How Pixar Found a Viable Animation Business Model

TL;DR

Pixar became an animated feature film company only after Lawrence Levy and Steve Jobs tested its options against industry evidence and a detailed financial model. Their analysis showed that animation required long production cycles, immense computing resources, stronger commercial conditions, and enough successful releases to avoid prolonged dry spells, while diversification into live-action films did not meaningfully reduce the risk.

Transcript

Hi, everyone. Welcome to the A6&Z podcast. I am Sonal. Today, we have as our special guest Lawrence Levy, the former CFO of Pixar, who also took the company public. He's on the board of directors at Pixar and was in the office of the president and has written a book just out called To Pixar and Beyond: My Unlikely Journey with Steve Jobs to Make En... Read More

Key Insights

• Pixar was a struggling graphics company in 1994, not an established entertainment business. Its activities included imaging computers, software, animated short films, commercials, and a small feature-film project called Toy Story, leaving its strategic identity and sustainable business model unresolved.
• A portfolio strategy initially appeared capable of balancing Pixar's risks. Levy expected the company's hardware, software, commercial, and animation activities to support one another, because relying exclusively on animated feature films seemed unreasonable when only Disney had previously sustained meaningful success in the category.
• Standalone animated filmmaking carried severe concentration risk because films required long production cycles. If Pixar released one film every four years and one failed, it could face an 8–12-year period without a successful release, while home-video revenue could not compensate for the absence of a hit film.
• Computer animation required both immense computing capacity and new creative technology. An animated feature contained about 110,000 frames, and rendering one frame could take a day at the time. Pixar also needed software capable of turning three-dimensional characters into emotionally expressive figures through subtle eye and mouth movements.
• Toy Story emerged from a 1991 agreement under which Disney funded Pixar's first animated feature. The arrangement helped Pixar when it was perilously close to failure, but Levy concluded that its terms tied Pixar to Disney for potentially 12 or 15 years while offering only a very small profit share.
• Pixar's strategic investigation combined qualitative and quantitative work. Levy and Jobs studied what building an entertainment company required, sought data on film economics, traveled to Hollywood, and questioned industry executives who would meet them because Pixar initially lacked even a spreadsheet showing how films performed financially.
• Diversification into live-action films did not solve Pixar's central risk problem. After studying that business, Levy and Jobs concluded it was also commercially unattractive and would not effectively offset animated-film risk, leaving Pixar to pursue animated features because that was its only credible opportunity.
• Pixar's financial model translated an improbable creative ambition into explicit business conditions. Levy and Jobs created a spreadsheet specifying how many films Pixar needed to release, how those films needed to perform, and what surrounding conditions had to exist for the company to have a viable chance.

Questions & Answers

Q: How did Pixar decide what kind of business to become?

Pixar evaluated its identity through both qualitative industry research and quantitative financial analysis. Lawrence Levy and Steve Jobs studied animation, live-action films, software, hardware, commercials, and related entertainment businesses. They met Hollywood executives, investigated how films generated money, and built a spreadsheet defining required releases and performance. They chose animated feature films largely because diversification did not provide a better path and animation appeared to be Pixar's only credible opportunity.

Q: Why was a standalone animated film company so risky?

A standalone animated film company depended on expensive products that took years to complete and could easily fail. Levy reasoned that releasing one film every four years meant a single unsuccessful release could create an 8–12-year dry spell. Historical precedent also looked discouraging: Disney was the only company identified as having achieved the model, and even Disney diversified into theme parks, television, and distribution rather than relying solely on animated features.

Q: What was Pixar's business before it became an entertainment company?

Pixar primarily viewed itself as a graphics company in 1994. It had pursued high-end computer graphics, produced an imaging computer, developed software, created acclaimed animated shorts, and made commercials. It also had a relatively small project called Toy Story underway. This assortment of activities gave Pixar technical and creative assets, but it did not yet provide a clear identity or a coherent, sustainable business model.

Q: How difficult was computer animation when Pixar made Toy Story?

Computer animation required enormous processing capacity and specialized software. An animated feature film contained about 110,000 frames, with each frame holding substantial data, and rendering a single frame could take a day at the time. Pixar also needed technology for manipulating three-dimensional characters such as Woody and Buzz. Convincing emotion depended on extremely subtle movements of eyes and mouths, so the company had to invent tools capable of producing believable performances.

Q: What role did Disney play in Pixar's early survival?

Disney agreed in a 1991 contract to fund the cost of Pixar's first animated feature, Toy Story. That support arrived when Pixar was perilously close to going out of business, making the project a form of last-chance opportunity. However, Levy believed Pixar paid a severe price: the agreement could bind the company to Disney for 12 or 15 years and provided only a very small share of profits, even when films performed exceptionally well.

Q: Why was home video not enough to make Pixar viable?

Home video was changing film economics and had produced strong results for Disney, but Levy did not believe Pixar could rely on it alone. Animated features took so long to make that revenue opportunities remained concentrated in a small number of releases. If Pixar produced a film every four years and one missed commercially, there might be no successful film for 8–12 years. Home video could not help when the company lacked a hit to distribute.

Q: How did Lawrence Levy and Steve Jobs evaluate Pixar's strategy?

Levy and Jobs treated the problem as both a business-model investigation and a financial modeling exercise. They traveled to Hollywood and spoke with executives including Edgar Bronfman Jr., Mike Ovitz, and Joe Roth, asking questions about the industry and possible adjacent businesses. At the same time, they gathered performance data and constructed a spreadsheet showing the number of required releases, necessary film results, and conditions Pixar needed for a viable chance.

Q: Why did Pixar reject a diversified portfolio business model?

Levy initially expected Pixar's different activities to offset one another's risks, much like a portfolio. He considered combining areas such as software, hardware, commercials, animation, and possibly other film businesses. However, the investigation showed that live-action filmmaking was also a difficult business and did not reduce the fundamental exposure associated with animated features. Pixar therefore became an animated feature film company by default, because the alternatives did not offer a stronger route.

Summary & Key Takeaways

• Lawrence Levy joined Pixar in 1994 after Steve Jobs unexpectedly called him. Pixar was then a struggling graphics company involved in imaging computers, software, animated shorts, commercials, and Toy Story. Levy initially expected to combine several businesses into a portfolio whose different risks could offset one another.

• A standalone animation company appeared commercially implausible because feature films took years to create and could leave an 8–12-year dry spell after a single failure. Each film contained roughly 110,000 frames, individual frames could require a day to render, and Pixar also had to invent technology for emotionally convincing character movement.

• Levy and Jobs investigated Pixar through qualitative industry research and quantitative financial analysis. They questioned Hollywood executives, studied how films generated revenue, evaluated possible diversification, and created a spreadsheet defining the required release frequency, performance, and commercial conditions. They ultimately chose animated feature films because the alternatives offered no better path.