The Walt Disney Company: The most successful enterprise for monetizing human nostalgia (Audio)

Have I ever shown you my Mickey Mouse impression? [laughter]

You’ve done your Mario impression for me in the past, but I’m not sure.

They’re a little similar. [laughter]

All right. Give me Mickey.

Oh, boy. Will you look at that? [laughter]

That is really good. You sound like Walt himself doing Mickey, right? Didn’t he do Mickey for 20 years?

Yep. He didn’t at the very first, and then one of the animators convinced him to do it. He did it for 20 years.

Have I ever given you my Donald Duck impression?

Oh, wow. Okay. Do I need to sit down for this one?

You might need to. All right, here we go. [laughter] That’s about right. I have a great Donald trivia for you coming up. Save it.

All right. 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.

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 from all the rest. It’s over 100 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.

Oh, yes.

I’m looking at you, David Rosenthal.

Oh, yes.

And it has played a prominent role in Acquired history, too. Our very first episode was Pixar. We’ve done Lucasfilm, Marvel, and 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? When you look at Disney’s profits today, it is in a whole different league than Paramount, Universal, Warner Bros., or any of the other classic Hollywood studios. The business of feature-film production is a mediocre one, especially by the standards of what we study here on 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.

Nor did I. 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. 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 and Bambi are from the 1930s and 1940s. They even predate the existence of televisions in people’s homes.

And importantly for Acquired’s roots, this really is a technology story. There were giant innovations that often bet the whole company on things like synchronized sound, 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, there was building a giant theme park in Anaheim when nothing else like it existed. They really did invent the entire concept of the flywheel business model that so many entrepreneurs are trying to copy.

Oh, yes.

So today, listeners, is The Walt Disney Company, Part 1: Walt’s era. Woo.

Well, first, a thank-you to my main source for facts and Walt quotes on this episode: Neal 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 incredible.

Yes. Well, with that, we start in Chicago in December 1901, where Walter Elias Disney is born. The family lore is that the Disneys are descended from the French d’Isignys of Normandy, who came over to England with William the Conqueror in 1066. That’s family lore—unverifiable.

At this point, lost to history.

Yes. Walt’s father, Elias, was 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 4, 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. 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, essentially, “Let’s get out of the dangerous city of Chicago and raise the kids somewhere small-town,” right? I think Marceline was actually created because they needed somewhere for the Santa Fe Railroad’s division point.

Yes.

Like when it was going to maybe Chicago and Kansas City, and they were like, “This place on the map looks good,” and they started the town of Marceline.

Exactly. And Robert, the uncle, had bought real estate there, speculating again that Marceline was going to grow.

So Marceline was basically a Disney movie. There were orchards and ponds and animals and farmhouses. There was also this charming little town that the railroad had created, with a main street—a Main Street, U.S.A., you might say. But that’s getting ahead of ourselves.

So, while the family was living there, Uncle Robert’s wife, Walt’s Aunt Maggie, would bring Walt gifts every time they came to visit Marceline to check up on their real-estate investments. One year, when Walt was probably 6 or 7 years old, Aunt Maggie brought him a Big Chief drawing tablet and pencil set. Walt was enraptured. He started sketching all the time, drawing and sketching everything he could see.

As the legend goes, one day Walt’s retired neighbor asked the young boy to draw him a picture of his favorite horse. The neighbor loved what Walt drew so much that he paid him a nickel for it and hung it in a frame in his house. Walt’s mind was blown. Young Walt was like, “My hobby, my art—it can make me money.” [laughter]

Whatever the exact truth of that story is, there is no doubt that somewhere in Marceline, in prepubescent Walt’s mind, a connection was forged between these two great forces: art and commerce. That would go on to drive not only the rest of his life, but also the company, the studio, and the movies—and 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 were involved. There wasn’t magical economic prosperity everywhere. It was a tough life.

Even though he could remember it as an idyllic childhood, which I also think is quite the foreshadowing of the Disneyfication of things in the future, it is both remembered as idyllic and was hard, as the real world is.

Yes. And I think it’s because of the age Walt was when he was there. They lived in Marceline only from when he was 4 to 8 or 9 years old, before he got really put to work.

So he gets to just enjoy 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. When Walt is 9 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 and put the family to work [laughter] delivering papers.

There are so many protagonists that we study on Acquired who started their careers 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 4 in the morning and falling asleep at school because he had to work so hard. 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 barbershop, which would pay him either a nickel or a free haircut for each. That would be Walt’s spending money growing up, which 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, and Walt becomes the cartoonist for his high school newspaper. But he’s not there long before he leaves high school to 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 that would eventually 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, 8 years his senior...

9 years, maybe.

8 or 9 years older.

Yeah. Much older.

Yep. He is living there. And Walt has a plan: 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 flyers for the upcoming holiday rush. Walt works there for 6 weeks through Christmastime and then gets unceremoniously laid off. But he gets 2 things out of this brief experience as an employee. 1: 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 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 Iwerks is the Steve Wozniak.

Although I think Walt was more hands-on. Yes, Walt was also an animator. He was just a better animator, and Walt was a camera operator. Walt was building stuff, doing things with his hands, and he was in the primary technological and artistic trade that his business was in.

So after the 2 of them get laid off, Walt suggests that rather than look for jobs again, they should just start their own studio together. I mean, hey, they’re professional artists. Why not? [laughter and gasps]

So they create Iwerks-Disney Commercial Artists, Incorporated, supposedly in that naming order so that it didn’t sound like an optometrist’s shop, like Disney-Iwerks.

How amazing is this? In the first Iwerks-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 Artists firm. 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.

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 Film Ad Company.

The reason that they specifically wanted Walt and Ub is that they have a relatively new business line at the Slide Company, which is producing animated commercials to run in movie theaters before films. 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 love about drawing, but it’s more than just art; it’s technology. 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 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, not in Kansas City.

Right?

But the whole industry is only 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. This whole art form is brand new. It couldn’t exist before the technological innovation of film.

Yep. It’s exactly right.

So part of the reason that cartoons are working well in advertising right now for the Film Ad Company is that it’s this novelty, almost a gimmick. It captures people’s attention.

Yep.

Even though they have no color, no sound, no story, it’s just a series of visual novelties.

It’s something they’ve never seen before. Of course, it’s interesting.

Yep. And in Walt’s mind—he really is always thinking, “How can I make a business, 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 as or better than anyone else in the world at it. Unlike if he’s going to try to be the best commercial artist in the world: 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. Walt puts together a few short cartoons that he creates all himself. He brands them as “Laugh-O-Grams,” and he ends up selling them on the side to a local movie theater chain to run before features. 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. That’s such a hokey name for what ends up becoming—well, this doesn’t become Disney, but the spirit of it becomes Disney here.

And the thing that they’re doing is so primitive. There’s no sound, there are no voices, there’s no color, there’s barely any background.

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. You can’t build a relationship with the cartoons that are being made at this time like you can with Mickey Mouse, Donald, 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 super-exaggerated things they call gags—things that a character does that aren’t necessarily consistent with anything else that they’ve done—within a few minutes of the gag starting and ending, or sometimes even a few seconds.

Yep. And honestly, that’s actually not that different from film itself overall at this point in time. 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, slapstick. It’s the stuff that my toddler laughs at. You could summarize every scene of every cartoon and most movies by going, “Oh, he fell down.”

[laughter]

Exactly. [gasps] 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.

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 and 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 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? The options could also be newsreels, 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 to the theater over 40 times per year.

Wow.

This is what you did every week for entertainment.

Wow. Yeah, compare that to today, where maybe you go once a year.

It’s 2: The average American goes to a movie theater twice a year now.

Yeah. I mean, back then, you could go to the movie theater, see a live show, ballet or opera, or a sporting event like a baseball game. When you went to the theater, it was a bundle. You were there for a production, but I think the point you’re trying to make is that there were also these cartoons with gags, newsreels, and the feature you were there to see. It was sort of this bundle of, “All right, let’s see what the theater has in store for me today.”

Yeah, exactly. So, in this survey of theater managers, only 23% of respondents said that they showed cartoons as part of the bundle and that their audiences liked them, which was by far the lowest of any of the other filler options.

Right in his dad’s footsteps.

Yeah, exactly.

And he raised money from people in Kansas City—friends and family. He went and lost the loan capital that people had given him.

Yep. So Walt goes to rich Uncle Robert for advice on what to do, given his failure. Robert says, “You know, kid, the best thing to do, if I were you, would be to skip town. Get out of there.” Which was actually really sound advice for back then. People’s reputations did not travel with them.

Nope. Your credit was local—the credit you had with people in your town. There was no other way to find you.

Now, it just so happens that both Robert and Walt’s older brother Roy had also just skipped town from Kansas City and moved out west to Los Angeles. So Walt packs his belongings, which was basically nothing at this point, hops aboard the Santa Fe train bound for L.A., and joins them in Hollywood. 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, having come to Hollywood, he’s going to get a directing job at one of the studios there.

Well, yeah, he had abandoned the idea of animation. He basically thought he was too late. He had seen some of the stuff coming out of the New York cartooning scene and was like, “Well, I’ll never be as good as them, so I need to start over with something completely new.” Which is silly and wrong in its own way, but there’s also the hubris of thinking 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?

No, no, no. So he rolls up to the Universal lot after getting there with no job, no money, and a borrowed bed. He has fake business cards made that say he’s with Universal. He’s just the Kansas City representative, so no one at Universal would really know who he is. He gives one to the receptionist at the Universal lot and walks in.

He spends at least a day, from what I could tell, roaming around and learning as much as he could about film production, internalizing a lot of those lessons. Then he tries to come back on future days and say, “Oh, yeah, I’m sort of with Universal. Now I have experience. Can you give me a job?” 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’s inevitably rejected by all the major Hollywood studios, he says later, “When things began to look hopeless, I got my cartoon things out again.” 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.”

At this point, pretty much the only popular cartoon left in the industry is Felix the Cat.

Yep.

Which was created by Pat Sullivan out of New York and distributed by the pioneering Margaret Winkler, also in New York. So Walt has one asset left over from his failed Laugh-O-Gram days: a reel of a hybrid live-action cartoon short that he had created right before he left Kansas City called Alice’s Wonderland. It was about a real-life little girl who interacted on screen with cartoons drawn over the film, which was 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 film a real-life actor, have them interact on screen with cartoon characters, and put them in the cartoon.

Yes, very cool. It 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.

Right. Yeah, there’s this funny, counterintuitive thing that live production is much faster and cheaper than animation. You just have a film camera, point it at something in the world that exists, and get everything you’re pointing at for free—the environment around you—instead of taking these exposures in an animation camera.

Yep. So Walt sends Alice’s Wonderland off to Winkler, and she likes it.

She does. And David, did you know we had 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 down to Burbank for a few days and looked through the corporate archives. One of the things the archivist pulled for us was this contract. I have a photo of it, and 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: it’s for 12 negatives of a subject series, and then, in all caps, “Alice Comedies.”

Amazing.

I also have a picture of this on the last page of the 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. Walt Disney is in business. You can see his signature, which is much less flowery than the version you see in the Disney logo. He would evolve it over time.

But, yeah, this is the moment. Walt Disney is in business. It’s his first actual commercial, big-time deal.

Yes. And I think when Walt gets word from Margaret, he runs into his brother’s room. Roy actually has tuberculosis at this time and is in a hospital ward. Walt 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.”

$15 to $1,800 per film is a lot of money at this time. Roy talks it through with him and says, “Okay, let’s get right to work.” 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 finances; Walt manages the creative side, and they get to work.

Yep.

So Walt, of course, writes to Iwerks back in Kansas City and to several of the other talented animators they knew there. He 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 began as the Disney Brothers Cartoon Studio, with a whole bunch of Kansas City guys who moved out to join Walt and start cranking away.

Yep. And the Alice comedies become a moderate success in the marketplace. Again, I think the novelty of cartoons plus live action entertains audiences for a few years. Ultimately, the Disney Brothers Studio produces 57 of the Alice comedies from 1923 to 1927.

Then, in 1927, Winkler’s relatively new husband, Charles Mintz, who had actually started working for her in the business, takes over as head of the business. By this point, he is no longer getting along with Pat Sullivan, the creator of Felix the Cat.

Big opportunity.

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 distributors 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 asks Walt, “Hey, Walt, can you make us a new series and a new character? You know, like Felix, but not Felix. Maybe not a cat.”

Right. We needed it to be plausibly different while still having everything that made Felix successful.

Yes. So Walt casts about for what they could come up with that was like a cat but shared a lot of the same recognizable attributes: a lot of white fur, a tail, some big ears, and something easy to draw in black and white. They came up not with Mickey Mouse, but with Oswald the Lucky Rabbit. And Oswald was a big hit.

It has the backing of Universal’s 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. It’s not surprising, because if you give the creative brief to Walt and take something that’s kind of working, but apply their 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 Disney-fy it or Iwerks-ify it in a way that really can speak to people.

Well, I think it really was the partnership of the 2 of them. Iwerks had immense artistic talent as an animator and was able to do that, and Walt had taste. He recognized it and 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 into a real operation, bordering on a major animation studio. They hire about 25 employees and start turning out Oswald cartoons. They move into a real studio building on Hyperion Avenue in the Silver Lake neighborhood of Los Angeles.

When they move there, Walt and Roy decide—at the instigation of one brother or the other—that they need to rename the company and the studio from the Disney Brothers Cartoon Studio to the Walt Disney Studio. So, there are 2 stories about this.

I was going to say, I’ve seen both.

One is that it was actually Roy’s idea.

Yes, because he’s like, “Hey, we need to start building a brand, and people need to know who is making these Oswalds. It should be the Walt Disney Studio, and you’re very clearly the frontman. You’re selling. You’re the visionary, the 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 had 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 to mostly overseeing the studio, which you have to do with an operation of 25 artists, creative people, and camera folks. You need someone who has an overall vision and taste to drive everything. Yep.

Now, as Walt is transitioning from sort of doer to really studio head, it’s worth knowing that the ownership of the Walt Disney Studio—which would become Walt Disney Productions, which 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.

Mintz, the husband of Winkler back in New York, who had already proved his stripes through his dealings with Felix the Cat and Pat Sullivan, senses another opportunity. He thinks that Walt has become superfluous and that it’s actually just the animators who really matter. Because the Walt Disney Studio doesn’t actually own the intellectual property of Oswald the Lucky Rabbit, Universal does.

Although the Walt Disney Studio was acting as though this were its creation and that it owned it, 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 was also 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 meet with Mintz and ask for a raise in the amount that the studio was getting paid per Oswald short.

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’re doing around here any longer. But I’ll 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, basically wiped out the margin. They were saying, “We’ll pay you the 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. 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 Iwerks. Through an act of subterfuge, he has gotten in touch with each of them individually and brought them over.

Only Iwerks—and I think maybe 2 or 3 other animators—refused to sign these secret deals with Mintz and stayed loyal to Walt and Roy.

Once Walt realizes this, there’s nothing he can do. 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 intellectual property. So, he has no leverage. He’s got nothing. He has no customer contract, no employees, and no intellectual property. Suddenly, the enterprise value—the entire value of Walt Disney Studios—is effectively zero.

Yep. It is an extremely bitter lesson for Walt and Roy, and it’s one that you can bet they never forget for the rest of their lives. Really, everything in Disney’s history, and all of the enterprise value that Disney has built—which we will see 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 going to 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?

Let’s see. By this point, Disney had acquired ABC and had acquired ESPN.

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 Lucky Rabbit.

And Oswald is repatriated, NBC gets Al Michaels, and all is right in the world. Amazing.

So, back to 1928. Walt and Roy are basically back at square 1 here. They have not just nothing; they actually have less than nothing because Mintz—ever the, well, really just a weasel is the right word—makes Walt and the Walt Disney Studio finish out the current Oswald contract, which still had a few cartoons left to animate.

Yeah. He makes Walt and the Walt Disney Studio finish out the current Oswald contract, which still had a few cartoons left to animate, and pay all of the animators who had 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 of 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. He scribbles a sketch for a new cartoon character right there on his drawing pad during 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.

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 a 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.

This would go on to become the Mickey cartoon “Plane Crazy.” Walt shows the sketches he’s making to Lillian, and Lillian says, “I like it, but Mortimer, that’s too awful 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 sweating. So he, Roy, and the couple of 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, shorten the ears, make them circles. 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 always had a fondness for mice because there were mice that would jump in his trash can in Kansas City while he was animating?

Sure, whatever. [Laughter]

You know, it’s all just part of the Walt myth.

Yes. And at least according to the Neal Gabler book, most likely Ub Iwerks is the one who first draws Mickey, not Walt on the train. But either way, Ub Iwerks definitely was the primary animator of the first Mickey cartoons, for the whole first series of Mickeys, including “Steamboat Willie.”

So by the summer of 1928, they’ve finished out the Oswald contract, and Walt and the small, merry crew have gotten 2 Mickey shorts ready for production: “Plane Crazy” and “The Gallopin’ Gaucho.” Walt takes them around to distributors. The Walt Disney Studio is well known at this point, and this seems like it would be promising new IP.

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 thousands, or hundreds of thousands, of raving fans for it.

Exactly. And then comes the eureka breakthrough idea. One of the gang recalls that “The Jazz Singer,” the famous first popular talkie—a movie with dialogue and sound—had just come out the previous fall. When they went to see it, there was a cartoon screened alongside it.

Walt, when he hears this, puts the 2 ideas together in his mind: a cartoon and sound. Supposedly, he says, “That’s it. That’s it. That’s what we’ve got to do. Stop all these silent pictures.” 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 sound.

Synchronized. Yes, exactly. Where what was happening in real time in the cartoon was then played in sound, synchronized in the movie theater.

Yeah. The concept before was that there’s music that plays, but it’s only loosely attached. This is attached to the frame and to the beat of the music. 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 there’s some music accompanying the cartoon that you’re watching. It’s that what’s happening in the cartoon feels like it is producing the sound.

Yes. There’s a great business-model lesson in this, which is that with the first 2 Mickeys flopping, if you just do the same thing as an existing competitor who already has distribution, brand, and customers, it’s not enough. You need to go do something leveraging a new piece of technology or a new platform. You’ve 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 smaller, worse also-ran.

Totally. And that could be anything. The only reason that the Oswalds worked, even though they were a ripoff of Felix, was because they came built in with Universal distribution. But Walt taking out the Mickeys before bringing sound—he’s got nothing to bring to the table here.

Yep.

So Walt lines up access to the Cinephone sound-recording system from a guy named Pat Powers, who had actually helped create Universal some number of decades earlier and then had gone on to become a sound innovator and entrepreneur, developing a sound system for this new movie technology.

Walt and the crew animate a test sequence of Mickey with sound, and they screen it for all their wives and girlfriends. Walt later writes 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.’” [Laughter and gasps]

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 personalities that audiences connect with.

So interesting. 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, doing a test animation and synchronizing the sound—even to show a little screener—must have been really hard at the time because none of the tools existed. They had to invent the way to synchronize the drawings with the music and the systems. It’s 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. Humans talk. Sound just made it way better.

Sound for cartoons was this giant leap. These characters, this art, can now be actual characters with personalities.

Yeah.

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 and nightmare of creating this thing. It was 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 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, [laughter] you know, this is the nature of the New York distributors. They get it made, and Walt takes it and shops it around to all the big folks in New York. They’re so conservative. They’re like, “Well, this is cool, but 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. [Laughter]

So Walt decides that he’s going to take matters into his own hands. 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 at the Colony Theater. He’s going around the distributors just to get this into 1 theater as a test.

“Steamboat Willie” premieres in New York City on November 18, 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 standing up and screaming, “We want ‘Steamboat Willie’ again,” instead of playing the main feature?

Yeah, exactly. Exactly. But still, Disney now needs to find a distributor. And now he’s got the proof point. [Laughter]

These New York distributors are still so conservative. They’re like, “Well, you had 1 hit. I don’t know that 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.”

Famously, one distributor, while Walt is meeting with him and trying to explain to Walt why he’s going to pass again on the Mickey deal, picks up a package of Life Savers candy. He says to Walt, “The public knows the Life Savers 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 there 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.

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.

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 turn to Pat Powers, his partner in the sound technology, who had been one of the original Universal executives. 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 Ub Iwerks to quit and leave Disney. He says, “Ub, 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.

Absolutely brutal.

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 is branded prominently up front and at the end as a Walt Disney comic, and they have become huge hits.

So even though Powers steals Ub Iwerks away, nobody cares. Everybody still wants the Mickeys. Everybody still wants Walt Disney comics. Disney has made himself the Life Savers 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. [laughter] 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 1,000 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. Then, if it works, I think we can franchise this nationally.”

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 Mickey Mouse Club charter from the company, from the Walt Disney Studio.

It's like a franchise.

Yeah, like a franchise, right, for $25. And 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, et cetera. 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 Scouts and Girl Scouts of America combined at this point in time.

That's insane scale and insane speed of adoption pre-internet.

Right. Pre-internet, pre-cable, pre-broadcast TV, the ability to get 1 million Americans doing something within a few years is—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 [laughter] 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 costs them the salary of the 1 animator 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 from that would get people to go see Mickey films.

Exactly. Yeah. It never becomes a huge revenue or profit driver for them, but 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 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 streets in New York and a man comes up to him—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 tablets that he's producing there in New York.

And this is really early days. Mickey's just starting to work. The studio still needs money. So Walt's like, “Sure. Yeah, I'll take $300. Why not?”

And $300 in 1929 is a lot of money. I mean, this is the beginning of the Great Depression.

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 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 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. 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. [laughter]

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.

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 $100,000, they would split every dollar of licensing revenue 50/50

and there would be a lot of dollars after the first $100,000. This is a huge moment. I mean, there is a real case to be made that besides Walt and Roy—and Ub Iwerks, too—but at least on the business side, besides Walt and Roy, Kay Kamen was the third most important person in the first 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 from guys that Walt met on the street—many of which were for a lot more than $300.

Yes—to a real professional operation doing $6 million of gross merchandise sales within 6 months. That then grows over the next 2 years to $70 million annually in gross merchandise sales all around the globe, from over 40 separate, super-high-quality consumer-product partners.

The most successful and famous example of this is the deal that Kamen does in 1933, right after he takes over, with the Ingersoll-Waterbury Watch Company.

This is crazy: within just a few years, they can be at a $70 million level in 1935 of merchandise. 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 Kamen 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 a real professional and well respected in the industry, with contacts. But to your point, Ben, there's just so much demand for Disney merch. The $70 million is a gross-sales-to-the-end-consumer number. Most deals that Kamen would do would be for 5% royalties on the wholesale price of the goods, and the $70 million was retail. If you assume a 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 Kamen. This is 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 Walt Disney Family Museum site that by the late 1930s, royalty income from merchandise had exceeded revenue from film rentals.

It wasn't even by the late 1930s. It was 1934.

It was quick, and it was by a lot.

Yes. 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 1930s, gives Disney an advance of $15,000 per film. But Walt is always investing ever more in the production of the cartoons themselves.

By this point in the mid-1930s, he's investing $30,000 or more 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 half of basically $2 million in pure-margin, almost pure-margin, revenue coming in from Kamen 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 $1 million.

Yep. Film profitability is highly dependent on a film-by-film basis. It's got to play out in theaters, et cetera.

All right. So, I cut you off on the Ingersoll watch company.

Yeah. Just as one example of the deals that Kamen is doing, in 1933, right after he takes over, he does a deal with the Ingersoll-Waterbury Watch Company to manufacture the famous Mickey Mouse watch. That watch would sell 2.5 million units over the next 2 years.

The Ingersoll-Waterbury Watch Company was about to go bankrupt during the Depression. It saves the company. Wasn't it also the most popular watch in America?

I think that's right, at least for some point in time during the 1930s.

It's fascinating. Of course, the modern Apple Watch Mickey Mouse watch face is a reference to this, because it's using his arms to point to the time 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 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.

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 of months ago about how “flywheel,” this term that everybody uses in business, is actually completely the wrong term for what you're trying to describe.

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 a system of integrated components that creates positive feedback loops. So we'll 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 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.

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 possible that audiences can build a deep relationship with. This is what Walt was building toward through all of his early years in animation. All the technical innovations, every step, was getting to a character that audiences could fall in love with.

Yeah.

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. With live-action characters, the characters are too bound up in the actors who play them, and that creates all sorts of problems.

Especially today, it makes your economics as a studio way worse because you have to pay the stars so much.

Right? There's wholesale transfer pricing. A huge amount of the margin you could get ends up being paid out to effectively your partner in creating the character: the actual actor.

Whereas Mickey works for free. No, you have to pay the animators, and they get paid very well to animate him.

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.

And Mickey doesn't age.

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 guess unless AI gets really good.

And live action is sort of dated to a time and place in a way that cartoons can transcend. 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 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. The few exceptions would be James Bond, but God, have they tried to do all sorts of crazy stuff in order to let that IP keep living. I mean, there have been 6 or 7 James Bonds, and they have to keep rebooting the story over and over.

Exactly. Okay, so that's step 1. Genuinely great IP that audiences fall in love with has to be at the core.

Then, step 2: You need to maximize the distribution for that IP as wide and as far as possible in its primary delivery vehicle. So, 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.

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 Mickey.

If you structure the nodes of the flywheel, the additional exposure reinforces the core IP.

Exactly. And so then, if you flash forward to today and 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 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 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.

You have to invest years ahead in production before you get any payout.

Right. Right. Any studio that is purely a studio is in for a rough go. But if you're trying to create this durable platform of profit with all of these ancillary businesses, then you can focus on scarcity, quality, and innovation in the primary medium.

Yep. Because you know you're going to drive revenue in perpetuity out of it through the flywheel.

Do you think, as it pertains to Acquired, we're so obsessed with quality and just being in one medium? Do you think it's okay to lower the quality bar outside the primary medium? 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.

Huh.

At least for Disney. I don't know about Acquired.

Yeah. I don't know if it applies to premium brands or luxury brands.

You have to be really careful about what the mediums are. This is why comics are 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 a great masterpiece like Snow White or Steamboat Willie each time.

Right. And when you read the non-canon Star Wars books—

Yes. It doesn't detract from the canon.

That's exactly right. But it does deepen your fandom.

Yes. Exactly. Exactly.

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. 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: 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 in Walt. He's been creating these cartoons. He's starting to really identify with the artistic community, with the fine artists of the time, and build a lot of those relationships. He wants to create something that is seen not only as a technology breakthrough, but as 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 total open question in the world of whether you can 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 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, one that could take bigger and bigger swings.

Yes.

All right. So, David, before we tell the story of how Snow White came to be, we have to tell the nickname of Snow White, the project that was going around Hollywood. Do you know what that was?

Disney's folly.

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, and about Jack Bogle with Bogle's folly in creating the Vanguard index funds. We have to start a folly tracker here on Acquired.

But even for Walt Disney, as successful as he and the studio had become, the idea of a feature-length animated film was crazy in 1930s Hollywood.

And it had never been tried before.

Roy tried to persuade him not to do it. He argued that it was going to bankrupt the studio.

Yeah, this is a multimillion-dollar undertaking. As you were talking about before, the shorts were $15,000 or $30,000 undertakings.

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.”

It had to be a masterpiece, or the whole thing was going to fall apart.

Okay. So why was this so expensive? Why was it such a giant undertaking to create an animated, full-length feature 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.

One tiny part of inking and painting.

So, let's start with the goal. The goal is to create the illusion of motion with a series of still frames—24 still frames per second. That requires a lot of clever tricks to make it economically possible, to make it consistent, and to make it enjoyable. If you really do your job, it also makes 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 things stretch and squish when someone bounces on the ground. It all just happens because you're shooting it in the real world. Yep.

So where does it all start? It starts with a good story. There's something called the story department that kicks off the process with little sketches that are pinned to corkboards. 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. Walt was famously amazing to watch when he did this acting.

This then gets put into a story reel of static sketches, just illustrating the main flow of the story. At this point, it's super easy to edit, reorder, change dialogue—anything.

I see where you're going with this at this point.

At this point, the sound department gets involved, and that's both music and voice. First, you'll often have a temp voice-over 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.

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. This way, the animator can do their drawings exactly to the music and dialogue. Now you can understand the insanity of what Steamboat Willie was trying to do and why that was so difficult. The Disney studio had to invent this process.

Yeah. And that was what, 7 or 8 minutes long?

Yes. Meanwhile, you have the layout department, which is doing the staging, the camera framing, the composition of these shots, and the lighting for every scene. 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 and lighting—this isn't lighting the way you think of lighting. This is the 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 2 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 4-foot-wide by something like 8-foot-tall backgrounds, because the camera has to pan around as the characters move around against the background. 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: getting to see the backgrounds of Snow White, Cinderella, and the other great Disney classics. You just look at them and think, “Oh my God, these are right up there with Rembrandts, 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 that are temperature-controlled and humidity-controlled. They've got all these UV filters all over everything, and there are 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 animators, since that character is going to exist on film for 80, 90, or 100 minutes. There's a lot of drawing to do.

Then there's the model department, which makes something called a maquette. The animators who are drawing a character hundreds and hundreds or thousands or tens of thousands of times need a consistent physical reference that they can hold, rotate, and examine under a lamp. These are 8-inch-tall versions of the characters—

Little statues—

Right? They're perfect, so that you can say, “How would they look from that angle? How would they look if I stood 8 feet away?”

Then you have animation itself. It starts with sketching on paper with a pencil or with charcoal, and they're literally sketching 1 frame at a time. They're flipping pages on their pad of paper 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 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. Think 1,000-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 1 character doing 1 thing on 1 layer.

Yes. There's usually about what, double that?

Triple, quadruple. Yeah.

So, there are 2 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 in-betweeners, where lead animators draw the key frames with the essential poses or major character movements, and then the assistants, or the in-betweeners, go to the drawings and bridge between those frames. The goal is to make the most efficient use of the skilled artists' time on the film.

Over time, a division of labor started to emerge, which makes sense. A super-skilled animator would work fast and loose, with sketches that had little extra lines hanging off everywhere. There would be revisions on top of the original drawing without actually cleaning up the mistakes underneath. Then it was handed over to a cleanup artist to trace their drawings with a single line, instead of the hairy mess, to get it ready for the next stage—but again, preserving the same correct emotion, flow, bounciness, shape, and form of the lines.

Both the in-betweeners and the cleanup artists were a result of the industrialization of the animation process, versus the early days and the early Mickey films, when a single artist animated the entire thing.

Yeah. By this point, as they're heading into Snow White, this had become a real-scale production process. 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 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. Let's talk about inkers. Back in 1914, Earl Hurd had invented a concept known as cel animation—C-E-L—where you would draw with ink on the front of a piece of transparent plastic, or cel in the business, short for celluloid. 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 can imagine that if you had to redraw every line on every frame every time, first, it would look crappy because things would wiggle all over the place when the film was actually playing. Second, it would just be 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. They would trace over their entire drawing with ink on cel every single frame.

Yes. So, what you would see on screen in a film is actually not the direct work of an animator, but 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 cels 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 they mask any colors that overflow out of the dwarf's shirt or Mickey's shoe. On the back, that's where you do your painting. You put all the colors on.

And, Ben, what you were referring to is that 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.

Painting is forgiving.

Yeah. But Disney has this room with thousands and thousands of colors of handmade, on-site paint. It's a production facility for paint color and for applying that color to animation cels.

It used to be called the Rainbow Room. Those colors—that paint—went into Snow White, Cinderella, Peter Pan, and Alice in Wonderland.

Thousands of people each making thousands of drawings. It multiplies fast. Then you've got your special-effects layer. Tinker Bell's wings use, effectively, spray paint, like a little paint gun, so they can be partially translucent. Or the dwarf's glasses, or sparkles. Another thing in special effects is 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 leaves that are closer to the camera?

Before any of this inking and painting, which was super expensive and time-consuming, they would do something called a pencil test. 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—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 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, the camera. This is the coolest part of the whole thing.

The multiplane. This is incredible.

So Disney and Ub Iwerks 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 1933 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 animation at 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, and there’s a team of operators to make it work. You had to climb a ladder to get all the way to the top.

Yeah, it’s probably 15 feet tall.

That feels high. 10, 12, yeah, something like that. There were up to 7 planes that you could use. You’ve got these horizontal planes between the floor and where the camera is mounted, up 12 feet in the air. Typically, the character was on the cel almost all the way close to the top of the camera, unless you had special effects or some foreground obscuring the character or something like that.

All the elements of the background at various different depths away from the character were painted on panes of glass and paper below that. You’d want the background broken out onto multiple panes so you could do things like a parallax effect if they were panning by. Or, if you wanted to do 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 2 of the 3 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. It would just photograph 1 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.

Yes.

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 3-way intersection of art, 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 3 years of studio work to create Snow White. Remember, this is at the same time as Disney is making short cartoons for, I don’t know, $20,000 to $30,000. And even that is way above what anybody else in the industry is spending.

This is $35 million inflation-adjusted. Movies are like $300 million budgets today, but imagine nobody’s doing that. You have the first idea to create an animated movie, and you're like, “I’d like a $35 million budget to make that.”

Right? When Roy said that he was worried it was going to bankrupt the studio, 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, et cetera, 2 million sketches and 250,000 finished drawings and cels 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 that it was like a gothic cathedral in animation. That is the only kind of analogy that makes sense here. They staffed up to 750 studio artists and did 3 years of nonstop work on production.

Yeah. Incredible.

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. 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 from those of a real-life woman. That way, they could get a sense from watching the test footage of 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 accidentally created and leaned into it. But that’s not going to motivate him to film a whole live-action version in costume just so they can make sure they get the spirit right. This is art that they’re creating.

An obsession with quality.

Absolutely. So the movie finally premieres in Hollywood on December 21, 1937. 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—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.

The category was so new and different that they were like, “Instead of being eligible to be nominated for Best Picture, let’s just create a special new category.”

So the Oscar statue that they give Walt Disney for Snow White is the only one that’s ever been made. It is a large Oscar: it is Snow White, and then 7 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 2 young daughters will attest.

Yeah. An interesting thing about this story, since you have daughters who watch it, David, is that it’s kind of dark. Walt did meaningfully change the Brothers Grimm stories that he adapted it from. It’s very interesting that all of these early Disney animated movies are adapted fairy tales or adapted existing lore that Disney 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 7 dwarves personalities, were in part motivated to soften the darkness of the fairy tale. 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.

Some of the decisions were actually made with the flywheel in mind, and the dwarves’ personalities are one of these.

They wanted to sell a lot of 7 Dwarfs merchandise. And what better way to do that than to give them all distinct personalities?

It’s true. When you go to Disneyland, there are a lot of people walking around with Dopey and Grumpy.

Exactly. Exactly. So, as we said, the movie itself is 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 Walt is 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.

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 works. There’s the studio, like Disney, that makes the actual movie. There’s a distributor, like United Artists or RKO, that does a lot of stuff.

They take the finished film and create all the prints that will go to theaters. They have the sales force 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. 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 are 2 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, for a dollar spent at the box office, what the splits are. So 65% gets retained by the exhibitor, or the theater; 13% goes to the distributor; and 22% goes to the studio.

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 2.5× or something. 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 it’s 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 1-year, 9-month period, they made $4.5 million in film rental income, the producer’s share. So this is just Disney’s share from Snow White and the Seven Dwarfs. That’s our real source of truth: We know they made $4.5 million.

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, et cetera, et cetera. So, yes, it’s 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 flywheel revenue to come along with it. If Walt thought that the flywheel worked well for Mickey Mouse, Snow White is like a whole other level.

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 soundtrack albums for movies before then, and it was a huge hit, both because it’s a great soundtrack and because, before this album, there was never anything that audiences could take home of the picture they saw in theaters. There was no home video, right? There was no streaming. There was no television. You went to see something in the movie theater. Sure, you could buy a piece of merchandise, like a doll or a costume—and there were a lot of those out there for Snow White—but you couldn’t take the movie home except in the form of the soundtrack.

And the songs are quite catchy. [Whistles] So the soundtrack is huge.

Beyond that, there are supposedly—I read—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 wrote this: “Sales of Snow White products might be America’s path out of the Depression.”

Wow.

That’s how successful it was. This movie was such a grand success artistically for Walt, film-wise; for the studio; for the whole medium of animation, legitimizing it right alongside live action; and for the flywheel business model of Disney.

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 more of these. Let’s build all the infrastructure to really do that.”

Yes. 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 they’re going to install there, and all the additional staff, Disney will now be able to produce 2 new feature animated releases every single year, plus shorts. It took 3 years to make Snow White. With all the learning from that, all the innovations of the new campus, and all the new staff, he thinks they’re now going to be able to pump out great new feature films every 6 months.

Which was a complete pipe dream, and they never were able to do.

Walt also, in his mind, came to see this Burbank campus as really a utopian place, almost like a college campus. Walt didn’t even graduate high school, let alone go to college, but he intentionally placed it in Burbank, which back then was like the sticks outside of Los Angeles.

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. I think he really wanted to create this band-of-merry-men-and-women type of feeling, where they could achieve the impossible, like producing 2 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, cost more, and require more people. This Burbank studio was necessary even to keep producing films every 3 years.

Yes.

But the lot itself is unbelievable. It’s 51 acres. There are sports fields and a cafeteria. There are art classes. Massages are 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 looked weird. It’s offset from the Burbank street grid at an angle. We asked the person who was showing David and me around why this was, and he said that it was Walt’s priority when they were building it to offer the exact perfect conditions for lighting to animators.

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’re in the Northern Hemisphere, the sun moves across the southern sky. If you have north-facing windows, your window offers the most consistent, non-direct light. Every animator got a window, and they built the shape of the building so that there were a whole ton of north-facing sides. The whole thing almost looks like a CPU heat sink. It’s got fins so that it has all these north-facing windows.

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 slats that were adjustable, so the animator could let in the exact right amount of indirect sunlight that they wanted in that room.

Once they got this building architecturally laid out on the campus, they were 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, at Apple it’s designers, and at Microsoft it’s PMs. [Laughter] The animators, to the extent that anyone but Walt had the power, were sort of the most valuable resource.

Yes, yes. It’s an animation-driven company.

Yes. So it’s got this utopian vibe, but there were trade-offs. This was huge compared to the old Hyperion site. People were 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 rank and file.

But to achieve all this, Walt does need capital.

Yes. Oh, yes, he does.

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. The Burbank campus construction costs alone were $3 million. That’s more than the money they had left over from Snow White proceeds after they repaid the Bank of America debt. Obviously, they had all the revenue from the soundtrack, 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 entirely 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 have this notion today of, “Oh, it’s the Disney style,” that’s not really reflective of the darkness of Snow White, Fantasia’s really experimental artistic vignette style set to classical music, or Bambi, which is again another completely different take—a very naturalistic film. These are wildly different skill sets and bigger and bigger investments using completely new techniques. So you’re not really just making more Snow Whites.

You’re doing discontinuous, unknown, high-risk bets.

Walt can’t help himself.

Yes.

So in total, between the $3 million for the campus and these 3 movies that they all have in production, which collectively cost about $5 million in so-called negative costs before they get released, Disney is in this new campus and set up for this next phase of the company by early 1940, but they’re $8 million in the hole. So Bank of America had loaned them another $4.5 million.

They just keep going to Bank of America over and over again, just remortgaging 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 was released. So international box office was basically $0, and Pinocchio ended up losing a lot of money—more than $1 million in losses on Pinocchio alone.

Yeah. In a scale-economies business, if you lose out on potential eyeballs and potential revenue but your fixed costs stay the same, that’s super, super bad news. There’s no ability to retroactively scale back how ambitious you were with investing in a film. 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. Not a lot of Pinocchio merchandise was getting sold in Europe in the summer of 1940.

No.

So after Pinocchio is a flop, Walt and Roy decide they basically only have 1 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 raise that. It’s funny you said $3.875 million. A little bit of that went to the bankers—there were 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 realized, because they’ve got the $8 million in investments that they need to fund, they have $4.5 million from Bank of America, and 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 equity and future cash flows to re-bet the farm. That is the way to think about this.

That summer in 1940, Walt has a rather ominous get-together with Henry Ford of the Ford Motor Company, just as a friendly meeting of these 2 American business titans. While they’re together, Walt mentions to Henry the IPO that they just did. 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 shareholders get a director on the board—an outside voice in the company who certainly is not going to share Walt’s vision here. So by the end of 1940, despite the capital raised from the stock offering, Disney is in a cash crunch.

Before the IPO, Walt had set up a kind of 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 basically months after Walt institutes it. What they end up doing as a result is raising salaries for the few top animators in the firm, while keeping salaries the same or lowering them for everybody else in the Burbank lot. This causes huge resentment and unrest in the animation workforce.

Yeah. I bet that’s going to make no one happy. But this is the literal trade-off. This is: We spent a bunch of money on Pinocchio, we didn’t have Europe, so we lost a bunch of money on that, and we still have big ambitions. This is Walt’s implicit choice in going out and raising all this debt, raising all this equity, and betting the farm again.

Yep. This is the downside of Walt’s always-go-for-broke and shoot-the-works philosophy.

Yep.

And it probably leads to the darkest moment of Walt’s life.

That would change his relationship with the company forever.

It would change, forever and irreparably, his relationship with Disney animation. The strike.

So on May 29, 1941, the Screen Cartoonists Guild—which was a union that had unionized every other major animation studio in Hollywood and New York over the couple of years leading up to this—

There were several of them at this point in time. We’ve been very Disney-centric, but there is an industry around this.

Yep. The Screen Cartoonists Guild finally decides to target Disney employees. Now, there’s a reason why the Screen Cartoonists Guild had stayed away from Disney, despite it obviously being the leader in animation up until this point, which is that I think Walt’s utopian dream, more or less, was true—or at least true enough. 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 costs 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 for some of the people sticking around, and big layoffs because Pinocchio didn’t pay back.

Yeah. Well, layoffs are coming. They haven’t happened yet, and this is part of why the organizing and the strike happen. 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 a drawing of Pinocchio with the caption “No Strings on Me.”

The strike lasts for 3.5 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. He thinks he will explain his position and the challenging state the company is in, 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 3 hours. Some of his lines from the speech, which he had written out ahead of time and so are 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. A labor magazine would write afterward, “Walt Disney’s speech recruited more members for the Screen Cartoonists Guild than a year of campaigning.”

That’s 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 deluded here into thinking, “Well, it’s not actually my employees who are doing this. It’s these very few communist agitators who have undercover become my employees and are riling up the rest of them.” Walt has 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 real corporate, haves-and-have-nots situation here on the Burbank campus.

Yeah.

Yeah. Yeah. It’s a mess. And then it gets worse. So, in the middle of the strike, which again lasts for 3½ months, hundreds of employees are gone from their jobs, 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, 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 at 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 it—he would call it a “godsend” and say that it gives him a chance to get away from this god-awful nightmare in Burbank. 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 Cartoonists Guild union. They raise salaries for the remaining employees, and they agree to a negotiated layoff of over 500 employees, 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 afterward. Really, not at all in the period of classical animation before computer animation comes along. Equally as importantly, Walt would never recover from this as it pertained to his relationship with the company, Walt Disney Productions.

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. 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—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. There wasn’t even proof. And you’ve got a major figurehead of a big U.S. corporation testifying. There’s all this video of him saying, “I believe so-and-so is a communist.”

Yeah. And of course, this would lead to the famous Hollywood blacklist and all the terrible stuff that comes out of that. One thing, later, by association with this, people would accuse Walt of being antisemitic, since much of the communist movement in the U.S., and especially in Hollywood, was in the Jewish community. Gabler investigates this pretty thoroughly in his book and concludes that there’s no evidence that Walt ever really was antisemitic. I turned over every stone I possibly could on this company. We spent, I don’t know, the better part of the year researching this, and I found zero evidence of that.

Yeah, same. Definitely anti-communist, for sure.

But anyway, speaking of the war—

By the way, this is four giant blows to the company in a row. You’ve got Europe dropping even before the U.S. enters the war. You’ve got the European distribution falling off. There’s a thing we didn’t talk about, which was Fantasia trying to make this giant bet on 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 for a real first run. So, out of the $2.3 million budget, in the first year after 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 U.S. enters the war.

One more note on Fantasia, though. Before we talk about the impact of the U.S. 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 and lost tons and tons of money. Later, it had 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 the ’60s and the hippies that thought, “Oh, this is the coolest thing.” So, if you look today at the list of inflation-adjusted top films in history by box office gross, Fantasia is the 24th-highest-grossing film in Hollywood history, inflation-adjusted.

Unbelievable.

So, it has all—

And kind of timeless.

Totally. It’s an 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 U.S. 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, 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 all new core IP production for the studio to a halt.

Yeah. So, the first thing that happens is, within hours and then days of Pearl Harbor getting bombed, the U.S. military moves into the studio. They look at Burbank and think, “This is a great asset.” Hundreds of troops set up shop, using the sound stages to work on all the optical systems for anti-aircraft. Sound stages are awesome. There are no windows. It’s a giant room—it’s the thing you would want for stuff like this. The second reason that I suspect you’re hinting at, David, is that it’s really close to Lockheed.

Yes, really close—specifically to Lockheed’s Skunk Works department—

—which is in Burbank. The secret Lockheed Skunk Works airplane hangars and department were 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: to protect Skunk Works.

Fascinating. Yeah.

So you’ve got that happening. You’ve got a whole bunch of the animators getting drafted.

Yep.

I mean, 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.

Yep.

And so the appetite for making more things like those 3 movies drops to, like, 0. 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 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 U.S. government saying, “Can you help us with some propaganda films? Can you help us encourage people to pay their taxes, buy war bonds, and support the troops?” And so Disney 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 U.S.’s time as an active participant in World War II basically gets repurposed to propaganda and training materials for the government.

And insanely, they do use Disney IP. You see all these crazy old posters with Donald Duck holding a gun—I mean, stuff you would sort of never see with these characters today. 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?

No.

They really did not employ Mickey Mouse.

They protected Mickey Mouse from the war image, and Donald Duck sort of led the charge—

—on all the war films.

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 more of a fighter character.

Yeah. Mickey started off as this troublemaker, but then kind of became the nice protagonist.

Yeah. The goody two-shoes. And then Donald was the foil.

Yeah.

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, all the things that contribute to Disney’s core. They’re 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 is in financially. Do you know what that is?

Ooh. Uh-oh. The Disney vault.

The vaults. Yes.

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 gotta remember is, with no home video and no TV, no one had seen Snow White in 7 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-released Snow White in theaters, and it brought in $3 million in revenue to Disney on just a few hundred thousand dollars in cost. They basically just had to print a few new copies of the film and then distribute them 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. They haven't seen it before, and they discover it for the first time, 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 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 7-year thing. 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 7 years from now we're going to take it out.” It just happened that 7 years later they had a big cash crunch, they needed some easy profits, and they put Snow White back in theaters.

And 7 years, give or take a couple of years, basically becomes the core Disney IP cadence to this very day. 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. 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 1 comes out 2013.

Frozen 2 comes out 2019.

Frozen 3 is slated for release next year, 2027. 6 to 8 years, like clockwork.

It's interesting they've applied it to sequels now, too.

Yep.

All right. So now we've got 4 components to the flywheel business. Your original 3: 1, genuinely compelling new intellectual property with characters that you resonate with; 2, maximize distribution of each element in the primary delivery vehicle; 3, feed that IP into as many ancillary profitable flywheel nodes as possible. And now we've got 4. Yep.

The vault, the re-releases. Strategically re-release it every 7 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.

Yep.

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.

All right. So we're coming out of the war. There's sort of a few moving parts here at Disney right now. The revenue from the government has dried up, so 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 package them together as feature films. These are movies that you almost assuredly have never seen, called 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 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. Disney has never released it 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 Bros. had started Looney Tunes, with Daffy Duck and Porky Pig and then Elmer Fudd, and of course—

Bugs Bunny.

Ironically, it's a former Disney story department employee, Charles Thorson, who does the initial designs for Bugs Bunny.

And then in 1940, the 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—

—and The Flintstones.

Yeah, The Flintstones, of course. The other major studios are starting to creep in on the animation game. And so by this postwar period, these other studios had grown in popularity and were really starting to rival Disney. Meanwhile, Disney goes the other way and gets into live action.

Yeah. They somehow had a bunch of cash tied up in Europe that they couldn't repatriate, so they needed to spend it in London. They went and shot a live-action film, Treasure Island, in London, which did well for them. Live action is far less expensive to create. You can do it fast, and they needed to do something with this cash.

But you're not buying a lot of Treasure Island merch today. It's not durable like the animated stuff.

As we talked about earlier, live action doesn't feed the flywheel, at least for Disney, in quite the same way.

Yep. They started doing nature documentaries. They did one called Seal Island, shot in Alaska.

They also started studying the emerging TV medium to see if they should do something here, but at this point in time decided, nah, basically not. But we'll watch it and see. We're very interested.

But Walt's heart really was in animation. He wanted to get back to making animated feature films that pushed the envelope. Roy, meanwhile, hates this idea since the studio is not on good financial footing. It has lots of debt. Walt ultimately has to give an ultimatum: If we don't get back to this, then we should just sell the company. Like, what are we even doing here?

In 1950, Roy capitulates, and the company went and raised another $2 million to finance its next film, which was Cinderella.

The first bright spot in a long time—

—and their first full-length feature film in 8 years, since Bambi in 1942.

And the way they made Cinderella was quite different, right? Walt pounds the table to make this thing, and then he kind of realizes the way they are going to make it feels compromised to him because the budget just can't be what they were blowing before in those early '40s to really push the envelope.

Yeah. There's a great quote from the animator Frank Thomas, who worked on Cinderella:

“We planned Cinderella more carefully and shot it all in live action first so we could judge it. This was without costumes or a set. We’d just go to a soundstage and see whether that scene was going to work. Walt said, ‘We can’t afford to animate it and then change it. The animation has to be right the first time.’”

Yeah. That was not the mindset they took into Snow White.

And this basically flips the live-action-animation thing from a source of inspiration and study to a crutch. So they were filming every scene and then rotoscoping—effectively tracing the live-action footage out of the camera to make it animated—which can lead to much more rigid-feeling animation.

Also, once you film it, you are completely locked into that view. It's not like you can move the theoretical camera, because you haven't really built the muscle to animate in that style for the film. So you're stuck with: this is how it looked in the camera, and this is how we trace it on paper.

It just had less of the lavish detail that they put into Pinocchio and Bambi. All this ultimately leads to Walt's heart just not being in it. He helps kick-start the whole thing, but then is not engaged during production of this film. It does end up being a huge critical and commercial success, though. Yes.

I believe it makes basically the same amount of money as Snow White. I think it does $8 million in film rentals in the first year.

Yep. At a cost of $2.2 million.

Yep.

So really, this is the first big financial success for the company since before the war. It's the biggest success since Snow White. It got the company back on sound footing after a pretty gnarly time.

A gnarly decade there. But, yeah, Cinderella is a huge bright spot. It was a one-time financial boost to the studio that didn't solve all the company's problems, but it did get animation back on the right foot creatively.

Even though Walt was no longer as deeply involved as he was in the Snow White era, it did turn things around enough that at least they were making quality work again. Obviously, those films still hold up today.

Over the next few years, they then released Alice in Wonderland, which, surprise, ballooned over budget and did not pay back. That is in part because a lot of historians say it's a film that Walt felt he should do because of his reverence for the source material.

Yep.

But he never quite had a clear idea of exactly what to do with it. So it's hard to put together these sorts of disjointed vignettes into one cohesive film, but it's artistically beautiful. Put a pin in that. We'll come back to it.

But there's an interesting comment on Alice from the 1951 annual report from Roy.

“‘Alice has not performed as well at the box office as Cinderella.’ Because of these circumstances, which were generally poor attendance at theaters”—he actually blames the macro, which is interesting—“and because Alice in Wonderland is our highest-cost feature, it is not expected to produce a profit from its first release. However, it is a classic property which should be a valuable asset to the company indefinitely.”

And hey, he was right.

Yep.

All right. So we've talked about Walt being disengaged here. What is he doing?

So Walt is playing with trains.

I mean—yes, he is. That's about the best way that I can frame this: he's getting really into trains and really into miniatures.

Yes. Trains, specifically model trains, and miniatures like miniature furniture and rooms in homes.

Yeah. I mean, gosh, I said we weren't going to dive into Walt's psyche on this episode, but I kind of think about this as a soul-searching half-decade where he's just looking for what he's going to get passionate about next, because he's bored. Animation isn't doing it for him the way that it used to, and he's reaching back into his childhood for inspiration.

And the way Walt would frame this is that he was developing these hobbies to keep his mind off the problems at the studio. That's what he would always say, right? These were nice things to do after a hard day at work.

Yeah.

But they became obsessions.

Yes.

When I said reaching back into his childhood, there was a train that ran through Marceline, which is why Marceline existed. There's this deep-seated psyche around trains and small-town America.

He and some of the other senior animators developed an interest in large-scale model trains, which are 1/8 the scale of an actual railroad train—big ones you could ride around on. There's amazing old footage of Walt riding around on these 1/8-scale trains.

Yep. So Walt took this extremely seriously. He ended up traveling to the 1948 and 1949 Chicago train fairs, and he kind of dove into this community of fellow train enthusiasts.

I was thinking this was strange. I kept reading about this and thinking, “This is wild.” There were 6 million model-train enthusiasts at the time. This was actually a pretty big thing.

Yes. And it was something that was really tangible for him to do with his hands. He was building some of the train cars himself. He actually had a workspace in the machine shop in Burbank, where he was building with the machine-shop staff.

There was a guy, Roger Broggie, who sort of led the machine-shop team and would go on to build a serious model train for Walt. Roger would also become, just to foreshadow here, the first Imagineer.

Yes, yes, yes. Well, just to foreshadow even more, all of this would lead to Imagineering.

Yes. So this team in the machine shop and Walt end up building this train. And David, you were saying “man of the people” in a very not-man-of-the-people-style thing: he ends up sinking $50,000—which is a giant amount of money at the time and a huge amount of his personal liquidity in 1950—into building a train in his backyard.

There was a half-mile of track that went through a tunnel. That tunnel, which he dug under his wife's garden, was 90 feet long on its own.

Yes. When Walt gets obsessed with something, he goes to unreasonable extremes.

When he and his wife were looking at houses to figure out what property they were going to buy and build a house on, a major consideration was whether there was room for a giant train to be laid out.

It's on Carolwood Drive, I believe, and he ended up naming it the Carolwood Pacific. The steam engine is named the Lilly Belle after his wife. It's a whole thing.

Yep. And if you go to Disneyland or Walt Disney World today, most of the steam engines on the railroads are named as callbacks to this period and this inspiration in Walt's life.

There's the Lilly Belle engine at Walt Disney World. There's the Ward Kimball, who was the original animator who got him into this hobby. There's the Roger Broggie, as you were saying, and then there's also the Roy Disney.

Oh, nice. I did not know that.

So, this is a great quote in a PBS American Experience documentary by historian Nancy Koehn, where she's reflecting on Walt in this moment:

“I can't control my employees. It turns out I can't control the larger stage right now. I can't even completely control my company. So here's a world I can recreate down to the smallest detail that is mine and perfect.”

And it would become something much bigger that would also be his and also be perfect.

Yes. So out of this stew comes Disneyland.

Yes, which is so funny because Walt would insist in interviews until his dying day that:

“The idea for Disneyland came about when my daughters were very young. And as I'd sit there while they rode the merry-go-round, I felt that there should be something built where parents and children could have fun together. So that's how Disneyland started. It all started from a daddy with two daughters wondering where he could take them where he could have a little fun with them, too.”

It's also that—

I'm sure that's part of it.

Yeah.

Some of both, but really the trains.

Okay, so how did Disneyland happen? Well, the initial thing was actually pretty small.

Yep, the initial idea.

Yes, there was a name floated—Mickey Mouse Park—that quickly changed to Disneyland, since it was much more about his new passions, trains, Americana, and miniatures than it was about Mickey Mouse.

He started working with artists to sketch out what it would be. The constraint that he had was, “We've got this 16-acre plot of land that's adjacent to the Burbank studio lot, between that and the river. That's what we're working with here.”

Yeah. And that's the natural place you would put this.

Of course. So, in March of 1952, Walt announced Disneyland, to be constructed on that little strip of land—

For a cost of $1.5 million.

A Snow White.

A Snow White. Yeah, we should speak in units of Snow White. It's actually cheaper than a Snow White, given the inflation.

Right. Much cheaper than a Snow White.

It's now been 15 years. So he decides, “I'd actually like to spend some money on a larger study for this, because I've got a couple of artist renderings here that include a cool little river and a train that runs on this. We're going to figure out attractions that go in this thing, but we really have to jam a lot in here. So I'd like more money.”

Roy and the board are none too enthused about this.

Yeah. Think about everything that we have said over the last, I don't know, hour about the state of the company. And Walt is saying, “Hey, I found a thing I'm interested in. Can I have some money to explore building this kind of inarticulable idea?” Yeah, right next to the studio lot.

It kind of goes over like a lead balloon.

Yes. So, the Walt Disney Company, at this time called Walt Disney Productions, does not free up the purse strings for this. So, what does Walt do? He talks to Roy about it, and they figure out a path forward. He's going to start his own company that would get formalized later in the year, in 1952, that ends up being called WED Enterprises. WED: Walter Elias Disney. His personal company that he can do—

Weird personal stuff with. [laughter]

Yes. So, over the course of 1952, Walt starts poaching people from Disney to work on this thing.

At first, it's just like a half-dozen people, and they're set up in a building on the back lot at Burbank. These would become the first Imagineers.

Yes.

And the interesting thing is, the people he's poaching—these are artists and animators who are being hired to build a theme park and big physical trains. This gives you a sense of Walt's leadership style. He would take a talented, creative person, and he'd be perfectly willing to assign them to things that they've never done before and say, “Yeah, he'll figure it out.”

We also just got to pause here for a minute and really underline what's happening here. This is Walt Disney.

Yes. By this point in history, he is the Walt Disney. He is the Walt Disney who has come up with a crazy new idea based on his obsessive hobby with model trains that the board of Disney Studios has basically rejected. And so he has gone full crackpot, like Colonel Kurtz style, and started his own separate company on the Disney campus, where he is poaching and recruiting some of the best Disney animators and artists to come over and stop doing animation and start working with him building a theme park. [laughter] That is what is happening here. [laughter]

I was about to make the comment, “Oh, this sounds a lot like Elon Musk.” But none of Elon's companies have a board that would vote against him. And so that's really the only difference here: kind of the Elon before Elon.

Yes.

So there end up being 2 problems with this plan. One is Walt and the architecture company that he hired kind of come to the conclusion that this plot of land—it's just too small. Even with all the clever ideas to be space-efficient, there's just too much that he wants to do with this Disneyland concept. It keeps growing in scope to accomplish all of it in that little strip of land. The second problem is, after provisional approval, the Burbank City Council starts to learn more, and they decline the proposal since they do not want a “carnival-like atmosphere” right there on the side of the river.

You could describe Disneyland as lots of things, but “carnival-like atmosphere”? [laughter] Clearly, they did not get the vision—

Right? The magic is that it isn't. It very easily could have been.

So, they need to find a bigger plot of land, and they need to work with a team that is really good at odd, research-based tasks. And you're never going to guess, listeners, where he goes for this. It is a crazy nugget of history. He goes to SRI, the Stanford Research Institute. If you've heard SRI before, it is one letter off from Siri, which was a spinout of SRI. Yes, that SRI—

That it was. I was just going to say that. You just triggered probably 2 million phones, [laughter] some of which are running the betas, so they'll have the new Siri AI.

Yeah. Yeah. SRI is the research firm that Walt hires to go identify what ultimately becomes Anaheim—the perfect spot. They absolutely knock it out of the park. But when you describe it, the site sounds completely nuts: 10 times bigger than the original site, a full 160 acres.

Yep.

25 miles away from Los Angeles. It is currently just some orange groves. Anaheim itself was a small farming town. There wasn't even a highway connecting it to Los Angeles.

There was a planned highway.

Yes. So, there's a quote from The Animated Man by Michael Barrier. The SRI analysis from August 1953 took into account a large number of factors, including likely population growth, freeway construction, and the effect of terrain on television transmission. Since the idea was that TV would play an important part in the promotion and development of Disneyland, the study pointed toward a location southeast of Los Angeles in Anaheim, in Orange County, just off the Santa Ana Freeway. That freeway was then under construction, but most of it between downtown Los Angeles and Orange County was scheduled for completion. The foresight of all the factors that they considered there—

Just incredible.

So, there is one problem, though, which is great. We found the perfect site. It's 160 acres, and we're going to do this much bigger and better than we were before. We're going to need some money.

We're going to need a lot of money.

So, Walt goes back to the company.

Yes. And remember, they had no interest in pursuing this, which is why he had to set up WED in the first place. It's becoming clear that this is happening. I mean, Walt Disney is a force of nature, and Roy becomes supportive—or at least as supportive as—

Strong-armed into supporting this—

Right? While still trying to protect the company.

And so, in April 1953, Walt Disney Productions' board of directors—this is a public company—agreed to a personal services contract with Walt and a contract with WED to design and build the Disneyland Park attractions. This is done as a cost-plus contract, so WED and Walt personally don't have to take any risk, at least in this part of it. It is just like, “We will pay you whatever it is, plus your profit margin, to go build stuff,” and it's kind of a blank check. There are some pretty wild other terms in this personal services contract, according to a 1990 article, decades later, in the L.A. Times. Walt is allowed to pursue outside projects, which effectively gives him all the benefits of being a free agent while still drawing his $153,000 salary from Walt Disney Productions. Okay, another point: Walt argues that he should be compensated for the use of his name. He ends up getting it, again, worked into this deal, and the contract awards him 10% of all merchandise sold.

Wow, I actually didn't find this. This is wild. So, here's the next bullet point: He will now get the right to invest alongside Walt Disney Productions in each live-action film project, which he would later do on Mary Poppins and other films. So, why did he negotiate for this? I mean, my feeling about Walt after doing all this research is that he didn't actually really care that much personally about money. Was he trying to accumulate cash so that he could fund Disneyland?

Exactly. Exactly. There's also some personal stuff tied up in here, his relationship with the company, where he's like, “It's not really mine anymore, so I kind of want more out of it.” That's sort of the less generous take on it. But he and Roy definitely came to this understanding of, well, if Walt is going to have to fund a lot of this, then we need to figure out a way for Walt to get more cash so that he can do—

I see. This is happening no matter what. So, we can do it the easy way or we can do it the hard way. [laughter]

It is interesting, his relationship with money. He was interested in money, but for the sake of deploying it. I mean, hoarding money was never his thing. He did live extravagantly compared to most people. He had that train and a vacation house in Palm Springs and all that, but it's not what the other big Hollywood moguls were doing.

Lillian Disney has a comment in 1956. She said, “I've always been worried. I have never felt secure. Never.”

He's always telling us how wealthy we are, how much we've got, and we haven't got anything.

And she's kind of right—

Because he's always putting it back.

Yes. And it's all tied up in the enterprise value of Disney, which he keeps re-mortgaging and re-betting the farm.

Yes. So, there's that angle. He also always believed in the park, just like he always believed that animation—feature animation—had a long runway ahead of it. And I was trying to think of the best way to contextualize this. So, to validate him there, this is a crazy stat and just how right he was about all of this. Walt built this company over his entire lifetime, from age 21 until he died in 1966. And if you look at the company's market cap today compared to where it was in 1966, 99.95% of the value was created after Walt Disney died.

Yep.

There was just so much more running room with his concept than he had time on this earth to execute.

Yep.

Do you know how I know the 1966 market cap? Is this ringing any bells for you, David?

No. So, during the Buffett partnerships, Warren Buffett saw that Disney was an underpriced asset in 1966, right before Walt died. So, Buffett bought a bunch of the stock in '66, since it had a market cap under $90 million at the time.

Under $90 million.

The company was doing $21 million in pre-tax earnings. And at this point, because this is after Disneyland, after a bunch of stuff, it had more cash than debt.

Wow. This is like Ben Graham bargain investing—

And even more so like Charlie Munger investing, because it was a great business at a great price.

Yeah. Wow.

A $90 million company doing $21 million in pre-tax earnings that has Disney's flywheel.

This is the buying opportunity of a lifetime when Buffett bought it.

That’s why he’s the GOAT. [laughter]

He did, of course, sell it.

Well, that was the right move after Walt’s death, as we will see in a few minutes.

Anyway, that’s sort of how I would characterize Walt’s relationship with wealth and what his goal was in this personal services contract. This whole thing ultimately becomes so contentious that 3 board directors actually resign from the public company. There’s also a shareholder lawsuit that gets brought and, for strange reasons, it doesn’t end up going through, but the remaining board members end up approving it.

Essentially, it was Roy’s way of saying, “Okay, the company doesn’t want to be too tied up in this project if it fails, but we will provide you a way to get more cash flows from the company so you can figure out how to do more of the funding of this thing yourself.”

Wow. Fascinating. So, just to reflect to this point in history, this is something I really never realized: the origin of Disneyland is, at least so far in the story, not about the company intentionally looking for more places to put its intellectual property.

No, it’s very intentionally not the flywheel in the beginning.

Right. There are essentially 0 synergies, as conceptualized so far, for Disneyland.

Yep. But all of that’s about to change, because Disneyland, even after the SRI report, the move to Orange County, and the acquisition of 160 acres, is getting so out of hand in its budget that it needs to actually come back to the company.

Sort of.

Sort of. [laughter] So, here’s the corporate structure. Originally, they thought they would need about $5 million for the Anaheim Disneyland. Spoiler: they would go way, way over that.

But because they thought it was going to be this expensive, Walt went back to the company again and said, “Look, I know we did this personal services contract thing, but I think it’s better if this is actually a Disney thing, and let’s figure out a way to really tie it all together here.”

So, what can we do?

At a $5 million price tag, the company cannot afford to fund this. If you look at 1952, when planning began, Walt Disney Productions made less than half a million dollars in net income. So 10 times that for the park’s budget is not going to fly. There’s no cash for it.

But at this point, the company is like, “All right, the proverbial train is moving forward here.” There is actually a good plan to integrate a whole bunch of Disney stuff into the park. This can be a Walt Disney Productions thing in one way or another. We’re good for $500,000, but we need to go find the bulk of the $5 million somewhere else.

Yeah.

So, in order to go get the bulk of the financing for the park, Walt comes back fully into the fold at the Disney studio and does something that no other movie executive is willing to do at this point in time. He embraces television. He goes to the TV networks for money.

Yeah. And the fascinating thing is, it’s in part because they don’t really want a pure financial partner for the park. They don’t want to just go raise a bunch of debt that they’ll then have to pay back. This has hamstrung them so many times.

They’re trying to think creatively: How can we do a 1 + 1 = 5 thing here, where we have this Disneyland, Inc. joint venture and someone else is building this thing and funding it?

So, at the time, the prevailing sentiment in Hollywood was that television was a threat—that if Hollywood movie studios started putting their content on TV, it would steal audiences away from the theaters. It’s just like in our NFL episode, where baseball was deathly afraid of television. I think the quote was, “Radio whets the appetite for attending baseball games live, and TV satiates it.”

Yes. And Walt realizes, just like the NFL did, that TV actually was a huge new opportunity. Walt says, “When television first hit, I went back to New York and I spent a week in New York just to study television. I had the feeling then that it was important and that we ought to get in it.”

The feeling of the motion picture business was that television was something we should fight or ignore, and maybe it would go away or some darn thing. I said, “Television is going to be my way of going direct to the public, bypassing the middleman.” I said, “Roy, this television thing can be the greatest thing, because we will be going direct to the public.”

And he also thinks it might be his ticket to financing the park. [laughter]

So, ABC had been wanting to do something with Walt—lobbying over and over and over again—because Walt did this one special a few years before. I think it was on NBC, not ABC. And it was great. There is something very compelling about Walt Disney and Disney stuff in a television special.

Yes. Yes. Uncle Walt Disney beaming into living rooms around America. [laughter]

But ABC is the third-place network. They don’t have as many affiliates. They don’t have as much reach. If you’re going to get a partner for something where you really want to take advantage of the full reach of a television network, it’s not ABC.

You really want CBS or NBC.

Yes. And so Walt actually goes to CBS and NBC with this pitch. I think it might be Roy actually flying to New York and doing this, but they’re not interested, at least not in the whole package that Walt is proposing.

Yes. They both say, “Hey, Walt, we would gladly do a regular television series with you, but I don’t know about this park thing.”

You’re asking for the better part of $5 million so that we can build a theme park with you, and that’s a bundled deal with doing a TV show. This is really weird.

Yep. ABC, though, Ben, as you were saying, they’re the newest of the networks and they’re struggling to catch on. They need something like Disney and Disneyland to break out.

So they say, “Yes.” Walt’s line on this was that ABC needed the show so badly that they bought the amusement park with it. [laughter]

Do you know the structural thing with the television industry that was going on in 1952?

No. So, back in 1948—and I promise this is related—back in 1948, the FCC paused the ability to get a new broadcast license while the FCC was sorting out some technical and policy problems. It was supposed to last 6 to 12 months, but it ended up lasting 4 years, until 1952: a freeze on the ability to get a new broadcast license.

So, the existing big 4 networks, which are about to become 3—NBC, CBS, and ABC—became pretty entrenched. Meanwhile, the number of households with TVs was absolutely exploding. It went from 9% of households in 1950 to 65% just 5 years later, in 1955.

Yeah. So, all these networks now have a basically government-protected—accidentally—oligopoly in this massive new market.

Yes. So, if ABC could put on a hit show, there weren’t that many choices of stuff to watch at any given time because of this supply-demand mismatch on content. Suddenly, a giant swath of Americans could pay attention instantly. So, they were really hungry for super-compelling content.

Walt goes to ABC kind of knowing this, and knowing they’re in third place, and says, “Okay, I will make this show for you, but, A, you’re doing the park with me, and, B, I have complete say on what happens during the program. I can change my mind anytime, and there’s no part of the contract about what I’m making for you.”

And ABC says, “Yes, absolutely. That sounds fine, Mr. Disney.”

Yes. So, ABC ends up investing $500,000 in equity in Disneyland, Inc., the same terms and amount as Walt Disney Productions. In addition, though, they also guarantee $4.5 million in bank loans. So, boom, there’s the rest of the financing that they think they need to get Disneyland off the ground, in debt guaranteed by ABC.

They would televise the TV show, but Walt Disney Productions would have to produce it. They’re actually buying a pretty expensive TV show, too. So, in addition to this $500,000 and the $4.5 million, ABC is also going to pay $5 million per year to Walt Disney Productions to make the show that they’re going to put on the air.

And ABC had the right to air it for 7 years, which made it the largest TV programming contract in history.

Yes, this is an absolutely over-the-top deal.

There is one other deal point: ABC negotiated to have the right to all the profits from Disneyland’s food and beverage for the first decade. [laughter and gasps]

They’re like, “Hey, we need something else out of this.”

Yes.

Yes. But a part of this contract that is completely set in stone is the opening date: July 17, 1955.

Interesting. I didn’t realize that the opening date was set in this contract with ABC. Either way, they do get the television show, and it works out to be a great deal for everybody involved because, Ben, to your point about supply and demand, it becomes a huge hit almost instantaneously when it launches in the fall of 1954.

The content is basically a behind-the-scenes look at all the different lands and the content for each: Tomorrowland, Frontierland, Adventureland, et cetera.

Yep. So, pretty quickly, Disneyland—because, of course, they name the TV show the same as the park—

Sure. I mean, if Walt gets to control all the programming, why not just make it the most perfectly aligned advertisement every week for a whole year to get ready?

Yes. So, it quickly becomes the 2nd most popular show on television, after I Love Lucy, and it’s the first ABC program to crack the top 25 shows ever. It was all NBC and CBS until Disneyland.

Unbelievable. Also, ABC lets Disney run trailers inside each episode for their current theatrical release. So, it both promotes Disneyland and the current movie slate.

It becomes a whole other node to the flywheel.

Yes. And for the first time, they get repeat exposure. Disney only gets a touch point once every few years with a consumer with a movie. Maybe you watch their shorts, but with TV, it's a way to build a repeated relationship.

They had this in a certain way with the comic strip before, but this is like that on steroids.

Yes.

So, in that same fall and winter of 1954 into 1955, the show has its first big viral moment, even before the park opens. In December 1954, Disney begins a 3-part live-action miniseries on the show about the story of Davy Crockett.

Oh, that's right.

And America goes nuts for Davy Crockett. For listeners who don't know, Davy Crockett is a historical American figure who fought and died in the Battle of the Alamo in Texas, over a century before this.

Disney highly fictionalizes the character.

Yes, totally. But this miniseries becomes a massive flywheel moment for Disney, totally unintentionally. Davy Crockett coonskin caps become the must-have kids' product of 1955. They sell 10 million caps in 1955.

Unreal.

Even better, the theme song, “The Ballad of Davy Crockett”—you know, “King of the Wild Frontier”—reaches number 1 on the Billboard charts in America and sells 7 million records. In total, Disney would go on to do around $300 million in gross sales of Davy Crockett merchandise, which, at this point, they had fully in-housed commercially. Kay Kamen had tragically passed away in an airplane crash in 1949, after which they in-housed all of this within Disney.

If all that happened with the same splits we mentioned before, at 5% royalties on that $300 million, assuming, again, 100% retail markup from wholesale, that's $7.5 million to Disney, which, I think, is more in actual revenue to Disney than they had earned from any film at that point in history.

If you add up all the pluses and all the minuses, by 1957—

The money they had ever made in profit dollars from their first-release films was a hair over $7 million. And they made, by your estimates, $7.5 million.

They made more from coonskin caps and record sales than—[laughter]—incredible. And what timing? Right before Disneyland opens.

Insane.

Amazing.

Disney absolutely crushed the timing on switching its horse to TV, or sort of embracing TV, and embracing it in this huge way. And not just with programming, but directing all this attention at Disneyland. We gave that stat earlier, all the way in the '20s, that the average American went to theaters over 40 times. By 1947, that number was down to about 32 times. And by 1956, the year after Disneyland opened, it was down to 14 times per year. Thanks to our friend Arvin at Worldly Partners for gathering all this data.

So, movie executives really had good cause to be concerned about TV.

Absolutely. Attention was shifting to television, and right as it was shifting in droves, boom, that is right where Disney showed up in this multiplicative way.

Yeah, man. Incredible timing.

And Walt, as ever, had a quote on this. This is from the special that he did back in 1950 as an experiment. He said:

“I regard television as one of our most important channels for the development of a new motion picture audience. Millions of television viewers never go to a picture theater, and countless others infrequently. In these highly competitive days, we must use the television screen along with every other promotional medium to increase our potential audience.”

Man, was he right.

And it's just so incredible that, because he started playing with trains, Disney became a major force in television and, of course, opened the park.

Yes. Okay, okay. So, how does this all come together? We've got this joint venture called Disneyland, Inc. It's got $500,000 from Walt Disney Productions. It's got $500,000 from ABC, $200,000 from Western Publishing, which distributed their books, and then Walt himself put in $250,000.

That's right. I did see that.

Yes.

And then they've got the $4.5 million of debt guaranteed by ABC.

Exactly. So, there's a total of $6-ish million that they have to spend to build the thing. Plus, there was actually another $2 million of 10-year bonds that ABC was committed to if they really, really needed an extra $2 million to flex from a budget of $6 million to a budget of $8 million.

So, Ben, I've read a bunch of places this ended up costing $17 million.

Yes, that is correct. So, the cap table is: Walt Disney Productions and ABC each own 34%, Western Publishing owns 14%, and Walt himself personally owns 17%. There's a contract between Disneyland, Inc. and WED Enterprises, which Walt owns 100% of, to actually build it all.

That would lay out a giant part of Disney's business model going forward: the opening of Disneyland.

All right. So, the development of the park: the team at WED had been getting inspiration, concepting, and iterating while all the ABC stuff was happening, while all the hype was building around America, and, of course, while the financial negotiations were happening. In September 1953, as legend goes, Roy is about to walk into meetings with television executives, and Walt famously locks himself in a room with Herb Ryman for an entire weekend and says, “Herb, can you draw the first full drawing of Disneyland?”

And Herb looks at him and he's like, “This what?” It was the first time he was hearing of this, and Walt says, “The theme park. You're going to come work on that with me.” Herb says, “I don't even work here. I used to work at Disney, but I don't work here now.” And Walt was like, “Yeah, but you're the guy to do this.” Herb looks at him and says, “Can you tell me a little bit more about this theme park?” Walt, metaphorically, kind of locks the door.

Yeah. He's like, “Great. I will stay here all weekend with you and tell you about the theme park.”

And out of that weekend emerges this beautiful drawing that they can use as a sales tool for the first meeting with ABC. You've got a castle, you've got mountains, you've got the railroad, you've got the river. The bones are all there.

The core vision of what Disneyland is.

Yes. Other WED employees, meanwhile, start traveling all over the U.S. looking at the best existing theme parks. Walt and others travel overseas to places like Tivoli Gardens in Copenhagen to get a completely different take on how they could do a park with green space—much more pleasant, less carnival-like, safer, and a less seedy experience than you were getting in theme parks in the U.S. That is the goal.

So, this year leading up to the park, what we're about to describe is completely insane. Remember, I said that the date was fixed in the television deal in part because the TV show was going to culminate in a live broadcast of the actual park opening, and there was all sorts of brand-new technology and logistics and operations that ABC was going to bring to bear for that. So, they were planning around that.

And there are some sources that say that it was 366 days to build the park. If you actually look at physical construction, it was less than that: 11 months. Wow. So, they end up building Disneyland in one-third the time that it took to make Snow White. Incredible. This whole thing sounds like a fever dream when you describe it.

A Main Street reflecting how Walt pictured the ideal small town from his childhood. Multiple rivers with different types of boats. There's going to be multiple rivers. Robotic animals coming out of the water on the Jungle Cruise. A castle. American Indians performing live shows of dances. Cars that kids—like 3-year-old kids—can drive around and crash into stuff.

Still my favorite part of Disneyland.

Yes. Autopia.

An intense amount of greenery and trees all had to be brought in. I mean, they're doing pine trees and they're doing palm trees. Absolutely exquisite landscaping to reinforce how pleasant and safe a place it was. A passenger train was built from scratch on real railroad ties that had to be laid down.

This thing is like Walt's fever-dream reflection of America, all in the most idealized, safe, clean, cheery way possible. They've got the past, they've got the future with Tomorrowland, Frontierland, and Adventureland, but no sign of the present. So you can be completely immersed and disconnected from your day-to-day troubles.

You know what? I actually never realized that Disneyland is 100% about the past and the future and 0% about the present.

And about the fantasy. You can go to Fantasyland. That's your other option if you don't want the past or the future.

So, the first part of construction is the 20-foot-high berm insulating all of Disneyland from the outside world, with the Disneyland Railroad sitting right at the top of it. To this day, I think the most impressive thing about Disneyland is the sightlines.

Despite several very, very different environments on a relatively small plot of land—from Star Wars today to Frontierland, Adventureland, Tomorrowland, and Main Street—you really only ever see what the Imagineers want you to. And it creates that unique experience where Main Street can feel nostalgic and wholly different from the jungle over at Adventureland, and very, very different from the strip-mall mania happening just a few acres away on any side of you.

Yep. I'll just keep going on the insanity of building this thing. There weren't yet any on-site buildings to fabricate the rides, so they did construction in Burbank.

That's right. And they trucked it all down.

That's a 50-minute drive if you don't hit traffic, and the highway was still being built. So it's all on surface streets. It's crazy. Think of the scale of the stuff that they were building.

Yep.

Halfway through construction, they discover that Rivers of America almost doesn't work at all. When they filled it with water, the water just drained into the dirt underneath. And David, as you mentioned, costs ballooned from the original $5 million to a total of $17 million. But that's actually pretty cheap.

Totally.

I did the inflation math. That's $210 million today. You absolutely could not build anything remotely close to Disneyland today for $200 million or in a single year. It

is astounding how it all got built. Also, very, very convenient for Disney that they sold a lot of coonskin caps as the budget was ballooning. [laughter]

Yes. And found sponsors to sponsor lands and rides, and drew on every ounce of debt they could.

Yes. This is the other absolute galaxy-brain Walt addition to the flywheel that he brings in with the parks: corporate sponsorships.

Yes.

There were 65 corporate sponsors in Disneyland within the first few years of it opening. At opening, there was Richfield Auto for Autotopia. Bank of America, of course, had to be there as a sponsor of Fantasyland. Coca-Cola as well.

You won't believe this. In addition to Coca-Cola, Pepsi had a sponsorship in Frontierland. Coke actually didn't become the exclusive supplier sponsor until 1990.

Yeah, that's right.

American Motors, Santa Fe Railway, TWA for the Rocket to the Moon, Monsanto was actually a sponsor.

That's right. Carnation, Kodak—the list goes on. But I do have one favorite, David.

The National Rifle Association. [laughter]

Wow. Frontierland. [gasps]

Yes. Inside the Davy Crockett Museum, there was a shooting gallery. There you go.

And it's unclear from the historical records if it is technically a sponsorship, but the rifles were provided by the NRA. Like, real rifles.

There you go. Flywheel in action.

Yes. [laughter] So, I was trying to do some comparison on this $17 million, inflation-adjusted to $210 million. The Star Wars: Rise of the Resistance ride that they built in 2019, which is excellent if you've never been on it, was rumored to cost anywhere from $200 million to $450 million for just 1 ride.

Right. And they built the whole park for less than that.

Yes. [laughter] Man, the things you could do back then.

Yes. Right. I mean, permitting was pretty light back then. So we get to opening day. How's it go? Well, less than half of the planned rides were open. And just to give you a sense of how down to the wire it came, Walt personally put on a mask and was helping to paint the 20,000 Leagues Under the Sea exhibit the day before it opened.

Opening day comes, and it's nearly 100° in the middle of July in Southern California. That created issues with the newly poured asphalt, and there are legends of women's high heels sinking into the asphalt because of that. [laughter] There are water fountains, but they don't yet have the plumbing finished to turn them on. So if you want something to drink in this 100° heat, you can go buy a Pepsi.

Exactly.

The restaurants ran out of food. Rides were breaking down. Mr. Toad's Wild Ride went down because it was too much for the power grid. And the Mark Twain riverboat began to sink since the operator let 500 people onto it, which was double the 250 he was supposed to. But despite all of this, it is a giant, giant hit.

That first day, which was technically a preview day for press and invited guests, 15,000 people were invited, but it is believed that 30,000 attended.

And then that was in person.

Yes.

Then there's the TV show. So ABC rolls in with 22 live TV cameras and a giant crew to operate it all with 1955 technology. The viewership numbers are astonishing. It was the world's largest live telecast ever. 83 million people tuned in to watch from home, which means that nearly half of America watched this broadcast.

Watched this 90-minute commercial. [laughter]

Right? Yes.

And it's crazy, right? It's live coverage of this wackadoo amusement-park opening. On the one hand, why would you want to watch that? On the other hand, you've been conditioned over the last year by one of the most popular television programs in America that this is going to be a giant deal, so you better be watching when it happens.

Do you know who the 3 anchors were that ABC hired to do the opening?

One was Ronald Reagan, right?

Ronald Reagan is the big one. Art Linkletter, Bob Cummings, and future president of the United States of America, Ronald Reagan.

It's crazy that the TV strategy just absolutely knocked it out of the park. What does half of America tune into anymore? I mean, ever.

Yeah. I mean, even the Super Bowl today, which is the biggest television event in America, only gets about 40% of U.S. households tuning in. And this was just to watch guys talk about what's going on behind them in an amusement park.

No, I think it was that America had been primed via the TV show for the whole past year that this was going to be the event of 1955.

Yeah. So cool. By the end of the first week, there were 160,000 visitors. 2 months after opening, the millionth visitor walked in. And in the first year, there had been 3.6 million visitors.

You have, in the second year of the park's operation, over 4 million visitors, which makes it more popular than both the Grand Canyon and Yellowstone National Park. It's like the most popular park in America is now Disneyland.

And today, the park has had over 900 million visitors since opening day.

My favorite little bit of trivia about Disneyland was learning about the original business model. So you used to have to pay to get on the rides.

You would pay—I think it was a dollar—for admission to the park.

And then you could buy booklets of tickets that would get you admission to the various rides and attractions. Different rides and attractions had different ticket grades and were priced differently. It was this whole complicated business model that they obviously have drastically simplified since, and raised prices astronomically.

Yes, absolutely. And I mean, the biggest success of the whole thing is it just couldn't be farther from a carnival or fairground. And that turned out to be a great, great business. Harrison Price, who led the research at SRI for Disneyland, said Disney's rethinking of the American amusement park had striking and immediate business consequences. Because his park was such a pleasant place, people stayed there longer, and because they stayed longer, they spent more time. Basically, Price said he tripled per-capita expenditures because he tripled time.

And then, of course, fast-forward to today at Disneyland or Disney World.

You go for 14 hours.

Yeah. Right. Per day. I mean, you're not going there for just a day. You're going there for multiple days, right?

You're making a whole trip out of it.

And if you're going to Disney World, then you're there a whole week.

Yeah.

So I promise we won't do too much part-2 foreshadowing on this episode, but this is just 1 point I've got to drive home. Disney parks and cruises today does $36 billion in revenue and $10 billion in profit per year. That is twice the amount of profit that their entertainment division produces.

Yeah. Also just wild to think about physical amusement parks having essentially a 30% net-income margin. [laughter]

What other physical park operator is going to operate with those kinds of margins?

And the fact that it's a bigger business for Disney than their movies.

Yes. Like twice as big of a business.

There are 160 acres in California. There’s a big swath of land in Florida. There are 5 or 6 of them around the world, plus some cruise ships. And that spins off more profit—twice as much profit—as all of the other Disney things you can experience anywhere, anytime.

Well, we’re going to get into this in a minute here. Really, the impressive thing is that Disney films are now great again, and the parks still do more revenue. We’re about to hit a period where the parks do a lot more net income than the films because the films suck.

Now, reflecting on all this, Disneyland actually was not a bet-the-company move for Walt Disney Productions financially. It was cleverly structured by Roy so that it wouldn’t be.

But reputationally, it absolutely was. People were willing to take these giant leaps on Walt because of who he was and what he had accomplished, the same way they do with Elon, Steve Jobs, or Warren Buffett—people getting deals that no one else could get. Roy was great at making sure it wouldn’t financially bankrupt the company, but Walt was betting that reputation extremely publicly to half the households in the US. So not only was he betting the company, he was betting his own personal fortune, too.

Remember that $250,000 that he put in? He sold his vacation house in Palm Springs. He borrowed $100,000 against his life insurance, and he took on a personal loan to fund that obligation.

Yep. All true, and all necessary because of how they had always operated the company. He wasn’t taking lots of cash out of the company—

Until the renegotiation of his employment contract.

Yep.

There’s a fascinating coda to all this crazy corporate stuff about how the park was formed. You might be wondering, well, wait—doesn’t the Walt Disney Company own the park outright now? When you visit Disneyland, don’t you assume, “Hey, wait, this is just part of Disney”? What about that weird joint venture thing with ABC and Walt personally?

So, here’s how it all goes down. The headline is that the Walt Disney Company would not actually own the park and everything within its borders for a full 27 years after opening, in 1982. Here’s the full story of who sold what and when.

Pretty quickly, Walt Disney Productions exercised its right to buy out Western Publishing and Walt personally. So, by 1958, 3 years after opening, it owned 66%. But the buyout right to ABC’s stake wasn’t pre-negotiated.

So, in 1960, when the company actually had enough cash to do it, Roy negotiated, “Hey, we’ll pay you $7.5 million to buy out your stake.” By 1960, the publicly traded company, Walt Disney Productions, did own all of Disneyland, Inc. But that leaves WED Enterprises, which had been hired as a contractor to build all the stuff.

Yes. And WED Enterprises is Imagineering today—Disney Imagineering.

Yes. But WED Enterprises, the entity at this point in time, also owned rights to some elements in the park.

Right? And it wasn’t consolidated into Disney, the company, yet. It was still this separate thing owned by Walt.

Right. So WED, which Walt was the 100% shareholder of, actually owned the railroad outright. It had been negotiated—

Of course, he did. [laughter]

—as a part of the personal services contract, because it was like, “Hey, I was already doing this side project, and now I’m just putting it on Disneyland.” [laughter]

It all comes back to trains.

So, he got ticket revenue from it as an annuity, basically.

Right, because all the rides cost money. So, the railroad at Disneyland—

Yes.

—was Walt’s.

Same thing with the monorail. These were not owned by Disneyland, Inc.; they were owned by WED.

Amazing. We also mentioned that, since WED was Walt’s personal company, it owned Walt’s name and likeness, which led to that 10% royalty on merchandise.

In 1963, 8 years after the park opened, Roy was getting very nervous that the public shareholders would sue over this admittedly very tenuous structure. So, they reached a deal. WED would be sliced into 2 pieces: Imagineering, the architectural engineering department, and everything else. Disney Productions would buy the half of WED that was Imagineering, so they finally brought Imagineering in-house in 1965.

Right. Right.

The rest of the holdings would be renamed Retlaw, which is Walter backwards. Inside of Retlaw, Walt would get to keep the trains, the monorail, and his 10% royalty. This was in 1965, and it would actually last all the way until 1982—nearly 3 decades after the opening—when the company said, “Enough is enough.” It went to Walt’s family, because this was after he had passed away, and bought out the name rights, the monorail, and the railroad in exchange for $43 million of Disney stock.

Insanely, WED Enterprises, which would later be Retlaw, got a total of $75 million in checks from Walt Disney Productions for the Disneyland Railroad and the monorail between 1953 and 1981, and another $46 million for name royalties.

Wow. So, I guess the question as a Disney shareholder would have been: was it worth it?

Right?

And the obvious answer is yes. There were all these conflicts of interest everywhere, and this would never fly today with modern shareholder, SEC, and securities laws. But in practice, if you were a Disneyland shareholder then and held through all of this, it worked out great for you.

Well, speaking of how great it would have worked out for you, after the launch of the TV show and the park, the company is just firing on all cylinders again. And Disneyland—the combination of the television show and the park—has really added a 5th element to the flywheel business model.

That’s right. You’ve got 1: compelling, great IP. 2: maximize distribution in the core vehicle. 3: feed the IP into as many ancillary vehicles as possible. 4: you’ve got the rereleases in the vault. And now 5: parks and television.

Television amplifies interest in all of the characters. You’ve got parks to do almost like the extreme bottom of funnel—the way to experience the most Disney thing you possibly could experience every once in a while, but a huge monetization event.

And of course, you do that. I just got back from Disneyland. Guess what? We’re watching a lot of Toy Story this week at my house. It’s a refresher on your fandom.

Thinking about it more now, television was adding another node to the flywheel for sure.

The parks are almost this hybrid flywheel plus IP, because all the core Disney IP, of course, goes into the parks. You’ve got the Peter Pan ride, you’ve got the Star Wars rides today, but the parks are also not just a destination—

Right? They’re a source of IP development, not just a sink of IP development.

And this would literally become true with Pirates of the Caribbean much later.

I mean, that’s got to have grossed billions after all these sequels.

You actually have new IP generation coming out of Imagineering and the parks.

Right? A lot of stuff hasn’t done as well. Haunted Mansion has never really worked as well as Jungle Cruise. But that is a great point: the parks serve as a way to feed the rest of the flywheel, not just be a sink of it.

So, this year, 1955, with the park and with TV revenue from Davy Crockett and The Mickey Mouse Club, this is basically the inflection point for the company. Revenue doubled from 1954 to 1955, and it would just keep on climbing for decades from this point forward. Disney effectively stops being a movie studio and becomes this new form of diversified, stable entertainment company.

Yes. In November 1957, Disney finally lists its stock on the New York Stock Exchange. Stock had obviously been held by the public ever since the 1940 stock offering, but it wasn’t listed and traded on the New York Stock Exchange until 1957.

Interestingly, post-IPO, Walt and Roy still effectively control the company. 47% of the voting power of the company is held by the Disney Voting Trust.

And so, you just don’t need that many other shareholders for your votes to carry the day.

So, even as a public company, it was still their sort of family company.

Yeah.

For a little bit. That would sort of wane over the decades from here.

Yep. Once the company is listed publicly and people start to realize the incredible power of the business behind Disney, in early 1958, The Wall Street Journal runs a front-page story about Disney’s unique business model.

This was one of the most fun things to discover in our research. The article’s title is “Disney’s Land, Walt’s Profit Formula: Dream, Diversify, and Never Miss an Angle.” This article in The Wall Street Journal is where the famous Disney flywheel illustration comes from—the one, Ben, that you are holding up live, framed in your studio.

This has been on the wall of my office for years. The legend that’s out there, that everybody believes, is that this was a napkin sketch that Walt himself drew. No, it was actually created by a Disney studio artist as an illustration for this Wall Street Journal piece.

Disney confirmed this for us when we were visiting them in the archives. Then we asked The Wall Street Journal to pull the original piece out of their archives. We’ll link to it in the show notes. It’s so cool that this is the origin of where it all came from.

Yeah, it serves as an illustration for something that, at the time, was actually a pretty difficult-to-articulate concept: a business flywheel. I will say the word “flywheel” never appears in the Wall Street Journal article.

No, that nomenclature would get added later.

But it was like the Journal saying, “Hey, Disney, help us with some kind of illustration that makes this point—that you have a wholly unique, new business model in the media landscape.”

And it’s a beautiful, beautiful diagram.

The whole article is great. Roy has these amazing quotes within it. He says, “Our diversified activities are related and tend to complement each other, helping us to do relatively fine business in the face of otherwise difficult times for the motion picture industry. Integration is the key word around here. We don't do anything in one line without giving a thought to its likely profitability in our other lines.” So spot-on. Then they walk through the steps of the company's flywheel with their plans for their upcoming feature film release of Sleeping Beauty, which was still a year away from release at the time of the article.

In 1958, how crazy is this? At Disneyland, which opened in 1955, the centerpiece of the whole thing is Sleeping Beauty Castle. That movie wouldn't come out for another 4 years, right? They were building hype for a movie that was basically in pre-production at this point.

In fact, it was based on concept art that was effectively a German castle because it was so far from the film.

Yes. Incredible. So, the article walks through how, at Disneyland, they've installed animated dioramas as an attraction, charging a 35¢ admission fee for them. These are animated dioramas of Sleeping Beauty, the upcoming movie.

Next, Disney is producing and selling Princess Aurora dolls and costumes. They're working on producing and publishing books of the Disney version of the fable that will be told in the movie. Of course, they are. And of course, there are segments in the Disneyland TV show about Sleeping Beauty. They're already preparing the soundtrack album to go on sale before the movie is released. And then finally, comics of Aurora and The Sleeping Beauty Story are already starting to come out as part of Walt Disney's Treasury of Classic Tales syndicated comic strip.

Fascinating.

Just amazing.

The other thing this article reveals is that Disney was intentionally making its TV shows in color even when TVs were still black and white because they thought it was likely TVs would go color soon, and they knew that the IP they were making would stay valuable for decades. The foresight—they were so bought in on, “We're just dumping valuable IP onto the pile, and we want it to live forever.”

Yep. Now there is one other thing we haven't talked about, which is that Disney brought its own film distribution in-house right before the launch of Disneyland.

Yes. Yeah. And this actually comes up in that Wall Street Journal article, too.

Yep. They created something called Buena Vista Distribution, and they left RKO Radio Pictures, which had been their distributor since, I think, 1936. Howard Hughes ended up owning it, and it had been kind of a train wreck as he spiraled out of control toward the end of his life. Disney didn't really want to be a part of that chaos. At the same time, Walt had really started thinking about Disney as vertically integrated entertainment, not just a film studio that would rely on others for distribution. So, in 1953, 2 years before Disneyland opened, they incorporated Buena Vista Distribution. The Living Desert was their first film, one of these nature documentaries.

Mhm. Then quickly thereafter, they did Lady and the Tramp and 20,000 Leagues Under the Sea through Buena Vista instead of through an outside distributor. It was kind of a test: Can we pull this off?

They got pretty good at it pretty fast, with the exception of international distribution, where they then had to rely on sub-distributors for a long time. But Disney had become such a household name, especially because of that weekly ABC show and because of Disneyland, where they were pretty uniquely well-suited to actually self-distribute without a middleman. This is like Walt's dream from the early cartooning days.

It's kind of surprising that they didn't start doing it after Snow White. I mean, who's going to turn down a Disney picture?

All right, you tee me right up because I was wondering the same thing. Cash flow.

Mhm. You can't distribute them before you actually get paid by the theaters when tickets are sold.

So Disney didn't have the working capital to pull this off until they had real strength in the mid-’50s.

That's such a good point. I always wondered why more studios didn't vertically integrate and own their own distribution. And that makes sense. You need a lot of working capital to do so. It's exactly right. In the long run, it's a pretty amazing strategy, since they'd been paying about a third of the total rentals to another distributor. And especially with these re-releases.

Yeah, it's an absolute no-brainer with the re-releases. At this point, Disneyland plus the merchandise licensing provides this really stable foundation. They almost replatformed the business—that's one way you could put it—where it's the same spiritual entity, but instead of the business being in the films, they now have the business in this stable foundation, and they do the films to add new stuff to the pile. But the platform itself is Disneyland, TV, merch, and licensing. So then, a few years later, in 1961, Walt Disney Productions, after 22 years of being in debt to Bank of America, finally paid off their last loan.

Roy must have been so happy on that day. [laughter] And Walt was already scheming how to blow some more money. [laughter]

Yes. So one thing we foreshadowed is Sleeping Beauty. We talked about Sleeping Beauty Castle. You might be wondering what ended up happening with the film. This, like many of the other films we talked about, did not recoup costs. Since then, it's done phenomenally well and made probably hundreds of millions of dollars in cumulative profit for Disney, but it did not pay back at the box office.

Mhm. Part of that was that it had a really high production cost, right? After all the success of Disneyland and all the ballyhooing about the flywheel and everything in the Wall Street Journal article, I mean, they're building around it.

Whole hog on this one.

Yeah, they spent $6 million making it. It was the most expensive film to produce to date.

Yep.

But Walt was pretty distracted with Disneyland, so he wasn't that authoritative voice to help the team find the great story in there. If it wasn't such an extravagantly detailed animation piece, then it probably would have been profitable.

And hey, given the company's business model, they're happy to play the long game, right?

So the weird thing is the financial blip that happens in 1959. Everything is true about this really stable platform. But if you look at that year—the financial year 1960—the company actually shows a loss. They flip briefly from looking increasingly profitable to suddenly having negative net income because Sleeping Beauty had that hole.

Mhm.

ABC canceled Zorro and The Mickey Mouse Club, which were both TV shows that Disney was making. This was related to Walt Disney Productions blowing up the Disneyland deal and saying, “You guys are kind of difficult to work with now. We want to buy you out of Disneyland.” And ABC was like, “All right, then we're going to stop paying you huge sums for your TV shows and giving you all this free marketing.” So that relationship ended there, at least for—

For the moment. ABC would come back in the beginning.

Yes. But the takeaway is that the company is actually financially stable now. This is okay.

Yeah. The last time that Walt and the company bet big on investing in production ahead of revenues was 1940, with the move to Burbank and having Pinocchio, Fantasia, and Bambi in production all at once.

Any one of those almost killed the company on its own.

Yeah. Now, though, post-Disneyland, they've got this stable base that they can take these big swings.

Yeah. Merchandise licensing taught them to crawl, and then they walked and ran with Disneyland in terms of that stable platform. Just to illustrate this bounce-back point, here's the trend: in 1957, they did $3.6 million in net income. Then the next year, $3.9 million. Then the next year, $3.4 million. Then 1960 happens—that perfect storm of badness—a $1.3 million loss. Then they bop right back: 1961, $4.5 million, then $5.2 million, then $6.5 million, then $7 million, then $11 million, then $12 million. I mean, they just—stability.

Mhm. And then Walt decided that it was too stable. [laughter] He needed to blow it all up again, or at least he wanted to. So he starts wondering, how can I bet it all again and in a bigger way? Is Disneyland—is a theme park really going to be my legacy? Are these animated films really going to be my legacy? Shouldn't I do something actually meaningful for the world?

Yes. This idea of a physical Disney location worked really well. But what if we don't stop at an amusement park? What if the next time we build an entire city? Maybe an Experimental Prototype Community of Tomorrow—EPCOT. [laughter] And if you think you know what we're talking about because you've been to EPCOT, that's not it.

That's not what we're talking about.

That's a theme park named EPCOT. But Walt had this insane vision that never got built, but got pretty far along in the process—again, a fever dream. Not just a place that you go for a day, but a place where you live and work, where you are transported by futuristic transport mechanisms, and where all the most innovative companies locate their innovation centers in one place together, with this beautiful tower in the center of it. I mean, this is the ideal future. So this was Walt's final project, the Florida project that never got built, as you say. And I think it all kind of stems back to Burbank—

And that brief moment before the strike, when the studio at Burbank really was this utopian physical place that was the perfect marriage of art and commerce. I really think that's what Walt always wanted to realize in the world.

And now, after the success of Disneyland, his ambition is restored, and he wants to build it in this city.

To my mind, the most interesting part about this is how far it got.

Yes, yes, yes. So the way that Walt starts working toward realizing this vision is through the 1964 World's Fair in New York. Walt gets this great idea leading up to the fair: Disney, building on its success at Disneyland, can partner with other big American companies and institutions to create Disney-sponsored pavilions and exhibitions at the fair that they can then transfer into Disneyland. But even more than that, the New York World's Fair can serve as an undercover test bed for this big idea of an East Coast city that will be a partnership between American industry, Disney, and the public.

The 4 exhibitions that they create for the 1964 World's Fair, many of which should probably sound familiar to you, are: It's a Small World, sponsored by Pepsi and UNICEF, which is actually designed by Mary Blair, who's this famous designer. She brought modernism to Disney. She's the one who basically did all the concept art for Alice in Wonderland, which is why it looks the way that it does. She's kind of responsible for that aesthetic. She was one of the original members of the Imagineers who came over from WED, and I believe she was the first female Imagineer.

That's right. That's right. And then she's the one who does Small World.

Yep. By far the most successful pavilion at the fair, it makes its way to Disneyland. So that's 1: It's a Small World. 2, the Carousel of Progress, sponsored by General Electric. 3, the Magic Skyway, sponsored by Ford. And 4, Great Moments with Mr. Lincoln, sponsored by the state of Illinois. That last one is how Disney Imagineering develops Audio-Animatronics for Abraham Lincoln.

Catch that.

Yes. This whole thing is an amazing test bed for Audio-Animatronics, which Disney kind of invents and then popularizes in Disneyland and then in Walt Disney World.

Yeah. And because it's Disney and part of Disneyland, we think, “Oh, yeah, Audio-Animatronics, like Disneyland—these are robots, right?”

Right. That's what Disney Imagineering is inventing in the late '50s and early '60s.

Well, David, you and I have had the privilege of being at some pretty cool robotics conferences, and you meet these PhD researchers who are sort of in and out of Disney. That is still where a lot of cutting-edge robotics happens.

Yes. So all 4 of those rides, after the fair, get ported right over to Disneyland because, of course—

3 of the 4.

The Ford one does not. The part of the deal is that Walt says, “You have to pay $1 million to use my name as part of your attraction,” in addition to footing the bill for building it. “But I'll forgive that $1 million if you let us put it in Disneyland afterward, because we want to get some value out of it after the fair.” And Ford says, “We'll just pay the $1 million.”

Poor decision on Ford's part.

I know.

Okay, so 3 of the 4 get ported over to Disneyland, but all of it leads right into planning for the Florida Project.

And I think while the Florida Project initially is not a theme park, and Walt is very much uninterested in building an East Coast Disneyland—he says it explicitly over and over again—he does have a nagging concern that an East Coast audience is more sophisticated than a West Coast audience, and that there isn't demand for a theme park like Disneyland in Florida. I always think he uses that as his emotional defense mechanism, his air cover for why he's saying, “Oh, I don't want to just do the same thing again.” I think it's like, “I'm afraid it'll fail.” One of the big takeaways from the World's Fair is, no, people would absolutely love a Disneyland-type thing, especially with Audio-Animatronics and all this cool new technology you're developing for the World's Fair.

Well, obviously, if Disney is going to do anything on the East Coast, it should be in Florida. It has the warmest year-round weather and, even more important—

Abundant cheap land.

Abundant cheap land all throughout the state.

Yep. So Walt, though, like you said, had no interest in just building another Disneyland. What is this Florida Project? I had heard about this lore and legend over the years before doing the research, but diving in, it blew my mind, and it will blow yours, too, hearing about what Walt's vision for it was—

The ambition.

So, 1, it starts with a brand-new airport of the future, paired together with a vast entrance complex and park. 2, there will, of course, be a theme park: a new Disney World Magic Kingdom theme park that was initially intended to be 5 times the size of Disneyland, just for the theme park. 3, a 1,000-acre industrial park intended to house satellite R&D offices for America's greatest companies. Think of everybody Walt is partnering with at the World's Fair: Ford, GE, Pepsi, all the companies that are corporate sponsors back at Disneyland. He wants them—

Yeah, Monsanto, to move their most advanced R&D teams to this new city in Florida.

And then 4, most important, the heart of the whole project is EPCOT. But again, not the EPCOT you know today. Walt's EPCOT was going to be, in his own words, “a living blueprint of the future,” where people actually live a life they can't find anywhere else in the world; “a showcase to the world for the ingenuity and imagination of American free enterprise.” Basically, it is a sci-fi city.

Meanwhile, I have to say, they couldn't open most of Tomorrowland for 1955, when they opened Disneyland, and they're having a really hard time keeping up with the pace of technology. I walk through Tomorrowland even today, and I'm like, “This all feels really dated and nothing like tomorrow.” I think Walt himself has a famous quip on this, which is, “Tomorrow comes a lot faster into today than we can keep up with.” So you could imagine, if they actually built this thing, it would very quickly not feel like the future. You plow a bunch of CapEx into concrete and futuristic concepts, new stuff gets invented really fast, and then it's ugly and old.

That's a good point. But perhaps you haven't heard the vision for what this city is yet.

Please, please lay it on me.

Okay. It will have a radical, radial design plan. The city itself is going to fan out like spokes on a wheel from a domed central downtown hub. Yes, you did hear that right: a 50-acre, enclosed, climate-controlled, fully domed central downtown city that will have no surface streets and fully pedestrian walkways.

Monorails.

Well, yeah. The only motorized forms of transportation will be monorails and this new concept of people movers. And then below ground, there will be a vast network of tunnels—a multilayered tunnel system underneath the ground—for cars and industrial vehicles to circulate throughout the city. On the edge of this downtown dome, there'll be high-density apartment buildings. Surrounding that, there is a vast green belt of parks and recreation facilities. And then, finally, in the outer ring of the city are low-density, single-family-home neighborhoods. The plan is that 20,000 people will live here in this city with fully self-governing infrastructure: schools, public services, everything. And it is all going to be founded as a new city in the state of Florida.

This is unreal.

Self-governing, but in a special district carved out and controlled lawfully by the Walt Disney Company.

I mean, it sort of sounds like a—I don't know if it's a utopian or a dystopian film, or both. Yeah, it's definitely ambitious.

So, on November 15, 1965, Walt, along with Roy and the then-governor of Florida, Haydon Burns, hold a press conference where they announce that Disney has been buying land in Central Florida—

Under various subsidiaries and obscured names, so no one would catch on to what they're doing.

Yep, and that a very large new Disney project will be coming to the state. Planning has already begun, and they will be seeking public approvals.

They bought 27,000 acres. That is the size of San Francisco.

Yes, yes. Twice the size of Manhattan. It's almost 40 square miles that they have purchased in the middle of Florida, and it's all swamp land right now. It's uninhabitable. So, in May of 1966, just a few months later, they get government approval to drain the swamp and prepare to build Walt's vision.

Let's go. [laughter] If only.

So, in late October of 1966, Walt records a film of a pitch—the full reveal for the Epcot vision. It is the second-to-last recorded appearance that Walt makes in his life, and he has no idea. The last one, I think, is a day or 2 later. He ends the video with, “Speaking for myself and for the entire Disney organization, we're ready to go right now.” Unfortunately, he dies about 2 months later. His death is both incredibly fast, incredibly unexpected, and, of course, kind of a slow-motion disaster that's been brewing his whole life ever since he started chain-smoking in France when he was 17 years old.

I mean, he was notorious for his hacking cough. That is how people knew he was approaching if you were in a building on the Burbank campus.

Yeah. You'd hear him hacking. So that summer in 1966, Walt had started experiencing pains in his body. He assumed that it was all the stress from all these new projects he was working on, or maybe old polo injuries that he had, or maybe this nagging cough. But obviously, it was cancer eating away at him. Finally, in November of 1966, right after recording the Epcot pitch video, he checks himself into the hospital, where doctors find a pretty massive tumor in his lungs.

They do emergency surgery to remove it. He comes back to the studio afterward, and the company announces publicly that Walt is back. They say he’s going to recover, but the cancer has metastasized, and the doctors tell him, “Hey, you probably only have a couple of weeks or months to live.” His health goes downhill quickly. On December 15, 1966, just 10 days after his 65th birthday, Walt Disney passes away right in the middle of this Epcot thing.

I mean, what a sliding-door moment. He was always escalating—bigger and bigger and bigger. It would have always been right in the middle of the biggest thing he’d ever done.

That’s such a good point. Mickey with synchronized sound, Snow White as the first animated feature film, the Burbank campus, plowing cash into all the expensive failures after Snow White, Disneyland. Every point in his life, he was betting the farm over and over and over again, and he always pushed all his chips in. It would have always felt like this.

That’s such a good point. If they had pulled off the Florida project, what would he have done next?

Right. Like a colony on the moon. [Laughter]

Yeah. I have to be honest, though. I will say I don’t have the faith after watching a lot of videos and documentaries and reading about the Florida project. It just doesn’t make sense to me.

And it may have protected his legacy that he didn’t live another 10 or 20 years to see this through.

Yep. I mean, even just building a domed city, how would you actually do that?

And look, I could be completely wrong. They invented amazing thing after amazing thing, but this one felt nuts. [Laughter]

I think it’s a totally fair point.

So immediately after Walt’s death, Roy renames the whole Florida project Walt Disney World in his honor. Roy postpones his own retirement to dedicate himself to finishing this project. In fact, just a couple of months later, in May of 1967, Roy gets full approval from the Florida State Legislature to build Epcot, to build Walt Disney World, and importantly, to carve out the Reedy Creek Improvement District, which gave the company a lot more autonomy over the area containing the land they purchased than they ever had in Anaheim.

Famously, Walt was very regretful that they didn’t buy up all the land around Disneyland, too, because he just hated all of the hotels and restaurants and crummy stuff around there. They run the show there in Florida.

That they do.

But Roy is not Walt, and he’s not willing to bet the company like Walt was. So he does see Walt Disney World through, but he dramatically scales it back, mostly because he doesn’t want to take on any additional debt for the company. He sets a goal that he’s going to get this thing constructed without raising debt for the company.

Which is unbelievable. They built the Magic Kingdom, the Walt Disney World—

The theme park—

Copy and paste of Disneyland in Florida for $400 million, with 2 hotels and no debt.

Yes. That is an incredible achievement. And it is absolutely not what Walt would have done.

Nope.

So it’s just the Magic Kingdom. There’s no city, no Epcot, no airport, and no industrial park. It’s more or less like, “Hey, we’ve got all this land, and we’re extremely confident that Disneyland is going to work here, so we’ll build it.”

And it was extremely successful.

Yep.

But it’s not betting the company, and it’s not blazing a new trail. I mean, how could you say Disney World isn’t a success? It’s an incredible success.

And there’s so much cool innovation there. The underground tunnels—they took everything about Disneyland and made it better. Now we don’t have to have people wandering around carrying trash bags. We don’t have to have characters appearing in the wrong land because the only way for them to, quote-unquote, come onstage is through a door that’s inconveniently placed.

We’ve got this network of underground tunnels where we can all do it exactly the way that we would have wanted to. I’m pretty sure the underground tunnels are actually at street level and all of Disney World is up 1 story. It’s this whole insane concept of, “What if we could do Disneyland over again, but not as cowboys—as real planners and builders and engineers, with a much bigger budget?”

Which may actually be, to your point, just as likely, if not more likely, that Walt Disney’s death preserved his reputation [laughter] and that this might have actually been the better path for the Florida project.

It may have been. Regardless, though, what it is not is shooting for the stars. After Walt’s death, the company basically stops doing that in every dimension. Roy himself tragically dies 2½ months after opening Disney World, at the end of 1971.

It’s kind of poetic. It seems like he said he was going to see this thing through, and he did.

And he did—for his brother. Then what follows is basically 13 years of Disney becoming a parks company.

Yeah. I mean, if you look over at the film side of things, the last film that Walt worked on was The Jungle Book, which ended up coming out after his death in 1967. He was deeply involved in this one. It was a smash hit, grossing $23 million in its first box-office run, which implies a cut of about $11 million for Disney and Buena Vista on a budget of just $4 million.

Yeah. Yeah. That’s bigger than Cinderella, certainly bigger than Sleeping Beauty, 101 Dalmatians, or any of the other movies around that era.

Yep. So the financials of the company keep growing, but really it’s all because of the parks. You can see it when you look at the numbers. In 1972, the first year of Disney World, films do $78 million in revenue and $44 million in profit. Parks do a whopping $174 million in revenue and $38 million in profit. All the rest of the flywheel—consumer merchandising, et cetera—does $27 million in revenue and $13 million in profit.

This is before the corporate expenses.

Yes, before the corporate expenses.

Okay. So what are the 3 profit numbers for each of those again?

So you’ve got, in 1972, $44 million in profit from films.

Yep. Biggest profit engine.

It’s actually a lot.

The IP of the company is still in good shape here in 1972. Parks do $38 million in profit, and other flywheel businesses do $13 million in profit.

Okay. So parks and movies are pretty comparable, then.

Yes. Pretty comparable right after Disney World opens.

Yep.

But then 12 years later, by the end of this period in 1984, parks and consumer products generate $250 million of operating income on over $1 billion in revenue, while film and TV barely break even, with only $2.2 million in operating income.

Income. So, yeah, by the end of this period, basically, IP-wise, the company is creatively bankrupt, and they’re running a parks and merch business.

No way.

Okay, give me the profit numbers from 1984 again.

So together, parks and consumer products generate $250 million in operating income—$1.4 billion in revenue from the parks and consumer products—and film and TV is $2.2 million.

Unbelievable.

It really illustrates what happens to the company during this period.

It’s funny because I only have the top-line numbers from all the annual reports that we took photographs of when we were in the archives. Revenue goes from $100 million in 1965 to $1.4 billion in 1984. Then, over on net income after all the corporate expenses, in 1965 it goes from $11 million all the way up to $97 million in 1984.

So if you just look at the whole business—

Yeah, the consolidated financials—

It looks great, but what you’re illustrating is that the core is rotting. They’re not contributing new IP onto the pile that consumers love. Otherwise, we’d be seeing that in the films division. Name a Disney film from the ’70s that you can even think of today.

They’re just harvesting over in the parks.

Yes. So really, the biggest problem this comes down to is that American mythmaking moved on. It moved elsewhere. This is the era when George Lucas makes Star Wars and Steven Spielberg makes Indiana Jones and E.T., and these guys become the new American storytellers—not Disney and not Disney animation.

Disney animation during this decade goes from a staff of roughly 500 at the time of Walt’s death all the way down to just 125 by the early ’80s. There are all sorts of problems. The films they do make are disasters. The worst example of this is The Black Cauldron. Did you read about this?

Yeah. Wasn’t it like 10 years in development?

10 years in development and production. It ties up the studio forever, and then when they eventually release it in 1985, it’s a total flop.

And it’s super dark, right? It’s like a scary kids’ movie.

Yeah. It’s a PG-rated Disney—

Right? It was the first one ever rated PG.

Yeah. Yeah. Yeah.

They do have some success with live action, starting in 1964 with the massive success of Mary Poppins, which won 5 Oscars. They kind of leaned into that side of the house.

Yep. They start Touchstone Pictures, and that has a couple of big hits. Splash is a big hit for them. But animation, the core of the company, is dying.

And, of course, Mary Poppins was made—

During Walt’s life—

With Walt’s involvement before his death.

But to your point all episode, great, they started Touchstone Pictures. Great, they made 20,000 Leagues Under the Sea and Old Yeller and The Absent-Minded Professor—

They made a bunch of Herbie the Love Bug live-action movies in—

Right—

The ’60s and ’70s.

And that's not to hate on any of these things on their own. My parents loved Herbie. I remember them talking about it. They showed it to me when I was a kid. Is that durable IP that feeds—

—the future of Disney? No.

No. No.

So then in 1984, basically the inevitable happens. Wall Street corporate raiders come gunning for Disney. I mean, it's an easy target, right? The financials look great. There's a lot of net income here, and there's also a lot of hard assets between the parks, the real estate, and the old films in the vault. This is like easy pickings to come in and take over the—

—super undervalued, right?

Yeah. I mean, the market cap of this company is only like $2 billion, despite $1.5 billion in top-line revenue and, call it, $100 million in net income. But this would be super easy: break up Disney, sell off the theme parks, sell off the IP to other movie studios. You could come in and make a killing doing this.

And that's what Saul Steinberg tries to do: come in, raid the company, and break it up for parts. But, David, I think you're getting ahead of yourself.

I'm pretty sure this should be how we start Part 2. Yes, this is the story for next time, but just know for now, as a little teaser, that this period of the company ends improbably—not with Disney being broken up, but with 3 complete outsiders coming in to run the company, none of whom have any history in animation, any familiarity with the flywheel business model, or any experience or demonstrated ability to operate anything outside film and television.

So, like, running parks? Nope. Doing merch? Nope. Nothing. None of that. And those 3 men—Michael Eisner, Frank Wells, and Jeffrey Katzenberg—would pull off probably the greatest media company comeback in history. So that's 2 Paramount executives and a lawyer-turned-Warner Bros. executive.

Yep, that's right.

It's like the other Hollywood studio executives are going to team up and come in and save Disney.

Doesn't sound like it's going to work, but we'll have the story in Part 2 because—[laughter]—boy, did it ever.

All right. Well, should we do some analysis?

Yes, absolutely. Do you still like the thing that we did on Vanguard, which is have 1 big question that we try to answer?

And I think the question should be: Why has nobody else built an IP flywheel like Disney?

Is it as simple as Disney was the first IP flywheel company, and so they've been the biggest? I mean, no, that's not it. But it is interesting: They are the first, and they're the biggest, best IP flywheel company at that point in history—1984.

Yeah. And I mean, really, even today, I don't think any of the other movie studios out there, any of the other major studios, are anywhere near as good a business.

No, they're all terrible businesses.

Yeah. Despite having, at this point, going on 100 years of watching Disney operate and seeing exactly how the flywheel business model works—I mean, The Wall Street Journal wrote that article in 1958—why has nobody else copied them successfully?

To be fair, the “terrible business” thing is not fair. The business of movie production on its own is a terrible business, but the other studios—you've got to give Universal a ton of credit.

And I guess that's my point. Universal is probably the closest, but even then, it's not Disney. I mean, isn't Universal running effectively the same playbook, but with less valuable IP or IP that they don't own? So they have to share it. Think like Harry Potter.

Yep.

Or just at a smaller scale.

Yeah. Still, nobody else is Disney. And to me, I think it all comes back to when we first talked about the flywheel, all the way in the beginning of the episode. I think animation is super, super key. I mean, Bob Iger, when he took over the company in 2005, had that famous quote: “As animation goes, so goes the company.”

Yep.

There really is something unique about animated IP: in its timelessness, in the ever-availability of its stars, in the better economics of not having to share too much on the back end or in merchandising fees, et cetera, with stars. And then I think, really, just the ability of people to form deep, lasting relationships with the characters versus live action. And because Disney's always had animation at its core, that's what creates all this special IP.

And it's all created in-house. You know, it's funny: I threw out Harry Potter. Universal doesn't own all of the rights to everything Harry Potter, but Disney for sure does own all the rights to everything—Buzz Lightyear, now that they own Pixar, or Aladdin, or Mickey Mouse. This is true vertical integration.

Yes. Yes. There's also Disney, for all its ups and downs, made the decision to never sell its catalog, so they could compound longer than everyone else. A lot of these other studios have sold their back catalogs, and some of them are worthless since they're live-action films in black and white that no one's ever going to watch. But Disney hasn't. They own everything they've ever made, and that ties to Walt's Oswald experience.

Yep. And I think there's something else, too, that only comes when you fully embrace the flywheel business model and the trade-offs that it involves. And it's the vault and the reissue strategy.

Yeah.

Disney. Let's put Marvel aside for a minute. [laughter] With the exception of Marvel—

You've got to put Star Wars in that pile, too, because I know where you're going with this. And the way you feel about Marvel, I feel about the overexploitation of Star Wars.

Yeah. Yeah. Okay. Great. Okay. All right. Let's put Star Wars aside, too. Core Disney, Disney Animation, and Pixar have been so disciplined over the years about metering out their content and delivering that content on an infrequent enough basis that it doesn't dilute it. And Marvel, ironically, I think really is the counterexample here. Yeah, it was on a great, great run, but honestly, it feels like the Disney+ification of Marvel. We'll get to this in the next episode, but my gripe would be that they're developing a lot of content to always have something fresh there.

Maybe the issue that we're both describing is actually a blurring of Flywheel Points 2 and 3. Point 2 was maximized distribution of each core IP's primary initial delivery vehicle, and your Point 3 was feeding IP into as many ancillary, profitable flywheel nodes as possible. It kind of feels like with direct-to-consumer Disney+, those 2 things got confused.

Yeah.

And what's the difference between ancillary content and primary content? It all ends up in the same place. And that's kind of how I feel when I watch some of the overexploited IP now.

Mm-hmm. Mm-hmm.

It goes all the way back to the point you made, I don't know, 6 hours ago or whatever: You have to be really clear about giving a nice lane around your primary medium and delivery vehicle, so that stuff still feels scarce, special, and canonical.

Yep. Yep. Yep. But I think for every other studio out there, their incentives have always been, and are always going to be, to release as much content as quickly as possible—especially once they have a franchise that's working. Get the sequels out as fast as possible and get the sure profits from them.

And Disney is playing a many-decade compounding game, which can take 3 decades to really kick in. And all these other studios change ownership every decade, and so there's really not the right ownership incentive structure to play a 3-decade game.

Yep. And I think this impacts the creative decisions, too, because when you don't need to release content, you can keep working on the content and make sure that you only release it once it's truly great.

Yeah. There's 1 other point on this, though, that we haven't really touched on, which is universe cohesion.

Here's my favorite way to make the point: What's your favorite Paramount song?

Right. Yeah. No idea. The Top Gun theme song. What's your favorite Universal song?

Right. Yeah.

But everyone's got a litany of answers to “What's your favorite Disney song?”

They actually managed to associate all of this love and heritage and fandom and universe interaction with the studio itself.

It's back to becoming the lifesaver of animation.

Yep.

As I was thinking about this, I was trying to ask myself: Are there any other companies in the broader—

—entertainment landscape? Ah, you got it. [laughter] That do this. I thought I was going to get you. Which is so great, because Nintendo and Disney—you know, Nintendo started on the back of Disney, right? As we talked about on our Nintendo episodes, right? It was the Disney license for the playing cards in Japan that kicked off modern Nintendo.

Yep.

Yes. But yes, they have the exact same ethos and flywheel.

But interestingly, they sort of don't play together now. I mean, that's the thing about vertically integrated companies: They don't really work together, right?

Right? And Nintendo has partnered with Universal now for their parks. I kind of suspect the only way a relationship between Disney and Nintendo could work would be if 1 of them buys the other.

Right?

Yep.

Great. 7 Powers.

Great. So listeners, this is the part of the show where we walk through Hamilton Helmer's 7 Powers framework, which effectively helps analyze why a business gets to be more profitable than its nearest competitor and do so sustainably. And those 7 are scale economies, network economies, counterpositioning, switching costs, branding, cornered resource, and process power.

I think we're just analyzing this for pre-1984 Disney.

Yep. Well, an easy one to start with: counterpositioning for days. Being willing to invest in a feature-length animated picture—I mean, that was the peak of this relative to anybody else doing animation leading up to Snow White, right?

Because their competitive set would have needed to be people who had the talent of their animation staff, which is not zero people, but few people, and who had all the cash from Mickey and the Mickey merch, which would have been almost no one. I don't know, actually. That's almost like capital as a moat to go pursue Snow White, because there was no one else who really could have done it.

Mhm. You know what? You're right. Versus the other animation studios, but Disney was counterpositioned, I think, versus the big live-action studios, because they never would have made a 3-year, $1.5 million investment in a film when it was—

Nor did they have the capability, though.

Yep.

So, let's see. Early on, branding pretty quickly played a role as soon as Mickey Mouse was established.

Walt Disney Productions. Absolutely.

Yeah. You'd pay more for a Walt Disney production than for others.

It was brand for Disney itself.

I wonder if there was process power. Reading some of the old recollections of animators, it seems like there were people that kind of traded between studios and left and started rival studios, and they were able to produce great work. So maybe there's not process power.

I mean, the big two, once it started to really kick in, are scale economies and network economies. The flywheel is sort of all about that. These films are all scale economies. It's: can I go plop down $6 million and then get the entire world to care about my movie for a year and make as much as possible on that, and then expand it out into the flywheel and take advantage of all those ancillary streams?

And then, of course, the network economies: if you have a big enough release, it is a cultural moment. It matters to the world.

Right? Gosh, I see it with my girls now, buying the Aurora costume that their friends also have so that they can dress up and play together.

Yeah. The flywheel is built on network economies. It's a combination of scale economies and network economies: scale economies to enable the investment in the IP, and then network economies across all of the nodes.

But the whole thing, if you were to go ask that question—why isn't another company able to replicate the success of Disney?—to any of the very smart executives and their great teams that work at competitive companies, they would say, “Oh, because Disney has the cornered resource of all that IP. What do you want me to do? I can't devise a strategy that's going to work in the next 5 to 10 years to suddenly beat Disney when they have 100 years of heritage and the world caring about their IP.” The entire thing is predicated on that.

Yep. Yep. Which really comes down to Walt always playing the long game and always being willing—

To bet the whole farm.

Yep. And being right enough times, and managing to survive through the times where he was wrong, that it worked.

Yep.

All right, quintessence.

Yes. So mine is: Disney managed to take not only a set of IP and build their flywheel, but a cohesive set of IP—an opinionated universe of timeless stories about durable emotional story arcs that are universally applicable and work together as one. And that is something that can stay relevant and, of course, monetize for a very long time across generations.

They can't fully avoid being a hit-based business. They are a movie studio, but they've gotten about as far away from it as they possibly can.

It's funny listening to you say that. I think that entire passage could equally apply to Nintendo.

Yeah.

Which really just shows how the companies—they are the 2 flywheel companies. They are the 2 intellectual-property flywheel companies out there.

Yeah.

Okay, okay. So my quintessence goes all the way back to the beginning of the episode and Marceline.

Of course it does.

Art and commerce. Those 2 things got married in Walt's head when he was a little kid, and that is Disney. It really is art. When Disney is at its best, what they make is not just a commercial product. It exists at a higher level than that, and it is married to this incredible commerce engine that is in and of itself beautiful. Disneyland and Disney World and all the parks are the most perfect expression of that.

It sounds exactly right. The sightlines, man. I like going to Disneyland just to walk around. It's the craziest thing. The rides are free, and I have just as much fun not going on them even though I've already paid for them. Any parent who's been to Disney with their kids knows exactly what I'm talking about. And it is irreproducible at any other company or place in the world.

All right, before we do carve-outs, I've got one fun little thing that didn't make the narrative. When Disney launched Donald Duck in 1934, they hired radio actor Clarence Nash to do his voice. Do you know how Clarence Nash got his start doing animal voices on the radio? You won't guess it, but it's an awesome Acquired crossover.

He was the radio spokesperson for Adohr Dairy Farms.

Whoa. In Southern California.

Trader Joe's.

Trader Joe's. [laughter]

That's awesome.

Crossover. Trader Joe's. Donald Duck. There you go. Trader Joe's' original milk supplier before they got bought by Trader Joe's competitor, 7-Eleven.

Yep, that's right. And, of course, Trader Joe's itself was in part inspired by the Enchanted Tiki Room at Disneyland.

That's right. Which we didn't talk about, but Walt also owned that personally. It opened in '63. He put up the capital for it. I think WED owned it, and it was ticketed separately. I think it was an extra 75 cents or something to go to Walt Disney's personal Tiki Room, which is why it's named—

The Tiki Room. That's right.

All right. Carve-outs, what you got?

All right. Follow-up to yours from the Vanguard episode: the shoes, Brooks Vanguards, are indeed great. I ordered a pair. They're excellent. I'm not wearing them today because they're not squishy enough to stand for whatever we're at—9 hours.

Yes, but they are great shoes. I got 2 pairs.

I wear them around the neighborhood. They're awesome. I have 2 YouTube channels.

Ooh, nice.

One is Defunctland.

I used to watch this channel all the time. I forgot about it for a while, and then I rediscovered it while we were doing research. It is the stories of either defunct or never-built theme parks, and it walks you through the insanity of Action Park in New Jersey.

Yep, I think that's right.

Tons of great Disney ones—Disney parks that were never built. There's a great one on the Florida Project. So I highly recommend Defunctland.

My second one is Animagraffs.

There's not a lot of videos on this channel, but they're all so cool. It is 3D models explained by a narrator, showing how really interesting pieces of machinery work. I've used it for at least 2 episodes that I can think of off the top of my head: one, how a mechanical watch works, and 2, how a Formula 1 car works. I highly recommend the channel, Animagraffs. It is awesome.

I also have 2 carve-outs. My first one is: we got a new car—

A Volvo EX30.

The little guy.

The little guy.

A, it is awesome. It's like the perfect car for San Francisco. It fits in tight parking spaces, but it can hold my whole family and a bunch of gear. B, oh my God, Chinese EVs are incredible. So Volvo is owned by Geely, which is a Chinese company, and the EX30 is a Geely-platform EV with Volvo branding, unlike the other Volvo cars.

I mean, this thing is crazy. It only costs like $35,000, and it's awesome. Unfortunately, that leads to C, which is Volvo just canceled it in the U.S. right after I got it.

Yeah, I think because of tariffs. Yeah.

Oh—

It is an amazing car. You can no longer buy it in the U.S., but you can internationally.

It was a short window.

And, man, I get Chinese EVs now. This is a really, really good car for not a lot of money.

Okay, my second carve-out is the San Francisco Symphony. Jenny and I went the other night. They have a new music director coming in, Elim Chan, and this was her first performance since being named music director. She's awesome. She's 39 years old. She's so much fun and so much energy.

And going to the symphony, which I hadn't been to in forever, made me realize that actually, through classical animation, I got a ton of exposure to classical music growing up. I think more than anything else—through Disney films and Looney Tunes and Warner Bros.—I was just sitting there like, “Man, I feel like I should be watching some animation right now.” [laughter]

Disney Part 2.

Yes.

The Renaissance.

Ben and David will return.

Yes. As always, thank you to all of our sources and the books that we read for this episode. They're all linked in the show notes, and a special thank-you to Arvin Navaratnam at Worldly Partners for his great write-up on Disney, linked in the show notes.

Arvin, for folks who don't know, is at Worldly Partners, which is a long-term investment firm focused on multi-decade compounding businesses. Very simpatico here with Acquired.

He provided us with the data on the rise of television—actually, some annual reports that we were missing even from our time in the Disney archives—and the original offering document for Disney selling shares to the public. All sorts of awesome stuff.

Personally, thank you to Jeffrey Katzenberg. We had a great breakfast when I was down in Burbank, and he helped us out a lot with research. You'll hear a lot more about him on part 2.

To Josh D'Amaro, the new CEO of The Walt Disney Company, for his time chatting through some stuff that we were wrestling with and helping us with research. Also to Nancy Lee and all the Disney folks in the archives, Animation Research Library, and all the other great folks in Burbank we met with on our research trip.

That really was incredible. Thank you to all of you.

To Mike Miller, former Wall Street Journal editor and now frequently helping us with Acquired episodes. Mike, you are awesome.

To Graydon, who emailed us last year with the observation that the entire business community misuses the phrase “flywheel.”

Yes.

Appreciate your help, Graydon.

Glad we finally found the perfect episode to bring this up.

Yes. Well, speaking of The Wall Street Journal, thank you to Ben Cohen and Emily Nelson over there, who helped us track down the original flywheel article. We will link to that in the show notes. Can't wait to share it with all of you.

To Mitch Lasky, our friend Mitch Lasky, former partner at Benchmark, who helped me think through a whole bunch of the flywheel dynamics.

To Ryan Shiner, who is Walt's great-grandson and is on the board of the Walt Disney Family Museum here in San Francisco, which really is an excellent museum. It's done by the family. It's about Walt, the person. Highly recommend going to see it next time you are in San Francisco.

And with that, listeners, we'll see you next time.

We'll see you back here this fall for Disney part 2.

Yes.