Building on Bedrock

by Derek Lidow

  Walt’s animation experience made him effective at visualizing how he would produce his new series, and he immediately dispatched Roy to rent a bigger space while Walt negotiated for his former partner Ub Iwerks to move to LA to help draw the cartoon portion of each episode. Walt assigned himself the task of directing the live action. Roy’s assignment was to operate the movie camera, pay the bills, and keep the books.

  Walt’s animation production skills and Ub’s drawing skills rapidly improved with the steady work. Despite the distributor feeling as though improvements in the quality of production were still necessary, the contract was renewed for a second year. The distributor dispatched her brother to LA from New York for several months to oversee the improvements. Walt diligently adopted the improved production techniques, but the costs of doing so ate up all his profits.

  With Walt having mastered the production techniques that made the Alice series equal in quality to other cartoons of the era, the distributor asked him to pitch a new cartoon series that Universal Studios would be able to market to theaters to show along with its movies. Walt proposed a series based on a smart-alecky rabbit with long ears named Oswald—an innovative concept at the time, since everyone in the business had always used cats as their protagonists.

  Oswald landed them a contract to produce twenty-six episodes over the coming year. Jubilant and emboldened, Walt cajoled his small team to double their production, producing another Alice along with the new Oswald episode in the following two weeks. But, as with the first Alice, the first Oswald episode was rejected by Universal for having jitter in the opening sequence, a confusing story, and Oswald’s bottom-heavy appearance. Walt, understanding that working with a major studio would require him to produce even higher-quality product, agreed with most of Universal’s criticisms (but rejected their suggestion that Oswald don a monocle). The second Oswald was accepted and received favorable reviews from the movie press.

  With the Oswald contract from a major motion picture studio, Walt had been accepted into the big leagues of his profession. Sam Walton similarly climbed from the small-town league of shop owners to the global retail big leagues through a relentless focus on process improvements. To run multiple stores, Sam had to develop and master crude processes for simultaneously tracking the status of sales and inventories in multiple locations, a process for replenishing items for each store, plus a process for managing the logistics required to get the items delivered to the right store. Sam developed his first crude processes with the help of Ben Franklin. He tacked pieces of paper with numbers he needed to know—like store reports or invoices—onto a bulletin board in front of his desk. Each bunch of papers held together by a tack represented a different action he had to take each week. Sam was visually oriented and seeing bunches of papers grow in size gave him an additional sense of how things were selling and helped him prioritize next steps. These crude processes worked for Sam in running a half dozen Ben Franklins, at which point he moved into a bigger office space with cubbyholes for each store’s paperwork, which he reviewed on a weekly basis or when a cubby filled up.

  Because Sam was not well organized, these basic and crude processes were critical for his success. If he had not religiously sorted his paperwork, transcribed critical numbers onto big worksheets, or sorted papers into cubbyholes, he would have lost control over the stores he owned, irrespective of whether he visited them constantly. Relentlessly working with store managers to make incremental small improvements to merchandising and store procedures improved almost every one of his stores, each becoming the best in its locale.

  But the store managers could only have been supported with the inventory and merchandising they needed because Sam forced himself to implement some basic processes for tracking store performance and for ordering. As these processes became routine, Sam could train others to take them over, thereby incrementally freeing up time and attention that could be invested in adding more stores, until he no longer needed Ben Franklin’s costly support and could gradually begin to compete with more sophisticated and better financed retail chains.

  Walt’s initial processes to successfully deliver his Oswald cartoons were equally crude by today’s standards. But in both cases, these processes were absolutely required for Walt and Sam to compete in their respective entrepreneurial leagues.

  With the Oswald contract in hand, Walt Disney, at the age of twenty-three, started to dream big. Walt instantly ratcheted up the demands and pressures on his team to produce better crafted, funnier, and more inventive Oswald episodes. To get even more production and higher-quality work out of his team, Walt developed several important productivity improvement techniques over the next year, including working out story and timing details using rough animations before committing to more detailed and costly final drawings. With a growing fixation on quality and detail, Walt became increasingly critical of his team’s work and demanded longer hours, resulting in his animators no longer feeling appreciated. On the other hand, Walt and Roy felt successful for the first time and used their Oswald profits to build identical houses for themselves on neighboring lots near their studio.

  As tensions rose at the studio, the distributor, Charles Mintz, was also feeling increasingly anxious about working with Walt.[17] Mintz felt Walt was losing his skill as an animator and adding little value as the producer. Walt spent most of his time improving the quality of Oswald in ways that only cost more money and that audiences wouldn’t even notice. As the time approached to renew the contract, the distributor and most of Walt’s disgruntled animation team secretly schemed to take over the production of Oswald. Walt Disney traveled to New York for what he thought would be a routine renewal of the Oswald contract. The contract negotiations went nowhere and Walt wound up spending several months in New York trying to convince the distributor or Universal to renew. The magnitude of the revolt was finally revealed when Roy, back in LA, received the mass resignation of almost the entire animation team. Only Ub Iwerks and a few junior animators remained loyal to Walt.

  Defeated, stunned, and depressed, Walt headed back to LA. On the return train trip, he sketched out on cocktail napkins and train stationery ideas for a new cartoon character based on a mouse. While the traitorous animators remained working at the studio for another two months to finish up the first Oswald contract, Walt and Ub worked secretly late into the night to produce the first Mickey Mouse episode. But no film studio was interested in distributing it. With no money coming in, Walt and Roy mortgaged their new houses to raise enough to make a second episode. Still no takers.

  A few months before, The Jazz Singer, the first talkie, had premiered, throwing the film industry into turmoil about where and how sound would apply to movies—and cartoons—in the future. Mickey Mouse, as originally envisioned by Walt, was silent. After the second episode failed to sell, Walt and Roy decided to gamble everything they owned to add sound to Mickey Mouse. A few cartoon makers had experimented with atmospheric sound as a general backdrop to action, but no studio had yet figured how to synchronize sound with animation. Walt and Ub created a Mickey Mouse story, Steamboat Willie, where all the gags, and even Mickey’s swagger, were tied to sounds. A junior animator suggested using a metronome to time the soundtrack, triggering Walt to develop novel timing tricks for scoring a synchronized soundtrack. The technique was tested with the small team remaining at the studio. While the film was projected, each person banged, squeaked, and mooed at appropriate times to synchronize exactly the sounds they planned to add. The team found tying the cartoon to their actions so hilarious that they continued to repeat their simulation over and over until they collapsed from exhaustion late into the night.

  Walt headed to New York with the written sound score and a reel of animation in search of a sound studio that could add sound to their film. The big companies that owned competing sound technologies were not excited about adding sound to a short cartoon when their business of adding sound to full-length features was growing quickly and demanding their full at
tention.

  As with hot technologies today, back in the late 1920s, new technologies such as adding soundtrack to film spawned scores of new startups, each of which offered supposedly unique products. Naturally drawn to people who showed appreciation for his work, Walt was most impressed with a sound-to-film entrepreneur named Pat Powers. Walt probably knew, but chose to overlook, the fact that Powers was notorious in the film industry for double-dealing and strong-arm tactics. Completely ignoring Roy, Walt decided to license Powers’ Cinephone Sound System for far more money than they had. Walt then gladly accepted Powers’ offer to find the best sound effects men in town and arrange for a sound studio (Powers just provided the equipment). The recording session cost $1,000, which was the last of the cash Roy had raised from the mortgages and from selling some assets. The session was a complete disaster, as the musicians ignored Walt’s instructions on how to synchronize the score to the cartoon.

  To obtain the money for a second recording session, Roy had no choice but to do what they had avoided doing up until then—taking out a bank loan. If Mickey Mouse did not succeed now, Walt and Roy would have to declare bankruptcy. To make sure the second recording session would work, Walt thought about how to make his instructions dead easy to follow. Over the next two weeks, Walt inscribed a ball that bounced at the implied beat of the action onto each frame of actual film the musicians watched while they played—and the second recording session hit its mark, so to speak. (Walt’s “follow the bouncing ball” technique is still used on karaoke DVDs today.)

  But Walt still didn’t have a distributor, so Pat Powers convinced Walt, again without consulting Roy, to make him Disney’s exclusive sales agent for 10 percent of all future fees. Powers then arranged for Walt to show Steamboat Willie to some top studio executives, most of whom loved the cartoon—but no one offered to distribute it. Fortunately, the manager of a large and famous New York City movie theater who had been invited to one of the Steamboat Willie screenings loved it and offered Walt $500 to show the cartoon for one week at his theater. Walt desperately needed more money to make payroll back in LA, so he countered with $1,000 for two weeks, and a deal was set.

  Audiences loved Steamboat Willie. So did the critics—even the critic for the New York Times. Audiences flocked to the theater to see the cartoon (not so much the feature film Gang War). A sensation with the public, it was also immediately recognized as a revolutionary cartoon, with everyone amazed by the new dimension sound added to storytelling. (It would take over a year for any other animation studio to figure out how to enhance their stories as effectively with sound.) Practically every distributor immediately offered to distribute Mickey Mouse, and many of the large studios offered to buy Disney Brothers outright. Walt was not interested in selling, and instead insisted on unprecedented fees and rights, which established distributors refused to accept—so still no deal.

  Pat Powers stepped forward with another offer. Again, without consulting Roy, Walt accepted, agreeing to let Powers oversee the regional distribution of Mickey Mouse in exchange for 10 percent of the gross receipts. While the national distributors and movie studios balked at Walt’s demands, regional and foreign theater chains jumped at the opportunity to show Mickey Mouse while agreeing to pay unprecedented fees for the cartoon. Money started to roll in, more money than Walt or Roy had ever dreamed of seeing.

  Walt and Roy bet their personal financial futures to enable Walt to develop new skills that they hoped could be commercialized. In roughly seven months, Walt had catapulted from being an inconsequential owner of a small animation studio producing a single cartoon series for a much bigger studio to being the most respected and successful animator in the world. He jumped from playing backup in the big league of animation to starring in the World Cup of talking cartoons. Walt’s breakthrough came when he actually invented new techniques: synchronizing animation, synchronizing sound scores, and using sound to amplify the impact of stories. He trained others in these skills so he could reproduce the innovations with each new cartoon, churning out products as innovative and globally impactful in their day as the iPhone was when it debuted in 2007.

  All the fame and accolades Walt received fueled his desire to make each new Mickey Mouse episode better than before. Consequently, each episode took longer and was more expensive to produce than the previous one. Even though Disney Studios received more money for Mickey Mouse than any cartoon in history to that point, the studio made less and less profit on each episode, to the point that a few years into the series, Mickey Mouse episodes lost money.[18] It was two other cartoon series that didn’t draw as much of Walt’s attention, Donald Duck and Silly Symphonies, which kept Disney Studios profitable enough to expand.

  Walt and Roy made another “all-in” bet when Walt decided to make the first animated feature length film, Snow White and the Seven Dwarfs. Walt worked intensely with his animators and story editors for five years writing and re-writing, drawing and re-drawing the story of Snow White. The arduous process of creating the first full-length feature cartoon required more money than any cartoon studio could fund from its cash flow. Walt insisted on total control of his ideas, which they both understood meant that there could be no outside investors to whom they would have to answer. Roy understood his position in the partnership was now to borrow the money to make the story of Snow White possible. Disney Studios would be financed by debt for the next thirty years.

  Roy had to prepare sophisticated projections that met the standards of banks large enough to provide them the millions of dollars they needed (today’s equivalent of many tens of millions of dollars). He became highly astute at understanding financial statements and projecting cash flow. Roy also mastered how and when to bring Walt into his discussions with bankers so the bankers would understand his creativity but not worry about his spendthrift ways.

  Snow White was considered by many to be the best movie ever made, and to this day it is always listed among the best. It was a global blockbuster; nobody had ever seen anything like it. Not even the first Star Wars movie can compare to its impact on audiences, let alone on critics. Once again, Walt and Roy were able to pay off their loans and still be flush with cash.

  But the next three very expensive feature animated films, Pinocchio, Fantasia, and Bambi, were financial bombs even if many admired their artistic contributions. The losses from these movies consumed all the Snow White profits, all the cartoon profits, and all the money Roy was able to borrow. Roy even had to sell public bonds in the early 1940s based upon the fame of the Disney brand, a de facto IPO, just to finish the movies in production. With the studio in financial distress, outside Board members representing the public bondholders and bankers refused to loan another penny for making any new full-length animated feature, grounding Walt. He wasn’t fired— nobody had the power to do that—but he was prevented from moving forward in the way that he wanted. Bedrock entrepreneurs may never have to give up ownership, but if they don’t generate profits, they cannot do whatever they want, no matter who they are or what league they play in.

  Walt Disney and Sam Walton took opposite approaches to achieving their bedrock entrepreneurial success. After Oswald, Walt relentlessly drove breakthrough innovation. Walt’s repeated successes, each with its close encounters with bankruptcy, catapulted Disney to the top of the major leagues of the entertainment business. But the profits of each breakthrough were used to finance new breakthroughs, so when the profits from past breakthroughs were spent and not replaced with profits from another innovation, Walt had to stop. He still controlled the place and he could still get involved in whatever project sparked his interest at the studio, but he couldn’t make films the way he wanted, when he wanted.

  It took Disney Studios fifteen years to build its profitability back to the point where Walt got another shot at innovating entertainment. During those fifteen years, Roy and Walt even sold a portion of the studio to the public to relieve pressure on their large debts. Over this time, Walt’s reputation subsided from wunde
rkind genius to formerly great innovator. He became less insistent on dictating every creative decision at the studio. Roy had a freer hand at managing the budget and finances, which helped him to maintain his focus on cash and profits. Limited by the studio’s focus on producing films in already established formats, Walt’s attention waned and critical and artistic acclaim eluded him.

  Walt badly needed creative release to feel good about himself. Since he could no longer feel creatively fulfilled at his studio, Walt developed new hobbies. He became fascinated with miniature dioramas, medium-scale operating model railroads, and moving, lifelike figurines, and his projects grew larger in scale and scope with time. When finances at the studio were finally stable enough, Roy arranged for Walt to receive a generous royalty income for the studio’s use of his name. Walt immediately invested this extra income back into his hobbies, which then grew further in scope to become so expensive that Walt even mortgaged his house to finance them.

  Walt’s hobbies enabled him to master a new series of skills. He was aggressive in hiring experts to help and support him in creating ever more sophisticated dioramas with moving figurines to accompany his scale model trains. Walt honed his skills to the point where he was able to envision an entirely new entertainment experience, which he called “Disneyland.” He brought more and more people to his personal studio/laboratory, where everyone loved his ideas and encouraged him to turn them into a reality.

  With Walt’s excitement in Disneyland growing , Roy girded himself to place yet another “all-in” bet for Disney Studios to be able to create and build the park. And he didn’t finance it by selling stock—a move that Disney’s outside investors would have thought way too risky. Roy, working again in tandem with Walt, landed financing by getting huge advances from the ABC television network for making shows for the wildly popular new entertainment medium, something no other studio was willing offer as they thought TV competed too directly with movies.