it took three years to make Snow White. With all the learning from that, all the innovations of the new campus, all the new staff, he thinks they're now going to be able to pump out great new feature films every six months, which was a complete pipe dream and they never were able to do.
Walt also in his mind comes to see this Burbank campus as really a utopian-like place, kind of almost like a college campus. I mean, Walt didn't even graduate high school, let alone go to college, but he intentionally places it in Burbank, which back then was like the sticks outside of LA.
He wanted the Disney lot, the Disney studio to be this special place kind of away from all these other studios controlled by their distributor bosses back in New York. And he kind of, I think, really wanted to create this band of merry men and women type feeling where they could achieve the impossible like producing two feature animated films a year.
Well, the thing he sort of didn't factor in is that you might be able to make Snow White faster in the future, but every idea that you have is going to be a different new idea that's going to be more ambitious and have more cost and require more people. And so this Burbank studio was necessary even to keep the same producing films every three years.
Yes. But the lot itself is unbelievable. It's 51 acres. There are sports fields, a cafeteria. There's art classes. There's massages available. There's sunbathing in the Penthouse Club. In many ways, this is like the Googleplex before the Googleplex.
Yeah. This is 1940 when they opened this.
Yes. And you're right. It's kind of designed to keep you there. Why would you need to go anywhere else? And really there's nowhere else to go around here. It reminds me a little bit of Epic Systems, too.
Yeah. Yeah. Yeah. Yeah. Very similar. Very similar.
So here's an example of the lengths that they went to on this campus. So I was looking at Google Maps planning our visit, David, and it looks weird. It's offset from the Burbank street grid at an angle. And we asked the person who was showing David and I around, listeners, why this is. And he said that it was Walt's priority when they were building it to offer the exact perfect conditions for lighting to animators, which of course, David, you know the spoiler here.
Yes. To have offices that face north because northern light is true light.
Do you know why northern light is preferable?
No, I just know that that's what our very kind tour guide told us.
So if you are in the northern hemisphere, the sun moves across the south sky. So if you're north-facing windows, your window offers the most consistent and non-direct light. And so every animator got a window and they built the building shape so that there's a whole ton of north-facing sides. Like the whole thing almost looks like a CPU heat sink. It's like got fins so that it's got all these north-facing windows. It's for the time it's an architectural marvel. It's one of the first buildings with air conditioning in Southern California. The windows had custom-built sort of slats that were adjustable so the animator could let in the exact right amount of sunlight, indirect sunlight that they wanted into that room. And once they sort of got this building architecturally laid out on the campus, they're like, "Yeah, let's build the entire campus around this." And to me, it really symbolizes that animators are the crown of Disney in this era, in the way that at Google it's engineers and at Apple it's designers and at Microsoft it's PMs. The animators, to the extent that anyone but Walt has the power, the animators are sort of the most valuable resource.
Yes. Yes. It's an animation-driven company.
Yes. So it's got this like utopian vibe but there were trade-offs. I mean this was huge compared to the old Hyperion site. People are more sectioned off to do their specific work. You had less access to Walt to know exactly what was going on upstairs if you were the rank and file. But to achieve all this, Walt does need capital.
He doesn't want to give up any control, but eventually he and Roy decide, we've only ever taken on bank loans. Maybe we need another source of capital.
Yep. I've got the numbers on all of this. So the Burbank campus construction costs alone were $3 million. So that's more than the money they had left over from Snow White proceeds after they repaid the Bank of America debt. But obviously they had all the, you know, the revenue from the soundtrack and the consumer products and all the flywheel revenue coming.
But still, they're planning to do Pinocchio. They're planning to do Fantasia, right? So the $3 million is just to build the facility. Then they got to staff it with 1,200 animators. So that's an extra 450 new animation staff they need to hire. And to feed Walt's vision of having multiple films in production at the same time, he greenlights production on Pinocchio, Bambi, and Fantasia all at the same time.
And all of these were completely different animation styles. Yes. And completely different from Snow White. If you look at these films, we sort of have this notion today of like, oh, it's the Disney style that is not really reflective in the darkness of Snow White. In Fantasia's really experimental artistic vignette style set to classical music. And Bambi is again another completely different take of a very naturalist film. These are wildly different skill sets and bigger and bigger investments using completely new techniques. So you're not really just like making more Snow Whites.
You're doing like discontinuous unknown high-risk bets.
Yes. So in total between the $3 million for the campus and then these three movies that they all have in production which collectively cost about $5 million in so-called negative costs before they get released. So before they earn a dollar of revenue by early 1940 Disney's yeah in this new campus and set up for this next phase of the company, but they're $8 million in the hole. So Bank of America had loaned them another $4 and a half million dollars.
They just keep going to Bank of America over and over again, just re-mortgaging the company.
And then the hope was that Pinocchio, the first of the new films to come out, would be a hit and earn profits quickly. Unfortunately, World War II had started in Europe by early 1940 when Pinocchio gets released. So international box office is basically zero and Pinocchio ends up losing money, like a lot of money, over a million dollars in losses on Pinocchio alone.
Yeah. In a scale economy's business if you lose out on potential eyeballs and potential revenue but your fixed costs stay the same. That's super, super bad news. I mean you there's no ability to retroactively scale back how ambitious you're being with investing in a film. You know, you've already spent all the money to create it and now you find out that you can't distribute it to half of your audience.
Yeah. Not to mention the impact on all the rest of the flywheel businesses. Like not a lot of Pinocchio merch getting sold in Europe in summer of 1940.
So after Pinocchio is a flop, Walt and Roy decide they basically only have one recourse at this point because Bank of America is not going to loan them any more money. They need to sell equity in the company for the first time. So in April 1940, Disney retains investment bankers and sells 3.875 million of convertible preferred stock with a 6% dividend, which technically is Disney's IPO. Is it technically? It doesn't go on a stock exchange. It's just over the counter. It's a public offering, I guess, but it's a pretty small group of the public.
Exactly. Exactly. It is a non-exchange public offering, and it's got this 6% cumulative dividend attached to it. So the expectation when you're investing is this company is going to pay me 6% of my investment back every year.
Yep. So it's actually a pretty sweet deal for the investors. They sell 30% of the company to do this to raise that. It's funny you said 3.875. A little bit of that went to the bankers. There was some transaction fees. So they only raise about $3.5 million directly to their balance sheet, but they give up 30% of the company to do that. And it comes with that 6% cumulative dividend to those shareholders.
Wow. So this means they're flying even closer to the sun than I realize because they've got the $8 million in sort of investments that they need to fund and they have $4.5 million from Bank of America and then if they're only getting $3.5 million in proceeds from the IPO, that's exactly $8 million.
They are shaving off every piece of their current self and future cash flows to rebet the farm. That is the way to think about this. So that summer in 1940, Walt has a rather ominous get-together with Henry Ford of the Ford Motor Company. Just sort of as like a friendly meeting of these two American business titans. And while they're together, Walt mentions to Henry about the IPO that they just did. And reportedly Ford tells him, "Walt, if you sold any of it, you should have sold all of it." Ominous. Ominous. A real board of directors gets established for the first time as part of this and the preferred get a director on the board. So an outside voice in the company who certainly is not going to share Walt's vision here. So by the end of the year in 1940, despite the capital raised from the stock offering, Disney's in a cash crunch. Walt before the IPO had even set up a kind of like proto employee ownership system where they set aside 20% of the company's equity and used that stake's profit distribution to fund an annual employee bonus pool. They have to eliminate that like months basically after Walt institutes it. And what they end up doing as a result is they raise salaries of the few top animators in the firm and then they keep the same or they lower salaries for everybody else in the Burbank lot. And this causes huge resentment and unrest in the animation workforce.
Yeah. I mean I bet that's going to make no one happy. But this is the like literal trade-off. This is we spent a bunch of money on Pinocchio. Yep. We didn't have Europe, so we lost a bunch of money on that. We still have big ambitions. And like this is Walt's implicit choice here with going out and raising all this debt, raising all this equity, betting the farm again.
Yep. This is the downside of Walt's always go for broke and shoot the works philosophy.
Yep. And it leads probably to the darkest moment of Walt's life that would change his relationship with the company forever, forever and irreparably his relationship with Disney animation. The strike. So on May 29th, 1941, the Screen Cartoonist Guild, which is a union that had unionized every other major animation studio in Hollywood and New York over the couple years leading up to this, which there were several of at this point in time. We've been sort of very Disney-centric, but there is an industry around this. Yep. Decides finally to target Disney employees. Now, there's a reason why the Screen Cartoonist Guild had stayed away from Disney despite it obviously being the leader in animation up until this point, which is I think Walt's utopian dream more or less was true or at least true enough. Like, he established the bonus pool for animation. He constructed this campus. Everything you were talking about earlier, Ben, but here with the cash crunch, that all comes crashing down.
Yeah. There's a great excerpt from the book The Animated Man by Michael Barrier. In the spring of 1941, under pressure from the Bank of America and holders of preferred stock, Walt Disney Productions agreed to scale back its production cost to about $15,000 a week. According to Walt Disney himself, that meant he had to hold the negative cost of new features to about $700,000 or one-third the cost of Pinocchio or Fantasia, which was also in development at the time. Since labor costs made up 85 to 90% of Disney's total costs, implementing such severe economies would mean laying off more than half the staff.
Oh, so you've got cost reduction in some of the people sticking around. And you've got big layoffs because Pinocchio didn't pay back.
Yeah. Well, layoffs coming. They haven't happened yet and this is part of why the organization and the strike happens. So hundreds of employees end up striking. They picket the Burbank campus. They march all day. They carry signs with slogans like Snow White and the 700 dwarves or what is a drawing of Pinocchio with the caption no strings on me. The strike lasts for three and a half months and it's a completely shattering event for Walt personally and for the company. As the union is organizing the employee base in the days and weeks leading up to the strike, Walt decides that he's going to make a speech and address the entire company, which he thinks, well, he will explain his position and the challenging state that the company's in and it will resolve everything and the employees will rally around him and the company. Unfortunately, it has the opposite effect. It is a complete disaster. He lectures the entire company for nearly three hours. Some of his lines from the speech, which he had written out ahead of time, so it's preserved, are, "My first recommendation to the lot of you is this. Put your own house in order. You can't accomplish a damn thing by sitting around and waiting to be told everything. If you're not progressing as you should, instead of grumbling and growling, do something about it." And then don't forget this. It's the law of the universe that the strong shall survive and the weak must fall by the way. And I don't give a damn what idealistic plan is cooked up. Nothing can change that.
Probably not what you want to tell your employee base after you just slashed their salaries.
Yeah. Yeah. A labor magazine would write afterwards, "Walt Disney's speech recruited more members for the Screen Cartoonist Guild than a year of campaigning."
Yeah, about the worst reaction that you could possibly have. And Walt, I don't know if you found this in your research, but it seems like he's kind of deluded here into thinking, well, it's not actually my employees that are doing this. It's these communist, very few communist agitators who have undercover become my employees and they're riling up the rest of them. And Walt's like kind of removed himself and he's in denial that this is actually what his workforce wants. The family atmosphere that we had at Hyperion is now a like real corporate, you know, have and have-nots here on Burbank campus.
Yeah. Yeah. It's a mess. And then it gets worse. So in the middle of the strike, which again lasts for three and a half months, that hundreds of employees are gone from their jobs that are not working and marching and protesting outside the company while they're trying to make Bambi, which is equally ambitious, right? Walt is just so depressed and in denial and upset about the whole thing that in August of 1941, he agrees to go on a goodwill trip to Latin America with Nelson Rockefeller's Office of the Coordinator of Inter-American Affairs. This is the trip that ultimately results in the Disney films Saludos Amigos and The Three Caballeros. If you've seen those or been to the Three Caballeros ride in Disney World in Epcot, it's actually great.
It also results in Roy having to resolve the strike because Walt is uninterested in dealing with it.
Yeah. The real reason Walt goes on this trip and he would write about he would call it a quote godsend and say that it gives him a chance to get away from this god-awful nightmare in Burbank.
Yeah. He basically just leaves the country and walks out on the whole thing and tells Roy to settle it. I'm leaving for 10 weeks. Do your best.
Yep. So while Walt is gone in Latin America, Roy does settle the strike after federal mediation. Disney ends up recognizing the Screen Cartoonist Guild union. They raise salaries for the remaining employees and they agree to a negotiated layoff of over 500 employees. So taking total headcount before the strike down from 1,200 to under 700. These are the layoffs, Ben, that you referred to.
The studio would never fully recover from this. Certainly not under Walt and not for many, many years afterwards. Really, not at all in the period of classical animation before computer animation comes along. And sort of equally as importantly, Walt would never recover from this as it pertains to his relationship with the company Walt Disney Productions.
Yes. It no longer feels like his family. It feels like a creation he's made that has sort of run away from his control.
Yep. He ultimately does decide that the company Disney and he Walt Disney have a creative and business future. But yeah, he never has the same relationship to the studio or animation after this.
Yep. He apparently according to Don Lusk, who was an animator there, made a list of everyone who went out on strike and said that everyone on this list isn't true to Disney and one day will not be here.
Yeah. So Ben, you mentioned Walt's sort of anti-communist streak that comes out of this. Yeah. For the rest of his life, he would blame all of this on communist influences in Hollywood. He would actually testify after World War II in front of the House Un-American Activities Committee, you know, HUAC as a friendly witness corroborating communist infiltration in Hollywood. He named names of people who he said were communists based on things he had heard about them like no even proof. And you've got like a major figurehead of a big US corporation testifying. There's all this video of it of him saying I believe so and so is a communist.
Yeah. And of course this would lead to the famous Hollywood blacklist and you know all the terrible stuff that comes out of that. One thing later sort of by association with this, people would accuse Walt of being anti-Semitic since much of the communist movement in the US and especially in Hollywood was in the Jewish community. Gabler investigates this pretty thoroughly in his book and concludes that there's not any evidence that Walt ever really was anti-Semitic. I turned over every stone I possibly could on this company and we spent I don't know the better part of the year so far researching this and I found zero evidence of that.
Yeah, same definitely anti-communist for sure. Yep. But anyway, so speaking of the war, by the way, this is like four giant blows to the company in a row. You've got Europe dropping even before the US enters the war. You've got the European distribution falling off. There's a thing we didn't talk about which was Fantasia tried to make this giant bet in a new type of sound for movies called Fantasound.
This alone almost killed the company. The budget for Fantasia was 50% bigger than Snow White.
And in the first run at the box office, they tried to use Fantasound, this new sound technology they had invented, and distributors didn't pick it up to do like a real first run. And so out of the $2.3 million budget in that first year it came out in 1941 they recouped $325,000.
Wow. That is a giant loss on Fantasia. I think Disney was also funding the development and distribution of Fantasound. So you've got those two then the strike. Now the US enters the war.
Yeah. One more note on Fantasia though. Before we talk about the impact of the US entering the war, do you know what ultimately ended up happening with Fantasia?
They made Fantasia 2000, 60 years later?
No. Yes, that is true, but that is not what I was getting at. So yeah, the initial release of Fantasia, as you said, was a total flop. They couldn't exhibit it anywhere, lost tons and tons of money. Later, it has this huge resurgence. I mean, I remember when I was growing up as a kid, my parents loved Fantasia.
Yeah. I actually thought Fantasia was a modern movie. It's crazy to me that it was Disney's second.
Right. Right. Right. I think it was like the 60s and the hippies that thought like, "Oh, this is like the coolest thing." So Fantasia, if you look today at the list of inflation-adjusted top films in history by box office gross, inflation-adjusted, Fantasia is the 24th highest-grossing film in Hollywood history.
So it has all and kind of timeless.
Totally. It's an amazing, amazing production. I mean, the music, the symphonies, the sound, it's go watch Fantasia if you've never seen it. It is well worth your time.
And now a hard cut over to World War II, right? Okay, so back to 1941. No sooner does Roy settle the strike than Pearl Harbor happens and the US now enters World War II. And unlike many of the other great American companies of that era that we've covered on this show before where World War II was great for their business like Coca-Cola or Mars or Lockheed, World War II is a disaster for Disney. Nothing of value gets built for Disney during the war. It basically breaks every single node in the flywheel. And on top of the strike, it just completely grinds to a halt. All new core IP production for the studio.
Yeah. So the first thing that happens is within hours and then days of Pearl Harbor getting bombed, the US military moves into the studio. They look at Burbank and they think, "This is a great asset." And so hundreds of troops, there are two reasons that set up shop using the sound stages to work on all the optical systems for anti-aircraft. Sound stages are awesome. There's no windows. It's a giant room. I mean, like it's the thing you would want for stuff like this. The second reason that I suspect you're hinting at, David, is it is real close to Lockheed.
Yes. Real close specifically to Lockheed Skunk Works department.
Which is in Burbank. The secret Lockheed Skunk Works airplane hangars and department was in Burbank because Burbank was the sticks back then and Disney is right next door. So that's probably the bigger reason why the military requisitions the Disney lot is to protect Skunk Works.
So you've got that happening. You've got a whole bunch of the animators getting drafted.
I mean, so you're down manpower. You're just coming out of the strike. You have these huge failures in Pinocchio, Fantasia. And also Bambi. Again, you've lost European distribution.
And so the appetite for making more things like those three
Movies drops to like zero. I mean, at this point, there's a financial reality that Disney owes a dividend to these shareholders, which interestingly enough, it actually suspended in 1942. They actually didn't pay out the dividend, but they do have to pay Bank of America. The films aren't going to be the thing doing it. And conveniently, they've got the US government saying, "Can you help us with some propaganda films? Can you help us encourage people to pay their taxes and buy war bonds and support the troops?" And so Disney kind of looks at everything, how it's all playing out, and says, "Yeah, that's what we're going to be doing for the war."
So all of the studio production work during the US's time as an active participant in World War II. Yeah. Basically just gets repurposed to propaganda and training materials for the government.
And insanely they do use Disney IP. Like you see all these crazy old posters with like, you know, Donald Duck holding a gun and I mean the stuff you sort of would never see with these characters today. But not only did Disney say we're work for hire, they said we can use the Disney IP. But interestingly, David, do you know about Mickey Mouse's role?
They really did not employ Mickey Mouse. They protected Mickey Mouse from the war image and Donald Duck sort of led the charge.
Well, part of this was because canonically Donald Duck is a sailor, right?
Oh, okay. That makes sense.
Yeah. Yeah. But then it makes sense to protect Mickey, too.
And Donald's also the more like fighter of a character.
Yeah. Mickey started off as this troublemaker, but then kind of became the like nice protagonist.
Yeah. The goody two shoes. And then Donald was the foil.
Yeah. So all of this though to our point earlier does nothing either for the flywheel model or for generating new IP to feed it.
Or pushing the envelope of technology or pushing the bounds of creativity, like all the things that contribute to Disney's core. That they are financially floated though by the war. I mean, the way that they make it through this period is they actually are generating net income reliably, not a lot, but from the government work.
Exactly. And there's one other big innovation, an actual bright spot that comes out of this back against the wall moment during the war that the company's in financially. Do you know what that is?
Ooh. Uh oh. The Disney vault.
Yes. So in 1944, the company is so cash-strapped that they come up with the again at the time crazy seeming idea to re-release Snow White in theaters because hey, we can't make new stuff, but people sure like that old movie. Let's just put it in theaters and see what happens.
And the thing you got to remember is with no home video and no TV, no one had seen Snow White in seven years.
Exactly. It truly vanished off the face of the earth except for the copies of the film that were held in the Disney vault.
In the Disney vault. Yes. So in 1944 they re-release Snow White in theaters and it brings in $3 million in revenue to Disney on just a few hundred thousand in cost. They basically just got to print a few new copies of the film and then distributed it out to theaters.
Right. The theaters get their normal cut, the distributor gets their normal cut, but Disney's cost to develop the film is like zero.
Yeah, they've already developed it. It's already done. This is an enormous boost for the company. And Ben, to your point about the 7-year gap since the initial release, it turns out conveniently that 7 years is just about the right amount of time for a new generation of children to come along and reach an age where they would be interested in consuming Snow White that haven't seen it before and they discover it for the first time. And yet it's infrequent enough that it doesn't dilute the IP. So Walt's got an amazing quote on this actually from the second re-release in 1951 of Snow White. In the 8 years since then, our first re-release, our potential audience has been increased by 25 million children who either were not born or were too young to attend a motion picture theater in 1944. You're an adult much longer than you're a kid.
It's so amazing. And they totally stumble into the seven-year thing. Like it's not like they intended when they made Snow White to say, "Okay, we're going to put it in the vault and then seven years from now we're going to take it out." It just happened that seven years later they had a big cash crunch. They needed some easy profits and they put Snow White back in theaters. And 7 years, you know, give or take a couple years basically becomes the core Disney IP cadence to this very day. And Disney could uniquely do it versus other studios because their IP was more timeless. It's animated and it's based on these timeless sort of lessons and these fairy tales of old. Like there are these simple but resonant stories and it carries through right to today. What is the cadence between Disney's Frozen movies today?
Frozen 3 slated for release next year 2027.
Six to eight years like clockwork.
It's interesting they've applied it to sequels now, too.
All right. So, now we've got four components to the flywheel business. Your original three, genuinely compelling new intellectual property with characters that you resonate with. Two, maximize distribution of each element in the primary delivery vehicle. You've got three, feed that IP into as many ancillary profitable flywheel nodes as possible. And now we've got four.
The vault, the re-releases.
Strategically re-release it every seven or so years. Frequently enough to capture each new generation of children, but not too frequently lest you dilute its impact.
With effectively evergreen content.
Yep. Roy has a great quote that he would tell the Wall Street Journal many years later. Our product is practically eternal. And it's so true.
So despite this genuine innovation of adding the vault concept to the flywheel, by the time the war ends in 1945, Disney is not in a good place. The flywheel is basically completely broken. There hasn't been any compelling IP generated for the past several years. And worst of all, Walt himself is disengaged and disillusioned.
Yeah. But clearly something happened because the Disney we know today is quite successful.
Yes. But before we continue the story.
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And as the AI control tower, they're giving companies a single place to manage all of it. Not just agents, but every AI system across your business. So listeners, if you are wrangling AI across your company, go check out service.com/acquired and just tell them that Ben and David sent you. All right, so we're coming out of the war. There's sort of a few moving parts here at Disney right now. So the revenue from the government has dried up. So that the thing that was putting them on sound financial footing is not there for the sort of quick revenue hits. The long-term stuff other than the re-releases, they haven't stoked the fire in a while.
So the strategy over these next few years is to sort of kickstart to try to do stuff that doesn't cost a lot of money but might have a lot of return.
And so they try a bunch of stuff on the animation side. They do packages where they take a bunch of shorts and they package them together as feature films. These are movies that you almost assuredly have never seen called like Make Mine Music or Fun and Fancy Free. Not big successes. The other thing they try in animation is to go back to the original Alice's idea of combining animation and live action. The result of that is the movie Song of the South. Yeah. Which historians look back on as racist and deeply problematic. And Disney has never released on home video or streaming. So not a big success for the flywheel there either. And for the first time in animation, there's now actually real competition in the marketplace. So before the war, Warner Brothers had started Looney Tunes, you know, with like Daffy Duck and Porky Pig and then Elmer Fudd and of course.
Ironically, it's a former Disney story department employee, Charles Thorson, that does the initial designs for Bugs Bunny.
And then in 1940, you know, same year it all started to fall apart for Disney, Joseph Barbera and William Hanna start working together. They produce Tom and Jerry for MGM. So the other major studios.
Yeah. The Flintstones, of course. Yeah. The other major studios are starting to creep in on the animation game. And so by this post-war period, these other studios had grown in popularity and were really starting to rival Disney. Meanwhile, Disney, they go the other way and they get into live action.
