The Second Coming of Steve Jobs - Alan Deutschman [80]
The problem was that Pixar wasn’t nearly ready for an initial public offering (IPO), at least not by the usual standards imposed by the investment bankers who specialized in those kinds of deals. The wizards of Wall Street always wanted a startup company to make money for a while before they agreed to sell its shares on the open market. No profits, no public offering. That was the unwritten but abiding rule at the leading brokerage houses.
Pixar had always lost money. Even with Disney paying most of its costs, Pixar was still losing more than $2 million a year. It had accumulated a deficit of $47 million from nine years of losses. And even if Toy Story was a big hit, Pixar’s slice of the profits would be small at best and they wouldn’t come for a long while. It was an ugly scenario.
Steve talked with his financiers in San Francisco and his lawyers in Silicon Valley. They told him that he was deluded. They thought that his scheme just wouldn’t work.
But that summer of 1995, something bizarre happened. Netscape Communications, a software company that was only a year old and had never made a profit, nonetheless went public. There was so much media hype and water-cooler buzz about Netscape’s product, the Mosaic web browser, that hordes of small-time investors clamored to buy shares. The stock’s price shot from $28 to $58 on its first day of trading, and the company’s founder, Jim Clark (an old colleague of the Pixar guys), made a paper profit of $565 million.
The Netscape deal was a pivotal moment in the modern history of Wall Street. It was the forerunner of a radically new conception of investing and stock promotion.
Steve wanted Pixar to be one of the first companies to follow Netscape’s example and emulate its extraordinary success. But there were other obstacles to taking Pixar public. For starters, John Lasseter expressed doubts about the idea. He was afraid that a publicly owned animation studio might have to compromise its artistic vision, creativity, and originality as it succumbed to Wall Street’s pressure for generating ever-higher revenues and profits. He wanted a studio that was driven by storytelling, not sales figures.
Steve decided to go public anyway, but for unexpectedly Byzantine reasons, he couldn’t do it without first securing the cooperation of John, Ed, Ralph, and Bill Reeves, who was the technical director of Toy Story. The foursome had Steve at their mercy thanks to one of the wrinkles in the 1991 deal between Disney and Pixar. Disney had insisted that Pixar’s key people must sign employment contracts, which would commit them to make Toy Story and two more films over a seven-year period. This way, if Disney wanted to produce a sequel or a spin-off, it could engage the same creative team. Employment contracts were a common practice in Hollywood but they remained an alien concept in Silicon Valley, where people cherished their freedom to switch jobs and start companies.
It wasn’t trivial to entice the four men into long-term deals that would tie them up for what might be the most productive years of their creative lives. So Pixar had sweetened the deal by setting up a profit-sharing program, which would cut them in on a small piece of the action on their films. That’s what clinched the Disney deal.
Now, in 1995, Steve’s bankers told him that he had to eliminate the profit-sharing arrangement. In a public company, the profits are supposed to rebound to the benefit of thousands of shareholders. It would look bad if Pixar’s earnings were always getting siphoned off by a few of its filmmakers and little was left over to enhance the stock price.
There was an alternative: public companies could reward their executives with stock options as a potentially lucrative incentive. This way, the key employees received windfalls only if they drove the stock price up and made money for the rest of the