The Walt Disney Company

Have I ever shown you my Mickey Mouse impression?

You've done your Mario impression for me in the past,

but I've not heard it. They're a little similar.

All right, give me Mickey, give me Mickey.

Oh boy, will you look at that?

That is really good. You sound like Walt himself doing Mickey.

Right. Didn't he do Mickey for like 20 years?

Yep, yep, yep. He didn't at the very first,

and then one of the animators convinced him to do it,

and then yeah, he did it for 20 years.

Have I ever given you my Donald Duck impression?

Oh, wow. Okay. Well, now I do.

I need to sit down for this one.

You might need to. All right, here we go.

It's about right.

I have a great Donald Duck trivia for you coming up.

Oh, all right. Save it. Save it.

You're going to be blown away.

I'm pretty sure you didn't find it.

Great. All right.

Onto the episode.

Let's do it.

Is it you who got the truth now?

Is it you?

Sit me down.

Say it straight.

Another story on the way.

Who got the truth?

Welcome to the spring 2026 season of Acquired,

the podcast about great companies and the stories

and playbooks behind them.

I'm Ben Gilbert.

I'm David Rosenthal.

And we are your hosts.

Today, listeners, we finally tell the story

of the Walt Disney Company.

Unbelievably, in 11 years of doing Acquired,

we have never told Walt's story.

And it's been a glaring omission.

It is the entertainment company different

than all the rest.

It's over 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, Pixar,

done Lucasfilm, we've done Marvel,

done ESPN.

Although those are a whole different version of Acquired.

We may need to decanonize those

and redo them the proper way.

That's part of this.

Listeners, since there are tons of biographies

and documentaries and places analyzing Walt's psyche,

we're gonna focus today on Acquired's sweet spot,

which is the business.

What is it that Walt's merry band did

from the 1920s onward

that made them succeed uniquely well in Hollywood?

And when you look at Disney's profits today,

it is in a whole different league than Paramount

or Universal or Warner Brothers

or any of the other sort of classic Hollywood studios.

The business of feature film production

is a mediocre one,

especially by the standards of what we study

on this show here with Acquired, except for Disney.

Yes, exactly.

And I will say, I am a huge Disney fan.

I grew up on Aladdin and the Lion King.

My first movie in theaters was Beauty and the Beast.

I'm a huge Star Wars nerd

and my wall was plastered with toy story posters growing up.

But somehow I knew nothing about the company's early history

before starting this research.

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.

Or that many of the movies I watched in my childhood

are actually from 50 years before I was even born.

Snow White was produced before World War II,

Pinocchio, Bambi.

These films are from the 30s and 40s.

They even predate the existence of televisions

in people's homes.

Yep.

And importantly for Acquired's roots,

this really is a technology story.

Giant innovations that often bet the whole company

on things like synchronized sound

or the crazy idea of a feature length animated movie at all.

Or the multi-plane camera to photograph the whole thing

and turn it into a movie.

And of course, building a giant theme park in Anaheim

when nothing else like it existed.

And they really did invent the entire concept

of the flywheel business model

that so many entrepreneurs are trying to copy.

Oh yes.

So today listeners is the Walt Disney Company,

part one, Walt's era.

Woo.

Well, big news from here at Acquired HQ.

This episode has a companion PDF

with visuals, charts, tables and illustrations

of key concepts, including Acquired's version

of the Disney flywheel.

We did a pilot of the idea after our Vanguard episode

and we got such overwhelming positive response

that we are doing it again.

So you can get access and follow along

by clicking the link in the show notes.

You might say we're building out our own flywheel here.

We are.

We're building out our own episode cooking.

And we're taking this timeless IP

that we are developing and figuring out

even more things to do with it.

That's right.

All right, so you can join the Acquired email list

at Acquired.fm.email.

That's where we'll send our big takeaways

from each episode, past episode corrections,

exclusive behind the scenes photos

that we founded our research.

And it's where you can vote on future episode topics.

Plus we will give away a little hint

each time about the next episode topic

that's Acquired.fm.email.

Come talk about this episode with us in the Slack

that's Acquired.fm.slash Slack.

And before we dive in,

we wanna thank our presenting partner, JPMorgan.

Yes, just like how we say every company has a story,

every company's story is powered by payments.

And JPMorgan is a part of so many of their journeys

from seed to IPO and beyond.

So with that, the show is not investment advice.

David and I may have investments in the companies

we discuss in this show is for informational

and entertainment purposes only.

David, take us in.

Well, first a thank you to my main source for facts

and Walt quotes on this episode,

Neil Gaibler's biography Walt Disney,

the triumph of the American imagination.

Gaibler I think was the only author who had full access

to the Disney archives and all the research he did

for that book is just incredible.

Yes.

Well, with that, we start in Chicago in December 1901

where Walter Elias Disney is born.

And the family lore is that the Disney's are descended

from the French Disney's of Normandy.

How do you spell that?

D apostrophe I S I G N Y S of Normandy

who came over to England with William the Conqueror in 1066.

That's family lore, unverifiable.

Yes, at this point, lost to history.

Yes.

So Walt's father, Elias, was sort of a frustrated entrepreneur.

He was variously a carpenter, landlord,

a 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

in the Midwest.

And so Elias came also to seek his fortune there.

Now, when Walt is four,

Elias moves the family out of Chicago

to an idyllic farm town also in the Midwest

where Robert had just purchased another tract

of real estate, Marceline, Missouri.

And Lily and Disney, Walt's future wife

would say about Marceline.

It was the most important part of Walt's life.

He didn't live there very long.

He lived in Chicago and Kansas City much longer.

But there was something about the farm

that was very important to him.

And Elias moved the family

because it was kind of like,

let's get out of the dangerous city of Chicago

and raise the kids right.

So sort of somewhere small town.

I think Marceline was actually created

because they needed somewhere

for the Santa Fe Railroad's division point.

Yes, yes.

Like when it was going to maybe Chicago and Kansas City

and they were like, and this place on the map looks good.

And they started the town of Marceline.

Exactly, exactly.

And Robert, the uncle had bought real estate there

kind of speculating again that this is Marceline's gonna grow.

So Marceline was like basically a Disney movie.

There's orchards and ponds and animals and farmhouses.

There's also this charming little town

that the railroad had created with a main street,

a main street USA, you might say.

But that's getting out of ourselves.

So while the family's living there,

Uncle Robert's wife, Walt's Aunt Maggie,

every time that they would come visit Marceline

to check up on their real estate investments,

she would bring Walt gifts.

And one year, when Walt is probably six or seven years old,

Aunt Maggie brings him a big chief drawing tablet

and pencil set and Walt is enraptured.

He starts sketching all the time, drawing,

sketching everything you can see.

And as the legend goes, one day,

Walt's retired neighbor asked the young boy

to draw him a picture of his favorite horse.

And the neighbor loves what Walt draws so much

that he pays him a nickel for it.

And he hangs it in a frame in his house.

And Walt, his mind is blown, young Walt,

he's like, my hobby, my art, it can make me money.

Now, whatever the exact truth of that story is,

there is no doubt that somewhere in Marceline,

in pre-pubescent Walt's mind,

a connection is forged between these two great forces,

art and commerce.

And that would go on to drive not only the rest of his life,

but the company, the studio, the movies,

made and changed America.

Absolutely.

The thing about Marceline though,

you said it's idyllic and like it's out of a Disney movie,

the reality of living in Marceline and life on the farm

is that it was very hard.

All the kids are involved,

there's not magical economic prosperity everywhere.

It's sort of a tough life,

even though he can sort of remember it

as an idyllic childhood,

which I also think is quite the foreshadow

of kind of the Disney version of things in the future.

It is both remembered as idyllic,

but also was hard as the real world is.

Yes, and I think it's because of the age Walt was

when he was there.

So they lived in Marceline only from when he was like

four to eight or nine years old,

before he gets really put to work.

So he gets to just enjoy all this bliss around him.

Yeah, the reality is it's pretty tough

for the family to make a living.

And in fact, they can't.

So Elias adds farming to his list of entrepreneurial failures.

And when Walt is nine years old,

they have to move the family again out of Marceline

to Kansas City,

where Elias decides he's gonna purchase a paper delivery route

for the Kansas City Star newspaper,

and he's gonna put the family to work delivering papers.

There are so many protagonists that we study unacquired

who started their career as newspaper boys.

I was gonna say, just like Jack Bogle from Vanguard

delivering papers in his youth and having to get up

at four in the morning and falling asleep at school

because he has to work so hard.

Like this is quite the reversal here for Walt from Marceline.

But he never stops drawing

and he never stops making money from it.

In Kansas City, he would draw frames for the local barber shop

who would pay him either a nickel or a free haircut for each.

And that would be Walt spending money growing up

that he would earn from his art.

Yep.

So later, when Walt enters high school,

Elias moves the family back to Chicago again,

this time for the jelly factory, which ends up failing,

where Walt becomes the cartoonist

for his high school newspaper.

But he's not there long before he leaves high school

to go join the Red Cross and get shipped off to France

as an ambulance driver during World War I,

where unfortunately, he would acquire a chain smoking habit

that he would keep up for the rest of his life

and eventually would kill him way too young.

Yep.

But Walt's not in France for long before the war ends.

And in the fall of 1919, he lands back in Kansas City

where Roy Disney, his older brother who is,

I think eight years his senior.

Nine years maybe.

89 years older.

Yeah, much older.

Yep, is living.

And Walt has a plan that he's gonna seek his fortune finally

as a true professional cartoonist.

So through Roy, he gets introduced

to an advertising art shop that's looking for apprentices

to help draw like flyers for the upcoming holiday rush.

And Walt works there for six weeks through Christmas time

and then gets unceremoniously laid off.

But he gets two things out of this brief experience

as an employee.

One, he gets a credential.

He can now say that he is a professional artist.

All you have to do is get paid to do something

and then you become a professional.

Exactly, exactly.

And you get something else.

A co-founder, another young apprentice from the art shop

named UB Iwerks.

I sort of think of UB as the Steve Wozniak of Disney.

Yes, absolutely.

Walt is like the original Steve Jobs

and I think you can definitely make the case

that UB is the Steve Wozniak.

Although I think Walt was more hands-on.

Yes.

Walt was also an animator.

UB was just a better animator

and Walt was a camera operator

and Walt was building stuff, doing things with his hand

and he was in the primary technology

and artistic trade that his business was in.

So after the two of them get laid off,

Walt suggests that rather than go look for jobs again,

they should just start their own studio together.

I mean, hey, they're professional artists.

Like why not?

So they create Iwerks Disney Commercial Artists,

incorporated.

Supposedly in that naming order

so that it didn't sound like a optometrist shop

like Disney Iwerks.

How amazing is this?

In the first Iwerks in 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.

And one of the clients that he goes to pitch

is a up and coming company called

the Kansas City Slide Company,

which happens to have become the country's largest producer

of advertising slides and short commercials

that would get shown in movie theaters

before feature films.

And the slide co has so much work at this point in time

that all of these films and movie theaters

are taking off around the country

that they say, hey, you guys seem talented.

We don't wanna just contract with you.

Why don't you come work here full time?

So Walt and UB's first entrepreneurial venture

quickly comes to an end and they go join the slide company.

Now, the reason that they specifically wanted Walt

and UB is that they have a relatively new business line

at the slide co, which is producing animated commercials

to run in movie theaters before films.

And this is what Walt and UB

end up getting put to work doing.

And they both just fall in love

with this new art form of animation.

It's like everything that Walt and UB too loves about drawing,

but it's more than just art.

It's technology, you know, you need cameras,

you need film, you need all these new inventions

to make animation happen.

Yeah, and at this point,

animation was really primarily used in advertising, right?

There wasn't really a successful thriving industry yet

as entertainment of its own based on animation.

It was like very, very early

and to the extent that it did exist as entertainment

and shorts, short films, cartoons on its own,

it was all based in New York, like not in Kansas City.

But the whole industry is only like barely 20 years old

at this point in time,

because you couldn't produce animation on any sort of scale

until you had widespread commercially available

film cameras and film projectors.

Like this whole art form is brand new.

It couldn't exist before the technological innovation of film.

Yep, that's exactly right.

So part of the reason that cartoons are working well

in advertising right now for the slide co,

is that it's this novelty, almost gimmick.

It captures people's attention.

Even though they have no color, no sound, no story,

it's just a series of like visual novelties.

It's something they've never seen before.

Of course, it's interesting.

Yep, and in Walt's mind,

who really is always thinking about

how can I make a business out of a career out of this?

This is also what makes it super attractive to him.

Because the whole industry is so new of animation,

he figures that he can quickly become as good or better

than anyone else in the world at it.

Unlike if he's gonna try and 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 and I might have a shot here.

Yep.

So Walt and Nub start experimenting on nights and weekends

with their own work,

just trying out, creating their own animations,

using the slide co-equipment and cameras.

And Walt puts together a few short cartoons

that he creates all himself.

He brands them as quote, Laffograms.

And he ends up selling them on the side

to a local movie theater chain to run before features.

And the Laffograms become a hit in Kansas City.

Audiences love them.

I love that the thing that led to the Walt Disney Company

is called Laffogram, like Laff-O-Gram.

It reminds me of, what was the Rolex watch,

the Turnograph?

Oh yeah, yeah.

Yeah, it's such a hokey name for what ends up becoming,

well, this doesn't become Disney,

but the spirit of which becomes Disney here.

And the thing that they're doing, they're so primitive.

There's no sound, there's no voices, there's no color,

there's barely backgrounds.

Yeah, it's so different from what you're used to today.

Because of those limitations,

you can't create a story or a real sense of character

for any of the characters that are in there.

Like you can't build a relationship with the cartoons

that are being made at this time,

like you can with Mickey Mouse or Donald or Goofy or Minnie.

The only emotion you can invoke is humor,

and the only real way to do humor is slapstick.

So it's just these like super exaggerated,

they call them gags, like things that a character does

that isn't necessarily consistent with anything else

that they've done within a few minutes

of starting gag happening and ending,

or sometimes even a few seconds.

And honestly, that's actually not that different

than 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, sort of slapstick.

It's the stuff that my toddler laughs at.

You could resummarize every scene of every comic

and most movies by going, oh, he fell down.

Exactly.

So in May of 1922, at 20 years old,

Walt decides that these Laugh-a-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 found Laugh-a-gram Films Inc.

And once again, he convinces Abaiworks 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-a-gram's local popularity

there in Kansas City, by the time we get into 22, 1923,

animation and cartoons in general around the country

are starting to lose their appeal.

The novelty is wearing off, the fad is dying down.

There's actually a survey of theater managers

right around this time in like 1922 or 1923,

where one of the questions is what filler options

do your audiences like to see

around the feature film that you're showing?

Cause it also would be newsreels or live comedies

or short serials.

Remember, there's no television.

There's not even really radio at this point in time.

If you want to get news or any kind of entertainment,

you go to the movie theater.

All right, I got a stat on this.

In the 1920s, the average American went over 40 times

per year to the theater.

Wow.

This is what you did every week for entertainment.

Compare that to today where like maybe you go once a year.

It's two.

The average American goes to a movie theater twice a year now.

Yeah, I mean, back then it was like,

you could go to the movie theater

or you could go see a live show, ballet or opera

or like a sporting event, like a baseball game

where you go to the movie theater, that's it.

And when you go to the theater, it was a bundle.

I mean, yeah, you were there for a production,

but I think the point you're trying to make is

there were also these cartoons with gags,

there were newsreels,

there was the feature you're there to see,

but it's sort of this like bundle of,

all right, let's see what the theater has in store

for me today.

Yeah, exactly.

So this survey of theater managers,

only 23% of respondents say that they show cartoons

as part of the bundle and that their audience is like it,

which is by far the lowest of any of the other filler options.

So Laffagram can't really find a market outside

of their local popularity in Kansas City.

And in 1923, the company goes bankrupt and shuts down.

And Walt is now this sort of 1.5 times

disgraced entrepreneur here in Kansas City.

Following right in his dad's footsteps.

Yeah, yeah, yeah, exactly.

And he raised money from people in Kansas City,

friends, family.

He went and lost people's loan capital that they gave him.

Yep.

So Walt goes to Rich Uncle Robert for advice

on what to do given his failure.

And Robert says, you know, kid, best thing to do

if I were you, I would just skip town.

Get out of there.

Which actually is really sound advice for back then, you know.

People's reputations did not travel with them.

Nope.

Your credit was the credit locally that you had

with the people in your town and no other way

to find you otherwise.

Now it just so happens that both Robert

and Walt's older brother Roy have just also skipped town

from Kansas City and moved out west to Los Angeles.

So Walt packs his belongings,

which is basically nothing at this point in time,

hops aboard the Santa Fe train bound for LA

and joins them in Hollywood.

And when he arrives there in the summer of 1923,

he's 21 years old.

He stays with Uncle Robert.

And initially, you really can't make this up.

I couldn't believe this when I read it.

Walt at first thinks that he's come to Hollywood.

He's gonna get a directing job in Hollywood

at one of the studios there.

Well, yeah, he has abandoned the idea of animation.

He basically thinks he's too late.

He's seen some of the stuff that comes out

of the New York cartooning scene.

And he's like, well, I'll never be as good as them.

So I need to go start over something completely new.

Right, which is sort of, you know,

silly and wrong in and of its own.

But also like the hubris that he thinks

that he could just show up in Hollywood

with no directorial experience

and become the next DW Griffith.

That is Walt for you.

Do you know this story of the Universal lot?

No, no, no.

So he rolls up to the Universal lot after getting there,

having no job, no money, borrowing a bed.

And he goes and has fake business cards made

that says he is with Universal.

He's just the Kansas city representative.

So no one at Universal would really know who he is.

And he gives it to the receptionist on the Universal lot

and he walks in.

And so he spends at least a day from what I could tell,

roaming around and learning as much as he could

about film production.

And like internalizes a lot of those lessons.

And then he tries to come back in future days

and say like, oh yeah, I'm sort of like with Universal.

And now I have experience and can you give me a job?

And he ends up running out of money and doesn't get a job.

That is amazing.

I didn't know that story.

So once he inevitably gets rejected

at all the major Hollywood studios,

he says later, when things began to look hopeless,

I got my cartoon things out again.

And he sets up shop animating again.

He's like, well, as you said, Ben,

this is the one thing I know how to do.

I should try that.

And at this point, pretty much the only popular cartoon

left in the industry is Felix the Cat,

which is created by Pat Sullivan out of New York

and distributed by the pioneering Margaret Winkler

also in New York.

So, well, has one thing, one asset leftover

from his failed Laugh-a-Gram days,

which is a reel of a hybrid live action cartoon short

that he had created with a,

right before he left Kansas City,

called Alice's Wonderland,

about a real life little girl

who interacts on screen with cartoons

that they've drawn over the film.

Which is like completely pioneering technology.

The other people who were doing animation this time

were just doing cartoons.

These Alice comedies, as they came to be called,

were a new process by which you could go

and film a real life actor

and then have them interact on screen

with cartoon characters and put them in the cartoon.

Yes, very cool.

And also had the unique property of being cheaper to produce

than full animation,

because you only had to animate the characters,

not all the backgrounds and everything.

Right, yeah, there is this funny counterintuitive thing

that live production is much faster and cheaper

than animation.

You just have a film camera

and you pointed at something in the world that exists

and you kind of get everything

that you're pointing it at for free.

Like the actor is interacting with a bunch of stuff

and when you're making an animated film,

you need to draw literally everything from scratch.

It's much harder and you need to do it

frame by

rather than the world just sort of happening around you

and you taking these exposures in a video camera.

Yep, so Walt sends Alice's Wonderland off to Winkler

and she likes it.

So she commissions Walt to create 12 more Alice comedies

for like $15 to $1800 each.

She does and David, did you know we have seen this contract?

Was this in the documents that we saw

in the Disney archives?

Yes, so listeners for this episode,

David and I went and spent a few days down in Burbank

looking through the corporate archives

and one of the things that the archivist pulled for us

was this contract and I have a photo of it,

I'm looking at it right now,

agreement entered into this 16th day of October 1923

between Walt Disney of 4406 Kingswell Avenue,

Hollywood, California, blah, blah.

And yeah, you're exactly right,

for 12 negatives of subject series

and then in all caps, Alice comedies and-

Amazing.

I also have a picture of this on the last page

of this contract,

because this is effectively the contract

that puts Disney in business.

I mean, this becomes the Walt Disney company.

Yeah, this is the moment, beginning of Disney.

You can see his signature,

which is much less flowery than the version

that you see in the Disney logo.

He would sort of evolve it over time.

But yeah, this is the moment.

Disney, Walt is in business.

It's his first actual commercial big time deal.

Yes, and I think when Walt sort of gets word from Margaret,

he runs into his brother's room.

His brother, Roy, actually has tuberculosis at this time.

It is in like a hospital ward

and he sort of runs in and shows in the contract

and says, we got it, it.

We're in business, we're doing it.

And you know, $15 to $1800 a film

is a lot of money at this time.

And Roy talks through with him and says,

okay, let's get right to work.

And he literally stands up and leaves the hospital ward.

It's like, all right, my tuberculosis is behind me.

And the two of them found the Disney Brothers cartoon studio

right there in October, 1923.

As a true partnership between the brothers,

Roy manages the business and the finance.

Walt manages the creative and they get to work.

So Walt, of course, writes a by works back in Kansas City

and several of the other talented animators

that they knew there and says, all right guys,

I got it this time, come on out to California.

We finally got a deal.

We're gonna build a real company

and a real animation studio.

And they do, the behemoth we know as Disney today

is the Disney Brothers cartoon studio

and a whole bunch of Kansas City guys

that moved out to join Walt to start cranking away.

Yep.

And the Alice comedies become a moderate success

in the marketplace.

Again, I think the novelty of cartoons plus live animation,

audiences are entertained for a few years.

Ultimately, the Disney Brothers studio produces 57

of the Alice comedies from 1923 to 1927.

And then in 1927, Winkler's relatively new husband,

Charles Mintz, who actually got to start working for her

in the business.

By this point in time, he has taken over

as sort of head of the business.

He is no longer getting along with Pat Sullivan,

the creator of Felix the Cat.

Big opportunity.

And he has brokered a little arrangement

with Universal Pictures, the big New York film distributor

to on the slide create a new character to rival Felix.

Now, mind you, he and Winkler are still the distributor

for Felix, for Sullivan.

And they're creating a new character

to compete with him on the side.

Sort of like they're building their own chips

while still buying Nvidia.

And so he turns around and taps Disney.

And says, hey, Walt, can you make us a new series

and a new character?

Like Felix, but not Felix, like maybe not a cat.

Right, we need it to be plausibly different

while still having everything that made Felix successful.

Yes, so Walt and a cast about, what can we come up with?

It's like a cat, but maybe shares a lot

of the same recognizable attributes,

like a lot of white fur, a tail, some big ears,

easy to draw in black and white.

And they come up not with Biky Mouse,

but with Oswald the Lucky Rabbit.

And Oswald is a big hit.

He's got the backing of Universal distribution behind it.

That's a big hit for Universal,

big hit for Winkler and Mintz,

and a big hit for the Disney Brothers cartoon studio.

And it's not surprising because if you give

the creative brief to Walt and up,

take something that's kind of working,

but apply your style.

Their style was great.

I mean, they were emotional animators.

There's a great quote in the book,

Walt Disney and 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 I-Works-fy it

in a way that really can speak to people.

Well, I think it really was the partnership

of the two of them.

I think I-Works had like immense artistic talent

as an animator and was able to do that.

And Walt had taste.

Like he recognized it and he knew when and where to apply it.

Yep.

So on the back of the Oswald success,

the Disney Brothers cartoon studio grows

pretty quickly from this rag tag group from Kansas City

to like a real operation, like a real, you know,

at this point, bordering on major animation studio.

They hire about 25 employees

and start churning out Oswald cartoons.

Yep.

They move into a real studio building

on Hyperion Avenue in the Silver Lake neighborhood

of Los Angeles.

And when they move there, Walt and Roy decide

to get unclear which brother's instigation

that they need to rename the company and the studio

from the Disney Brothers cartoon studio

to the Walt Disney studio.

So there's two stories about this.

I was gonna say, I've seen both.

One is that it was actually Roy's idea.

Yes.

Because he's like, hey, you know,

we need to start building a brand.

Like people need to know who is making these Oswalds

and it should be the Walt Disney studio.

And you're very clearly the front man,

you know, you're selling, you're the visionary,

you're the sort of creative talent.

And this is a creative company.

Of course it should be you.

Yep.

The other story is that Walt's always had a dream

since he got to Hollywood of having his name

up on a neon sign.

Now that they have their own real studio,

he wants a neon sign constructed

that says the Walt Disney studio,

which I think does happen.

Yes.

We'll put the photo in the email.

The Hyperion Avenue studio has this really cool sign

or did for a long time before it got knocked down.

And I think it's a script mall or something today.

And in that vein, now that the studio

has become a real operation,

Walt moves from actually doing a lot of the animation

and camera work, mostly to overseeing the studio,

which you have to with an operation of 25 artists

and creative people and camera folks.

You need someone who has an overall vision

and taste to drive everything.

Yep.

Now, as Walt is transitioning from sort of doer

to really studio head.

And worth knowing the ownership of Walt Disney studios

that would become Walt Disney productions,

that would become the Walt Disney company

was at this point 60% owned by Walt and his wife

and 40% owned by Roy and his wife.

Yep.

So Vince, the husband of Winkler back in New York

who has sort of already proved his stripes by his dealings

with Felix the cat and Pat Sullivan.

He senses another opportunity.

He thinks that Walt has become superfluous.

And that it's actually just the animators who really matter.

And because the Walt Disney studio

doesn't actually own the IP of Oswald the Lucky Rabbit.

Universal does.

Although the Walt Disney studio was acting

like this was sort of their creation that they owned.

Yeah.

I don't think Walt or Roy really read the fine print

on the contracts here.

So in early 1928, Walt and his wife, Lillian,

who Lillian also was an early studio employee.

In the Inkin paint department.

Inkin paint department, that's right.

We'll get to that.

They make a fateful trip as a couple to New York

where one of the items on the agenda is for Walt

to go meet with Mints and ask for a raise

in the amount that the studio is getting paid

per Oswald short.

So Walt sits down with Mints and Mints is like,

well, I don't know about paying you more.

I don't think I like that idea.

In fact, I'm not even really sure, Walt,

what you are doing around here any longer.

But I'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 gonna have to pay you less, not more.

Like $500 per cartoon, less.

Which my understanding is that basically wiped out

the margin and they were saying,

we'll pay you cost to make these Oswald cartoons.

Yeah, I think Mints had basically calculated,

okay, if Walt takes this,

then I'm willing to let his studio keep making it.

And if he doesn't take it, then it's all equal to me.

I'm just gonna steal his animators

and go make it myself.

And crucially, before this meeting even happens,

he's already stolen the animators.

Mints has an ace in the hole.

He has, I think, signed contracts

with nearly all the animators except Ub Iwerks.

He has sort of through an act of subterfuge

gotten in touch with each of them individually

and brought them over.

Yeah, only Ub and I think maybe two or three other animators

refused to sign these secret deals with Mints

and stayed loyal to Walt and to Roy.

Once Walt realizes this, there's nothing he can do.

Like it's a free country.

He can't force his animators to stay.

He doesn't have employment contracts with them.

And he also doesn't have any control or rights

to the actual Oswald IP.

So he has no leverage.

He's got nothing.

He's got no customer contract.

He's got no employees.

He's got no intellectual properties.

Suddenly the enterprise value,

so that the entire value of Walt Disney Studios

is effectively zero.

Yep, it is a extremely bitter lesson for Walt and for Roy.

And it is one that you can bet they never forget

for the rest of their lives.

And really like everything in Disney's history

and all of the enterprise value that Disney has built

that we will see all across the rest of this episode

traces back to this moment.

It's a hard reaction to this lesson.

Totally.

I have a fun bit of trivia for you, Ben.

So as I think you know, Disney eventually does get

the rights to Oswald back.

This is gonna be my trivia for you.

Oh!

All 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 access CEO did the deal.

Yes.

Do you know how Bob got Oswald back for Disney?

So let's see.

By this point Disney had acquired ABC.

Yep.

Which 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 rabbit.

And Oswald is repatriated and NBC gets Al Michaels

and all is right in the world.

Amazing.

So back to 1928.

Walton Royer basically back at square one here.

They have not really just nothing.

They actually have less than nothing

because Mintz ever the, well really just kind of weasel

is the right word.

Yeah.

He makes Walt and Walt Disney Studios

finish out the current Oswald contract

which still had a few cartoons left to animate on it

and pay all of the animators who had all betrayed him

and were all about to defect.

Mintz is like, no, no, 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 contract.

Just brutal.

Absolutely humiliating for Walt.

And so then as legend has it

on the long, long train ride back home from New York,

Walt is struck by a bolt of inspiration.

And he scribbles a sketch for a new cartoon character

right there on his drawing pad on the train trip.

A character that wouldn't just reverse all the woes

of the Oswalds and turn around the company's fortune

but would maybe become one of if not the most recognized

figure in all of human history.

But before we tell the story of Mickey Mouse,

now is a great time to thank our friends at JP Morgan.

Yes, our presenting partner.

So today we are sharing a story

from one of JP Morgan's partners

and a company that you may know, Bill,

which is formerly Bill.com.

Right, Bill is the financial operations platform

for half a million small and mid-sized businesses,

what they call the Fortune 5 million.

They help manage and maximize cash flow for SMB companies

and Bill's DiviCard product is what employees

at those businesses use to fund their operations

day to day.

So here's a scenario that many listeners

may have experienced.

Someone on your team maxes out the credit line

on their corporate card with an unexpected purchase.

You send a wire to pay off the card

so you can continue using it,

but it takes two to three days to clear.

Meanwhile, your team can't transact.

Yeah, Bill solved that for its half a million customers

using an embedded payment solution from JP Morgan.

With API based sub-ledgering,

they can manage millions of payments in real time

on any platform all with one bank account.

Every Bill customer gets a unique virtual account number.

So the moment a payment is received,

the credit line is restored.

The result is a way simpler way to receive

and route payments at scale.

And the actual numbers are awesome.

Payment posting went from two to three days to seconds.

Inquiries dropped 83%.

Even Bill's own treasury team reclaimed 20 hours a week

from manual reconciliation.

For decades, these were Fortune 500 only capabilities,

but Bill and JP Morgan figured out how to deliver

that same infrastructure to the Fortune 5 million

while also improving Bill's internal operations.

You can read the full case study as always

at jpmorgan.com slash acquired.

And something else, if you wanna join us

and JP Morgan in person, we'll be on stage

at the We Are Developers World Congress

in San Jose this September.

Click the link in the show notes to learn more.

Okay, so David, how does this Oswald catastrophe

lead to Mickey Mouse?

All right, so here's the story of Mickey Mouse

as Walt would tell it.

March 1928, he and Lillian are on the long train ride

back home to LA from New York.

He's struck by the bolt of inspiration

for a new cartoon scenario about a plucky mouse

named Mortimer who is attempting to fly an airplane

just like his hero, Charles Lindbergh.

And this would go on to become

the Mickey cartoon plane crazy.

So Walt shows his sketches that he's making to Lillian

and Lillian says, I like it, but Mortimer?

That's too sissy a name.

How about Mickey?

And thus Mickey Mouse is born.

Now, the real story is more likely

that Walt and Lillian get back to LA

and Walt is like sweating.

So he and Roy and Ab and a couple other animators

who stayed loyal to them hold up

and they start brainstorming ideas

for some kind of new idea or new character

that they can create to replace Oswald

and turn around the studio's fortunes.

And also when you see Mickey and you see Oswald,

it's not hard to imagine where Mickey Mouse came from.

It's like kind of like, shore in the ears, make him circles.

You know, they both kind of have this white face

and the black outline.

I mean, it's really just the same brief

that created Oswald.

It was like, hey, take Felix and do something like Felix,

except this time it's take Oswald

and do something like Oswald.

And make damn sure we own it.

Yes, exactly.

So they land on the idea of a mouse.

And didn't Walt claim that he sort of like always

had a fondness for mice

because there were mice that would like jump in his trash can

in Kansas City while he was animating and...

Sure, whatever.

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

Yes.

And at least according to the Neil Gaibler book,

most likely, Ab is the one who first draws Mickey,

not Walt on the train.

But either way,

Ab definitely was the primary animator

of the first Mickey's for the whole first series of Mickey's,

including Steamboat Willie.

So by the summer of 1928,

we finished out the Oswald contract

and Walt and Ab and the small little merry crew

have gotten two Mickey shorts ready for production,

plain crazy and the Gallup and Goucho.

And Walt takes them around to distributors.

You know, the Walt Disney studio is well known at this point.

This seems like it would be promising new IP

and none of the major distributors are interested.

They're like, yeah, I don't know.

Mickey, it's like Oswald, but...

Without all the, you know,

thousands or hundreds of thousands of raving fans for it.

So... Exactly, exactly.

And then comes the Eureka breakthrough idea.

One of the gang recalls that the jazz singer,

the famous first popular talky,

he did movie with dialogue and sound

that had just come out the previous fall,

when they went to see it,

that there was a cartoon screened alongside it.

And Walt, when he hears this,

puts the two ideas together in his mind,

of a cartoon and sound.

And supposedly he says, that's it, that's it.

That's what we've gotta do.

Stop all these silent pictures.

Now at this point, people had made cartoons with sound,

but nobody had ever made a cartoon

with sound like the jazz singer had sound.

Synchronized sound.

Synchronized, yes, exactly.

Where what was happening in real time in the cartoon

was then played in sound,

exactly synchronized in the movie theater.

Yeah, the concept before was there's music that plays,

but it's only loosely attached.

And this is to the frame and to the beat of the music.

Like if you see Mickey on screen,

bop into something, then you might hear a xylophone

on the exact same downbeat, play a note.

Yeah, it's not just that like there's some music

accompanying this cartoon that you're watching,

it's that what is happening in the cartoon

feels like it is producing the sound.

Yes, there's a great business model lesson in this,

which is with the first two Mickey's flopping,

if you just do the same thing as an existing competitor

who already has distribution, brand customers,

it's not enough.

You need to go do something leveraging

a new piece of technology or a new platform.

You gotta come at it from an orthogonal way

in order to leapfrog and make people pay attention to you.

Otherwise you're just a like smaller worse also ran.

Totally, and that can be anything.

I mean, the only reason that the Oswalds worked,

even though they were a rip off of Felix,

it was because they came built in

with the universal distribution.

But yeah, Walt taking out the Mickey's before bringing sound,

like he's got nothing to bring to the table here.

Yeah.

So Walt lines up access to the Cinephone Sound Recording

System from a character named Pat Powers,

who had actually helped create universal,

some number of decades earlier,

and then had gone on to become a sound accolade

and entrepreneur developing a sound system

for this new movie technology.

And so Walt and Ub and crew,

animated a test sequence of a Mickey with sound,

and they screen it for all their wives and girlfriends.

And Ub writes later of what happened next

when they screened the synchronized sound Mickey

for the first time.

I never saw such a reaction in an audience in my life.

The scheme worked perfectly.

The sound itself gave the illusion of something emanating

directly from the screen.

Walt kept crying, this is it, we've got it.

It turned out that sound was the critical enabling technology

for animation to go beyond a novelty

and allow the characters that are on screen

to actually have personality that audiences connects with.

So interesting.

And it's not obvious at first.

Until you do.

I mean, it's obvious in retrospect,

but you can totally see how when Walt had this insight

and then they made the investment

because doing a test animation and synchronizing the sound,

like even to show a little screener

must have been really hard at the time

because none of the tools existed.

They sort of had to invent the way

to synchronize the drawings with the music and the systems.

It's sort of a big bet even to try

and see if that creates personality.

Right, right.

And sound did the same thing for live action movies,

but it's not that big a leap to have humans talking,

like humans talk.

Sound just made it way better.

Sound for cartoons was this giant leap.

These characters, this art can now be actual characters

with personalities in a way that they couldn't before.

Non-obvious at the time,

completely obvious in retrospect.

Yep, so they make Steamboat Willie

as the third Mickey, but the first with synchronized sound.

Which we're gonna skip over the whole headache nightmare

of creating this thing,

but it was like Walt constantly going back and forth

to New York, betting every last dollar that he had,

inventing all these new processes,

trying different ways to get an orchestra

synced to the sound.

Oh yeah, they like animated a little ball on the screen

that would sync to the orchestra as they were playing.

Yes, and he couldn't get the original conductor

of the orchestra to actually use his method.

The orchestra guy was like,

eh, trust me, and then it was all out of sync

with the screen.

The net of it is it's a giant, painful,

operational struggle to get this thing out,

but my God, does it hit?

Yes, well, you know,

this is the nature of the New York distributors.

They get it made.

Walt takes it and shops it around,

all the big folks in New York,

and they're so conservative, they're like,

well, this is cool, but I don't know

how audiences are gonna react to this.

We kind of want to see a test first.

I don't want to be first in line.

Yeah, exactly, exactly like VCs.

Like, oh, so Walt decides that he's gonna take matters

into his own hands, and he goes directly

to the manager of the Colony Theater in New York City

and cuts a deal for $1,000 to run Steamboat Willie

before the features that they're showing

in the Colony Theater.

So going around distributors just to get this

in one theater as a test.

And so Steamboat Willie premieres in New York City

on November 18th, 1928, before the film Gang War.

Nobody really remembers Gang War

because Steamboat Willie is a revolution.

Critics love it, audiences love it.

Yeah, isn't there some famous story

of people sort of standing up and screaming,

we want Steamboat Willie again

instead of playing the main feature?

Yeah, yeah, exactly, exactly.

But still, you know, Disney now needs to find a distributor.

And now he's got the proof point.

These New York distributors, they're still so conservative.

They're like, well, you had one hit.

I don't know that like we can really trust

that this isn't just a fad,

that the future sound mickeys are also gonna be a hit

and that you can repeat the magic.

And famously, one distributor while Walt is meeting

with him here, and he's trying to explain to Walt

why he's gonna pass again on the Mickey deal,

picks up a package of lifesavers candy.

And he says to Walt, the public knows the lifesavers brand.

They know what these are.

They don't know Walt Disney and they don't know your mouse.

I can only imagine Walt sitting here just seething.

But this makes a huge impression on him.

I think this is an important thing about Walt.

He definitely has a huge ego, right?

He is very willing to learn,

even from pretty obnoxious people.

He's like, you know what, you're right.

Oh, I think he's motivated by learning.

He's motivated.

I think he's an engineer.

I think he loves picking things apart

and learning the way they work.

I think he's motivated to make the best art he can

in addition to making the best business he can.

So if someone's gonna 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 gonna know

if they liked the picture,

they were gonna know Walt Disney's name.

Ultimately, what Walt does is he turns to Pat Powers,

his partner in the sound technology,

who had been one of the original universal executives,

and they cut a deal where Powers

will be Disney's direct distribution agent

in return for just 10% of the gross revenue on the Mickey's,

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 Mince 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,

what do we need Walt for?

So this explains the sweetheart deal on distribution

because that was the real prize he was after.

And just a year later, in 1930,

Powers does the unthinkable.

He convinces Ub IWorks to quit and leave Disney.

He says, we're gonna get you set up with your own studio.

You're gonna work with me, we're gonna create new characters.

It's the exact same thing that Mince 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 branded prominently upfront

and at the end a Walt Disney comic

and they had become huge hits.

So even though Powers steals IWorks away, nobody cares.

Everybody still wants the Mickey's,

everybody still wants Walt Disney comics.

Disney has made himself the lifesavers of animation.

Disney first switches to Columbia for distribution

and then to United Artists

and audiences just keep loving Mickey.

In fact, they love him so much

that it leads to the discovery of a whole new business model

for Disney and the company,

the intellectual property flywheel.

And it starts with the Mickey Mouse Club.

This is wild.

I had no idea about the origins of the Mickey Mouse Club.

Basically discovered by Disney by accident.

Totally by accident.

So in the summer of 1929,

just a few months after Steamboat Willie

and the first sort of nationally distributed Mickey's,

the manager of the Fox Dome Theater

in Ocean Park, California,

contacts Walt with an idea.

Why don't we partner to start a Mickey Mouse Club for kids?

I've got like a thousand kids

who keep showing up here at the theater every weekend

and all they wanna do is watch the Mickey's

again and again and again.

I think we should capitalize on this.

We can create a club, like a kids club,

and we can charge parents a membership fee.

The kids will love it.

The parents will get them out of the house every weekend.

It'll be great.

And we can pilot it here at the Fox Dome Theater.

And then if it works,

I think we can franchise this nationally.

And so this is exactly what Walt

and this theater manager do.

The way it works when they take it national

is that theaters would buy a quote,

Mickey Mouse Club Charter from the company,

from the Walt Disney studio.

It's like a franchise type.

Yeah, like a franchise right for $25.

And then as part of the club,

the kids and their parents would gain the right

to buy exclusive Mickey merchandise.

I mean, it's kind of amazing, right?

Pay to become a member of a club

to dedicate yourself to fandom

so you have the right to buy more things.

The right to buy more things.

Yes, so like hats, buttons, banners, 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 and girl scouts

of America combined at this point in time.

That's insane scale and insane speed of adoption

pre-internet.

Right, right.

Pre-internet, pre-cable, pre-broadcast TV.

The ability to get a million Americans doing something

within a few years is like, how did that even work?

I mean, I'm trying to think how word

could even spread that quickly.

I guess through Disney's distributors to the theaters.

Well, this is like a no brainer proposition

for a movie theater operator.

You're gonna take your Saturday or Sunday afternoons,

which are probably reserved mostly for kids anyway,

all your matinee showings.

You're gonna convert it into a Mickey Mouse Club.

Kids are gonna love it.

They're gonna buy a bunch of stuff

that you otherwise wouldn't have the opportunity

to sell to them.

Parents are gonna love it

because they get rid of the kids.

And then for Disney,

they're just getting this turbocharged distribution

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 kinda 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 launched a daily Mickey comic strip

with King Features Syndicate in newspapers

around the country.

It gets published daily in 60 US newspapers

and then also internationally in 20 more countries

around the world.

So Disney is getting paid

to produce a Mickey comic strip,

which only cost them the salary of the one animator

that they have making it every day.

A 24 year old named Floyd Gottfriessen,

who would do it every day for 45 years.

Wild.

So not only are they getting revenue for this,

they're getting free daily advertising

and IP exposure to probably a 100000000 plus people

through this newspaper comic distribution every single day.

And even if they weren't getting paid for it,

the marketing on that,

so that people go see Mickey films.

Exactly, yeah, it never becomes a huge revenue

or profit driver for them,

but like that free daily marketing

and 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 saw that 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.

So that's sort of, they're getting the seeds of like,

okay, we're making some money on the comics,

but it really is like a massive marketing engine.

Well, you're teeing up the big one here,

which is March and Consumer Products.

Yep.

So pretty quickly after Steamboat Willie,

Walt is walking the street in New York

and a man comes up to him,

like comes up to Walt Disney on the street

and offers Walt $300 to license the Mickey character

to put it on a series of children's writing workbooks

that he's producing there in New York.

And this is like really early days,

Mickey's just starting to work,

the studio still needs money,

so Walt's like, sure, yeah, I'll take 300 bucks, why not?

And 300 bucks in 1929, it's a lot of money.

I mean, this is the beginning of the Great Depression.

Yes, yes, Mickey takes off during the Depression.

In fact, he sort of becomes like a national champion,

it's part of his success that people view

plucky Mickey's success as a mouse, as the underdog,

as like something that Americans can identify with

through the Depression.

And life is hard.

I mean, having a sort of way to disassociate a little bit

and just enjoy a like fun loving problem free cartoon.

I don't think people know this.

Mickey's role in these early comics

is exactly what you're saying, the underdog.

He's getting himself into these tricky situations

by someone that seems bigger and stronger

and he's able to figure it out and emerge.

It's the American spirit.

Yep, yep, yep.

So back to the writing tablets.

They take off and do huge, huge sales.

Disney doesn't even know how much sales

because all they have is 300 bucks

and a handshake from this guy.

So Walton Roy figure, all right,

we need to get smarter about merch.

So they contact an ad man in Kansas City

that Walt admired named Kay Cayman,

who had owned an advertising firm

and they agree to do a deal

where Kay becomes the exclusive commercial products agent

for all Disney merchandise licensing beginning in 1933.

And the deal they do is that Disney would get 60%

of the first $100,000 in royalties

that Kay is able to generate from licensing,

Disney brands and mascots.

And then after the first 100K,

they would split every dollar of licensing revenue 50-50.

And there would be a lot of dollars after the first 100K.

This is a huge moment.

I mean, there is a real case to be made

that besides Walt and Roy and, and, and, uh, by works too.

But at least on the business side, besides Walt and Roy,

Kay Cayman was the third most important person

in the first, you know, half century of Disney.

All right. So make your case.

What, what, what goes on to happen here?

So within six months, Kay takes Disney merchandising

from this hodgepodge of random licenses

of guys that Walt met on the street.

And many of which were a lot more than 300 dollars.

Yes, yes, yes.

To a real professional operation doing $6 million

of gross merchandise sales within six months.

That then grows over the next two years

to $70 million annually of gross merchandise sales

all around the globe from over 40 separate,

super high quality consumer product partners.

So the most successful and famous example of this

is the deal that Kay does in 1933,

right after he takes over with the Ingersoll Watch Company.

This is crazy that within just a few years,

they can be at a $70 million level in 1935 of merch.

I mean, there's so much pent up demand to buy Mickey Mouse

stuff that you can sort of explode out of the gate.

I don't even really understand how Kay lined up 40 merchants

and got all this stuff manufactured and distributed

in such a short period of time.

Well, I think part of it though is that he's like

a real professional and well respected in the industry

with contacts, but yeah, to your point Ben,

there's just so much demand for Disney merch.

So the $70 million is a like gross sales

to the end consumer number.

So most deals that Kay would do would be for 5% royalties

on the wholesale price of the goods

and the $70 million was retail.

So if you assume 100% retail markup,

that's $35 million in wholesale revenue.

Disney and Cayman are splitting 5% of that number

between them, but even that is $1.75 million

split 50-50 between Disney and Kay.

This is like an astronomical number

and it is a way, way bigger and better business

than the cartoons themselves at this point in time.

It's funny, I found the comment on the Disney Family Museum

site that by the late 1930s, royalty income from merchandise

had exceeded revenue from film rentals, but-

It wasn't even by the late 1930s.

It was 1934.

It was quick and it was by a lot.

Yes, yes.

So just to illustrate the difference,

the distribution deal that Disney does with United Artists

for the Mickey films and for the Silly Symphonies,

which is the second cartoon series

that Disney starts in the 30s,

Disney gets an advance of $15,000 per film,

but Walt is always investing ever more and more

in the production of the cartoons themselves.

By this point in time in the mid-30s,

he's investing like $30,000 plus per cartoon.

He's only getting a $15,000 advance.

So it's not even guaranteed that each individual cartoon

would be profitable.

Usually they were, but they would have to earn out

on the back end, compare that to half of basically

$2 million in pure margin, almost pure margin revenue

coming in from K every year.

It doesn't even matter that Walt is investing everything

back into the cartoons.

He's got this money spigot coming in.

So summarizing that, films are tens or low hundreds

of thousands of dollars of profit coming in

and the merch is on the order of a million dollars.

Yep, and film profitability is highly dependent

on a film by film basis.

It's got to play out in theaters, et cetera, et cetera.

All right, so I cut you off on the Ingersoll Watch Company.

Yeah, just as one example of like the deals

that Kay is doing, in 1933, right after he takes over,

he does a deal with the Ingersoll Watch Company

to manufacture the famous Mickey Mouse Watch.

That watch would sell 2.5 million units

over the next two years.

The Ingersoll Watch Company was about to go bankrupt

during the Depression.

It saves the company.

And wasn't it the most popular watch in America?

I think that's right, at least for some point in time

during the 30s.

Fascinating, and of course the modern Apple watch,

Mickey Watch face is a reference to this

because he's using his arms to point to the times

on that original Ingersoll Watch.

This is a whole different shape of a business

than has ever existed before.

I mean, it's funny, we started the episode

comparing Disney to other Hollywood studios,

but this is not a Hollywood studio.

They're not shooting live action films.

They're making these cartoons.

The rest of the industry is kind of doing slapdash ones.

They're doing like really high production value

sound synchronized cartoons.

And they're actually making more of their money

from merchandise.

They've got these Mickey Mouse clubs.

The comic.

Like this is a new thing that no one else is doing.

Yep, this is the birth of the Disney flywheel,

and nobody else has it.

So is this a point where, David,

I could make my pedantic aside

that I've been telling you about?

Yes, yes, yes, go for it.

We had a great email from a listener a couple months ago

about how flywheel, this term that everybody uses

in business is actually completely the wrong term

for what you want to describe.

So Disney is famous for this concept.

As is Amazon, and it inspired Azilly and other founders

to try and articulate their own flywheel and draw it out.

But hilariously, David, as you say, it is a misnomer.

It describes the wrong physics phenomenon.

People are trying to describe a system

that has a positive feedback loop

where inputs into one element of the system

are amplified and add energy

to other parts of the system.

But that is not actually what a flywheel is.

A flywheel is a primitive battery.

It is a way to store energy to be deployed later.

Yeah, it's like a version of the same mechanism

that a spring serves in a mechanical watch.

Right, exactly.

But in reality, there's not really a better shorthand

for system of integrated components

that creates positive feedback loops.

So we will continue alas to use the phrase flywheel,

but the important thing here is that Walt really did

sort of either discover or invent this business model

of the intellectual property flywheel

that we see replicated all over the place today.

I mean, I think it really revealed itself to him and Roy

in these early years of Mickey.

And it's probably worth taking a moment

to talk about why this works so well.

So the most important thing,

and I don't think this was premeditated in any way by Walt,

but it was just something he innately cared so deeply about,

is to make the highest quality,

genuinely most compelling new IP as possible

that audiences can build a deeper relationship with.

This is like what Walt was building to,

and up to through all of his early years in animation,

all the technical innovations,

every step was getting to a character

that audiences can fall in love with.

Now, critically for Disney,

and again, I think completely accidentally discovered

by Walt, the IP that works best for flywheel dynamics

almost has to be animated, i.e. not live action,

because with live action characters,

the characters are too bound up in the actors

that play them, and that creates all sorts of problems.

Like one, especially today,

it makes your economics as a studio just like way worse

because you gotta pay the stars so much.

Right, there's wholesale transfer pricing,

a huge amount of the margin you could get ends up

getting paid out to effectively your partner

in creating the character, the actual actor.

Whereas Mickey works for free.

Now, you gotta pay the animators,

paid very well to animate them, it's a-

That's on the value capture side,

but on the value creation side,

which I think is the more important thing,

Mickey is always available to work.

Yes, yes.

And Mickey doesn't age.

Yes, exactly.

You can create a eternal character through animation

in a way that you just can't when you're using real people.

I mean, Star Wars is greatest Star Wars-ism,

we'll talk about it later in the episode,

is gonna have a problem when Mark Hamill

and Harrison Ford die.

I mean, I guess unless AI gets really good.

And live action is sort of dated to a time and place

in a way that cartoons can sort of transcend.

Yes, yes.

And they can always exist in the present

in a way that we're gonna talk about Davey Crockett later,

but at some point it became completely uninteresting

to watch Davey Crockett,

even though he was like a complete heartthrob obsession.

That was great IP for the moment,

it just wasn't as durable.

Yeah, live action IP with very few exceptions

tends not to have the staying power

over decades and generations that animation does.

Yeah, few exceptions being like James Bond,

but God, if they tried to do all sorts of crazy stuff

in order to let that IP keep living.

I mean, like there's been 67 James Bond's,

and they have to keep rebooting the story over and over.

Exactly.

Okay, so that's step one.

Genuinely great IP that audiences fall in love with

has to be at the core.

Then step two, you need to maximize the distribution

for that IP as wide and as far as possible.

In its primary delivery vehicle.

So like Mickey in those films,

get those films into as many theaters as possible

to just completely saturate the world.

It's sort of a scale economies thing.

If you're gonna 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 and the flywheel business model,

they're willing to make every sacrifice possible

to maximize distribution because they know

that they're gonna 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 wanna get that IP into as many other arenas as possible.

And this is exactly what Disney was doing.

Right, other mediums.

Merch, clubs, comics, books, magazines.

The beauty here and the discovery that Disney makes

is that when you put the IP into these other ancillary nodes,

it doesn't cannibalize the core IP.

Like you're not gonna 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's.

If you structure the nodes of the flywheel, right,

the additional exposure reinforces the core IP.

That's really interesting.

So you do need some scarcity of the character

in its main medium,

where you need like a really high quality bar

and not oversaturate there.

But in your secondary mediums,

then you can cover the earth and be like everywhere all the time.

Exactly.

And so then if you flash forward to today

and like the problems that Hollywood

and most other studios have,

and Disney too, especially with Marvel,

if you come out with sequels all the time

at this like ever increasing cadence of the core IP

and the core delivery vehicle, people get tired of it.

That's super interesting.

But the flywheel lets you get that constant exposure

without oversaturating the core IP.

It's like absolutely brilliant.

Not to mention releasing films is actually not

and never has been a great business model.

It's just not that high margin.

It's not that repeatable or predictable in its success.

So you kind of...

You have to invest years ahead in production

before you get any payout.

Right, right.

In any studio that is purely a studio is in for a rough go.

But if you're trying to basically create this

like durable platform of profit

with all of these ancillary businesses,

then you can focus on scarcity, quality, innovation

in the kind of primary medium.

Yeah, because you know you're gonna drive revenue

basically in perpetuity out of it through the flywheel.

Do you think...

I'm thinking about this as it pertains to acquired.

We're so obsessed with quality

and just being in one medium.

Do you think that it is okay

to lower the quality bar outside the primary medium?

Like can Disney throw Mickey Mouse on all sorts of crap

without diminishing the brand of Mickey Mouse

as long as the primary medium of film

stays really high quality?

Basically, I think the answer to that is yes.

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, but...

You gotta be really careful about what the mediums are.

This is why comics is so perfect for the flywheel

because people are used to consuming a daily bit of content

in a comic strip and they don't have expectations

that it's gonna 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.

It does deepen your fandom.

Yes, exactly, exactly.

So all of this as Walt starts to understand

the business model power of what they've created

leads him right to the natural conclusion

that Disney should basically always invest

as much time and money as possible

in the creation of new core IP.

And Walt is starting to get a crazy idea

of how he might be able to do that,

which is to create Hollywood's first full length

animated feature film, Snow White.

Yeah, and David, you put it in such a capitalist way there

that it's to maximize the amount of dollars

that you sink into making the quality

so that it federates onto this flywheel.

Sure, there was an element of that.

There also is an artist with Walt

where he's been creating these cartoons.

He's starting to like really identify

with the artistic community,

with the fine artists of the time,

build a lot of those relationships.

And he wants to create something that is sort of seen

as not only a technology breakthrough,

but like an art breakthrough.

Can he create a masterpiece in this new medium?

And can he play with your emotions?

I mean, we know that cartoon characters

in a slapstick way can make you laugh,

but there is this like total open question in the world

of can you create animation so realistic

and characters so compelling

that you can make audiences cry?

That's the other side

of the ludicrously capitalist big investment

into Snow White.

You're totally right.

I'm looking at it through like a business model,

capitalist lens and I don't think Walt

was thinking about it that way specifically.

He did want to build the most successful company

that he possibly could.

That could take bigger and bigger swings.

So listeners, before we tell you the story of Snow White

and how it came to be,

now is a great time to tell you

about one of our favorite companies, Versel.

So building software in the agentic AI era

demands a completely different kind of infrastructure.

So that's exactly what Versel has been building.

Their tools in their agent stack have been huge

for companies like Notion, Brex and Neon

for shipping agents to production.

And they just made some really big announcements on stage

at their annual conference called SHIP,

which David and I actually spoke at last year.

One of the biggest announcements is Eve,

Versel's open source agent framework.

Yep, Eve is the glue that ties their agent stack together.

Building an enterprise great agent

that used to take weeks with Eve, it now just takes minutes.

Think of it as like the next JS for agents,

opinionated, open source, and it runs everywhere.

And Versel uses it for their whole business.

Their data agent gives the whole company

on demand analytics scoped to each person's permissions.

Their sales agent nearly doubled pipeline coverage

and their autonomous AI sales rep platforms

is in the top 10% of their human reps,

you know, for only a few thousand dollars a year.

They also rolled out new support for enterprise apps

and agents because here's what every executive is realizing.

Once everyone can build an agent,

the hard part is knowing who can access what

and what every agent is actually doing.

Wouldn't it be nice to run your agents and apps

inside your own cloud so that everything you build

stays within your own security boundary?

Versel does exactly that.

Versel's your one stop shop for the agentic era,

tools, frameworks, infrastructure,

all engineered to work together and built for enterprises.

And one last cool thing,

their ship conference is hitting more cities worldwide.

So you can find out more at versel.com slash acquired,

that's V-E-R-C-E-L dot com slash acquired

and just tell them that Ben and David sent you.

All right, so David, before we tell the story

of how Snow White came to be,

we got to tell the nickname of Snow White,

the project that was going around Hollywood.

Do you know what that was?

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 about Jack Bogle

with Bogle's Folly with creating the Vanguard Index Funds.

We got to start a Folly tracker here on acquired.

Yeah, a Folly tracker.

But yeah, I mean, even for Walt Disney,

as successful as he and the studio have become,

the idea of a feature length animated film

was crazy in 1930s Hollywood.

And it had never been tried before.

I mean, Roy tried to persuade him not to do it.

He argues that it's gonna bankrupt the studio.

Yeah, this is a multimillion dollar undertaking

when David, as you were talking about before,

the shorts were like $15,000, $30,000 undertakings.

Yep, Walt would say later about Snow White,

we had decided there was only one way

we could successfully do Snow White,

and that was to go for broke, shoot the works.

There would be no compromise on money, talent, or time.

We did not know whether the public

would go for a cartoon feature,

but we were darn sure that audiences

would not buy a bad cartoon feature.

So good.

It had to be a masterpiece,

or the whole thing was gonna fall apart.

Okay, so why was this so expensive?

Why such a giant undertaking to create

a animated feature full length film?

Listeners, I thought it'd be fun on this episode

to dive into the process and give everyone

a little primer on what are the steps

to create an animated film.

Yes, it's a true technical wonder,

and you and I got to actually do it

when we went to visit the Disney studio.

It was so fun.

Well, one part of one frame of it.

One tiny part of inking and painting.

Listeners, we'll include some behind the scenes

ink and paint photos of David and I in the email.

So let's start with the goal.

The goal is to create the illusion of motion

with a series of still frames,

like a ton of still frames,

24 still frames per second.

So that requires a lot of clever tricks

to make it economically possible,

to make it consistent, and to make it enjoyable.

And if you really do your job,

to make it emotional for the viewer.

And to be clear, live action film is the same thing.

It's an illusion.

But as we talked about earlier,

it doesn't cost anything to animate the humans.

And you get physics for free.

So believability comes for free.

You don't have to do clever things like figure out

how do things stretch and squish

when someone bounces on the ground?

It all just sort of happens

because you're shooting it in the real world.

So where does it all start?

It starts with a good story.

So there's something called the story department

that kicks off the process with little sketches

that are sort of pinned to cork boards.

And so these story meetings are great.

You have people acting out alongside the drawings

to illustrate their idea,

how the characters move and interact and talk.

And Walt was famously amazing to watch

when he did this acting.

So this then gets put into a story reel of static sketches,

just kind of illustrating the main flow of the story.

At this point, it is super easy to edit, reorder,

change dialogue, anything.

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

At this point.

So then the sound department gets involved

and that's both music and voice.

So first you'll have oftentimes a temp voiceover.

So the animators have something to animate to

if you don't have the real actors

laying down the vocal track yet.

You also have the music scored and recorded at this phase.

And the way that animation and sound are synced at this point

is through something called bar sheets or exposure sheets

where the entire film, this is going to sound insane,

is broken down by frame, by syllable of dialogue,

and by beat of the music.

And these are mapped together.

So this way the animator can do their drawings

exactly to the music and dialogue.

Now you can kind of understand the insanity

of what Steamboat Willie was trying to do

and why that was so difficult.

The Disney studio kind of had to invent this process.

Yeah.

And that was what, 78 minutes long?

Yes.

Meanwhile, you have the layout department

who is doing the staging, the camera framing,

the composition of these shots, the lighting for every scene.

Now when I say things like staging, there's no stage,

camera framing, there is a camera,

but that's not even the camera this is referring to.

This is where the synthetic camera is aiming

in the synthetic action.

Composition, lighting, this isn't like lighting,

the way you think of lighting,

this is this very abstract art of imagining

what it would look like if these characters were real

and there were real lights

and figuring out how to draw that scene.

Then this gets forked into two parallel processes

where background painters are doing their work

on these gorgeous watercolors on paper and oil paintings

on these super wide panes of glass

to allow for the panning across the scene.

Whenever you go into the Disney archives,

you can see these, I don't know, four foot wide

by something like eight inch tall backgrounds

because the camera has to pan around

as the characters move around against the background.

And then the other side of the fork is the animators

who are doing their work on the characters themselves.

Yep.

Yeah, the backgrounds are just beautiful

when you see them in person.

That was my favorite part about the archive

to get to see the backgrounds of Snow White

or Cinderella or the other great Disney classics.

You just look at them and think, oh my God,

these are right up there with Rembrandt's or Picasso's

or they got, they should be in a museum.

And they are basically in a museum.

Disney has 11 rooms in the animation research library

which are temperature controlled and humidity controlled.

And they've got all these UV filters all over everything.

And there's these drawers and inside,

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

in positions they're likely to be in throughout the film.

This is distributed to each animator

who works on that character.

Because often, and by necessity,

there are multiple since that character

is going to exist on film for 80, 90, 100 minutes.

There's a lot of drawing to do.

Then there's the model department

who makes something called a maquette.

The animators who are drawing a character

hundreds and hundreds or thousands of times

or tens of thousands of times need a consistent

physical reference that they can hold and rotate

and examined under a lamp.

So these are eight inch tall versions

of the characters that are-

The original statues.

Right, they're perfect so that you can kind of say,

how would they look from that angle?

How would they look if I stood eight feet away?

Then you have animation itself.

So it starts with sketching on paper

with a pencil or with charcoal.

And they're literally sketching one frame at a time.

And they are flipping pages on their pad of paper

back and forth, back and forth over and over again

to get a feel for how the emotion of the drawing

is coming through frame to frame.

Does this character move like I think they should move?

Are they consistent in their motion?

Is their clothing sort of twirling the right way

when they turn left?

It's an insane art.

Are their mouths speaking correctly?

Yeah.

Right, as the character drifts closer

to the synthetic camera, are they getting big

in a way that feels consistent with the laws of physics?

My mind is so blown by the skill and talent of these people.

So 24 frames per second means 12 to 14 drawings per second.

So I 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 one character

doing one thing on one layer.

Yes, there's usually about what, double that?

Triple, quadruple, yeah.

So there's two ways that this can happen.

One is the most clean and obvious one straight ahead,

which is where an animator draws every frame in order.

Or there's something called 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 they sort of bridge

between those frames.

And the goal of doing this is to make

the most efficient use of the skilled artist's time

on the film.

Now over a time, a division of labor started to emerge

where, which kind of makes sense,

a super skilled animator would do work kind of fast

and loose with sketches that had little extra lines

hanging off everywhere.

There'd be like revisions on top of their original drawing

without actually cleaning up the mistakes underneath.

And then it was handed over to a cleanup artist

to trace their drawings with a single line

versus the hairy mess to kind of get it ready

for the next stage.

But again, preserving the same correct emotion flow,

bounciness shape form of the lines.

Both the in-betweeners and the cleanup artists

were kind of a result of the industrialization

of the animation process versus the early days

in the early Mickey ones of a kind of a single artist

animating the entire thing.

Yep, by this point as they're heading into snow white,

this had become a real scale production process.

I mean, it wasn't quite like an assembly line.

This is still art here, but it's a lot closer

to Henry Ford than it is to Picasso in his studio.

At least you do need to sort of synchronize

and coordinate teams and make the highest use

of the most valuable scarce resources, stuff like that.

So then there's ink and paint.

So let's talk about inkers.

Back in 1914, Earl Hurd had invented a concept

known as Cell Animation, C-E-L,

where you would draw with ink on the front

of a piece of transparent plastic,

or cell in the business short for celluloid.

And that way you could keep redrawing

just the character in each frame

and the background could stay static.

That essentially made animation possible at all in 1914.

You could imagine if you had to just redraw every line

on every frame every time, one, it would look crappy

because things would sort of wiggle all over the place

when the film was actually playing,

but two, it just was economically infeasible

to draw every line every time.

Yeah, it was not scalable.

So it had evolved since then

where there were now armies of people

who were almost exclusively women at this point in history

who would literally duplicate every line

that the animators drew on paper with pencil

and they would trace over their entire drawing

with ink on cell, every single frame.

Yes.

So what you would see on screen in a film

is actually not the direct work of an animator,

but it's the painstaking work of an inker

who traces over the animators line

on the transparent celluloid instead of on paper.

Yep.

And then the inkers would flip the cells over

and pass them off to the painters.

Yes.

So this is how they get color in.

You want your outlines on the front,

so it masks any colors that sort of overflow

out of the dwarf's shirt or Mickey's shoe.

And then on the back, that's where you do your painting.

You put all the colors on.

And David, what you were referring to is you and I

did some painting on a pre-inked Mickey Mouse.

Hey, we did a little bit of inking on the front side.

We did a little bit of inking.

Inking is harder than painting.

Painting is forgiving.

Yeah.

But Disney has this room with thousands and thousands

of colors of handmade onsite paint

that is a production facility for paint color

and applying that color to animation cells.

It used to be called the rainbow room.

Those colors, that paint went into

Snow White, Cinderella, Peter Pan, Alice in Wonderland.

Thousands of people each making thousands of drawings.

It multiplies fast.

So then you've got your special effects layer.

So like Tinkerbell's wings use effectively spray paint,

like a little paint gun,

so it can be partially translucent

or the dwarf's glasses or sparkles

or another thing in special effects is like water effects.

What if you want to make it look like

there's a little bit of ripple in the water

or some depth of field on some leaves

that are closer to the camera.

So before any of this inking and painting,

which was super expensive and time consuming,

they would do something called a pencil test

where they would take the pencil sketch drawings on paper

and put them all through the camera.

So the animators and Walt could look at the rough action

and see if it felt right.

See if it had the right physics,

correctly represented each character's tone and emotions.

It's almost like a higher fidelity prototype

than the one that we first talked about.

That came out of the story meetings.

It was a way to catch things that weren't working

before you got all the way to full fidelity.

Then camera, this is like the coolest part of the whole thing.

The multi-plane, this is incredible.

So Disney and Bill Gehryt took the idea

of a multi-plane camera that had existed before Disney.

Ub Iwerks actually built one of the first

advanced multi-plane cameras back in 33

while he was away from the company doing his own thing

using parts from an old Chevy.

Yes, yes.

And then Walt rehired Iwerks later to come back

and lead within Disney.

Yep, like process improvement for how we do animation.

So Disney created the first one to be used in a feature film.

It is unbelievably cool.

It has an entire massive room to itself.

There's a team of operators to make it work.

You had to climb a ladder to get all the way to the top.

So here's how it works.

There's a still frame photo camera

mounted on the top of this thing, pointed straight down.

Yeah, it's like what, probably 15 feet tall?

That feels high, 10, 12.

But something like that.

There were up to seven planes that you could use.

So you've got these horizontal planes between the floor

and where the camera is mounted, you know,

up 12 feet in the air.

Typically with the character on the celluloid

almost all the way close to the top of the camera,

unless you had like special effects

or some foreground obscuring the character

or something like that.

And then all the elements of the background

at various sort of different depths away from the character

are painted on panes of glass and paper below that.

And you'd want the background broken out

onto multiple panes so you could do things

like a parallax effect if they were sort of panning by.

Or if you wanted to do like an establishing shot

to zoom in on a subject from far away,

you could progressively in every single photo

that the camera took, every frame,

bring the panes of glass closer to the camera

at different calculated rates.

So the distance between the planes could be adjusted

to really sell the animation.

David, you and I saw one of these

in the corporate archives in Burbank.

You've actually seen two of the three that exist, right?

Yes, yes.

One of the other ones is at the Walt Disney Family Museum

in the Presidio in San Francisco,

which is an incredible museum and resource

that informed a lot of this episode.

Worth calling out, this is a photo camera,

not a movie camera.

So it would just photograph one frame at a time

and then all the technicians would adjust all the knobs

and layer placements for the next frame.

So when you look at the level of invention required

to create a multi-plane camera and operate it,

you kind of start to understand how these guys

in the animation department could evolve into imagineers.

Yes.

Like there's a lot of physicality involved in animation

that I don't think I really understood

until diving into this process.

You know what?

What's happening at Disney

isn't just the intersection of art and commerce,

it's the three-way intersection of art and commerce

and engineering and always has been.

Yep, I think that's right.

All right, so that's the animation process.

That is why this is such a giant difficult undertaking

to create something like Snow White.

Absolutely enormous undertaking.

So when all is said and done,

it takes one and a half million dollars

of investment over three years of studio work

to create Snow White.

Remember, this is at the same time

as Disney is making short cartoons for like,

I don't know, 20, $30,000.

And even that is way above what anybody else

in the industry is spending.

This is $35 million inflation adjusted.

And yeah, movies are like $300 million budgets today,

but imagine nobody's doing that

and you have the first idea to create an animated movie

and you're like, I'd like $35 million of budget to make that.

Right, when Roy said that he was worried

it was gonna bankrupt the studio,

like Roy was being the rational one.

Yes.

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.

Ben, as you were saying, all the art and the work

that goes into it, 2000000 sketches

and 250,000 finished drawings and cells go into snow white.

This is at a scale so beyond what anybody else

in the entire entertainment industry is doing.

Gabler in his book uses the analogy of,

it was like a Gothic cathedral in animation.

That is like the only kind of analogy that makes sense here.

They staffed up to 750 studio artists

and did three years of nonstop work on production.

Yeah, incredible.

They actually went so far as to hire actors

to play each of the roles.

Yes.

And put them in full costumes

so they could film them for inspiration

just so that 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 characters proportions

were actually pretty different than a real life woman

so that they could kind of get a sense

from watching the test footage

how the character moved around in the world.

Yeah, I mean, you made the point a few minutes ago, Ben,

that Walt Disney wasn't doing this

because he was some capitalist.

I think he really did recognize

the incredible flywheel business model

that he had sort of accidentally created

and leaned into it, but like,

that's not gonna motivate him

to film a whole live action version in costume

just so that they can make sure they get the spirit right.

Like, this is art that they're creating.

And obsession with quality.

Absolutely.

So the movie finally premieres in Hollywood

on December 21st, 1937.

And I mean, it's one of the greatest films ever made.

The Academy Awards creates a special Oscar

for Snow White, a special award.

Yeah, because they didn't think it could be eligible

for Best Picture.

Right, right, right.

This movie, I don't wanna bury the lead,

it was the highest grossing film not only of the year,

but ever.

Ever.

It did $8 million of rental revenue

on a $1.5 million production cost.

And like, the category was so new and different

that they were like,

instead of being eligible to be nominated for Best Picture,

let's just create a special new category for it.

So the Oscar statue that they give Walt and Disney

for Snow White is the only one that's ever been made.

It is a large Oscar, it is Snow White,

and then seven little Oscars below it.

Walt personally would go on to win more Academy Awards

than anyone in history.

Walt has 26 Academy Awards.

The next highest is 13.

Yes, I mean, the audience reception was incredible.

Like you said, Ben, it was the highest grossing film

ever made of any kind, animated or otherwise,

in history to that point.

The critics reception is equally glowing.

Time Magazine writes prophetically

that Snow White is an authentic masterpiece

to be shown in theaters and beloved by new generations

long after the current crop of Hollywood stars,

writers and directors are sleeping

where no prince's kiss can wake them.

Of course, foreshadowing the Disney vault.

Snow White is alive and well today

as my two young daughters will attest.

Yeah, an interesting thing about this story,

I'm curious since you have daughters who watch it, David,

is it's kind of dark and Walt did meaningfully change

the brother's grim story that he sort of adapted it from.

It's very interesting that all of these early Disney's

cartoon movies, animations are adapted fairy tales

or adapted existing lore that Disney sort of changes.

The film was not really made as a children's movie.

No. Yes, it was animated, but it's dark.

No, and in fact, a lot of those decisions

like giving each of the seven dwarves personalities

in part were motivated to soften the darkness

of the fairy tale and Walt would always say

that he didn't make movies for children,

but of course he wanted children to be able

to watch them too, but some of the decisions

were actually made with the flywheel in mind

and the dwarves personalities is one of these.

They wanted to sell a lot of seven dwarves merchandise

and what better way to do that

than to give them all distinct personalities.

That is true, when you go to Disneyland,

there's a lot of people walking around

with like dopey and grumpy. Exactly, exactly.

So as we said, the movie itself, extremely profitable.

It does $8 million in film rental revenue

against the $1.5 million production cost

just in its first theatrical run.

Which dramatically changes the studio's financial position.

Yes, yes, now it is a bit of a misconception

that the profits from Snow White, the film itself,

would end up paying for the new Burbank studio

that Walt's about to construct.

That's not entirely true.

I think most of the film profits from Snow White

went to repay all the loans to Bank of America.

Yes, so listeners, it's worth diving into a little bit

of the complexity of how each of the parties

in the value chain of making and distributing movies work.

There's the studio like Disney, who makes the actual movie.

There's a distributor like United Artists or RKO

who does a lot of stuff.

They take the finished film,

they create all the prints that'll go to theaters,

they have the 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.

And so Disney has this 1944 annual report for employees

that David actually found when we were in the archives.

We were flipping through annual reports

and you were like, what is this?

There's two reports for 1944, what's going on here?

And they actually had 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 it has a breakdown of if for a dollar

getting spent at the box office, what are the splits?

And so 65% actually gets retained at the exhibitor

or the theater.

13% goes to the distributor and 22% goes to the studio.

And so when we've been saying rentals,

here's the interesting thing about that.

The distributor and the studio come together

and they actually rent their collectively owned film

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 two and a half X or something.

And that 8 million is the 13% plus the 22%.

Right, it's the share of Disney the studio

plus their distributor.

That's exactly right.

And so then I know I'm doing some financial gymnastics here.

Well, hey, all of this Hollywood accounting

even through to this very day is so obscure and arcane,

I think on purpose so that neophytes to the business

don't really understand the deals that they're making.

If you go look at what is really the source of truth here,

the 1940 IPO prospectus,

which we are gonna get to,

you can very clearly see that over a one year

and nine month period, they make $4.5 million

in film rental income the producers share.

So this is just Disney's from Snow White and the Seven Dwarfs.

So that's our real source of truth that we know,

$4.5 million.

Now, they had about $2.3 million of debt

from the $1.5 million of production costs

plus the interest that they owed Bank of America.

Yep.

So a huge portion of the net that they're taking home

just from the box office of Snow White

is going to repay the debt,

let alone operating expenses for the studio, et cetera, et cetera.

So yes, it's like great for the company,

but it's not quite as transformative

from the box office alone as people would think.

So they effectively have $2.2 million leftover

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 wanna go build a gigantic campus.

Yes, but Ben, of course,

Disney isn't just making $2.2 million in profits from Snow White.

There's all that good, good flywheel revenue

to come along with it.

So, if Walt thought that the flywheel worked well

for Mickey Mouse, Snow White is like a whole another level.

So before the film is even widely released

around the country,

they have their next major flywheel node,

their next business model innovation, already in market.

The movie soundtrack.

I couldn't believe this when I learned it.

Snow White was the very first movie soundtrack

ever created and sold to the public.

It all started with Snow White.

There were no movie soundtrack albums before then.

And it is a huge hit, both because it's a great soundtrack,

but before this album,

there was never anything that audiences could take home

actually of the picture that they saw in theaters.

There's no home video, right?

There's no streaming, there's no television.

You go to see something in the movie theater.

Sure, you could buy a piece of merch,

like a doll or a costume,

and there were a lot of those out there for Snow White,

but you couldn't take home the movie

except in the form of the soundtrack.

And the songs are quite catchy.

With a lot of work and stuff.

So the soundtrack is huge.

Beyond that, there supposedly,

I read our 2,183 separate SKUs of Snow White merchandise.

They get pumped into the global markets

by K.K. Mann's Consumer Products Organization.

Unreal.

The New York Times actually writes this

that quote, sales of Snow White products

might be America's path out of the depression.

That's how successful it was.

I mean, this movie was such a grand success artistically

for while film-wise for the studio,

for the whole medium of animation and legitimizing it

right alongside live action,

and for the flywheel business model of Disney.

So all of this enables Walt to pursue his next dream,

which is that he wants to build

a brand new state of the art animators paradise.

Ben, as you alluded to, the new Disney Burbank

animation studio, still the corporate headquarters

of the company to this very day.

Right, he basically sees the success of Snow White

and thinks, oh yeah, we're gonna do a lot, lot more.

A lot more.

Let's build all the infrastructure

and really do that right.

Yes, so Walt's goal with the new Burbank studio

was to be able to house 1200 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?

And he thinks that with this new campus,

everything that they're gonna install there

and all the additional staff,

that Disney will now be able to produce two new feature

animated releases every single year, plus shorts.

So like it took three years to make Snow White.

With all the learning from that,

all the innovations of the new campus, all the new staff,

he thinks they're now gonna be able to pump out

great new feature films every six months.

Which was a complete pipe dream

and they never really built to do.

Walt also in his mind,

think comes to see this Burbank campus

as really a utopian like place,

kind of almost like a college campus.

I mean, Walt didn't even graduate high school,

let alone go to college,

but he intentionally places it in Burbank,

which back then was like the sticks outside of LA.

He wanted the Disney lot, the Disney studio

to be this special place, kind of away

from all these other studios controlled by their

distributor bosses back in New York.

And he kind of, I think really wanted to create this band

of merry men and women type feeling

where they could achieve the impossible,

like producing two feature animated films a year.

Well, the thing he sort of didn't factor in is that

you might be able to make Snow White faster in the future,

but every idea that you have is gonna be

a different new idea that's gonna be more ambitious

and have more cost and require more people.

And so this Burbank studio was necessary

even to keep producing films every three years.

But the lot itself is unbelievable.

It's 51 acres, there are sports fields, a cafeteria,

there's art classes, there's massages available,

there's sunbathing in the penthouse club.

In many ways, this is like the Googleplex

before the Googleplex.

This is 1940 when they opened this.

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, very similar, very similar.

So here's an example of the lengths

that they went to on this campus.

So I was looking at Google Maps planning our visit, David.

And it looks weird, it's offset from the Burbank

street grid at an angle.

And we asked the person who was showing David and I

around listeners why this is,

and he said that it was Walt's priority

when they were building it to offer the exact perfect

conditions for lighting to animators.

Which of course, David, you know the spoiler here.

Yes, to have offices that face north

because northern light is true light.

Do you know why northern light is preferable?

No, I just know that that's what

our very kind tour guide told us.

So if you are in the northern hemisphere,

the sun moves across the south sky.

So if you're north facing windows,

your window offers the most consistent

and non-direct light.

And so every animator got a window

and they built the building shape

so that there's a whole ton of north facing sides.

Like the whole thing almost looks like a CPU heat sink.

It's like got fins so that it's got

all these north facing windows.

It's for the time it's an architectural marvel.

It's one of the first buildings with air conditioning

in southern California.

The windows had custom built sort of slats

that were adjustable.

So the animator could let in the exact right amount

of sunlight, indirect sunlight that they wanted

into that room.

And once they sort of got this building

architecturally laid out on the campus, they're like,

yeah, let's build the entire campus around this.

And to me, it really symbolizes that

animators are the crown of Disney in this era.

In the way that at Google, it's engineers

and at Apple, it's designers and at Microsoft, it's PMs.

The animators, to the extent that anyone but Walt has the power,

the animators are sort of the most valuable resource.

Yes, yes.

It's an animation driven company.

Yes.

So it's got this like utopian vibe, but there were trade-offs.

I mean, this was huge compared to the old Hyperion site.

People are more sectioned off to do their specific work.

You had less access to Walt to know exactly what was going

on upstairs if you were the rank and file.

But to achieve all this, Walt does need capital.

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.

So the Burbank campus construction costs alone

were $3 million.

So that's more than the money they had left over

from Snow White proceeds after they repaid the Bank of America

debt, but obviously they had all the revenue from the soundtrack

and the consumer products and all the flywheel revenue coming.

But still, they're planning to do Pinocchio.

They're planning to do Fantasia.

Right.

So the $3 million is just to build the facility.

Then they got to staff it with 1,200 animators.

So that's an extra 450 new animation staff they need to hire.

And to feed Walt's vision of having multiple films

in production at the same time, he green lights production

on Pinocchio, Bambi, and Fantasia all at the same time.

And all of these were completely different animation styles.

Yes.

And completely different from Snow White.

If you look at these films, we sort of have this notion today

of like, oh, it's the Disney style.

That is not really reflective in the darkness of Snow White

in Fantasia's really experimental, artistic, vignette style

set to classical music.

And Bambi is, again, another completely different take

of a very naturalist film.

These are wildly different skill sets

and bigger and bigger investments using completely new techniques.

So you're not really just like making more Snow Whites.

You're doing like discontinuous unknown high risk bets.

Walt can't help himself.

Yes.

So in total between the $3 million for the campus

and then these three movies that they all have in production,

which collectively cost about $5 million

in so-called negative costs before they get released,

so before they earn a dollar of revenue.

By early 1940, Disney's yeah, in this new campus

and set up for this next phase of the company.

But they're $8 million in the hole.

So Bank of America had loaned them another $4.5 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 1941, Pinocchio gets released.

So international box office is basically zero

and Pinocchio ends up losing money, like a lot of money,

over a million dollars in losses on Pinocchio alone.

Yeah, in a scale 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're being 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 the screens.

Half of your audience?

Yeah, not good.

Not to mention the impact on all the rest

of the flywheel businesses,

like not a lot of Pinocchio merch getting sold in Europe

in summer of 1940.

No.

So after Pinocchio's a flop,

Walton Roy decided they basically only have one recourse

at this point because Bank of America

is not gonna 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 traded public offering.

And it's got this 6% cumulative dividend attached to it.

So the expectation when you're investing is this company

is gonna pay me 6% of my investment back every year.

So it's actually a pretty sweet deal for the investors.

They sell 30% of the company to do this,

to raise that, it's funny, you said 3.875,

a little bit of that went to the bankers.

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 sort of investments

that they need to fund.

And they have 4.5 million from Bank of America.

And then if they're only getting 3.5 million

in proceeds from the IPO,

that's exactly $8 million.

They are shaving off every piece of their current self

and future cash flows to re-bet the farm.

That is the way to think about this.

So that summer in 1940,

Walt has a rather ominous get-together with Henry Ford

of the Ford Motor Company.

Just sort of as like a friendly meeting

of these two American business titans.

And while they're together,

Walt mentions to Henry about the IPO that they just did.

And reportedly Ford tells him,

"'Walt, if you sold any of it, you should have sold all of it."

Aminous, ominous.

A real board of directors gets established

for the first time as part of this.

And the preferred get a director on the board.

So an outside voice in the company

who certainly is not gonna share Walt's vision here.

So by the end of the year in 1940,

despite the capital raise from the stock offering,

Disney's in a cash crunch.

Walt, before the IPO, had even set up a kind of

like proto-employee ownership system

where they set aside 20% of the company's equity

and used that stakes profit distribution

to fund an annual employee bonus pool.

They have to eliminate that like months basically

after Walt institutes it.

And what they end up doing as a result

is they raise salaries of the few top animators in the firm.

And then they keep the same or they lower salaries

for everybody else in the Burbank lot.

And this causes huge resentment

and unrest in the animation workforce.

Yeah, I mean, I bet that's gonna make no one happy.

But this is the like 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.

We still have big ambitions.

And like this is Walt's implicit choice here

with going out and raising all this debt,

raising all this equity, betting the firm again.

Yep, this is the downside of Walt's

always go for broke and shoot the works philosophy.

Yep.

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

That would change his relationship

with the company forever.

Forever.

And irreparably his relationship with Disney Animation,

the strike.

So on May 29th, 1941, the Screen Cartoonist Guild

which is a union that had unionized

every other major animation studio in Hollywood

and New York over the couple of years leading up to this.

Which there were several of at this point in time.

We've been sort of very Disney centric

but there is an industry around this.

Yep.

Decides finally to target Disney employees.

Now, there's a reason why the Screen Cartoonist Guild

had stayed away from Disney,

despite it obviously being the leader in animation

up until this point.

Which is, I think Walt's utopian dream

more or less was true or at least true enough.

Like he established the bonus pool for animation.

He constructed this campus.

Everything you were talking about earlier Ben.

But here with the cash crunch, that all comes crashing down.

Yeah.

There's a great excerpt from the book,

The Animated Man by Michael Barrier.

In the spring of 1941, under pressure

from the Bank of America and holders of preferred stock,

Walt Disney Productions agreed to scale back

its production cost to about $15,000 a week.

According to Walt Disney himself,

that meant he had to hold the negative cost

of new features to about $700,000

or one third the cost of Pinocchio or Fantasia,

which was also in development at the time.

Since labor costs made up 85 to 90% of Disney's total costs,

implementing such severe economies

would mean laying off more than half the staff.

So you've got cost reduction

in some of the people sticking around

and you've got big layoffs

because Pinocchio didn't pay back.

Yep.

Well, layoffs coming.

They haven't happened yet.

And this is part of why the organization

and the strike happens.

So hundreds of employees end up striking.

They pick it, the Burbank campus, they march all day,

they carry signs with slogans like Snow White

and the 700 Dwarves, or what is a drawing of Pinocchio

with the caption, no strings on me.

The strike lasts for three and a half months.

And it's a completely shattering event

for Walt personally and for the company.

As the union is organizing the employee base

in the days and weeks leading up to the strike,

Walt decides that he's gonna make a speech

and address the entire company, which he thinks,

well, he will explain his position

and the challenging state that the company's in

and it will resolve everything

and the employees will rally around him and the company.

Unfortunately, it has the opposite effect.

It is a complete disaster.

He lectures the entire company for nearly three hours.

Some of his lines from the speech,

which he had written out ahead of time, so it's preserved,

are my first recommendation to the lot of you is this,

put your own house in order.

You can't accomplish a damn thing

by sitting around and waiting to be told everything.

If you're not progressing as you should,

instead of grumbling and growling, do something about it.

And then don't forget this,

it's the law of the universe that the strong shall survive

and the weak must fall by the way.

And I don't give a damn what idealistic plan is cooked up.

Nothing can change that.

Probably not what you wanna tell your employee base

after you just slashed their salaries.

Yeah.

Yeah, a labor magazine would write afterwards,

Walt Disney's speech recruited more members

for the Screen Cartoonist Guild than a year of campaigning.

Yeah, about the worst reaction that you could possibly have.

I don't know if you found this in your research,

but it seems like he's kinda deluded here into thinking,

well, it's not actually my employees that are doing this,

it's these communist, very few communist agitators

who have undercover become my employees

and they're riling up the rest of them.

And Walt's like kind of removed himself

and he's in denial that this is actually

what his workforce wants.

The family atmosphere that we had at Hyperion

is now a real corporate, have and have nots here

on the Big Burbank campus.

Yeah.

Yeah, it's a mess and then it gets worse.

So in the middle of the strike,

which again lasts for three and a half months

that hundreds of employees are gone from their jobs

that are not working and marching

and protesting outside the company.

While they're trying to make Bambi,

which is equally ambitious.

Right.

Walt is just so depressed and in denial

and upset about the whole thing

that in August of 1941,

he agrees to go on a goodwill trip to Latin America

with Nelson Rockefeller's office

of the coordinator of Inter-American Affairs.

This is the trip that ultimately results

in the Disney films Saludos Amigos and the Three Caballeros,

if you've seen those or been to the Three Caballeros ride

in Disney World in NEPCOT, 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 quote,

God send and say that it gives him a chance

to get away from this God awful nightmare in Burbank.

Yeah, he basically just leaves the country

and walks out on the whole thing

and tells Roy to settle it.

I'm leaving for 10 weeks, do your best.

Yep, so while Walt is gone in Latin America,

Roy does settle the strike after federal mediation.

Disney ends up recognizing the Screen Cartoonist Guild Union.

They raise salaries for the remaining employees

and they agree to a negotiated layoff

of over 500 employees.

So taking total headcount before the strike

down from 1200 to under 700,

these are the layoffs, Ben, that you referred to.

The studio would never fully recover from this,

certainly not under Walt and not for many, many years afterwards,

really not at all in the period of classical animation

before computer animation comes along.

And sort of equally as importantly,

Walt would never recover from this

as it pertains to his relationship

with the company Walt Disney Productions.

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.

He apparently, according to Don Lusk,

who was an animator there, made a list

of everyone who went out on strike

and said that everyone on this list isn't true to Disney

and one day will not be here.

Yeah, so Ben, you mentioned Walt's sort of anti-communist

streak that comes out of this.

Yeah, for the rest of his life,

he would blame all of this on communist influences

in Hollywood.

He would actually testify after World War II

in front of the House Un-American Activities Committee,

HUAC, as a friendly witness corroborating

communist infiltration in Hollywood.

He named names of people who he said were communists

based on things he had heard about them,

like no even proof.

And you've got like a major figurehead

of a big US corporation testifying,

there's always video of it of him saying,

I believe so and so as a communist.

Of course, this would lead to the famous Hollywood Blacklist

and all the terrible stuff that comes out of that.

One thing later sort of by association with this,

people would accuse Walt of being anti-Semitic

since much of the communist movement in the US

and especially in Hollywood was in the Jewish community.

Gabler investigates this pretty thoroughly in his book

and concludes that there's not any evidence

that Walt ever really was anti-Semitic.

I turned over every stone I possibly could on this company

and we spent, I don't know, the better part of the year

so far researching this and I found zero evidence of that.

Yeah, same, definitely anti-communist for sure.

Yep.

But anyway, so speaking of the war.

By the way, this is like four giant blows

to the company in a row.

You've got Europe dropping even before the US enters the war.

You've got the European distribution falling off.

There's a thing we didn't talk about which was Fantasia

tried to make this giant bet in a new type of sound

for movies called Fanta Sound.

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 Fanta Sound,

this new sound technology they had invented

and distributors didn't pick it up

to do like a real first run.

And so out of the $2.3 million budget,

in that first year it came out in 1941,

they recouped 325,000.

Wow.

That is a giant loss on Fantasia.

I think Disney was also funding the development

and distribution of Fanta Sound.

So you've got those two then the strike,

now the US enters the war.

Yeah, one more note on Fantasia though,

before we talk about the impact of the US entering the war,

do you know what ultimately ended up happening with Fantasia?

They made Fantasia 2000, 60 years later.

No.

Yes, that is true, but that is not what I was getting at.

So yeah, the initial release of Fantasia,

as you said, was a total flop.

They couldn't exhibit it anywhere,

lost tons and tons of money.

Later, it has this huge resurgence.

I mean, I remember when I was growing up as a kid,

my parents loved Fantasia.

Yeah, I actually thought Fantasia was a modern movie.

It's crazy to me that it was Disney's second.

Right, right, right.

I think it was like the 60s and the hippies

that thought like, oh, this is like the coolest thing.

So Fantasia, if you look today at the list

of inflation adjusted top films in history

by box office gross inflation adjusted,

Fantasia is the 24th highest grossing film

in Hollywood history.

So it has a whole second life.

And kind of timeless.

Totally, it's an amazing, amazing production.

I mean, the music, the symphonies, the sound,

it's, go watch Fantasia if you've never seen it.

It is well worth your time.

And now a hard cut over to World War II.

Right, yeah, yeah, yeah.

Okay, so back to 1941, no sooner does Roy settle the strike

than Pearl Harbor happens and the US now enters World War II.

And unlike many of the other great American companies

of that era that we've covered on this show before

where World War II was great for their business

like Coca-Cola or Mars or Lockheed,

World War II is a disaster for Disney.

Nothing of value gets built for Disney during the war.

It basically breaks every single node in the flywheel.

And on top of the strike, it just completely grinds

to a halt, all new core IP production for the studio.

Yeah, so the first thing that happens is within hours

and then days of Pearl Harbor getting bombed,

the US military moves into the studio.

Yes, yes.

They look at Burbank and they think this is a great asset.

And so there are hundreds of troops.

There are two reasons that set up shop using the sound stages

to work on all the optical systems for anti-aircraft.

Sound systems are awesome.

There's no windows.

It's a giant room.

I mean, like it's the thing you would want

for stuff like this.

The second reason that I suspect you're hinting at, David,

is it is real close to Lockheed.

Yes, real close specifically

to Lockheed Skunk Works department,

which is in Burbank, the secret Lockheed Skunk Works

airplane hangers and department was in Burbank

because Burbank was the sticks back then

and Disney is right next door.

So that's probably the bigger reason why the military

requisitions the Disney lot is to protect Skunk Works.

Fascinating.

So you've got that happening.

You've got a whole bunch of the animators getting drafted.

I mean, so your down man power,

you're just coming out of the strike.

You have these huge failures in Pinocchio, Fantasia,

and also Bambi.

Again, you've lost European distribution.

And so the appetite for making more things

like those three movies drops to like zero.

I mean, at this point, there's a financial reality

that Disney owes a dividend to these shareholders,

which interestingly enough, it actually suspended.

In 1942, they actually didn't pay out the dividend,

but they do have to pay Bank of America.

The films aren't gonna be the thing doing it.

And conveniently, they've got the US government saying,

can you help us with some propaganda films?

Can you help us encourage people to pay their taxes

and buy war bonds and support the troops?

And so Disney kind of looks at everything,

how it's all playing out and says,

yeah, that's what we're gonna be doing for the war.

So all of the studio production work during the US's time

as an active participant in World War II,

yeah, basically just gets repurposed

to propaganda and training materials for the government.

And insanely, they do use Disney IP.

Like you see all these crazy old posters with like,

Donald Duck holding a gun.

And I mean, the stuff you sort of would never see

with these characters today,

but not only did Disney say we're work for hire,

they said we can use the Disney IP.

But interestingly, David,

do you know about Mickey Mouse's role?

Ooh, 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 is because

canonically Donald Duck is a sailor, right?

Oh, okay, that makes sense.

Yeah, yeah, but that makes sense to protect Mickey too.

And Donald's also the more like fighter of a character.

Mickey started off as this troublemaker,

but then kind of became the like nice protagonist.

The goody-touchies 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,

like all the things that contribute to Disney's core.

They are financially floated though by the war.

I mean, the way that they make it through this period

is that they actually are generating net income reliably,

not a lot, but-

From the government work. Exactly.

And there's one other big innovation,

an actual bright spot that comes out of this

back against the wall moment during the war

that the company's in financially.

Do you know what that is?

Ooh.

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 seven years.

Exactly.

It truly vanished off the face of the earth,

except for the copies of the film

that were held in the Disney vault.

In the Disney vault, yes.

So in 1944, they re-release Snow White in theaters,

and it brings in $3 million in revenue to Disney

on just a few 100000 in costs.

They basically just gotta print a few new copies of the film

and then distribute it out to theaters.

Right, the theaters get their normal cut,

the distributor gets their normal cut,

but Disney's cost to develop the film is like zero.

Yeah, they've already developed it.

It's already done.

This is an enormous boost for the company.

And Ben, to your point about the seven-year gap

since the initial release,

it turns out conveniently that seven years

is just about the right amount of time

for a new generation of children to come along

and reach an age where they would be interested

in consuming Snow White that haven't seen it before

and they discover it for the first time.

And yet it's infrequent enough

that it doesn't dilute the IP.

So Walt's got an amazing quote on this,

actually from the second re-release in 1951 of Snow White.

In the eight years since then, our first re-release,

our potential audience has been increased

by 25 million children who either were not born

or were too young to attend a motion picture theater in 1944.

You're an adult much longer than you're a kid.

It's so amazing.

And they totally stumble into the seven-year thing.

Like it's not like they intended

when they made Snow White to say,

okay, we're gonna put it in the vault

and then seven years from now we're gonna take it out.

It just happened that seven years later,

they had a big cash crunch, they needed some easy profits

and they put Snow White back in theaters.

And seven years, give or take a couple of years

basically becomes the core Disney IP cadence

to this very day.

And Disney could uniquely do it versus other studios

because their IP was more timeless.

It's animated and it's based on these timeless

sort of lessons and these fairy tales of old.

Like they're these simple but resonant stories.

And it carries through right to today.

What is the cadence between Disney's frozen movies today?

Frozen one comes out 2013,

Frozen two comes out 2019,

Frozen three slated for release next year, 2027,

six to eight years, like clockwork.

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

All right, so now we've got four components

to the flywheel business.

Your original three, genuinely compelling new intellectual

property with characters that you resonate with,

two, maximize distribution of each element

in the primary delivery vehicle.

You've got three, feed that IP into as many

ancillary profitable flywheel nodes as possible.

And now we've got four, the vault, the re-releases.

Strategically, re-release it every seven or so years,

frequently enough to capture each new generation

of children, but not too frequently

lest you dilute its impact.

With effectively evergreen content.

Yep.

Roy has a great quote that he would tell

the Wall Street Journal many years later,

our product is practically eternal.

And it's so true.

So despite this genuine innovation

of adding the vault concept to the flywheel,

by the time the war ends in 1945,

Disney is not in a good place.

The flywheel is basically completely broken.

There hasn't been any compelling IP generated

for the past several years.

And worst of all, Walt himself is disengaged

and disillusioned.

But clearly something happened

because the Disney we know today is quite successful.

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All right, so we're coming out of the war.

There's sort of a few moving parts here at Disney right now.

So the revenue from the government has dried up.

So the thing that was putting them

on sound financial footing is not there

for the sort of quick revenue hits.

The long-term stuff, other than the re-releases,

they haven't stoked the fire in a while.

So the strategy over these next few years

is to sort of kickstart, to try to do stuff

that doesn't cost a lot of money,

but might have a lot of return.

And so they try a bunch of stuff.

On the animation side, they do packages

where they take a bunch of shorts

and they package them together as feature films.

These are movies that you almost assuredly

have never seen called like Make Mine Music

or Fun and Fancy Free, not big successes.

The other thing they try in animation

is to go back to the original Alice's idea

of combining animation and live action.

The result of that is the movie Song of the South, whoof.

Yeah, which historians look back on

as racist and deeply problematic

and Disney has never released on home video or streaming.

So not a big success for the flywheel there either.

And for the first time in animation,

there's now actually real competition in the marketplace.

So before the war, Warner Brothers had started Looney Tunes

with like Daffy Duck and Boogie Pig,

and then Elmer Fudd and of course, Bugs Bunny.

Ironically, it's a former Disney Story Department employee

Charles Thorson that does the initial designs for Bugs Bunny.

And then in 1940, same year,

it all started to fall apart for Disney.

Joseph Barbera and William Hannah start working together.

They produce Tom and Jerry for MGM.

So the other major studios...

And the Flintstones.

Yeah, the Flintstones, of course.

Yeah, the other major studios are starting to creep in

on the animation game.

And so by this post-war period,

these other studios had grown in popularity

and were really starting to rival Disney.

Meanwhile, Disney, they go the other way

and they get into live action.

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.

So 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, decide, eh, basically not.

But we'll watch it and see.

We're very interested.

But Walt Hart 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

that 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 their next film,

which was Cinderella.

The first bright spot in a long time.

And their first full length feature film in eight years

since Bambi in 1942.

And the way they made Cinderella was quite different, right?

Yeah, so Walt pounds the table to make this thing.

And then he kind of realizes the way they are gonna make it

feels compromised to him.

Cause the budget just can't be what they were blowing before

in those early 40s to try 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.

Just go on a soundstage and see

whether that scene's 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, not the mindset that they took into Snow White.

And this basically flips the like live action animation thing

from a source of inspiration and study to a crutch.

So they were filming every scene and then rotoscoping

effectively like tracing the live action footage

out of the camera to make it animated,

which can lead to this 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 kind of stuck with this

and how it looked in the camera 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 like,

Walt's heart is just not in it.

He kind of helps kickstart the whole thing,

but then is not engaged during the production of this film.

It does end up being a critical

and commercial huge 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, on a cost of 2.2 million.

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.

Gnarly decade there.

But yeah, so 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, you know,

as deeply involved as he was in the Snow White era,

it did turn things around enough

that like at least they were making quality work again.

And like obviously those films still hold up today.

Over the next few years,

they then released Alice in Wonderland,

which surprised, 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 like he should do

because of his reverence for the source material,

but never quite had a clear idea

on exactly what to do with it.

So it's hard to put together these sort of disjoint vignettes

into one cohesive film, but artistically beautiful.

So put a pin in that, we'll come back to it.

But 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, I-

Yes, he is.

That's about the best way that I can frame this

is he's getting really into trains

and really into miniatures.

Yes, trains specifically model trains

and miniatures like miniature furniture

and like rooms and homes and miniatures.

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.

This is me editorializing as this like soul searching half

decade where he's just looking for what is he going to get

passionate about next?

Because he's sort of bored.

Like animation isn't doing it for him the way that it used to.

And he's like 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 of the problems at the studio.

That's what he would always say.

Right, that these were nice things to do after a hard day at work.

Yep.

But they became obsessions.

Yes.

When I said reaching back to his childhood,

there was a train that ran through Marceline,

which is why Marceline existed.

And there's this like deep seated psyche around trains

and small town America.

He and some of the other senior animators developed this interest

in large scale model trains, which are one eighth the scale

of an actual railroad train.

So like big like ones you could ride around sitting on top of.

There's amazing old footage of Walt like riding around on these

these one eighth scale trains.

Yep.

So Walt took this extremely seriously.

He ends up traveling to the 1948 and 1949 Chicago train fair.

And he kind of dove into this community of fellow train enthusiasts.

I was thinking this was strange.

Like I kept reading about this and I was like, this is wild.

There were 6000000 train enthusiasts,

like model train enthusiasts at the time.

This was actually like a pretty big thing.

Yeah.

This isn't like billionaire hobbies today.

This is like a Walt is hanging out with other enthusiasts kind of

man of the people style.

Yes.

And it was something that was really tangible for him to do with his

hands.

I mean, 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 Broggy, who sort of led the machine shop team

who would go on to build a serious, serious model train for Walt.

Roger would also become just a foreshadow here, the first imagineer.

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, and David, you were saying like man of the people style in a very not man of

the people style thing, he ends up sinking $50,000, which is like 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 that which he dug under his wife's garden on its own was 90 feet long.

Yes.

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

When he and his wife were looking at houses to figure out where, what property

they were going to buy and then build a house on, a major consideration was,

is there room for a giant train to be laid out?

He ends up, it's on Carrollwood Avenue, I believe, Carrollwood Street.

Yep.

He ends up naming it the Carrollwood Pacific.

The steam engine is named the Lily Bell after his wife.

It's a whole thing.

Yep.

And if you go to Disneyland or Disney World today, most of the steam engines of the

railroads are named in callbacks to this period and this inspiration in Walt's life.

So there's the Lily Bell engine at Walt Disney World.

There's the Ward Kimball, who is the original animator that gets him into this hobby.

There's the Roger Broggy, as you're saying, and then there's also the Roy Disney.

Oh, nice.

I did not know that.

So this is great quote in a PBS American Experience documentary by historian Nancy Cohn, where

she's reflecting on Walt in this moment.

And her quote is, I can't control my employees, 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

quote, 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.

You know, 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.

The initial idea.

Yes.

There was a name floated Mickey Mouse village that sort of quickly changed to Disneyland since it was much more about his new passions, trains, Americana and miniatures than it was about Mickey Mouse.

And he started working with artists to sketch out what it would be.

And 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.

So that's sort of what we're working with here.

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

Of course.

So in March of 1952, Walt announces it, Disneyland, to be constructed on that little strip of land for a cost of $1.5 million.

A snow white.

Yeah, we should speak in units of snow white.

It's actually cheaper than a snow white given the inflation.

Yeah, 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 like artists renderings here that include cool little river and a train that runs on this.

And we're going to figure out, you know, attractions that go in this thing.

But we really got a 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 like inarticulatable idea?

Yeah, right next to the studio lot.

Yeah, 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 kind of 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.

Yep.

His personal company that he can do weird personal stuff with.

Yes.

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

And 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 they're animators.

They're being hired to build a theme park and like 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, you'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 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.

That is what is happening here.

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.

It's kind of like Elon before Elon.

Yes.

So there ends up being two 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 quote carnival like atmosphere.

Right there on the side of the river.

You could describe Disneyland as lots of things, but carnival like atmosphere.

Clearly they did not get the vision.

Right.

The magic is that it isn't.

Exactly.

Like 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 is like a crazy nugget of history.

He goes to SRI, the Stanford Research Institute.

If you've heard SRI before is one letter off from Siri, which was a spin out of SRI.

Yes, that SRI.

That it was.

I was just going to say that you just triggered like, you know, probably 2000000 phones.

Some of which are running the beta so they'll have the new Siri AI.

Yeah.

Yes.

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.

Ten times bigger than the original site.

A full 160 acres.

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 will 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.

Walt Disney is a force of nature and Roy becomes supportive or at least as supportive as...

Get strong armed into supporting this.

Right.

While still trying to protect the company.

And so in 1953 in April, Walt Disney Productions Board of Directors, this is a public company, agreed to a personal services contract with Walt and contracts with WED to design and build a public company.

And so Walt 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 you know, 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 LA 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 being a free agent.

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 what happens if he gets the right to invest in Walt Disney Productions?

Walt says he will 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.

Walt's 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.

There's also some like 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 kind of 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 that.

Yeah, I see.

This is happening no matter what.

So we can do it the easy way or we can do it the hard way.

It is interesting on his relationship with money.

He was interested in money, but for the sake of deploying it.

I mean, hoarding money was never his thing.

Like he did live extravagantly compared to most people.

He had that train and, you know, a vacation house and Palm Springs and all that.

But it's not what the other big Hollywood moguls were doing.

Lily in 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 in.

Yes.

And it's all tied up in the enterprise value of Disney, which he keeps sort of remortgaging

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.

And 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.

Wow.

So Buffett bought a bunch of the stock in 1966 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, this 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 that has Disney's flywheel is the buying

opportunity of a lifetime when Buffett bought it.

That's why he's the goat.

He did, of course, sell it.

Yeah.

Right.

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 sort of

what his goal was in this personal services contract.

This whole thing ultimately becomes so contentious that three board directors actually resign

from the public company.

There's also a shareholder lawsuit that gets brought and for sort of strange reasons it

doesn't end up going through.

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 like 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 zero synergies as conceptualized so far for Disneyland.

Yep.

But all of that's about to change because Disneyland even post all of the budget expansion after

I am moving to Orange County and 160 acres is getting so out of hand in its budget that

it needs to actually come back to the company.

Sort of.

So here's the corporate structure.

Originally they thought they would need about $5 million for the Anaheim Disneyland.

To 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.

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.

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 not cash for it.

But at this point, the company is kind of 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.

What can we do?

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 is Hamstrung them so many times.

They're trying to think creatively of how can we do a one plus one equals five thing

here where we have this Disneyland Inc. joint venture and someone else is building this

thing and funding it.

So yeah, at the time, the prevailing sentiment in Hollywood was that TV was a threat.

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 wets the appetite for attending baseball games live and TV satiates

it.

Yes.

But Walt realizes just like the NFL did, that TV actually was a huge new opportunity.

It 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 we should ignore it 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.

By passing 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.

So ABC had been wanting to do something with Walt.

I mean, lobbying over and again.

Because Walt did this one special a few years before, I think it was on NBC, not ABC.

And it was great.

Like there is something very compelling about Walt Disney and Disney stuff in a television

special. Yes. Yes.

Avuncular Walt Disney beaming into living rooms around America.

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 that 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 for 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 5000000 dollars 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.

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 like six to 12 months, but it ended up lasting four years

until 1952, a freeze on the ability to get a new broadcast license.

So the existing big four networks, which are about to be three, 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 five years later in 1955.

Yeah. So all these networks now have basically government protected

all the gopally accidentally in this massive new market.

Yes. So if ABC could put on a hit show, like there's not 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're like really hungry for super compelling content.

So 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 and 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.

Same terms and amount as Disney productions.

In addition, though, they also guarantee four and a half million dollars 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.

And they would televise the TV show, but Walt Disney productions would have to

produce it, but they're actually buying a pretty expensive TV show also.

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 it was ABC's to air for seven years, which made it the largest TV

program and contract in history.

Yes, this is an absolutely over the top deal.

There is one other deal point, which is ABC negotiated to have the right to all

the profits from Disneyland's food and beverage for the first decade.

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 17th, 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, like instantaneously when it launches in the fall of 1954.

The content is basically a behind the scenes look at all the different lands

and content for each.

So Tomorrowland, Frontierland, Adventureland, etc.

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 the programming, like 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 second most popular show on television after I love Lucy.

And it's the first ABC program to crack the top 25 shows ever.

Like it was all NBC and CBS until Disneyland.

Unbelievable.

Also, ABC lets Disney run trailers inside each episode for their current

theatrical release.

Yes.

So it both promotes Disneyland and the current movie slate.

It becomes a whole nother note of the flywheel.

Yes.

And for the first time they get repeat exposure.

I mean, Disney only gets a touch point once every few years with a consumer with a movie.

And maybe you watch their shorts.

But with TV, it's this 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 like viral

moment even before the park opens.

So in December of 1954, Disney begins a three part live action miniseries on the show about

the story of Davy Crockett.

Davy Crockett.

Oh, that's right.

And America goes nuts for Davy Crockett.

For listeners who don't know, Davy Crockett is like a historical American figure that fought

and died in the Battle of the Alamo in Texas over a century before this.

Which 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.

Even better, the theme song, the Ballad of Davy Crockett, you know, King of the Wild

Frontier reaches number one on the Billboard charts in America and sells 7000000 records.

In total, Disney would go on to do around $300 million of gross sales of Davy Crockett

merchandise, which at this point they fully in-house commercial products.

K.K.

Cameron had tragically passed away in an airplane crash in 1949 after which they in-house all

of this within Disney.

So if all that happened with the same splits we mentioned before at 5% royalties on that

$300 million, assuming again, a 100% retail markup from wholesale, that's seven

and a half million dollars to Disney, which, you know, I think is more in actual revenue

to Disney than they had earned from any film at that point in history.

And David, this is really going to play your mind.

That is actually more than the amount of income they had received ever

cumulatively from first run animated features.

If you add up all the pluses and all the minuses, by 1957, the money they had made

ever in profit dollars from their first release films was a hair over $7 million.

And they made, by your estimates, seven and a half million.

They made more from Coonskin caps and record sales.

Incredible.

And what timing right before Disneyland opens.

It's insane.

Amazing.

Disney absolutely crushed the timing on switching their 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, Arvind, 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 like multiplicative way, you know.

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 tele 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.

OK, so how does this all come together?

We've got this like joint venture called Disneyland Inc.

It's got 500000 dollars from Walt Disney Productions.

It's got 500000 dollars from ABC.

It's got 200000 dollars from Western Publishing, who distributed their

books and then Walt himself put in 200 and 50000 dollars.

That's right.

I did see that.

Yes.

And then they've got the four and a half million of debt guaranteed by ABC.

Exactly.

So there's a total of six ish million dollars that they have to spend to build the thing.

Plus, there was actually another 2000000 of 10 year bonds that ABC was committed to

if they really, really needed an extra 2000000 dollars to flex from a budget of six

to a budget of eight.

So then I've read a bunch of places this ended up costing 17 million dollars.

Yes, that is correct.

So the cap table is Walt Disney Productions and ABC each own 34 percent.

Western Publishing owns 14 percent and Walt himself personally owns 17 percent.

And there is a contract between Disneyland Inc.

and Wed Enterprises, which Walt owns a hundred percent of to actually build it all.

So all of this leads up to July 17th, 1955, the opening of Disneyland that would change

the company forever, that would change American vacations forever, that would lay out a giant

part of Disney's business model going forward, the opening of Disneyland.

Yes.

But before we do that, now is a great time to thank our friends at Statsig.

Yes.

So Walt Disney had this idea that he would often talk about, plusing.

Most amusement parks would be effectively complete at opening, and then they'd call

it finished, but not Disneyland.

Walt treated the park as something that you have to keep improving forever.

And he constantly looked at how guests move through it.

Yep.

This idea, though, only works if you can see what's happening.

You can't improve an experience on a hunch.

What mattered was how guests really behaved, not what anyone assumed in a meeting,

which is largely the same problem that product teams have today, just at speed and scale.

You can ship faster than ever now, but the hard part becomes knowing which changes

actually improve the product.

And now coding with AI only raises those stakes because LLMs are non-deterministic,

meaning that the same input doesn't always produce the same output.

So a small change to a prompt or model can have surprisingly large downstream effects.

Offline evals will really only get you so far and you need to be getting signals

from real users and making decisions on that.

And that's where StatSig comes in.

They offer product teams experimentation, feature flags and product analytics all in one place.

You can ship quickly, roll out changes safely and measure how those changes impact

users making your product actually better instead of just guessing.

Yes.

So just like Walt continuously was plusing Disneyland still today, StatSig is how you

improve your product after you've shipped it.

You can learn more at StatSig.com slash acquired and just tell them that Ben and

David sent you.

All right.

So the development of the park, the team at WED had been getting inspiration and sort

of concepting and iterating while all the ABC stuff is happening, while the hype

building around America is happening.

And of course, well, the financial negotiations are happening.

So in September of 1953, as legend goes, Roy is about to walk

into meetings with television executives and Walt famously locks himself in a room

with Herb Reiman 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, Disney, what?

Is it the first time hearing of this?

And he's like, the theme park, you're going to come work on that with me.

And he's like, 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.

And so Herb kind of looks at him and he says, can you tell me a little bit more

about this theme park?

Walt, this is metaphorical, 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 the weekend emerges this beautiful drawing that we will send out

in the email, acquired.fm slash email 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 wet 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 and Copenhagen to get

sort of a completely different take on how they could do a park with green space.

Much more pleasant, less carnival like safer, kind of 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 are 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 like brand new technology and logistics and operations

that ABC was going to bring to bear for that.

So they were 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.

Eleven 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 three 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 that 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 of a place that it

was a passenger train 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 and 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.

Yeah.

You can go to fantasy land.

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 railroads sitting right atop it.

To this day, I think the most impressive thing about Disneyland is the sight lines.

Despite several very, very different environments on a relatively small plot of land.

I mean, from Star Wars today to Frontierland, Adventureland, Tomorrowland, 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 than the jungle over at Adventureland and very, very different than the strip

Malmania 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 wasn't yet any on site buildings to fabricate the rides.

So they did construction at 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, cost ballooned from the original 5000000 to a total of 17 million.

But that's actually pretty cheap.

Totally.

I did the inflation math.

That's 200 and 10000000 dollars today.

You absolutely could not build anything remotely close to Disneyland today for 200000000 dollars 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.

Yes.

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

Yes.

This is the other just like 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.

So at opening, there was Richfield Auto for Autopia Bank of America.

Of course, they had to be there sponsor of Fantasyland Coca-Cola as well.

You won't believe this.

In addition to Coca-Cola Pepsi, they 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.

Wow, Frontierland?

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.

So I was trying to do some comparison on this 17 million inflation adjusted to 210 million.

The rise of the resistance Star Wars 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 one ride.

Right.

And they built the whole park for less than that?

Yes.

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 does 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.

It's nearly 100 degrees 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.

There are water fountains, but they don't yet have the plumbing finished to turn on.

So if you want something to drink in this 100 degree 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 that he was supposed to.

But despite all of this, it is a giant, giant hit.

That first day that 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.

Right.

Yes.

It's crazy, right?

It's live coverage of this like 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?

I'm sure you do.

But do you know who the three anchors were that ABC hired to do the opening?

One was Ronald Reagan.

Yeah, Ronald Reagan is the big one.

Art Linklater, Bob Cummings and future president of the United States of America, Ronald Reagan.

It's crazy.

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 percent of US 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 was 160,000 visitors.

Two months after opening, the millionth visitor walked in.

And in the first year, there had been 3.6 million visitors.

Yeah.

In the second year of the park's operation, it does over 4000000 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 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'd 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.

And different rides and attractions would have different ticket grades and would be 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 sort of 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.

Yes.

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, you know, fast forward to today at Disneyland or Disney World.

You go for like 14 hours.

Yeah, right.

Oh, per damn.

And you're not going there for just today.

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 they're there a whole week.

Yeah.

So I promise we won't do too much part two foreshadowing on this episode, but this is just one point I got to drive home.

Disney Parks Inc.

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.

Right.

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

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

Yes.

Like twice as big of a business.

And this is, you know, there's 160 acres in California.

There's a big swath land in Florida.

There's five or six of them around the world.

There's some cruise ships.

And that spits off more profit, twice as much profit than 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 still the parks 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 moved for Walt Disney productions financially.

It was cleverly structured by Roy to not be.

But reputationally, it absolutely was.

I mean, people were willing to take these giant leaps on Walt because of who he was and what he had accomplished the same way that they do with Elon or Steve Jobs or Warren Buffett getting deals that no one else could get.

So Roy was like great at making sure it wouldn't financially bankrupt the company, but Walt was sort of 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?

Yep.

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 sort of renegotiation of his employment contract.

So there is a fascinating coda to all this crazy corporate stuff on how the park was formed.

You might be wondering, well, wait, doesn't the Walt Disney Company own the park out right now?

I mean, when you visit Disneyland, don't you assume, hey, wait, this is just part of Disney?

What about that weird joint venture thing and ABC and Walt personally?

So here's how it all goes down.

The headline is the Walt Disney Company would not actually own the park and everything within its borders for a full 27 years after opening in 1982.

So here's the full story of who sold what and when.

Pretty quickly, Walt Disney Productions exercised their right to buy out Western publishing and Walt personally.

So by 1958, three years after opening, they owned 66 percent.

But the buyout right to ABC's stake, that wasn't pre-negotiated.

So in 1960, when the company actually had enough cash to do it, that's when Roy negotiated, hey, we'll pay you $7.5 million to buy out your stake.

So by 1960, the publicly traded company Walt Disney Productions did own all of Disneyland Inc.

But that leaves wet enterprises, which had been hired as a contractor to build all the stuff.

Yes, and wet enterprises is imaginary today, Disney Imagineering.

Yes. But wet 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, right?

It was still this separate thing owned by Walt.

Right. So, which Walt is the 100 percent shareholder of, actually owned the railroad outright.

It had been negotiated 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.

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 was Walt's.

Same thing with the monorail.

These were not owned by Disneyland Inc.

They were owned by WED.

Amazing.

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

In 1963, eight 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 get sliced into two pieces.

Imagineering the architectural engineering department and everything else.

Disney productions would buy the half of WED that was imagineering.

So they finally in-house'd Imagineering in 1965.

The rest of the holdings would be renamed RETLAW, which is Walter backwards.

Right. Right.

And inside of RETLAW, Walt would get to keep the trains, the monorail and his 10 percent royalty.

This is in 1965.

That would actually last all the way until 1982, nearly three decades after the opening, where the company says enough is enough goes to Walt's family because this is after he passed away.

And they 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 for 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.

I mean, there's all these conflicts of interest everywhere and this would never fly today with sort of modern shareholder and SEC and securities laws.

But in practice, if you were a Disneyland shareholder then and you held through all of this, that worked out great for you.

Well, speaking of how great it would have worked out for you, after the launch of the TV show, the park, the company is just firing on all cylinders again.

And Disneyland, the combination of the television show and the park have really added a fifth element to the flywheel business model.

That's right.

You've got one compelling great IP, two maximized distribution in the core vehicle, three feed the IP and do as many ancillary vehicles as possible.

Four, you've got the re-releases in the vault and now five, parks and television.

This is a television to amplify 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 mean, 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 like hybrid flywheel plus IP because all of the core Disney IP, of course, goes into the parks.

I mean, 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 I mean, this would literally become true with Pirates of the Caribbean much later.

I mean, that's got to have gross 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.

Like Haunted Mansion has never really worked as a movie.

Yeah, it never really worked.

Double Cruise.

But yeah, that is a great point that 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, with TV revenue from Davy Crockett and Mickey Mouse Club, this is basically the inflection point for the company.

Revenue doubled from 54 to 55, and it would just keep on climbing for decades from this point forward.

Disney effectively stops being a movie studio and it becomes this new form of diversified, stable entertainment company.

Yes.

In November of 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 do 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.

Yeah.

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.

Yeah.

Once the company's 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.

And this was one of the most fun things to discover in our research.

So the article's title is Disney's land, Walt's profit formula, dream, diversify and never miss an angle.

And this article in the Wall Street Journal is where the famous Disney flywheel illustration comes from.

Ben, you are holding up live that you have framed in your studio.

This has been on the wall of my office for years.

So 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.

And 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.

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 of 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 compliment 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.

And 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 opens in 1955, there is the centerpiece of the whole thing is Sleeping Beauty Castle.

That movie wouldn't come out for another four 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 at Disneyland, they have installed animated dioramas as an attraction that they're charging a 35 cent admission fee for.

These are animated dioramas of Sleeping Beauty, the upcoming movie.

Next, Disney is producing and selling Princess Aurora dolls and costumes.

They are 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 movies released.

And then finally, comics of Aurora and the Sleeping Beauty story are already starting to come out as part of the Disney 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.

I mean, the foresight, they are 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 in-house their own film distribution right before the launch of Disneyland.

Yes.

Yeah.

And this actually comes up in that journal article too.

Yep.

They create something called Buena Vista distribution and they left RKO Radio Pictures, who 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.

And at the same time, Walt had really started thinking about Disney as vertically integrated entertainment, not just a film studio who would rely on others for distribution.

So in 53, two years before Disneyland opened, they incorporated Buena Vista.

The Living Desert was their first film, it's one of these nature documentaries.

Then quickly thereafter, they did Lady and the Tramp and 20,000 Leagues Under the Seas distribution through Buena Vista instead of through an outside distributor.

It was kind of like a test, like can we pull this off?

They got pretty good at it pretty fast with the exception of International, 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.

I mean, 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 teed me right up because I was wondering the same thing.

Cash flow.

You can't be a distributor unless you're on great financial footing because the cash flow cycle means that you are fronting money to print films, distribute them before you actually get paid by the theaters when tickets sell.

So Disney didn't have the working capital to pull this off until their real strength in the mid fifties.

That's such a good point.

I always had 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, I don't know, what is it, 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 merchant licensing provides this really stable foundation.

They almost like re-platformed the business is 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 like add new stuff to the pile, but the platform itself is Disneyland, TV, and merchant 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.

And Walt was already scheming how to blow some more money.

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.

I mean, since then it's done phenomenally well and made probably hundreds of millions of dollars in cumulative profit for Disney, but did not pay back at the box office.

Part of that was it had a really high production cost, right?

After all the success of Disneyland and all the bali-hooing about the flywheel and everything in the Wall Street Journal article, I mean, they really went-

And all the height they're building around it.

Whole hog on this one.

Yeah, they spent $6 million making it.

It was the most expensive to produce to date.

Yeah.

But yeah, I mean, Walt was pretty distracted with Disneyland, so he wasn't that kind of authoritative voice to help the team find the great story in there.

But yeah, 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 this year, 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.

Like they flip briefly from looking increasingly profitable to suddenly net income negative because sleeping beauty had that hole.

ABC canceled Zorro and Mickey Mouse Club, which were both TV shows that Disney was making, which 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 is 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.

Yes.

But the takeaway is the company is actually financially stable now that this is OK.

Yeah.

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

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

Yeah.

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

Yeah.

Merchant 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.

1957, they do three point 6000000 dollars in net income.

Then the next year, three point nine.

Then the next year, three point four.

Then 1960 happens that perfect storm of badness.

One point 3000000 dollar loss.

Then they bop right back 1961, four point five.

Then five point two.

Then six point five.

Then seven, then 11, then 12.

I mean, they just stability.

Mm hmm.

And then Walt decided that it was too stable.

And 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, right?

Is Disneyland like as a theme park going to really be my legacy?

Are these animated films really going to be my legacy?

Shouldn't I do something actually meaningful to the world?

Yes. I mean, 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 like an experimental prototype community of tomorrow, you know, Epcot.

And if you think, you know what we're talking about

because you've been to Epcot, that's not what we're talking about.

That's a theme park named Epcot.

But Walt had this insane, insane vision that never got built,

but got pretty far along in the process for.

Again, a fever dream, not just of a place that you go for a day,

but a place where you live and you work and you are transported

in futuristic transport mechanisms and all the most innovative companies

locate their innovation centers all in one place together.

And there's 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 that's what Walt always wanted to realize in the world.

And now after the success of Disneyland,

his ambition is restoked 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 towards realizing this vision

is the 1964 World's Fair in New York.

So Walt gets this great idea leading up to the fair

that Disney on the success that they have 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 this sort

of undercover test bed for this big idea of an East Coast city

that will be a partnership between American industry, Disney and the public.

So the four exhibitions that they create for the 1964 World's Fair,

many of which should probably sound familiar to you.

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 that 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.

And she was one of the original team members of Imagineers that came over from

WED and I believe 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.

That makes its way to Disneyland.

So that's one to the Carousel of Progress sponsored by General Electric,

three, the Magic Skyway sponsored by Ford,

and then four great moments with Mr. Lincoln,

Toyota A90

fully domed central downtown city

no surface streets

monorails

people movers

multi layered tunnels

cars and industrial vehicles

Volvo EX 30

EV

platform EV

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