Lessons from an American Icon

We close The Power of Little Ideas with a tale both inspiring and cautionary, the story of The Walt Disney Company.

It’s inspiring because this American icon, a pioneer of the Third Way, owes much of its success—and, at crucial times, its very survival—to complementary innovation. It’s cautionary because the history of Disney is hardly a story of inexorable growth and success. The company’s fortunes have waxed and waned in the ninety-some years since its founding, and from that mixed record, we believe there are lessons to be learned about the Third Way.

Anyone looking at The Walt Disney Company today is most likely to say it began with animated cartoons, moved on to animated feature films, which it invented, and then steadily expanded over the years to become a diversified entertainment powerhouse that incorporates animated films, live-action movies, theme parks, television programs, a chain of Disney retail stores, Disney merchandise, and a host of lesser ventures.

We see a different story. Yes, Disney is a diversified entertainment company that evolved from its early success in animated films. But we think the Disney-branded portion of the company—excluding the ABC and ESPN television networks and the complementary innovations around them—is best understood as a practitioner of the Third Way, starting with Walt Disney himself. Much of what is typically considered the company’s opportunistic diversification over the years is better understood as complementary innovation around its core, which in this case was not an individual product but a type of product—animated feature films.¹

But Disney is also a lesson in how successful application of the Third Way can lead to internal dysfunction, separation of the different types of innovation, and ultimately—in Disney’s case—an erosion of capability in the core. To understand this, you must understand something about Walt Disney and the history of his company. We’ll start at the beginning.

The Animator from Missouri

Born in Chicago in 1901, Walt Disney grew up in two Missouri communities: Marceline and Kansas City. An indifferent student, he was remembered as an artist who drew cartoons and other illustrations for his school’s student publications. He left high school before graduating and served a year in Europe at the end of World War I as a Red Cross ambulance driver. On his return to Kansas City, he worked as an artist for a small ad agency, where he learned to create animated movie ads that were shown to moviegoers. This was his first contact with movie animation, and it captured him.

In the early 1920s, animated movies were considered a novelty—only good for showing gags and pratfalls to amuse patrons before the real movie began. After an unsuccessful attempt to set up an animation studio in Kansas City, Disney decided to try his luck in Hollywood because his uncle lived there and his brother, Roy, had been sent there to recuperate from tuberculosis. His choice of Hollywood wasn’t as obvious as it seems now. The leading animation studios of the time were actually located in New York City.

In Hollywood, he had some initial success with a series of short films that combined animation with live action, and with fully animated films starring a character of his own creation, Oswald the Lucky Rabbit. When he lost the rights to Oswald to his distributor, he invented a new character—Mickey Mouse—whose rights he carefully protected. The first two Mickey Mouse cartoons gained some attention, but Disney’s real breakthrough came when he decided to add sound to the third cartoon, Steamboat Willie, in 1928. What made this cartoon distinctive was not just the addition of sound—it was the first talkie cartoon—but the way the sound and onscreen action were tightly synchronized. Steamboat Willie excited cartoon audiences just as Al Jolson’s The Jazz Singer, the first talkie feature film, had thrilled moviegoers the year before. Mickey Mouse quickly went on to become a worldwide phenomenon. His spunky optimism seemed to be the tonic a Depression-weary world needed. By one estimate, a million audiences (not just individual moviegoers) saw a Mickey Mouse cartoon each year in the early 1930s.²

Animated films in the 1930s were enormously complicated to make. Creating the illusion of motion required Disney and his animators to create 24 slightly different drawings for every second of film—1,440 frames per minute.³ But as difficult as the process was, Disney was obsessed with doing it well. Of his competitors, he once said, “We can lick them all with Quality.”⁴ As one of his animators said, “Whatever we did had to be better than anybody else could do it, even if you had to animate it nine times, as I once did.”⁵

Yet what truly set Disney apart was not the quality of his artwork but the way he thought about animation. To him, the magic of animation was that with it, he could create any world he wanted. Any fantasy could be turned into seeming reality. If Mickey needed music, he could play a cow’s ribs as if they were a xylophone. If he needed a ladder, he could turn his own tail into one. Because Disney could see animation’s enormous possibilities, he set his sights higher than did other animation studios. He concentrated on telling a story rather than animating a series of silly sight gags, and so he was the first animation head to create a story department. His goal was to create animated characters so real they could generate an emotional response from the audience. While others thought animation simply meant making characters move on the screen, he understood its real meaning. To “animate” meant “to bring to life” in every sense of the word—physical, emotional, and psychological. He wanted to breathe life into his characters so that the audience would care about and identify with them. No one else at that time saw the possibilities he saw or pushed their animators to reach for them.

From Cartoons to Animated Feature Films

Given such ambition and vision, it was almost inevitable that Disney would start to think beyond cartoons and animated shorts. In the early 1930s, he began to consider producing a full-length animated feature film that theaters would offer as an evening’s main attraction. He and his brother Roy, the studio’s money man, also hoped a longer film would produce better financial returns. Every time the studio got more money for its cartoons, Walt improved the process of animated storytelling in ways that always seemed to raise costs. He saw an animated feature as a way to improve the studio’s financial stability and to stay ahead of its competitors.

Walt chose the story of Snow White as his—and the world’s—first animated feature. Producing it would take years and stretch to the limit both the studio’s finances and the many animators who worked on it. If it had failed, it almost certainly would have pushed the studio over the edge.

But, of course, it didn’t fail. A huge success with both audiences and critics when it was released in 1937, Snow White and the Seven Dwarfs allowed the company to pay off its loans, begin to build a bigger studio, and hire the hundreds of additional staff that producing more animated features would require. Over the next three decades, the studio under Disney produced a stream of such features, many of which are still considered animation classics, including: Pinocchio (1940), Fantasia (1940), Dumbo (1941), Bambi (1942), Fun and Fancy Free (1947), Melody Time (1948), The Adventures of Ichabod and Mr. Toad (1949), Cinderella (1950), Alice in Wonderland (1951), Peter Pan (1953), Lady and the Tramp (1955), Sleeping Beauty (1959), One Hundred and One Dalmatians (1961), and Mary Poppins (1964), a hybrid live-action and animated feature that was nominated for a Best Picture Oscar.

While some of these films were critical and financial successes, many were not. Pinocchio—Disney’s first film after Snow White—returned only 44 percent of what it had cost to make and release. Fantasia, Dumbo, and Bambi—his next three films—produced lackluster returns—especially Fantasia, which attempted to animate classical music. Even though Disney lavished special care and effort on it and even created a special sound system for it, Fantasia was a disappointment. The studio struggled through the war years as it made films for the government and armed forces. After the war, through the 1950s and early 1960s, it continued to produce animated features that did well enough—though Sleeping Beauty in 1959 was a great popular and financial disappointment.

Disney and Complementary Innovations

By the early 1950s, it was clear to Walt and Roy Disney that producing animated feature films was a very risky business. The costs to produce a new film were high, and audience reaction difficult to predict. Disney’s animated film business—if separated from the rest of the company—cannot be considered a success on any commercial dimension. In fact, as we will show next, if the studio had depended only on those films and cartoons to support itself, it would have failed. What allowed the studio to survive and ultimately thrive were the complementary innovations the Disney brothers created around those films. To understand this, we must return to the early days of Mickey Mouse cartoons.

Mickey Mouse Clubs and Merchandise

The first complementary innovation appeared just as Mickey Mouse’s popularity was building. The manager of a suburban Los Angeles theater invited Walt to a regular matinee meeting the manager held to fill his theater with youngsters on Saturday afternoons: the Mickey Mouse Club. At club meetings, members took the Mickey Mouse pledge, sang a Mickey Mouse song (“Minnie’s Yoo Hoo” with a chorus of farm animal sounds), recited the Mickey Mouse creed, and watched Mickey Mouse cartoons. Walt embraced the idea and authorized the manager to expand the club to theaters all across the country. At their peak, the Mickey Mouse Clubs had an estimated one million members spread over eight hundred chapters from coast to coast. A Mickey Mouse comic strip, which quickly spread to twenty-two countries, was equally popular.⁶

And there was Mickey Mouse merchandise. Mickey’s picture appeared on Post Toasties cereal boxes, Cartier sold a diamond Mickey Mouse bracelet, and there was a Mickey Mouse version of almost every article of children’s clothing, as well as Mickey Mouse dolls, comic books, candy, watches, and toy trains.⁷ In 1934, sales of Disney merchandise (mostly Mickey Mouse items) totaled $70 million worldwide. That same year, Walt commented that he made more money from Mickey’s ancillary rights than he made from the mouse’s cartoons.⁸

Mickey was only the beginning. The studio vigorously pursued a similar approach with all its animated characters—for example, in 1938, fans bought $2 million worth of Snow White handkerchiefs.⁹ By 1947, sales of Disney-related merchandise rose to roughly $100 million per year. By 1948, five million Mickey Mouse watches had been sold, and there were more than two thousand Disney-related products. Sales of that merchandise, in a giant virtuous circle, built the audience for Mickey Mouse cartoons and—later—the company’s animated features.

Disneyland

Walt Disney’s concept for building Disneyland, which opened in 1955 in Anaheim, California, apparently emerged from the confluence of several of his interests and concerns. Animated features had proven themselves financially problematic, and he tired of the unending financial strains that he could no longer pass off to his brother. Also, and not least, a bitter animators’ strike in 1941 had left him feeling betrayed by his “boys,” many of whom had worked closely with him to produce Snow White and other classics. Whatever the reason, after World War II, his heart seemed to have moved on from animated features and was seeking something else to embrace. In Disneyland, he found the next outlet for his creative energies.

In the 1940s and 1950s, US amusement parks were seedy, dirty, disreputable places that no one would visit with children. After seeing the Danish Tivoli Gardens and American attractions such as Colonial Williamsburg and Greenfield Village, Walt decided to change that. Just as he used animated features to create a fantasy world for himself and his audience, he would use a Disneyland park to create a physical fantasy world that the “audience” could actually enter and explore. Indeed, core parts of that physical space would be the worlds he had first created on screen. He even thought of the park as a giant movie set that guests could wander through. He insisted that park employees consider themselves actors on stage playing a role when they were working. He planned to surround the park with a berm that blocked any sight of the world outside. Once you entered, nothing would disturb the fantasy. It would be a place and a world never before seen.

It’s easy to believe that Disneyland was a natural extension of Disney’s animated films but that, otherwise, they were unrelated. We believe the relationship is tighter and more organic than that. Disneyland complements the animated films and wouldn’t exist without them. It’s impossible to imagine Disneyland without the fantasy worlds and characters Disney created in his films. When Disneyland opened in 1955, McCall’s magazine called it a place where “Walt Disney’s cartoon world materializes bigger than life and twice as real.”¹⁰

In return, Disneyland expanded and extended enormously the economic value of Disney’s films and characters. Disneyland put Walt’s company, for the first time in its history, on a solid, stable financial foundation. And the creation of Disneyland enabled Disney to develop another complementary innovation: a weekly television program.

Walt Disney and Television

While Disney would not launch his own TV show until the mid-1950s, he had been aware of television’s potential since the mid-1930s, when he saw an early demonstration. He considered it a medium he could use and thereafter always insisted on retaining television rights for everything his studio produced.¹¹

Disney saw in television a means not only to promote Disneyland, but to finance its construction as well. He shrewdly approached ABC, the newest and weakest of the new national networks (NBC and CBS were the other two), which was desperate for programming to attract an audience and expand the number of affiliated stations. It especially wanted to tap into Hollywood movies, particularly those aimed at a growing market segment of “youthful families.”¹²

The ABC-Disney agreement called for the Disney studio to produce a weekly program hosted by Walt that drew on the studio’s vast library of films and cartoons, included some new material, and—above all, in Walt’s mind—devoted at least one segment per week to promoting Disneyland, which was also the name of the program. In return, ABC would pay for the show’s production and invest in the construction of Disneyland. Disneyland, the program, launched in 1954 (the year before the park opened) and was such a hit with the national audience that it transformed ABC into a bona fide network. Based on that success, ABC added a daily hour-long program, the Mickey Mouse Club, also a great and long-lived success. Together, those programs made Walt a media star.

Disney and the Third Way

It should be clear by now that Walt, aided by Roy, was a master of the Third Way. According to his biographer, Walt was “the first to bundle television programs, feature animation, live-action films, documentaries, theme parks, music, books, comics, character merchandise, and educational films under one corporate shingle.”¹³ The income from those complements allowed the studio to survive its many brushes with bankruptcy before the mid-1950s and put it on a firm foundation with steady, healthy profits.

Some may disagree. Didn’t at least some of those complementary innovations—theme parks, in particular—make the company a different company? Instead of complementary innovations, weren’t these efforts just natural business and product extensions, lateral innovations, that allowed the company to evolve from an animated film company to ultimately a diversified entertainment and media enterprise with multiple key products? Hadn’t animated features, once important, become just one of many products, and not even the most important, as the company continued to move on and evolve?

This argument may sound plausible, but it wasn’t the way Disney himself saw his company. In 1957, two years after Disneyland had opened and its immense success was obvious, he prepared a diagram that shows how he saw his creations: not as a collection of disparate, independent parts but as one organism with a heart that made everything else possible (figure 8-1).

At the center of the diagram are Disney theatrical films, animated and live-action. Around the films are the complementary innovations—Disneyland (theme parks), television programs, merchandise, music, comic strips, publications, and others—based on the films. Note the arrows that indicate both the connection and direction of influence. Films lead to everything else. Films make everything else possible. But note too that many of the complementary innovations also feed and support each other.

Disney’s diagram is the best description of a Third Way system we’ve seen. Take a moment to review the three characteristics of the Third Way: First, it consists of multiple, diverse complementary innovations around a key product or service that make the key product (and each other) more appealing and competitive. Second, the complements operate together as a system or family to carry out a single strategy or purpose—in the case of Disney, to enrich the customer’s experience of the story and characters first introduced in feature films. And finally, the family of complements is closely and centrally managed. Walt clearly designed his company to deliver on all three of these characteristics.

If the story ended here, it would still be an inspiring example of the Third Way. But at the beginning of this chapter, we promised a tale both inspiring and cautionary. This is where—after Walt and Roy died—the story of The Walt Disney Company turns cautionary—and instructive.

After Walt and Roy passed away, those who led the company saw it in different ways. Some saw it as Walt had seen it: a company with a core surrounded by multiple complementary innovations that both supported and fed off the core and each other. Other leaders, however, saw it as an entertainment company with multiple parts, and they tended to deal with the parts separately. They didn’t understand the Third Way.

By tracing the history of the company from about 1970 until now, we can see which of these two approaches—pursuing the Third Way or simply managing the company as a collection of related but distinct parts—produced better results.

The New Leadership Team: 1971 to 1984

After Walt passed away in 1966 and his brother Roy in 1971, the Disney board named an insider, Card Walker, to lead the company. The leadership team also included Ron Miller, Walt’s son-in-law, whom Walt had brought into the company, and Roy E. Disney, Walt’s nephew and the son of his brother-partner. The corporate mantra they all sought to follow was clear: “What would Walt do?”¹⁴

The practical effect of this approach was that the company pressed forward with the plans for Disney World that Walt had been pursuing when he died. The Magic Kingdom was the first segment to open in that Florida complex, in 1971, followed eleven years later by Epcot, the futuristic community that had most fascinated Walt.¹⁵ In 1983, a year after Epcot, the company launched the Disney Channel and opened Tokyo Disneyland Resort.

Through this period, as the company seemed to move forward aggressively, it was drifting away from character- and story-driven animated feature films. Instead, it produced such forgettable live-action movies as Herbie Rides Again (1974), Escape to Witch Mountain (1975), and The Cat from Outer Space (1978). From 1970 through 1984, Disney released a total of only five animated films and two hybrid animated-live-action features. In eight of those years, no animated features of either type were released. And in 1984, the studio released no movies at all.¹⁶

Almost all of the few animated features Disney did release in this period lacked the distinction and innovation of Disney’s earlier films. Even the company’s iconic weekly television program, Disneyland, which debuted in 1954 and featured Walt himself, struggled through this period and was finally canceled in 1981.

CEO Walker seriously considered shutting down the motion picture arm of the company, which helps to explain the relative dearth of films released in the late 1970s and early 1980s. Recalling Walt’s adage that the only worthwhile publicity was word of mouth, which was free, Walker refused to spend money on marketing and advertising movies. If people didn’t like or want the kind of movies that Disney was making, then it wouldn’t make movies.¹⁷

Because of all this, financial results declined. Pretax return on assets, a healthy 13.2 percent in 1973, declined almost in half to 6.9 percent in 1983. Markets ignored the company, and its stock price remained basically unchanged from the early 1970s, when Walt Disney World Resort opened, through the mid-1980s.

By that time, Roy E. Disney had resigned as an employee of the company, though he remained on the board. Frustrated, pushed aside, excluded from decision making, and knowing that Walker had labeled him the “idiot nephew,” Roy E. left the company in 1977 to protest the direction management was taking. In his letter of resignation, he said the “creative atmosphere for which the Company has so long been famous … has … become stagnant,” and “the Company is no longer sensitive to its creative heritage.” Furthermore, “motion pictures and the fund of new ideas they are capable of generating have always been the fountainhead of the Company; but present management continues to make and remake the same kind of motion pictures, with less and less critical and box office success.”¹⁸ Ironically, this man, whose father had headed the business side of the studio, became the advocate of its creative side.

The company’s drift away from its creative heritage was felt throughout the company. “When I started here in 1978,” said Chris Buck, who years later directed the animated hit Frozen, “the studio was run by Walt Disney’s son-in-law, Ron Miller. Nice guy, but he wasn’t a filmmaker and he wasn’t an artist.”¹⁹ As if to prove the point after Roy E. Disney left, Ron Miller picked Thomas Wilhite, the publicity director, to take over as vice president of creative development for the company. Wilhite had never before produced a motion picture. His live-action films through the early 1980s did poorly at the box office.

What for a time hid the poor performance of Disney’s feature films was what later management would call the “moat,” the ring of complementary innovations such as theme parks, merchandise, and television that surrounded the moviemaking unit and protected the company from the ups and downs of the movie business. Unfortunately, the moat also distracted company leaders from the importance of maintaining a healthy film business.

Eventually, the company’s poor performance caught up with Walker, and he resigned in 1983. He was replaced by Raymond Watson, an architect who had worked for Walt in the early days of planning Epcot. Picking Watson seemed to support another charge that Roy E. Disney had made when he resigned—that the company was “more interested in real estate development than in motion pictures.”²⁰

Watson’s tenure lasted only a year. By early 1984, the company’s stock price had dropped from $85 in late 1982 to $58. From a high of $135 million in 1980, the company’s net revenue had fallen to $93 million in 1983. The shareholders, led by Roy E. Disney (who was still on the board), were upset, and new management was hired.

A Return to the Core: The Mid-1980s to the Mid-1990s

The year 1984 marked the beginning of a new era. Michael Eisner was named chairman and CEO, and Frank Wells became president and chief operating officer; each reporting directly to the board. To revitalize the feature film business, Eisner hired Jeffrey Katzenberg to head moviemaking, and brought Roy E. Disney back as head of feature animation, reporting to Katzenberg.

Katzenberg and Disney revived the studio’s animation’s arm, which sprang back to life with a string of animated hits that included The Little Mermaid (1989), Beauty and the Beast (1991), Aladdin (1992), and, most successfully, The Lion King (1994). Seeing the potential in these stories for more than an animated movie, Disney created a theatrical arm whose first venture, a musical version of Beauty and the Beast, opened on Broadway in 1994, followed by a musical The Lion King in 1997. The Lion King went on to become only the fourth Broadway show ever to play seven thousand performances. After the turn of the new century, it was followed by others, including Mary Poppins (2006), The Little Mermaid (2008), and Aladdin (2011).

The company also revived the Mickey Mouse Club on television. The show, now titled The All-New Mickey Mouse Club, went on to launch the careers of several stars, including Justin Timberlake, Christina Aguilera, and Britney Spears. In addition, Eisner opened the first Disney Stores in 1987 and expanded the chain aggressively.

As the quality of the animated feature films improved, revenues soared across the board. From 1991 to 1997, Disney’s entertainment revenues rose from $2.6 billion to $7.0 billion, consumer products sales went from $700 million to $3.8 billion, and theme park and resort revenues climbed from $2.8 billion to $5.0 billion. In that same period, Disney’s overall revenue rose from $6.1 billion to $22.5 billion.²¹

More Stagnation: 1997 to 2006

In 1994, following a well-publicized internal struggle, Katzenberg left Disney to start his own studio. Corporate performance metrics continued to look healthy for a few years, but Katzenberg’s departure actually marked the end of an era. Once again, the company focused more on independently expanding complementary businesses than on producing the kind of animated features that moviegoers loved and that ultimately drove complementary sales.

By 2006, the studio had gone twelve years without an animated feature film hit. The reason, according to an article in Wired, was the film development process at Disney: “Like most movie studios, [Disney] had for decades employed a C-suite of what’s somewhat generously known as ‘creative executives’—cookie-cutter MBA types who tasked underlings with turning vague premises into magic … Somehow, though, as Disney Animation’s films became less successful, the executives exerted more power. They made decisions about what movies would be developed—based on market research, tea leaves, their own opinions—and assigned directors and producers to those projects, none of which became hits.”²²

Don Hall, who directed the 2014 animated hit Big Hero 6, first joined Disney in 1995. “It was a broken system,” he recalled. “I can’t pinpoint where we lost our way, but it was affected by the fact that the people in charge weren’t necessarily lovers of the art form.”²³

Films weren’t the only trouble spot. The number of Disney Stores grew rapidly, and many stores were located in inappropriate and unprofitable locations. The company was struggling to turn around its Euro Disney park, which had flopped upon opening outside Paris in 1992 and continued to have problems. The Disney-MGM Studios Theme Park at Walt Disney World Resort opened and proved to be an awkward alliance. In moves that, in hindsight, can only appear misguided, the company bought both a pro hockey franchise and a pro baseball team to leverage two live-action feature films, The Mighty Ducks (1992) and Angels in the Outfield (1994). So tenuous was the connection between these teams and the films they were supposed to complement that Disney sold the Anaheim Angels in 2003 and the Anaheim Mighty Ducks in 2005. It was also in this period that Disney began selling cassettes and DVDs of its classic movies, a trove of great value but not one that could be exploited indefinitely, particularly given the studio’s inability to keep growing that trove.

More than 100 percent of Disney’s revenue growth from 1997 to 2000 came from the growth of its television properties (the ABC network and ESPN, the sports cable channel). Despite the tremendous success of three Disney-Pixar movies (Toy Story, A Bug’s Life, and Toy Story 2), revenues in the studio entertainment division actually dropped from $7.0 billion to $6.0 billion between 1997 and 2000. Income from the consumer products division dropped from nearly $900 million in 1997 to $455 million in 2000. By the summer of 2001, all key metrics for the company, including return on equity, return on assets, and return on investment, had declined by more than 50 percent since 1997. Net income had dropped steadily from $2.0 billion in 1997 to $832 million in 2000. The stock price had dropped from $23 to $17.

And as bad as things were in 2000, they only got worse from there. The stock market tanked in 2000, and the terrorist planes brought down the Twin Towers in 2001. Merchandise sales continued to decline. Theme park and resort revenues dropped. The company reported an overall loss of $158 million in 2001, and performance continued to languish over the next few years. ABC wasn’t doing well. The acquisition of the Family Channel was a disaster. Disneyland Resort Paris (renamed from Euro Disney) still struggled. And the company began closing its hundreds of unprofitable Disney Stores.

The one bright spot throughout this period, especially for films, was Pixar. Disney had an agreement with Pixar to distribute and cofinance its films.²⁴ In return, Disney received half the revenues and owned all rights to the stories and characters. Disney benefited enormously throughout this period as Pixar turned out an unprecedented string of animated hits. The first was Toy Story in 1995 (the first computer-generated feature film), followed by A Bug’s Life (1998), Toy Story 2 (1999), Monsters, Inc. (2001), Finding Nemo (2003), The Incredibles (2004), and Cars (2006). All these movies were huge financial and critical successes and all, of course, gold mines of ancillary merchandise, not to mention the Pixar-themed attractions that Disney could add to its theme parks. The contrast between Pixar’s successes and Disney’s failures couldn’t have been more stark.

The profits that Disney collected from its contract with Pixar and the growth of its ABC and ESPN television properties helped mask the decline in the company’s Disney-branded core enterprises: movies, theme parks, stores, and merchandise. In those businesses, Disney was wringing as much value as it could from past success, but it was building no foundation for the future. In Eisner’s letter to shareholders in Disney’s 2002 annual report, he recognized the problems with the company’s earnings and stock price. But he promised that the investments recently made in the Disney and ESPN brands—that is, in the complementary innovations around both of them—would create “a protective moat.”²⁵ He predicted that those businesses would grow annually by 20 percent—but made no major changes in the animation business that could have driven the Disney portion of that growth.

It was no small matter, then, when Disney’s relationship with Pixar unraveled in the early 2000s. When Pixar proposed Toy Story 2 as one of the three films it would produce under its existing agreement with Disney, Eisner said no. After that, Steve Jobs, chairman of Pixar, refused to negotiate with Eisner and instead went through others at Disney. Pixar extended the agreement to cover seven films, but ultimately, the relationship between Jobs and Eisner broke down. In January 2004, Pixar announced that it was ending talks to extend the agreement.²⁶

Eisner, already under attack by dissident investors, including Roy E. Disney, resigned on September 30, 2005, one year before his contract expired. Bob Iger was named his replacement.

A Return to Animation: 2006 to Now

One of Iger’s first moves was to reconnect with Jobs and negotiate Disney’s purchase of Pixar in 2006 for $7.4 billion. Iger understood the importance of animated features, an importance impressed on him when, as the new CEO, he traveled to Hong Kong in September 2005 for the opening of Hong Kong Disneyland. As he watched the opening parade, he realized that all the Disney characters he saw on parade floats were based on films decades old, and all the recent characters were from Pixar movies. “It was pretty easy to see that we had a real problem,” he said. “It was staring me in the face.”²⁷

When Disney bought Pixar, it decided not to combine the two animation studios. However, it did move three of Pixar’s key leaders, President Ed Catmull, creative head John Lasseter, and technology lead Greg Brandeau, to lead Disney’s animation arm in Los Angeles (while still leading Pixar). Catmull and Lasseter were given the alternative of closing the Disney operation, but they chose to keep it alive because of its iconic stature in the history of animation.²⁸

Given that the only change made to Disney animation was the addition of these three managers and the management practices they brought with them, the turnaround at Disney was stunning. No other changes were made—no work was shared, no people transferred, and no teams from one division reported to the other. The difference at the box office was immediate and powerful (figure 8-2). The three movies Disney produced before the Pixar acquisition—Meet the Robinsons (2007), Bolt (2008), and The Princess and the Frog (2009)—averaged revenues of $249 million each.²⁹ The first three movies that Disney delivered after Catmull, Lasseter, and Brandeau’s new management had a chance to take effect were Tangled (2010), Wreck-It Ralph (2012), and Frozen (2013), which on average earned over three times the earlier group’s average.³⁰ Tangled (2010) was the first Disney animated feature in more than fifteen years to gross more than $500 million, and Frozen (2013) was the most successful animated feature in history. Frozen grossed almost $1.3 billion and won for Disney its first Oscar for Best Animated Feature.³¹ Big Hero 6 (2014), which followed soon after, was also a hit.

Disney’s revenues rose from $33.7 billion in 2006 to $52.5 billion in 2015. Operating income rose even faster, from $6.4 billion in 2006 to $14.7 billion in 2015. Sales at Disney parks and resorts jumped from $10.8 billion to over $15 billion between 2010 and 2014, while consumer products sales rose from $2.7 billion to $4.0 billion. These results, aided as well by the success of the company’s other media businesses (ESPN, ABC, and the television stations), tripled Disney’s stock price from under $30 in 2010 to over $90 at the end of 2014.

Lessons Learned

The Walt Disney Company without Walt succeeded when it was led by leaders who understood what he had built—a Third Way organization with films, especially animated films, at its creative center where they provided the stories and characters that nourished everything else. And it struggled when its leaders saw the company instead as a diversified entertainment conglomerate. While live-action movies are and always have been part of the Disney appeal, Disney began as an animation studio, and even after nearly a century, the health of that department is ultimately what drives the well-being of the whole company.

In some ways, it’s hard to blame those leaders—Walker in the 1970s and Eisner in the late 1990s—who didn’t understand what Walt Disney had created. The Third Way presents great challenges. As the success of the total system grew, the complexities of each complement increased, the separation of the different businesses widened, and the ability to see them as an integrated whole declined. The political infighting that characterized Disney under Eisner’s reign also served to drive apart the different parts of the company. The result was an atomizing of the system into a fractious group of battling business units rather than a smoothly functioning whole, and the overall performance of the company soon declined. Maintaining an integrated set of complementary innovations requires constant vigilance and care.

The success of a Third Way project depends on maintaining a strong and vibrant core, even if that core doesn’t generate the most revenue. When Disney nurtured its core by producing a stream of high-quality animated feature films, its core and complementary businesses all thrived. When it neglected the core, when it tried to live on the legacy of past success, both its core and complementary businesses suffered.

If there was one person after Walt Disney and Roy O. Disney who understood and consistently argued for the power of the system and the importance of the storytelling at its core, it was Roy E. Disney, the nephew and son of the two founders. Twice when management drifted away from Walt’s vision, Roy resigned his position at the company. Ultimately, he resigned from the board as well and led efforts to replace management. After an extended battle with stomach cancer, Roy died on December 16, 2009, just short of his eightieth birthday. At a ceremony to honor him, Disney CEO Bob Iger said: “It was Roy taking all those people and animation under his wing that led to all of those great films in the mid-80s and ’90s, from The Little Mermaid to The Lion King to Aladdin to Beauty and the Beast. We certainly owe Roy a great debt of gratitude for all that … Animation really is our crown jewel.”³²