Ben Gilbert and David Rosenthal on the Walt Disney Company, the Flywheel, and Monetising Nostalgia

Ben Gilbert

Listeners, we finally tell the story of the Walt Disney Company. Unbelievably, in eleven years of doing Acquired, we have never told Walt's story, and it has been a glaring omission. It is the entertainment company different from all the rest. It is over a hundred years old, and it has played a prominent role in almost all of your childhoods and, if you are a parent, likely your parenting journey too. It has played a prominent role in Acquired history as well: our very first episode was Pixar, and we have done Lucasfilm, Marvel, and ESPN, although those are a whole different version of Acquired, and we may need to decanonize them and redo them the proper way.

Since there are tons of biographies and documentaries analysing Walt's psyche, we are going to focus today on Acquired's sweet spot, which is the business. What did Walt's merry band do from the 1920s onward that made them succeed uniquely well in Hollywood? When you look at Disney's profits today, it is in a whole different league than Paramount or Universal or Warner Brothers or any of the other classic Hollywood studios. The business of feature film production is a mediocre one, especially by the standards of what we study on this show, except for Disney.

David Rosenthal

Exactly. And I will say I am a huge Disney fan. I grew up on Aladdin and the Lion King. My first movie in theatres was Beauty and the Beast. But somehow I knew nothing about the company's early history before starting this research. For example, it started in Kansas City. There was a character that was supposed to be Mickey Mouse before Mickey Mouse but was lost in a contract dispute. Many of the movies I watched in my childhood are actually from fifty years before I was born. Snow White was produced before World War II. Pinocchio, Bambi, these films are from the thirties and forties. They predate the existence of televisions in people's homes.

Ben Gilbert

And importantly for Acquired's roots, this really is a technology story. Giant innovations that often bet the whole company, on things like synchronised sound, or the crazy idea of a feature-length animated movie at all, or the multiplane camera to photograph the whole thing. And of course building a giant theme park in Anaheim when nothing else like it existed. They really did invent the entire concept of the flywheel business model that so many entrepreneurs are trying to copy. So today, listeners, this is the Walt Disney Company, part one, Walt's era. A quick thank-you to my main source for facts and Walt quotes on this episode: Neal Gabler's biography, Walt Disney: The Triumph of the American Imagination. Gabler, I think, was the only author who had full access to the Disney archives.

David Rosenthal

We start in Chicago in December 1901, where Walter Elias Disney is born. Walt's father, Elias, was a frustrated entrepreneur. He was variously a carpenter, landlord, farmer, newspaper route owner, and eventually a failed jelly factory investor. When Walt is four, Elias moves the family out of Chicago to an idyllic farm town in the Midwest, Marceline, Missouri. Lillian Disney, Walt's future wife, would say about Marceline, 'It was the most important part of Walt's life. He didn't live there very long, but there was something about the farm that was very important to him.'

Ben Gilbert

Marceline was basically a Disney movie. There are orchards and ponds and animals and farmhouses. There is also this charming little town that the railroad had created with a main street, a Main Street USA, you might say. While the family is living there, Walt's aunt Maggie brings him gifts. One year, when Walt is six or seven, she brings a big drawing tablet and pencil set, and Walt is enraptured. He starts sketching everything he can see. And as the legend goes, one day a retired neighbour asks the young boy to draw a picture of his favourite horse, loves it so much that he pays Walt a nickel for it, and hangs it in a frame. And Walt's mind is blown. My hobby, my art, it can make me money.

David Rosenthal

Whatever the exact truth of that story is, somewhere in Marceline a connection is forged in prepubescent Walt's mind between these two great forces, art and commerce. That would go on to drive not only the rest of his life but the company, the studio, the movies. It would change America.

Ben Gilbert

The thing about Marceline, though, is that the reality of life on the farm was very hard. All the kids are involved. It is a tough life. He can remember it as an idyllic childhood, which I think is quite the foreshadow of the Disney versionification of things in the future: it is both remembered as idyllic and was hard, as the real world is.

David Rosenthal

The family can't make a living farming, so Elias adds farming to his list of failures. When Walt is nine, they move to Kansas City, where Elias buys a paper delivery route for the Kansas City Star and puts the family to work delivering papers. But Walt never stops drawing and never stops making money from it. In Kansas City he would draw frames for the local barbershop, who would pay him a nickel or a free haircut for each. Later, when Walt enters high school, the family moves back to Chicago for the jelly factory. Walt becomes the cartoonist for his high school newspaper, but he leaves to join the Red Cross and gets shipped off to France as an ambulance driver during World War I, where he acquires a chain-smoking habit that he keeps for the rest of his life, and that eventually kills him too young.

David Rosenthal

In the fall of 1919 he lands back in Kansas City, where his older brother Roy Disney, eight or nine years his senior, is living. Through Roy, Walt gets introduced to an advertising art shop looking for apprentices to draw flyers for the holiday rush. He works there six weeks and gets laid off, but he gets two things out of it. One, a credential: he can now say he is a professional artist. And two, a co-founder, another young apprentice named Ub Iwerks.

Ben Gilbert

I think of Ub Iwerks as the Steve Wozniak of Disney.

David Rosenthal

Yes. Walt is the original Steve Jobs, and you can make the case that Ub is the Wozniak. Although Walt was more hands-on. He was also an animator, just a better animator, and a camera operator, building things with his hands in the primary technology and artistic trade the business was in. After the two of them get laid off, Walt suggests they start their own studio. They create Iwerks-Disney Commercial Artists, in that naming order, supposedly so it didn't sound like an optometrist shop, Disney Eyeworks.

Ben Gilbert

How amazing is this. In Walt Disney's first business, he was not the main name on the door.

David Rosenthal

Not the main name on the door, but the driving force. He pitches prospective clients around Kansas City, and one is the up-and-coming Kansas City Slide Company, which has become the country's largest producer of advertising slides and short commercials shown in movie theatres. They have so much work that they say, why don't you come work here full time? And so Walt and Ub's first venture quickly ends, and they join the Slide Company, specifically to work on a new line producing animated commercials. They both fall in love with this new art form. It is everything they love about drawing, but it is more than art, it is technology. You need cameras, film, all these new inventions.

Ben Gilbert

At this point animation was primarily used in advertising. There wasn't a thriving entertainment industry based on it yet, and to the extent it existed as short cartoons, it was all based in New York, not Kansas City. The whole industry is only about twenty years old, because you couldn't produce animation at any scale until you had widespread commercially available film cameras and projectors. This whole art form couldn't exist before the technological innovation of film.

David Rosenthal

In Walt's mind, who is always thinking about how to make a career of this, that newness is what makes it attractive. Because the whole industry is so new, he figures he can quickly become as good as or better than anyone in the world at it. Unlike trying to be the best commercial artist, where oil painting is thousands of years old, becoming the best cartoon animator is a small pool. So Walt and Ub start experimenting nights and weekends on the Slide Company's equipment. Walt puts together short cartoons he brands 'Laugh-O-Grams' and sells them to a local theatre chain to run before features. They become a hit in Kansas City.

Ben Gilbert

The things they are doing are so primitive. No sound, no voices, no colour, barely any backgrounds. Because of those limitations you can't create a story or a real sense of character. You can't build a relationship with these cartoons the way you can with Mickey or Donald or Goofy or Minnie. The only emotion you can invoke is humour, and the only way to do humour is slapstick, these super-exaggerated gags. And honestly that is not that different from film overall at this point. Charlie Chaplin is the big star, and most of his movies are physical comedy. You could resummarise every scene by going, oh, he fell down.

David Rosenthal

So in May 1922, at twenty years old, Walt leaves the Slide Company and founds Laugh-O-Gram Films. He convinces Ub and a few others to quit and come along. And it is another failure, because by 1923 cartoons around the country are losing their appeal. The novelty is wearing off. There is a survey of theatre managers around this time asking what filler options audiences like around the feature. Remember, there is no television, barely any radio. If you want news or entertainment, you go to the movie theatre.

Ben Gilbert

I have a stat on this. In the 1920s the average American went to the theatre over forty times per year. This is what you did every week for entertainment. Compare that to today, where the average American goes to a movie theatre about twice a year. When you went then, it was a bundle: newsreels, live comedies, short serials, cartoons with gags, and the feature you came to see.

David Rosenthal

In that survey, only twenty-three per cent of respondents say they show cartoons and that audiences like it, by far the lowest of any filler option. So Laugh-O-Gram can't find a market outside its local popularity, and in 1923 the company goes bankrupt. Walt is now a one-and-a-half-times disgraced entrepreneur in Kansas City, right in his father's footsteps, and he lost the loan capital of friends and family. He goes to his rich uncle Robert for advice, and Robert says, best thing to do, skip town. Which was sound advice back then. People's reputations did not travel with them. Both Robert and Roy have already moved out west to Los Angeles, so Walt hops aboard the Santa Fe train bound for LA and joins them. He arrives in the summer of 1923, twenty-one years old.

Ben Gilbert

And at first, you can't make this up, Walt thinks he is going to get a directing job in Hollywood. He has abandoned animation. He thinks he is too late, that he will never be as good as the New York cartoonists, so he needs to start over. There is a story of the Universal lot: he rolls up with no job and no money, has fake business cards made saying he is the Kansas City representative of Universal, gives it to the receptionist, and spends at least a day roaming the lot learning everything he can about film production. Then he tries to come back and parlay that into a job, and eventually runs out of money.

David Rosenthal

Once he gets rejected at all the major studios, he says later, 'When things began to look hopeless, I got my cartoon things out again.' At this point about the only popular cartoon left is Felix the Cat, created by Pat Sullivan and distributed by the pioneering Margaret Winkler in New York. Walt has one asset left over from Laugh-O-Gram: a reel of a hybrid live-action cartoon short called Alice's Wonderland, about a real little girl who interacts on screen with drawn cartoons. That was pioneering. These Alice Comedies were cheaper to produce than full animation, because you only had to animate the characters, not the backgrounds. Walt sends Alice's Wonderland to Winkler, she likes it, and she commissions twelve more Alice Comedies for fifteen hundred to eighteen hundred dollars each.

Ben Gilbert

And David, we have seen this contract. For this episode we spent a few days down in Burbank looking through the corporate archives, and the archivist pulled it for us. 'Agreement entered into this sixteenth day of October 1923 between Walt Disney of 4406 Kingswell Avenue, Hollywood, California.' Twelve negatives of the subject series, in all caps, Alice Comedies. This is effectively the contract that puts Disney in business. This becomes the Walt Disney Company. You can see his signature, much less flowery than the version in the logo.

David Rosenthal

When Walt gets word, he runs into his brother Roy's room, who at this time has tuberculosis and is in a hospital ward, shows him the contract, and says, we got it, we're in business. Roy essentially stands up and leaves the hospital ward. And the two of them found the Disney Brothers Cartoon Studio, in October 1923, as a true partnership: Roy manages the business and finance, Walt the creative. Walt writes to Ub Iwerks and the other talented Kansas City animators and says, come out to California, we finally have a deal.

David Rosenthal

The Alice Comedies become a moderate success. The Disney Brothers studio produces fifty-seven of them from 1923 to 1927. Then Winkler's husband, Charles Mintz, who has taken over the business, is no longer getting along with Pat Sullivan, and brokers an arrangement with Universal Pictures to create a new character to rival Felix. So he turns to Disney and says, can you make us a new series, like Felix but not Felix. Walt and Ub cast about for something like a cat but with the same recognisable attributes, lots of white fur, a tail, big ears, easy to draw in black and white. And they come up not with Mickey Mouse, but with Oswald the Lucky Rabbit.

Ben Gilbert

And Oswald is a big hit, backed by Universal distribution. It is not surprising, because if you give the brief to Walt and Ub, take something that is working and apply your style, their style was great. They were emotional animators. There is a quote in Bob Thomas's book Walt Disney: An American Original: 'Before Disney, cartoons were slapdash, two-dimensional characters in bizarre movement before elemental backgrounds. Disney insisted on rounded, humanised figures. He wanted the humour to come out of the character, not the outrageous action.'

David Rosenthal

On the back of Oswald, the studio grows quickly, hiring about twenty-five employees. They move into a real building on Hyperion Avenue in the Silver Lake neighbourhood, and rename from the Disney Brothers Cartoon Studio to the Walt Disney Studio. There are two stories about the rename. One is that it was Roy's idea: we need to build a brand, and people should know it is the Walt Disney Studio. You are the frontman, the visionary. The other is that Walt always dreamed of his name in a neon sign, and now he gets one on Hyperion Avenue. Worth knowing the ownership at this point: sixty per cent owned by Walt and his wife, forty per cent by Roy and his wife.

David Rosenthal

But Mintz senses another opportunity. He thinks Walt has become superfluous and that it is really the animators who matter. And because the Walt Disney Studio does not actually own the Oswald IP, Universal does, Walt has no leverage. In early 1928 Walt and Lillian, who was herself an early studio employee in the ink and paint department, make a trip to New York, where Walt asks Mintz for a raise. Mintz says, I am not even sure what you are doing around here any longer, and in fact we are going to pay you five hundred dollars per cartoon less, which basically wipes out the margin.

Ben Gilbert

And crucially, before the meeting even happens, Mintz has already stolen the animators. He has signed nearly all of them except Ub Iwerks, through an act of subterfuge, contacting each of them individually. Only Ub and two or three others refuse and stay loyal.

David Rosenthal

Once Walt realises this, there is nothing he can do. He has no employment contracts, no rights to Oswald, no leverage. Suddenly the entire value of Walt Disney Studios is effectively zero. It is an extremely bitter lesson, and one you can bet Walt and Roy never forget. Everything in Disney's history, all the enterprise value we will see across the rest of this episode, traces back to this moment.

Ben Gilbert

A fun bit of trivia. Disney eventually does get the rights to Oswald back in 2006. Bob Iger, one of his first acts as CEO, did the deal. Do you know how? By this point Disney had acquired ABC and ESPN, and Universal was owned by NBC, now Comcast. There is an ABC asset Bob trades for Oswald, and that asset is Al Michaels, the Monday Night Football commentator, traded like a sports team to NBC in exchange for the IP rights to Oswald the Lucky Rabbit.

David Rosenthal

Back in 1928, Walt and Roy have less than nothing, because Mintz, the weasel, makes them finish out the current Oswald contract and keep paying all the animators who had betrayed him while they finish the last shorts. Absolutely humiliating. And so, as legend has it, on the long train ride home from New York, Walt is struck by inspiration and scribbles a sketch for a new character, one that would not just reverse the Oswald disaster but would become maybe the most recognised figure in all of human history.

David Rosenthal

Here is the story of Mickey Mouse as Walt would tell it. March 1928, he and Lillian on the train home, and he is struck with inspiration for a plucky mouse named Mortimer trying to fly an airplane like his hero Charles Lindbergh, which would become the Mickey cartoon Plane Crazy. Lillian says, I like it, but Mortimer is too pompous a name, how about Mickey. And thus Mickey Mouse is born. The real story is more likely that Walt and Roy and the couple of animators who stayed loyal hole up and brainstorm a new character to replace Oswald.

Ben Gilbert

And when you see Mickey and Oswald, it is not hard to imagine where Mickey came from. Shorten the ears, make them circles. It is the same brief that created Oswald. Take Felix and do something like Felix, except this time it is take Oswald and do something like Oswald, and make damn sure we own it.

David Rosenthal

Exactly. According to Gabler, it is most likely Ub Iwerks who first draws Mickey, not Walt on the train, and either way Ub was the primary animator of the first Mickeys, including Steamboat Willie. By the summer of 1928 they have two Mickey shorts ready, Plane Crazy and The Gallopin' Gaucho, and Walt takes them to distributors. None of the majors are interested. It is like Oswald, but without the hundreds of thousands of raving fans.

David Rosenthal

Then comes the breakthrough. One of the gang recalls that when they saw The Jazz Singer, the famous first popular talkie, there was a cartoon screened alongside it. Walt puts the two ideas together, a cartoon and sound, and says, that's it, that's what we've got to do, stop all these silent pictures. Now, people had made cartoons with sound before, but nobody had made a cartoon with sound the way The Jazz Singer had sound.

Ben Gilbert

Synchronised sound.

David Rosenthal

Synchronised. Where what was happening in real time in the cartoon was played in sound, synchronised in the theatre.

Ben Gilbert

The concept before was that music played, but it was only loosely attached. This is to the frame and the beat. If Mickey bops into something on screen, you hear a xylophone on the exact same downbeat. It is not just music accompanying the cartoon, it is that what is happening in the cartoon feels like it is producing the sound. There is a great business model lesson here. With the first two Mickeys flopping, if you just do the same thing as a competitor who already has distribution, brand, and customers, it is not enough. You need to leverage a new piece of technology or a new platform, come at it from an orthogonal angle, or you are just a smaller, worse also-ran.

David Rosenthal

So Walt lines up access to the Cinephone sound recording system from Pat Powers, who had helped create Universal decades earlier and had become a sound entrepreneur. Walt and crew animate a test sequence and screen it for their wives and girlfriends, and Walt writes later: '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.' It turned out that sound was the critical enabling technology for animation to go beyond a novelty and allow the characters to have personality that audiences connect with.

Ben Gilbert

And it is not obvious at first. Doing a test animation and synchronising the sound must have been really hard at the time, because none of the tools existed. They had to invent the way to synchronise the drawings with the music. It was a big bet even to see if that creates personality.

David Rosenthal

Sound did the same thing for live-action movies, but that was not a big leap, humans already talk. Sound for cartoons was a giant leap. These characters, this art, could now be actual characters with personalities in a way they couldn't before. Non-obvious at the time, completely obvious in retrospect. So they make Steamboat Willie as the third Mickey, but the first with synchronised sound.

Ben Gilbert

We are going to skip the whole nightmare of creating it, but it was Walt constantly going to New York, betting every last dollar, inventing new processes, trying to get an orchestra synced to the film. They animated a little bouncing ball on screen to sync the orchestra. The original conductor wouldn't use the method and it came out all out of sync. It is a giant, painful operational struggle to get out, but my god does it hit.

David Rosenthal

Walt shops it around the big New York distributors, and they are so conservative. This is cool, but we don't know how audiences will react, we want to see a test first. Nobody wants to be first in line. So Walt goes directly to the manager of the Colony Theatre in New York City and cuts a deal for a thousand dollars to run Steamboat Willie before the features. Steamboat Willie premieres on November 18th, 1928, before a film called Gang War. Nobody remembers Gang War, because Steamboat Willie is a revolution. Critics love it, audiences love it. There are stories of people standing up and screaming to see Steamboat Willie again instead of the feature.

David Rosenthal

But Disney still needs a distributor, and even with the proof point the New York distributors are conservative. Famously, one, while explaining why he is going to pass again, picks up a package of Life Savers candy and says, 'The public knows the Life Savers brand. They don't know Walt Disney, and they don't know your mouse.'

Ben Gilbert

I can only imagine Walt sitting there seething.

David Rosenthal

But this makes a huge impression on him. Walt has a huge ego, but he is very willing to learn even from obnoxious people. He is motivated by learning, an engineer who loves picking things apart. If someone will offer him a lesson, he will take it, even if he is mad at the person. He writes about this moment later: 'From now on, the audience was going to know if they liked the picture, they were going to know Walt Disney's name.' Ultimately Walt turns to Pat Powers, his sound-technology partner, and cuts a deal where Powers will be Disney's direct distribution agent for just ten per cent of the gross on the Mickeys.

Ben Gilbert

And it was a too-good-to-be-true deal, because Powers, like all these New York guys, was plotting to do the exact same thing as Mintz. He wanted to give Walt a sweetheart deal, then lure away the animation talent, because Powers had the sound technology. If I get the animators, what do we need Walt for?

David Rosenthal

Just a year later, in 1930, Powers convinces Ub Iwerks to quit and leave Disney, promising to set him up with his own studio. Exactly what Mintz did. Except it plays out the opposite way, because Walt has learned his lesson. By the time this happens, over a dozen Mickey shorts with sound have come out, every single one branded prominently up front and at the end as a Walt Disney comic, and they have become huge hits. So even though Powers steals Ub away, nobody cares. Everybody still wants the Mickeys. Disney has made himself the Life Savers of animation. Disney first switches to Columbia for distribution, then to United Artists, and audiences keep loving Mickey.

David Rosenthal

In fact, they love him so much that it leads to the discovery of a whole new business model, the intellectual property flywheel. And it starts with the Mickey Mouse Club, discovered by Disney basically by accident. In the summer of 1929, the manager of the Fox Dome Theatre in Ocean Park, California, contacts Walt: why don't we start a Mickey Mouse Club for kids? I have a thousand kids showing up every weekend wanting to watch the Mickeys again and again. We can charge parents a membership fee, the kids will love it, the parents get them out of the house, and if it works we can franchise it nationally.

Ben Gilbert

And that is what they do. Theatres would buy a Mickey Mouse Club charter from the Walt Disney Studio, like a franchise, for twenty-five dollars. As part of the club, the kids and parents gain the right to buy exclusive Mickey merchandise. Pay to become a member of a club to dedicate yourself to fandom, so you have the right to buy more things. Hats, buttons, banners, and all of it split back with Disney.

David Rosenthal

Pretty quickly there are eight hundred Mickey Mouse Clubs across the country with more than a million total members, more than the Boy and Girl Scouts of America combined.

Ben Gilbert

That is insane scale and speed pre-internet. How did word even spread that quickly? Through the theatres. It is a no-brainer for a theatre operator: convert your Saturday and Sunday matinees, which were mostly for kids anyway, into a Mickey Mouse Club. Kids love it, they buy a bunch of stuff, parents get rid of the kids, and Disney gets turbocharged distribution and brand recognition.

David Rosenthal

So they lean into Mickey at the corporate level. A few months after the club kicks off, in January 1930, they launch a daily Mickey comic strip with King Features Syndicate, published in sixty US newspapers and internationally in twenty more countries. Disney gets paid to produce it, at only the salary of one animator, a twenty-four-year-old named Floyd Gottfredson, who would do it every day for forty-five years. Not only are they getting revenue, they are getting free daily advertising and IP exposure to probably a hundred million-plus people every single day.

Ben Gilbert

It never becomes a huge profit driver, but that free daily marketing in most major newspapers is incredible. Interesting to note, Oswald actually was on a candy bar back in the day. When Walt, who then thought he owned Oswald, had the chance to monetise it, he didn't even consider charging. It didn't need to be a revenue stream, it was just really good for him that Oswald was on the candy bar. So they are getting the seeds of the idea: we make some money on the comics, but it really is a massive marketing engine. But you are teeing up the big one, merch and consumer products.

David Rosenthal

Pretty quickly after Steamboat Willie, Walt is walking the street in New York and a man offers him three hundred dollars to license Mickey onto a series of children's writing workbooks. It is early days, the studio needs money, so Walt says, sure, why not. Three hundred bucks in 1929 is a lot of money. This is the beginning of the Great Depression, and Mickey takes off during it. He becomes a kind of national champion, the plucky underdog Americans can identify with. In these early comics Mickey gets into tricky situations against someone bigger and stronger and figures it out. It is the American spirit.

David Rosenthal

The writing tablets take off and do huge sales, and Disney doesn't even know how much, because all they have is three hundred dollars and a handshake. So Walt and Roy figure they need to get smarter about merch. They contact an adman in Kansas City that Walt admired named Kay Kamen, and agree that Kay becomes the exclusive commercial products agent for all Disney merchandise licensing beginning in 1933. Disney would get sixty per cent of the first hundred thousand dollars in royalties Kay generates, then split every dollar after that fifty-fifty. And there would be a lot of dollars after the first hundred thousand. There is a real case that on the business side, besides Walt and Roy, Kay Kamen was the third most important person in the first half-century of Disney.

Ben Gilbert

So make your case.

David Rosenthal

Within six months, Kay takes Disney merchandising from a hodgepodge of random licenses to a professional operation doing six million dollars of gross merchandise sales. That grows over the next two years to seventy million annually of gross merchandise sales around the globe, from over forty separate high-quality consumer product partners. The most famous example is the deal Kay does in 1933 with the Ingersoll Watch Company.

Ben Gilbert

It is crazy that within a few years they are at a seventy-million level of merch. There is so much pent-up demand to buy Mickey Mouse stuff that they explode out of the gate.

David Rosenthal

The seventy million is gross sales to the end consumer. Most deals were five per cent royalties on the wholesale price, and the seventy million was retail. If you assume a hundred per cent retail markup, that is thirty-five million in wholesale, and Disney and Kamen are splitting five per cent of that, so about one and three-quarter million dollars split fifty-fifty. That is an astronomical number, and a far bigger and better business than the cartoons themselves at this point. By the Disney Family Museum's account, by the late 1930s royalty income from merchandise had exceeded revenue from film rentals, but it wasn't even the late thirties, it was 1934, and by a lot.

David Rosenthal

To illustrate the difference: the United Artists distribution deal for the Mickeys and the Silly Symphonies, the second cartoon series, gives Disney an advance of fifteen thousand dollars per film, but Walt is always investing more, thirty thousand-plus per cartoon by the mid-thirties. So it is not even guaranteed each cartoon is profitable. Compare that to half of basically two million in near-pure-margin revenue from Kay every year. It doesn't even matter that Walt is investing everything back into the cartoons, he has this money spigot coming in.

David Rosenthal

The Ingersoll deal is one example. That Mickey Mouse watch would sell two and a half million units over the next two years. The Ingersoll Watch Company was about to go bankrupt in the Depression, and it saved the company. It was, at least for a time in the thirties, the most popular watch in America. The modern Apple Watch Mickey face is a reference to it, Mickey using his arms to point to the time.

Ben Gilbert

This is a whole different shape of business than has ever existed. We started the episode comparing Disney to other Hollywood studios, but this is not a Hollywood studio. They are making high-production-value, sound-synchronised cartoons, they are actually making more of their money from merchandise, and they have these Mickey Mouse Clubs. This is a new thing no one else is doing.

David Rosenthal

This is the birth of the Disney flywheel, and nobody else has it.

Ben Gilbert

Can I make my pedantic aside first? We had a great email from a listener about how 'flywheel', this term everybody uses, is completely the wrong term. Disney is famous for the concept, as is Amazon, and it inspired a zillion founders to draw out their own flywheel. But it is a misnomer. People are trying to describe a system with a positive feedback loop, where inputs into one element are amplified and add energy to other parts. That is not what a flywheel is. A flywheel is a primitive battery, a way to store energy to be deployed later.

David Rosenthal

It is a version of the same mechanism a spring serves in a mechanical watch. But in reality there is not a better shorthand for a system of integrated components that creates positive feedback loops, so we will continue, alas, to use the phrase flywheel. The important thing is that Walt really did discover or invent this business model of the intellectual property flywheel. It revealed itself to him and Roy in these early years of Mickey, and it is worth talking about why it works so well.

David Rosenthal

The most important thing, and I don't think it was premeditated, was to make the highest-quality, genuinely most compelling new IP possible, that audiences can build a deep relationship with. That is what Walt was building toward through all his early years, all the technical innovations, every step getting to a character audiences can fall in love with. Now, critically for Disney, and again accidentally discovered, the IP that works best for flywheel dynamics almost has to be animated, not live action. Because with live-action characters, they are too bound up in the actors who play them. That makes your economics worse, because you have to pay the stars, and there is wholesale transfer pricing, a huge amount of the margin gets paid out to the actor, effectively your partner in creating the character.

Ben Gilbert

Whereas Mickey works for free. You have to pay the animators, and they get paid well, but that is the value-capture side. On the value-creation side, which is more important, Mickey is always available to work.

David Rosenthal

And Mickey doesn't age. You can create an eternal character through animation in a way you can't with real people. Star Wars, as great as it is, is going to have a problem when Mark Hamill and Harrison Ford die, unless AI gets really good. Live-action IP with very few exceptions tends not to have the staying power over decades and generations that animation does.

Ben Gilbert

Live action is dated to a time and place in a way cartoons can transcend. Mickey can always exist in the present. We will talk about Davy Crockett later, but at some point it became completely uninteresting to watch Davy Crockett. He was a heartthrob obsession, great IP for the moment, but not durable. The few exceptions are things like James Bond, and god have they tried to keep that IP living, six or seven Bonds, rebooting the story over and over.

David Rosenthal

So that is step one, genuinely great IP at the core. Step two, maximise distribution of that IP as wide and far as possible in its primary delivery vehicle. Get Mickey's films into as many theatres as possible to saturate the world. It is a scale-economies thing: if you invest a whole bunch in making it the very best, you need to distribute it everywhere to maximise the impact of that upfront investment.

Ben Gilbert

Which applies to any film. But for Disney in the flywheel model, they are willing to make every sacrifice to maximise distribution, because they know they will monetise through the flywheel in a way nobody else can. If they saturate all of America, or all of the English-speaking world, then that character, that movie, becomes a shared cultural memory.

David Rosenthal

That leads to the third thing, the ancillary nodes. Once you have great IP and distribute it as widely as possible, you get it into as many other arenas as possible, other mediums, merch, clubs, comics, books, magazines. The beauty, and the discovery Disney makes, is that when you put the IP into these ancillary nodes, it doesn't cannibalise the core IP. You are not going to oversaturate Mickey with a daily comic strip the way you would if you released a new Mickey film every day. If you structure the nodes right, the additional exposure reinforces the core IP.

Ben Gilbert

So you need some scarcity of the character in its main medium, a really high quality bar and no oversaturation there, but in your secondary mediums you can cover the earth, be everywhere all the time.

David Rosenthal

Exactly. And if you flash forward, the problem Hollywood and Disney have today, especially with Marvel, is coming out with sequels at an ever-increasing cadence of the core IP, so people get tired of it. The flywheel lets you get constant exposure without oversaturating the core. Not to mention that releasing films is not, and never has been, a great business. It is not high margin, not repeatable or predictable, and you invest years ahead of any payout. Any studio that is purely a studio is in for a rough go. But if you build a durable platform of profit with ancillary businesses, you can focus on scarcity, quality, and innovation in the primary medium, because you know you will drive revenue in perpetuity through the flywheel.

Ben Gilbert

Do you think it is okay to lower the quality bar outside the primary medium? Can Disney throw Mickey on all sorts of crap without diminishing the brand, as long as film stays really high quality?

David Rosenthal

Basically, I think the answer is yes, at least for Disney. But you have to be careful about the mediums. This is why comics is so perfect: people are used to consuming a daily bit of content and don't expect a masterpiece like Snow White each time.

Ben Gilbert

And when you read the non-canon Star Wars books, it doesn't detract from the canon, it deepens your fandom.

David Rosenthal

Exactly. All of this leads Walt to the conclusion that Disney should always invest as much time and money as possible in creating new core IP. And Walt is getting a crazy idea of how, Hollywood's first full-length animated feature film, Snow White.

Ben Gilbert

You put it in such a capitalist way, to maximise the dollars you sink into quality so it federates onto the flywheel. But there is also an artist in Walt. He is building relationships with the fine artists of the time and wants to create something seen not only as a technology breakthrough but an art breakthrough. Can he create a masterpiece in this new medium, and can he play with your emotions? We know cartoons can make you laugh, but there is a total open question: can you create animation so realistic and characters so compelling that you can make audiences cry.

David Rosenthal

You are totally right. I am looking at it through a business-model lens, and I don't think Walt was thinking about it that way. He did want to build the most successful company he could, one that could take bigger and bigger swings.

Ben Gilbert

Before we tell the story of Snow White, we have to give its nickname going around Hollywood.

David Rosenthal

Disney's Folly.

Ben Gilbert

Yes. The same thing people said about Trip Hawkins working on Madden, or Jack Bogle with Bogle's Folly and the Vanguard index funds. Even for Walt Disney, the idea of a feature-length animated film was crazy in 1930s Hollywood, and it had never been tried. Roy tried to persuade him not to do it, arguing it would bankrupt the studio. This is a multi-million-dollar undertaking when shorts were fifteen to thirty thousand.

David Rosenthal

Walt said later: '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 audiences would not buy a bad cartoon feature.' It had to be a masterpiece or the whole thing would fall apart.

Ben Gilbert

So why was this such a giant undertaking? I thought it would be fun to give everyone a primer on the steps to create an animated film. The goal is to create the illusion of motion with a series of still frames, twenty-four still frames per second. That requires clever tricks to make it economically possible, consistent, enjoyable, and, if you do your job, emotional. Live-action film is the same illusion, but 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 figure out how things stretch and squish when someone bounces on the ground.

Ben Gilbert

It starts with a good story. The story department kicks off with little sketches pinned to corkboards, with people acting out the scenes alongside the drawings, and Walt was famously amazing to watch doing this. That becomes a story reel of static sketches, easy to edit and reorder. Then the sound department gets involved, music and voice. Often a temp voiceover so animators have something to animate to, and the music scored and recorded at this phase. Animation and sound are synced through bar sheets, or exposure sheets, where the entire film is broken down frame by frame, syllable of dialogue, and beat of music, all mapped together. This is why Steamboat Willie was so hard: the studio had to invent this process, for a film only seven or eight minutes long.

Ben Gilbert

Meanwhile the layout department does staging, camera framing, composition, and lighting for every scene. None of this is literal, it is the synthetic camera aiming at synthetic action, imagining what real lights on real characters would look like and drawing that. This forks into two parallel processes. Background painters do gorgeous watercolours on paper and oil paintings on super-wide panes of glass to allow panning across the scene. In the Disney archives you see backgrounds maybe four feet wide by eight inches tall, because the camera pans as the characters move.

David Rosenthal

The backgrounds are just beautiful in person. That was my favourite part of the archive, the backgrounds of Snow White and Cinderella. You look at them and think, these are right up there with Rembrandts or Picassos, they should be in a museum. And they basically are, Disney has eleven temperature- and humidity-controlled rooms in the animation research library, with UV filters, drawers and drawers of old background paintings and drawings. It almost looks like a data centre.

Ben Gilbert

On the other side of the fork, the animation department develops a character model sheet showing the character from several angles, distributed to each animator, because there are multiple, since a character exists on film for eighty to a hundred minutes. Then the model department makes a maquette, an eight-inch statue the animators can hold and rotate under a lamp for a consistent physical reference. Then animation itself starts with sketching on paper, one frame at a time, flipping the pages back and forth to feel how the emotion comes through frame to frame.

David Rosenthal

Are their mouths speaking correctly, is their clothing twirling the right way, as the character drifts closer to the synthetic camera does it get bigger consistent with the laws of physics.

Ben Gilbert

My mind is blown by the skill of these people. Twenty-four frames per second means twelve to fourteen drawings per second, about a thousand per minute, around eighty thousand in a feature of this era, and that is if there is only one character on one layer. Usually there are three or four. There are two ways to do it. Straight ahead, where an animator draws every frame in order. Or inbetweeners, where lead animators draw the key frames and assistants bridge between them, to make the most efficient use of the skilled artists' time. A division of labour emerged: a super-skilled animator would work fast and loose, then hand it to a cleanup artist to trace the drawing with a single line, preserving the same emotion, flow, and bounciness.

David Rosenthal

By the time they head into Snow White this had become a real scale production process. Not quite an assembly line, this is still art, but a lot closer to Henry Ford than to Picasso in his studio. You need to synchronise teams and make the highest use of the most valuable scarce resources.

Ben Gilbert

Then ink and paint. Back in 1914 Earl Hurd invented cel animation, where you draw with ink on the front of a transparent celluloid sheet, so you keep redrawing just the character in each frame and the background stays static. That made animation possible at all. By this point there were armies of people, almost exclusively women at this point in history, who traced over the animators' pencil drawings with ink on cel, every single frame. So what you see on screen is not the direct work of an animator, but the painstaking work of an inker. Then the inkers flip the cels over and pass them to the painters, who put the colour on the back, so the outlines on the front mask any overflow.

David Rosenthal

And we did a little bit of inking and painting on a pre-inked Mickey when we visited the studio. Inking is harder than painting, painting is more forgiving. Disney has a room with thousands of colours of handmade on-site paint, once called the Rainbow Room. That paint went into Snow White, Cinderella, Peter Pan, Alice in Wonderland.

Ben Gilbert

Then the special effects layer, Tinker Bell's wings using a little paint gun to be partially translucent, water effects, depth of field. Before all the expensive inking and painting, they would do a pencil test, running the pencil sketches through the camera so Walt and the animators could look at the rough action and see if it felt right, catch things before full fidelity. Then camera, the coolest part of the whole thing.

David Rosenthal

The multiplane. This is incredible.

Ben Gilbert

Disney and Bill Garity took the idea of a multiplane camera that had existed before. Ub Iwerks actually built one of the first advanced multiplane cameras back in 1933, while away from the company, using parts from an old Chevy, and Walt later rehired Ub to lead process improvement inside Disney. Disney created the first one used in a feature film. It has an entire massive room to itself and a team of operators, and you climb a ladder to the top. A still-frame photo camera is mounted at the top pointing straight down, maybe ten to fifteen feet up, with up to seven horizontal planes between the floor and the camera. The character is on celluloid near the top, and the background elements are painted on panes of glass at various depths. You break the background onto multiple panes so you can do a parallax effect, or bring the panes closer to the camera at different calculated rates for an establishing shot that zooms in.

David Rosenthal

You have actually seen two of the three that exist. One is at the Walt Disney Family Museum in the Presidio in San Francisco, an incredible resource that informed a lot of this episode.

Ben Gilbert

Worth noting, this is a photo camera, not a movie camera. It photographs one frame at a time, and then the technicians adjust all the knobs and layer placements for the next frame. When you see the invention required to build and operate a multiplane camera, you start to understand how these animators could evolve into Imagineers. There is a lot of physicality in animation I didn't understand until diving into this.

David Rosenthal

What is happening at Disney isn't just the intersection of art and commerce, it is the three-way intersection of art and commerce and engineering, and always has been.

David Rosenthal

So that is why this is such a giant undertaking. When all is said and done, it takes one and a half million dollars over three years to create Snow White, at the same time Disney is making shorts for twenty or thirty thousand. That is about thirty-five million inflation-adjusted. Movies are three-hundred-million-dollar budgets today, but imagine nobody is doing that, and you have the first idea for an animated movie and you want thirty-five million. When Roy said it would bankrupt the studio, Roy was being the rational one. They take out a series of loans from Bank of America to finance it.

Ben Gilbert

Two million sketches and two hundred and fifty thousand finished drawings and cels go into Snow White, at a scale beyond what anyone else in the entertainment industry was doing. Gabler uses the analogy that it was like a gothic cathedral in animation. They staffed up to seven hundred and fifty studio artists over three years. They even hired actors to play each role in full costume so animators could watch the natural motion. The actress who played Snow White wore a hair helmet, since the drawn character's proportions were quite different from a real woman, so they could see how the character moved.

David Rosenthal

You made the point that Walt wasn't doing this just as a capitalist. He recognised the flywheel and leaned into it, but that is not going to motivate him to film a whole live-action version in costume just to get the spirit right. This is art. An obsession with quality.

David Rosenthal

The movie premieres in Hollywood on December 21st, 1937, and it is one of the greatest films ever made. It was the highest-grossing film not only of the year but ever, doing eight million in rental revenue on a one-and-a-half-million production cost. The category was so new that instead of a best picture nomination, the Academy created a special Oscar, one large Oscar with seven little Oscars below it. Walt would go on to win more Academy Awards than anyone in history, twenty-six, the next highest being thirteen. Time magazine wrote prophetically that Snow White is 'an authentic masterpiece, to be shown in theatres 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.' Foreshadowing the Disney vault.

Ben Gilbert

An interesting thing: it is kind of dark, and Walt meaningfully changed the Brothers Grimm story. All these early Disney animations are adapted fairy tales or lore that Disney changes. The film was not really made as a children's movie.

David Rosenthal

No. And a lot of decisions, like giving each of the seven dwarfs personalities, were partly to soften the darkness. Walt always said he didn't make movies for children, but of course he wanted children to be able to watch them. And some decisions were made with the flywheel in mind, the dwarfs' personalities among them. They wanted to sell a lot of seven-dwarfs merchandise, and what better way than distinct personalities. Go to Disneyland and there are a lot of people walking around with Dopey and Grumpy.

David Rosenthal

The film does eight million in rental revenue against the one-and-a-half-million cost in its first run, which dramatically changes the studio's position. Now, it is a misconception that Snow White's film profits paid for the new Burbank studio. Most went to repay the Bank of America loans. It is worth diving into how the value chain works. There is the studio, like Disney, who makes the movie. There is a distributor, like United Artists or RKO, who creates the prints, sells to theatres, plans marketing, ships the films, and handles billing. And there is the theatre, or exhibitor.

Ben Gilbert

Disney has this 1944 annual report for employees that David found in the archives. There were two reports for 1944, a different one for employees than for shareholders. The employee report has a graphic, 'Where does the money come from,' breaking down a dollar spent at the box office: sixty-five per cent is retained by the exhibitor, thirteen per cent goes to the distributor, and twenty-two per cent to the studio. The distributor and studio come together and rent their collectively owned film to the exhibitor. So the eight million is even higher than you think, the gross box office would be significantly higher, maybe two and a half times, and the eight million is the thirteen per cent plus the twenty-two per cent.

David Rosenthal

All this Hollywood accounting is obscure and arcane, on purpose, so neophytes don't understand the deals. If you look at the real source of truth, the 1940 IPO prospectus, you can see that over a year and nine months they made four and a half million in film rental income, the producer's share, just Disney's, from Snow White. They had about two point three million of debt from the production costs plus interest owed to Bank of America. So a huge portion of the net from the box office goes to repay debt, let alone operating expenses. They effectively have about two point two million left over after paying the theatre, the distributor, and the loan.

Ben Gilbert

Two point two million in 1937 is still a lot of money, but they want to go build a gigantic campus.

David Rosenthal

And of course Disney isn't just making two point two million from Snow White, there is all that flywheel revenue. Before the film is even widely released, they have their next major flywheel node in market, the movie soundtrack. I couldn't believe this: Snow White was the very first movie soundtrack ever created and sold to the public. Before this album there was never anything audiences could take home of the picture they saw. No home video, no streaming, no television. You could buy a doll or costume, and there were a lot of those, but you couldn't take home the movie except as the soundtrack.

Ben Gilbert

The soundtrack is huge. Beyond that, there are supposedly two thousand one hundred and eighty-three separate SKUs of Snow White merchandise pumped into global markets by Kamen's consumer products organisation. The New York Times wrote that sales of Snow White products 'might be America's path out of the Depression.' That is how successful it was. This movie was a grand success artistically for Walt, for the studio, for the whole medium of animation, and for the flywheel.

David Rosenthal

All of this enables Walt to pursue his next dream, a brand-new state-of-the-art animators' paradise, the Burbank studio, still the corporate headquarters today. He sees the success of Snow White and thinks, we are going to do a lot more of these, let's build the infrastructure. His goal was to house twelve hundred-plus animators and staff, up from about three hundred before Snow White and seven hundred and fifty during it. He thinks the new campus will let Disney produce two feature animated releases every year, plus shorts. It took three years to make Snow White, and he thinks he can now pump out a great feature every six months.

Ben Gilbert

Which was a complete pipe dream, and they never managed it. The thing he didn't factor in is that every idea would be a different, more ambitious, more expensive idea. So the Burbank studio was necessary even to keep producing a film every three years.

David Rosenthal

Walt comes to see this campus as a utopian place, almost like a college campus, though he never even graduated high school. He puts it in Burbank, which back then was the sticks outside LA, wanting the studio to be a special place away from the other studios controlled by their distributor bosses in New York, a band of merry men and women. The lot is fifty-one acres, with sports fields, a cafeteria, art classes, massages, sunbathing in the penthouse club. In many ways it is the Googleplex before the Googleplex, and it is 1940.

Ben Gilbert

Here is an example of the lengths they went to. Looking at Google Maps planning our visit, the campus looks weird, offset from the Burbank street grid at an angle. Our tour guide said it was Walt's priority to offer perfect lighting conditions for animators, so the offices face north, because northern light is true light.

David Rosenthal

Do you know why northern light is preferable?

Ben Gilbert

If you are in the northern hemisphere, the sun moves across the southern sky, so north-facing windows offer the most consistent, non-direct light. Every animator got a window, and they built the building shape with a whole lot of north-facing sides, almost like a CPU heat sink with fins. It is one of the first buildings with air conditioning in Southern California. The windows had custom adjustable slats so the animator could let in the exact right amount of indirect sunlight. To me it symbolises that animators are the crown of Disney in this era, the way engineers are at Google, designers at Apple, PMs at Microsoft. To the extent anyone but Walt has power, the animators are the most valuable resource.

David Rosenthal

It is an animation-driven company. But to achieve all this, Walt needs capital. He doesn't want to give up control, but he and Roy decide they need another source beyond bank loans. I have the numbers. The Burbank construction costs alone were three million, more than the money left over from Snow White after repaying Bank of America. Then they have to staff it with twelve hundred animators, an extra four hundred and fifty hires, and to feed Walt's vision he greenlights Pinocchio, Bambi, and Fantasia all at the same time.

Ben Gilbert

And all completely different animation styles, completely different from Snow White. We have this notion today of the Disney style, but that is not reflected in the darkness of Snow White, in Fantasia's experimental artistic vignettes set to classical music, or in Bambi's naturalist take. Wildly different skill sets, bigger investments, completely new techniques. You are not just making more Snow Whites, you are doing discontinuous, unknown, high-risk bets. Walt can't help himself.

David Rosenthal

Between the three million for the campus and about five million in so-called negative costs for the three films before release, by early 1940 Disney is in this new campus but eight million in the hole. Bank of America had loaned them another four and a half million. The hope was that Pinocchio, the first of the new films, would be a hit and earn profits quickly. Unfortunately World War II had started in Europe by early 1940, so international box office is basically zero, and Pinocchio ends up losing a lot of money, over a million dollars.

Ben Gilbert

In a scale-economies business, if you lose eyeballs and revenue but your fixed costs stay the same, that is very bad news. You can't retroactively scale back how ambitious you were, you have already spent the money, and now you find you can't distribute to half your audience. Not to mention the impact on the rest of the flywheel, not a lot of Pinocchio merch getting sold in Europe in the summer of 1940.

David Rosenthal

After Pinocchio flops, and with Bank of America not willing to lend more, Walt and Roy decide they must sell equity for the first time. In April 1940 Disney sells three point eight seven five million of convertible preferred stock with a six per cent dividend, which is technically Disney's IPO, though it doesn't go on an exchange, it is over the counter. They sell thirty per cent of the company. After transaction fees they raise about three and a half million to the balance sheet, and it carries a six per cent cumulative dividend, a pretty sweet deal for investors.

Ben Gilbert

So they are flying even closer to the sun than I realised. They have eight million in investments to fund, four and a half million from Bank of America, and only three and a half million from the IPO, which is exactly eight million. They are shaving off every piece of their current and future cash flows to re-bet the farm.

David Rosenthal

That summer Walt has an ominous meeting with Henry Ford. Walt mentions the IPO, and reportedly Ford tells him, 'Walt, if you sold any of it, you should have sold all of it.' A real board of directors gets established for the first time, and the preferred get a director, an outside voice not going to share Walt's vision. By the end of 1940, despite the raise, Disney is in a cash crunch. Walt had set up a proto employee-ownership system, setting aside twenty per cent of the equity to fund an annual bonus pool, and they have to eliminate it months after he instituted it. What they do instead is raise the salaries of a few top animators while keeping the same or lowering salaries for everybody else on the Burbank lot. That causes huge resentment and unrest.

Ben Gilbert

This is the literal trade-off. We spent a bunch on Pinocchio, we lost Europe, we still have big ambitions, and this is Walt's implicit choice after raising all this debt and equity and betting the farm again. This is the downside of Walt's always-go-for-broke philosophy. And it leads probably to the darkest moment of Walt's life, that would change his relationship with the company forever. The strike.

David Rosenthal

On May 29th, 1941, the Screen Cartoonists Guild, which had unionised every other major animation studio, decides finally to target Disney. There is a reason they had stayed away despite Disney being the leader: Walt's utopian dream was true enough. He established the bonus pool, he constructed the campus. But with the cash crunch, that all comes crashing down.

Ben Gilbert

There is a great excerpt from Michael Barrier's book The Animated Man: 'In the spring of 1941, under pressure from the Bank of America and holders of preferred stock, Walt Disney Productions agreed to scale back its production costs to about fifteen thousand dollars a week. That meant Walt had to hold the negative cost of new features to about seven hundred thousand, one-third the cost of Pinocchio or Fantasia. Since labour costs made up eighty-five to ninety per cent of Disney's total costs, implementing such severe economies would mean laying off more than half the staff.'

David Rosenthal

The layoffs are coming but haven't happened yet, and that is part of why the strike happens. Hundreds of employees strike and picket the campus, carrying signs like 'Snow White and the 700 dwarfs' and a drawing of Pinocchio captioned 'There are no strings on me.' The strike lasts three and a half months and is a shattering event for Walt and the company. As the union organises, Walt decides to make a speech to the whole company, thinking he will explain his position and everyone will rally around him. It has the opposite effect. He lectures the company for nearly three hours. Some of his lines, written out ahead of time so they are preserved: '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 waiting to be told everything.' And, '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.'

Ben Gilbert

Probably not what you want to tell your employees after slashing their salaries.

David Rosenthal

A labour magazine wrote afterwards, 'Walt Disney's speech recruited more members for the Screen Cartoonists Guild than a year of campaigning.' About the worst reaction you could have. And Walt seems deluded, thinking it is not really his employees but a few communist agitators who had become his employees and are riling up the rest. He has removed himself, in denial that this is what his workforce wants. The family atmosphere of Hyperion is now a corporate haves-and-have-nots on the Burbank campus.

David Rosenthal

Then it gets worse. In the middle of the strike, in August 1941, Walt, depressed and in denial, agrees to go on a goodwill trip to Latin America with Nelson Rockefeller's Office of the Coordinator of Inter-American Affairs. This trip results in the films Saludos Amigos and The Three Caballeros. It also results in Roy having to resolve the strike, because Walt is uninterested. Walt called the trip a 'godsend,' a chance to get away from 'this god-awful nightmare in Burbank.' He essentially leaves the country and tells Roy to settle it, I'm leaving for ten weeks, do your best.

David Rosenthal

While Walt is gone, Roy settles the strike after federal mediation. Disney recognises the union, raises salaries for the remaining employees, and agrees to a negotiated layoff of over five hundred, taking headcount from twelve hundred to under seven hundred. The studio would never fully recover, not under Walt, not for many years, really not at all in the period of classical animation before computer animation. And Walt would never recover in his relationship with the company. It no longer feels like his family, it feels like a creation that has run away from his control.

Ben Gilbert

According to an animator named Don Lusk, Walt made a list of everyone who went out on strike and said everyone on it isn't true to Disney and one day will not be here.

David Rosenthal

For the rest of his life, Walt would blame this on communist influences in Hollywood. After the war he testified before the House Un-American Activities Committee as a friendly witness, corroborating communist infiltration and naming names of people he said were communists based on things he had heard, no proof. This would lead to the famous Hollywood blacklist. By association, people would later accuse Walt of antisemitism, since much of the communist movement in Hollywood was in the Jewish community. Gabler investigates this thoroughly and concludes there is no evidence Walt was ever antisemitic. Anti-communist for sure.

Ben Gilbert

By the way, this is four giant blows in a row. Europe drops even before the US enters the war, so European distribution falls off. There is a thing we didn't mention, that Fantasia made a giant bet on a new type of sound for movies called Fantasound.

David Rosenthal

This alone almost killed the company. Fantasia's budget was fifty per cent bigger than Snow White. In its first run they tried to use Fantasound, but distributors didn't pick it up for a real first run, so out of the two point three million budget in 1941 they recouped three hundred and twenty-five thousand. A giant loss, and Disney was also funding the development and distribution of Fantasound. So you have those two, then the strike, and now the US enters the war.

Ben Gilbert

One more note on Fantasia. The initial release was a total flop, but later it has a huge resurgence, in the sixties, the hippies thought it was the coolest thing. Today, on the list of inflation-adjusted top films by box office gross, Fantasia is the twenty-fourth highest-grossing film in Hollywood history. Go watch it, the music, the symphonies, the sound, it is an amazing production.

David Rosenthal

And now a hard cut to World War II. No sooner does Roy settle the strike than Pearl Harbor happens and the US enters the war. Unlike many great American companies of that era where the war was great for business, Coca-Cola, Mars, Lockheed, World War II is a disaster for Disney. Nothing of value gets built. It breaks every node in the flywheel and grinds all new core IP production to a halt.

Ben Gilbert

Within hours and days of Pearl Harbor, the US military moves into the studio. They look at Burbank and think, this is a great asset. Hundreds of troops set up shop using the soundstages to work on optical systems for anti-aircraft. Soundstages are great: no windows, giant rooms. The second reason, David, that I suspect you are hinting at, is it is real close to Lockheed.

David Rosenthal

Real close to Lockheed's Skunk Works department, which was in Burbank because Burbank was the sticks, and Disney is right next door. That is probably the bigger reason the military requisitions the lot, to protect Skunk Works.

Ben Gilbert

You have a bunch of animators getting drafted, so you are down manpower, just coming out of the strike, with huge failures in Pinocchio and Fantasia and lost European distribution. The appetite for making more films like those drops to zero. There is a financial reality that Disney owes a dividend to the preferred shareholders, which it actually suspends in 1942, but they still have to pay Bank of America. And conveniently the US government asks for propaganda films, to encourage people to pay taxes, buy war bonds, and support the troops. So Disney says, that is what we are going to be doing for the war.

David Rosenthal

All the studio's production during the war gets repurposed to propaganda and training materials for the government. And insanely they use Disney IP, all these old posters with Donald Duck holding a gun, stuff you would never see with these characters today. Not only did Disney do work for hire, they let their IP be used.

Ben Gilbert

But interestingly, do you know about Mickey Mouse's role? They really did not employ Mickey Mouse. They protected Mickey from the war image, and Donald Duck led the charge on the war films. Part of this was that canonically Donald is a sailor. And Donald is the more fighter-type character. Mickey started as a troublemaker but became the nice protagonist, the goody two-shoes, and Donald was the foil.

David Rosenthal

All of this does nothing for the flywheel or for generating new IP to feed it, or pushing the envelope of technology or creativity, all the things that contribute to Disney's core. But they are financially floated by the war, generating net income reliably, not a lot, from the government work. And there is one other big innovation, a bright spot out of this back-against-the-wall moment.

Ben Gilbert

The Disney vault.

David Rosenthal

The vault. In 1944 the company is so cash-strapped they come up with the crazy-seeming idea to re-release Snow White in theatres. We can't make new stuff, but people sure like that old movie, let's put it in theatres and see what happens.

Ben Gilbert

And the thing to remember is that with no home video and no TV, no one had seen Snow White in seven years. It had truly vanished off the face of the earth except for the copies held in the Disney vault.

David Rosenthal

In 1944 they re-release Snow White and it brings in three million in revenue on just a few hundred thousand in cost, basically printing a few new copies. The theatres and distributor get their normal cut, but Disney's cost to develop the film is essentially zero. It is an enormous boost. And it turns out seven years is about the right amount of time for a new generation of children to reach an age where they would be interested, discovering it for the first time, yet infrequent enough that it doesn't dilute the IP. Walt has an amazing quote from the 1951 re-release: 'In the eight years since our first re-release, our potential audience has been increased by twenty-five million children who either were not born or were too young to attend a motion picture theatre in 1944.'

Ben Gilbert

It is amazing, and they totally stumble into the seven-year thing. It is not like they planned it, they just had a cash crunch seven years later and needed easy profits. And seven years, give or take, becomes the core Disney IP cadence to this day. Disney could uniquely do it because their IP was more timeless, animated and based on fairy tales, simple but resonant stories. What is the cadence of Disney's Frozen movies today? Frozen came out in 2013, Frozen 2 in 2019, Frozen 3 slated for 2027, six to eight years like clockwork. Interesting they have applied it to sequels now too.

David Rosenthal

So now we have four components to the flywheel. One, genuinely compelling new IP with characters you resonate with. Two, maximise distribution of each element in the primary vehicle. Three, feed the IP into as many ancillary profitable nodes as possible. And now four, the vault, strategically re-release every seven or so years, frequently enough to capture each new generation of children but not so frequently you dilute its impact, effectively evergreen content. Roy has a great quote he told the Wall Street Journal years later: 'Our product is practically eternal.'

David Rosenthal

Despite this genuine innovation, by the time the war ends in 1945 Disney is not in a good place. The flywheel is basically broken, no compelling IP for several years, and worst of all Walt himself is disengaged and disillusioned.

Ben Gilbert

Something happened, though, because the Disney we know today is quite successful. Coming out of the war, there are a few moving parts. The government revenue has dried up. The long-term stuff, other than re-releases, they haven't stoked in a while. So the strategy over the next few years is to do things that don't cost a lot but might have a lot of return.

David Rosenthal

They try a bunch on the animation side. They do package films, taking a bunch of shorts and packaging them as features, movies you have almost assuredly never seen, like Make Mine Music or Fun and Fancy Free. Not big successes. They also go back to the original Alice idea of combining animation and live action, resulting in Song of the South, which historians look back on as racist and deeply problematic, and which Disney has never released on home video or streaming. Not a big success for the flywheel either.

Ben Gilbert

And for the first time there is real competition. Before the war, Warner Brothers started Looney Tunes, with Daffy Duck, Porky Pig, Elmer Fudd, and Bugs Bunny. Ironically a former Disney story department employee, Charles Thorson, did the initial designs for Bugs Bunny. And in 1940, the same year it all started to fall apart for Disney, Joseph Barbera and William Hanna start working together, producing Tom and Jerry for MGM, and later the Flintstones. The other major studios are creeping into the animation game and by the postwar period were really starting to rival Disney.

David Rosenthal

Meanwhile Disney goes the other way, into live action. They somehow had a bunch of cash tied up in Europe they couldn't repatriate, so they shot a live-action film, Treasure Island, in London, which did well. Live action is far less expensive, you can do it fast, and they needed to spend the cash. But you are not buying a lot of Treasure Island merch today, it is not durable. Live action doesn't feed the flywheel the same way. They also started nature documentaries, like Seal Island shot in Alaska, and they studied the emerging TV medium but decided, for now, no, though we'll watch it.

David Rosenthal

Walt's heart really was in animation. He wanted to get back to making feature films that push the envelope. Roy hates the idea, since the studio has lots of debt. Walt ultimately gives an ultimatum: if we don't get back to this, we should just sell the company, what are we even doing here. In 1950 Roy capitulates, and the company raises another two million to finance Cinderella, the first bright spot in a long time, and their first full-length feature in eight years since Bambi in 1942.

Ben Gilbert

And the way they made Cinderella was quite different. Walt pounds the table for it, then realises the way they will make it feels compromised, because the budget can't be what they were blowing in the early forties. There is a great quote from the animator Frank Thomas, who worked on it: 'We planned Cinderella more carefully and shot it all in live action first so we could judge it, 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.' Not the mindset they took into Snow White.

David Rosenthal

This flips live-action reference from a source of inspiration and study to a crutch. They filmed every scene and then effectively rotoscoped, tracing the live-action footage, which leads to more rigid animation. Once you film it you are locked into that view. It had less of the lavish detail of Pinocchio and Bambi. Walt's heart is just not in it, he kickstarts it but isn't engaged during production. It does end up a critical and commercial success, though, making basically the same as Snow White, about eight million in film rentals in the first year on a cost of two point two million. Really the first big financial success since before the war.

Ben Gilbert

It got animation back on the right foot creatively, and those films still hold up. Over the next few years they release Alice in Wonderland, which ballooned over budget and did not pay back, in part, historians say, a film Walt felt he should do because of his reverence for the source material, but never had a clear idea what to do with. Hard to put those disjoint vignettes into one cohesive film, but artistically beautiful. Roy had an interesting comment in the 1951 annual report: 'Alice has not performed as well at the box office as Cinderella. 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 he was right.

Ben Gilbert

So Walt is disengaged here. What is he doing?

David Rosenthal

Walt is playing with trains.

Ben Gilbert

Yes he is. He is getting really into trains and miniatures, model trains and miniature furniture and rooms in miniature.

David Rosenthal

I said we weren't going to dive into Walt's psyche, but I think about this as a soul-searching half-decade where he is looking for what to get passionate about next, because animation isn't doing it for him the way it used to, and he is reaching back into his childhood for inspiration. Walt would frame it as developing these hobbies to keep his mind off the studio's problems, nice things to do after a hard day. But they became obsessions. There was a train that ran through Marceline, which is why Marceline existed, so there is a deep-seated psyche around trains and small-town America. He and other senior animators got into large-scale model trains, one-eighth scale, big enough to ride on top of.

Ben Gilbert

There were six million model-train enthusiasts at the time, this was a big thing. This isn't a billionaire hobby, it is Walt hanging out with other enthusiasts, man-of-the-people style. He was building some of the train cars himself, in the machine shop at Burbank, with a guy named Roger Broggie who led the machine shop team, who would go on to build a serious model train for Walt and become the first Imagineer.

David Rosenthal

Just to foreshadow, all of this would lead to Imagineering.

Ben Gilbert

And in a very not-man-of-the-people way, Walt sinks fifty thousand dollars, a huge amount of his personal liquidity in 1950, into building a train in his backyard. Half a mile of track through a tunnel ninety feet long, dug under his wife's garden. When they were house-hunting, a major consideration was whether there was room to lay out a giant train. It is on Carolwood, and he names it the Carolwood Pacific, with a steam engine named the Lilly Belle after his wife.

David Rosenthal

When Walt gets obsessed, he goes to unreasonable extremes. If you go to Disneyland or Disney World today, most of the steam engines are named as callbacks to this period. There is the Lilly Belle, the Ward Kimball, named after the animator who got him into the hobby, the Roger Broggie, and the Roy O. Disney. There is a great quote in the PBS American Experience documentary from a historian reflecting on Walt in this moment: 'I can't control my employees, I can't control the larger stage, 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.'

Ben Gilbert

And it would become something much bigger that would also be his and also be perfect. Out of this stew comes Disneyland.

David Rosenthal

Which is funny, because Walt would insist in interviews until his dying day: '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 there should be something built where parents and children could have fun together. 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.'

Ben Gilbert

It is also that, I'm sure, but really the trains.

David Rosenthal

The initial idea was pretty small. There was a name floated, Mickey Mouse Village, that quickly changed to Disneyland, since it was more about his new passions, trains, Americana, and miniatures, than about Mickey. The constraint was a sixteen-acre plot adjacent to the Burbank studio lot, between it and the river. In March 1952 Walt announces Disneyland, to be built on that strip of land for one and a half million dollars.

Ben Gilbert

A Snow White.

David Rosenthal

A Snow White. We should speak in units of Snow White. Actually cheaper than a Snow White given inflation, since it has been fifteen years. He wants more money for a larger study, and Roy and the board are none too enthused. Think about the state of the company, and Walt is saying, I found a thing I'm interested in, can I have money to explore building this inarticulable idea, right next to the studio. It goes over like a lead balloon. So Walt talks to Roy and they figure a path: Walt will start his own company, formalised later in 1952, called WED Enterprises, for Walter Elias Disney. His personal company where he can do weird personal stuff.

Ben Gilbert

Over 1952 Walt starts poaching people from Disney, at first a half-dozen, set up in a building on the back lot. These become the first Imagineers. And the interesting thing is they are artists and animators being hired to build a theme park and big physical trains. This gives you a sense of Walt's leadership: he would take a talented creative person, assign them to something they had never done, and say, he'll figure it out.

David Rosenthal

We have to pause and underline what is happening. This is the Walt Disney, who has come up with a crazy new idea based on his obsessive model-train hobby, that the board of Disney Studios has basically rejected. So he has gone full Colonel Kurtz and started his own separate company on the Disney campus, poaching some of the best Disney animators to stop doing animation and build a theme park.

Ben Gilbert

I was about to say this sounds like Elon Musk, but none of Elon's companies have a board that would vote against him. That is the only difference, Elon before Elon.

David Rosenthal

Two problems emerge. One, Walt and the architecture firm conclude the plot is too small, the Disneyland concept keeps growing in scope. Two, after provisional approval, the Burbank City Council declines the proposal, not wanting a 'carnival-like atmosphere' by the river.

Ben Gilbert

You could describe Disneyland as lots of things, but carnival-like atmosphere. The magic is that it isn't, though it very easily could have been. So they need a bigger plot and a team good at odd research-based tasks. And you will never guess where he goes, SRI, the Stanford Research Institute, one letter off from Siri, which was a spinout of SRI.

David Rosenthal

SRI is the firm Walt hires to identify what becomes Anaheim, the perfect spot. When you describe it, it sounds nuts: ten times bigger than the original, a full one hundred and sixty acres, twenty-five miles from Los Angeles, currently just orange groves. Anaheim was a small farming town, and there wasn't even a highway connecting it to LA, there was a planned one. There is a quote from Barrier's The Animated Man: 'The SRI analysis from August 1953 took into account a large number of factors including likely population growth, freeway construction, and the effect of terrain on television transmission. Since the idea was that TV would play an important part in the promotion of Disneyland, the study pointed toward a location southeast of Los Angeles in Anaheim, in Orange County, just off the Santa Ana Freeway,' then under construction. The foresight is incredible.

David Rosenthal

There is one problem, they need a lot of money. So Walt goes back to the company, which had no interest, which is why he set up WED. But it is becoming clear this is happening, Walt is a force of nature, and Roy becomes as supportive as he is strong-armed into being, while still trying to protect the company. In April 1953 the Walt Disney Productions board agrees to a personal services contract with Walt and contracts with WED to design and build the Disneyland attractions. It is a cost-plus contract, so WED and Walt don't take risk in this part, they get paid whatever it costs plus a margin, a kind of blank check.

Ben Gilbert

There are wild other terms in this personal services contract, per a 1990 LA Times article. Walt is allowed to pursue outside projects, giving him the benefits of being a free agent while still drawing his one-hundred-and-fifty-three-thousand-dollar salary. He argues he should be compensated for the use of his name, and gets it worked in: the contract awards him ten per cent of all merchandise sold. He also gets the right to invest alongside Walt Disney Productions in each live-action film, which he later does on Mary Poppins and others. Why negotiate for this? My feeling after all this research is that Walt didn't really care that much personally about money. Was he trying to accumulate cash to fund Disneyland?

David Rosenthal

Exactly. There is also personal stuff, his relationship with the company where it is not really his anymore, so he wants more out of it, the less generous take. But he and Roy came to an understanding: if Walt is going to fund a lot of this, they need a way for Walt to get more cash. This is happening no matter what, so we can do it the easy way or the hard way. On money, Walt was interested in it for deploying it, not hoarding it. He lived extravagantly compared to most people, the train, a vacation house in Palm Springs, but not like the other Hollywood moguls. Lillian said in 1956: '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 is kind of right, because he is always putting it back in, all tied up in the enterprise value of Disney, which he keeps re-mortgaging.

David Rosenthal

He also always believed in the park, just as he always believed feature animation had a long runway. Here is a crazy stat for how right he was: Walt built this company from age twenty-one until he died in 1966, and if you compare the company's market cap today to 1966, ninety-nine point nine-five per cent of the value was created after Walt died. There was so much more running room in his concept than he had time on earth to execute.

Ben Gilbert

Do you know how I know the 1966 market cap? During the Buffett partnerships, Warren Buffett saw Disney was an underpriced asset in 1966, right before Walt died, and bought a bunch of stock, since it had a market cap under ninety million at the time. The company was doing twenty-one million in pre-tax earnings, and after Disneyland it had more cash than debt.

David Rosenthal

This is Ben Graham bargain investing, and even more Charlie Munger investing, a great business at a great price. A ninety-million company doing twenty-one million pre-tax with Disney's flywheel, the buying opportunity of a lifetime. He did, of course, sell it, which was the right move after Walt's death. This whole personal-services thing becomes so contentious that three board directors resign, and a shareholder lawsuit is brought that doesn't go through, but the remaining board approves it. Essentially it was Roy's way of saying, the company doesn't want to be too tied up if this fails, but we will give you a way to get more cash flows so you can fund it yourself.

Ben Gilbert

Just to reflect on this: the origin of Disneyland is, so far, not about the company looking for more places to put its IP.

David Rosenthal

No, it is very intentionally not the flywheel in the beginning. There are essentially zero synergies as conceptualised so far. But that is about to change, because Disneyland, even after moving to Orange County and one hundred and sixty acres, is getting so out of hand in its budget that it needs to come back to the company. Originally they thought they would need about five million. Because they thought it would be that expensive, Walt went back and said, I think it is better if this is actually a Disney thing, let's tie it all together. At a five-million price tag the company can't fully fund it, in 1952 Walt Disney Productions made less than half a million in net income. But the company is good for five hundred thousand, and they need to find the bulk of the five million somewhere else.

Ben Gilbert

So Walt comes back into the fold and does something no other movie executive would do, he embraces television. He goes to the TV networks for money. And they don't want a pure financial partner, they don't want to just raise debt they'll have to repay, that has hamstrung them so many times. At the time the prevailing Hollywood sentiment was that TV was a threat, that putting content on TV would steal audiences from theatres. Just like our NFL episode, where baseball was afraid of television. The quote was, radio whets the appetite for attending games and TV satiates it.

David Rosenthal

But Walt realises, like the NFL did, that TV was a huge opportunity. Walt says: 'When television first hit, I went back to New York and spent a week just studying it. I had the feeling then that it was important and that we ought to get in it. The feeling of the motion picture business was that television was something we should fight, or ignore and maybe it would go away. I said television is going to be my way of going direct to the public, bypassing the middleman. I said, Roy, this television thing can be the greatest thing, because we will be going direct to the public.' And he thinks it might be his ticket to financing the park.

Ben Gilbert

ABC had been lobbying to do something with Walt, because he had done a TV special a few years before, on NBC, and it was great, there is something compelling about Walt and Disney stuff in a special. But ABC is the third-place network, fewer affiliates, less reach. If you want the full reach of a network, it is not ABC.

David Rosenthal

So Walt actually goes to CBS and NBC first, but they are not interested in the whole package. They would gladly do a regular series, but not the park thing bundled in, asking for the better part of five million to build a theme park is really weird. ABC, though, is the newest network, struggling to catch on. They need something like Disney and Disneyland to break out. Walt's line was that ABC needed the show so badly that 'they bought the amusement park with it.'

Ben Gilbert

Do you know the structural thing going on in the television industry in 1952? Back in 1948 the FCC paused the ability to get a new broadcast license while it sorted out technical and policy problems. It was supposed to last six to twelve months, but it lasted four years, until 1952. So the existing big networks, NBC, CBS, and ABC, became entrenched, while the number of households with TVs was exploding, from nine per cent in 1950 to sixty-five per cent five years later in 1955.

David Rosenthal

So all these networks have a government-protected oligopoly, accidentally, in a massive new market. If ABC could put on a hit show, there weren't many choices of what to watch at a given time, so a giant swath of Americans could pay attention instantly. They were hungry for compelling content. Walt goes to ABC knowing this, and says, I will make this show, but you are doing the park with me, I have complete say over the program and can change my mind anytime, and there is no part of the contract about what I'm making for you. And ABC says, yes, absolutely, Mr Disney.

David Rosenthal

ABC invests five hundred thousand in equity in Disneyland, Incorporated, same terms as Disney Productions, and guarantees four and a half million in bank loans. There is the rest of the financing. And ABC also pays five million per year to Walt Disney Productions to make the show, ABC's to air for seven years, the largest TV programming contract in history at the time.

Ben Gilbert

There is one other deal point, ABC negotiated the right to all profits from Disneyland's food and beverage for the first decade. And part of the contract is set in stone, the opening date, July 17th, 1955. It works out great for everyone because the show becomes a huge hit the moment it launches in the fall of 1954. The content is a behind-the-scenes look at all the different lands, Tomorrowland, Frontierland, Adventureland.

David Rosenthal

And of course they name the TV show the same as the park.

Ben Gilbert

If Walt controls all the programming, why not make it the most perfectly aligned advertisement every week for a whole year to get ready.

David Rosenthal

It quickly becomes the second most popular show on television after I Love Lucy, and the first ABC program to crack the top twenty-five, it was all NBC and CBS until Disneyland. ABC also lets Disney run trailers inside each episode for their current theatrical release, so it promotes both the park and the movie slate. It becomes another node in the flywheel. And for the first time they get repeat exposure. Disney only got a touchpoint once every few years with a movie, but with TV it is a way to build a repeated relationship, like the comic strip but on steroids.

David Rosenthal

In the fall and winter of 1954 into 1955, the show has its first viral moment, even before the park opens. In December 1954 Disney begins a three-part live-action miniseries about Davy Crockett, a historical American figure who fought and died at the Battle of the Alamo over a century before, whom Disney highly fictionalises. America goes nuts. Davy Crockett coonskin caps become the must-have kids product of 1955, selling ten million caps. Even better, the theme song, The Ballad of Davy Crockett, reaches number one on the Billboard charts and sells seven million records. In total Disney would do around three hundred million of gross sales of Davy Crockett merchandise, and by this point they had fully in-housed commercial products, since Kay Kamen had tragically died in a plane crash in 1949.

Ben Gilbert

At five per cent royalties on that three hundred million, assuming a hundred per cent retail markup, that is seven and a half million to Disney, more in actual revenue than they had earned from any film at that point. And this will blow your mind: it is more than the amount of income they had ever received cumulatively from first-run animated features. If you add up all the pluses and minuses, by 1957 the money they had ever made in profit from first-release films was a hair over seven million. They made more from skin caps and record sales than from all their animated features combined.

David Rosenthal

And what timing, right before Disneyland opens. Disney absolutely crushed the timing on embracing TV, and in a huge way, directing all this attention at Disneyland. That stat from the twenties, that the average American went to theatres over forty times a year, by 1947 was down to about thirty-two, and by 1956, the year after Disneyland opened, down to fourteen times per year. So movie executives had good cause to be concerned about TV, attention was shifting, and right as it shifted in droves, boom, that is where Disney showed up in a multiplicative way.

Ben Gilbert

Walt had a quote, from that 1950 special: 'I regard television as one of our most important channels for the development of a new motion picture audience. Millions of televiewers never go to a picture theatre 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.' And it is incredible that because he started playing with trains, Disney became a major force in television and opened the park.

David Rosenthal

So how does it come together? Disneyland, Incorporated, has five hundred thousand from Walt Disney Productions, five hundred thousand from ABC, two hundred thousand from Western Publishing, who distributed their books, and Walt himself put in two hundred and fifty thousand. Plus the four and a half million of debt guaranteed by ABC, a total of about six million to build the thing, with another two million of ten-year bonds ABC was committed to if needed. The cap table: Walt Disney Productions and ABC each own thirty-four per cent, Western Publishing fourteen, and Walt personally seventeen, with a contract between Disneyland, Incorporated, and WED Enterprises, which Walt owns one hundred per cent of, to actually build it.

David Rosenthal

The team at WED had been concepting while the ABC and financial negotiations happened. In September 1953, as legend goes, Roy is about to walk into meetings with television executives, and Walt famously locks himself in a room with Herb Ryman for an entire weekend and says, Herb, can you draw the first full drawing of Disneyland. Herb says, Disney what, he doesn't even work there anymore, and asks Walt to tell him more. Walt metaphorically locks the door, and out of the weekend emerges a beautiful drawing they use as a sales tool for the first meeting with ABC, with a castle, mountains, the railroad, the river. The core vision.

Ben Gilbert

Other WED employees travel the US looking at the best theme parks, and Walt travels overseas to places like Tivoli Gardens in Copenhagen to get a different take, a park with green space, more pleasant, less carnival-like, safer than the seedy US parks. What we are about to describe is completely insane. The date was fixed in the TV deal in part because the show would culminate in a live broadcast of the opening. Some sources say it was three hundred and sixty-six days to build, but the physical construction was less than that, eleven months. They build Disneyland in one-third the time it took to make Snow White.

Ben Gilbert

The whole thing sounds like a fever dream. A Main Street reflecting Walt's ideal small town from childhood. Multiple rivers with different boats. Robotic animals on the Jungle Cruise. A castle. Native Americans performing live dances. Cars that three-year-olds can drive and crash into stuff, still my favourite part, Autopia. An intense amount of greenery and trees, all brought in, pine trees and palm trees, exquisite landscaping to reinforce how pleasant and safe it was. A passenger train built from scratch on real railroad ties. Walt's fever-dream reflection of America, all idealised, safe, clean, cheery. The past, the future with Tomorrowland, Frontierland, and Adventureland, but no sign of the present, so you can be completely immersed and disconnected from your troubles.

David Rosenthal

I never realised Disneyland is one hundred per cent about the past and the future and zero per cent about the present.

Ben Gilbert

And the fantasy. You can go to Fantasyland if you don't want the past or the future. The first part of construction is the twenty-foot-high berm insulating Disneyland from the outside world, with the Disneyland Railroad on top. To this day the most impressive thing is the sightlines. Despite very different environments on a relatively small plot, you only ever see what the Imagineers want you to. Main Street can feel nostalgic and wholly different from the jungle over at Adventureland, very different from the strip-mall mania just a few acres away.

David Rosenthal

There weren't yet on-site buildings to fabricate the rides, so they did construction at Burbank and trucked it all down, a fifty-minute drive if you don't hit traffic, and the highway was still being built, so all on surface streets. Halfway through, they discover the Rivers of America almost doesn't work, the water drained into the dirt underneath. Cost ballooned from five million to seventeen million. But that is actually cheap.

Ben Gilbert

I did the inflation math, that is two hundred and ten million today. You absolutely could not build anything remotely close to Disneyland today for two hundred million, or in a single year. Also very convenient that they sold a lot of coonskin caps as the budget was ballooning. And they found sponsors to sponsor lands and rides, and drew on every ounce of debt.

David Rosenthal

This is the other galaxy-brain Walt addition to the flywheel that he brings with the parks, corporate sponsorships. There were sixty-five corporate sponsors in Disneyland within the first few years. At opening there was Richfield Oil for Autopia, Bank of America sponsoring Fantasyland, Coca-Cola.

Ben Gilbert

In addition to Coca-Cola, Pepsi had a sponsorship in Frontierland, Coke didn't become the exclusive supplier until 1990. American Motors, Santa Fe Railway, TWA for the Rocket to the Moon, Monsanto was a sponsor, Carnation, Kodak, the list goes on. But I have one favourite.

David Rosenthal

The National Rifle Association.

Ben Gilbert

Inside the Davy Crockett Museum there was a shooting gallery. It is unclear from the records if it is technically a sponsorship, but the rifles were provided by the NRA, real rifles. Flywheel in action. For comparison, the Rise of the Resistance Star Wars ride they built in 2019 was rumoured to cost anywhere from two hundred to four hundred and fifty million for one ride, and they built the whole park for less than that. Permitting was pretty light back then.

David Rosenthal

So opening day, July 17th, 1955. Less than half the planned rides were open. To show how down to the wire it came, Walt personally put on a mask to help paint the 20,000 Leagues Under the Sea exhibit the day before. It is nearly a hundred degrees in July, which caused issues with the newly poured asphalt, and there are legends of women's high heels sinking into it. The water fountains don't have plumbing finished, so if you want a drink in the heat you buy a Pepsi. The restaurants ran out of food. Mr Toad's Wild Ride went down because it was too much for the power grid, and the Mark Twain riverboat began to sink when the operator let five hundred people on, double the two hundred and fifty allowed. But despite all this, it is a giant hit. That first day, technically a preview for press and invited guests, fifteen thousand were invited but an estimated thirty thousand attended.

Ben Gilbert

And that was in person. Then there is the TV show. ABC rolls in with twenty-two live cameras and a giant crew operating 1955 technology. The viewership numbers are astonishing, the world's largest live telecast ever, eighty-three million people tuned in, nearly half of America watching this ninety-minute commercial.

David Rosenthal

It is crazy, live coverage of a wacky amusement park opening. On one hand, why watch that, on the other, you have been conditioned over the last year by one of the most popular programs in America that this is a giant deal, so you better be watching. Do you know who the three anchors were that ABC hired?

Ben Gilbert

One was Ronald Reagan.

David Rosenthal

Ronald Reagan, Art Linkletter, Bob Cummings, and future president of the United States Ronald Reagan. The TV strategy absolutely knocked it out of the park. What does half of America tune into anymore? Even the Super Bowl only gets about forty per cent of US households, and this was just to watch guys talk about an amusement park behind them. America had been primed for the whole past year that this would be the event of 1955.

Ben Gilbert

By the end of the first week there were one hundred and sixty thousand visitors. Two months later, the millionth visitor. In the first year, three point six million. In the second year, over four million, making it more popular than both the Grand Canyon and Yellowstone. And today the park has had over nine hundred million visitors since opening day.

David Rosenthal

My favourite trivia is the original business model. You used to pay a dollar for admission, then buy booklets of tickets that got you onto the various rides, different ride grades priced differently, a whole complicated model they have since simplified while raising prices astronomically. The biggest success is that it couldn't be farther from a carnival, and that turned out to be a great business. Harrison Price, who led the SRI research, said Disney's rethinking of the amusement park had striking business consequences: because the park was such a pleasant place, people stayed longer, and because they stayed longer, they spent more. Price said he tripled per-capita expenditures because he tripled time.

Ben Gilbert

And fast forward to today, you go for like fourteen hours a day, and you make a whole trip out of it, a whole week at Disney World.

David Rosenthal

I promise we won't do too much part-two foreshadowing, but one point I have to drive home: Disney parks and cruises today do thirty-six billion in revenue and ten billion in profit per year, twice the profit of their entertainment division.

Ben Gilbert

Wild to think about physical amusement parks having essentially a thirty per cent net income margin. What other physical park operator operates with those margins, and the fact that it is a bigger business than their movies, twice as big.

David Rosenthal

We'll get into this, but really the impressive thing is that Disney films are now great again, and still the parks do more revenue. Now, Disneyland actually was not a bet-the-company move for Walt Disney Productions financially, it was cleverly structured by Roy not to be. But reputationally it absolutely was. People were willing to take giant leaps on Walt because of who he was, the same way they do with Elon or Steve Jobs or Warren Buffett, getting deals no one else could. So Roy was great at making sure it wouldn't bankrupt the company, but Walt was betting his reputation extremely publicly, to half the households in the US, and betting his personal fortune too. Remember that two hundred and fifty thousand he put in, he sold his Palm Springs vacation house, borrowed a hundred thousand against his life insurance, and took a personal loan.

Ben Gilbert

All necessary because of how they had always operated the company, he wasn't taking lots of cash out until the renegotiation of his contract.

David Rosenthal

There is a fascinating coda to how the park was formed. You might assume the Walt Disney Company owns the park outright. But the company would not actually own the park and everything within its borders for a full twenty-seven years after opening, until 1982. Here is the story. Pretty quickly Walt Disney Productions exercised their right to buy out Western Publishing and Walt personally, so by 1958 they owned sixty-six per cent. The buyout of ABC's stake wasn't pre-negotiated, so in 1960, when the company had the cash, Roy negotiated to pay seven and a half million to buy out ABC, and by 1960 Walt Disney Productions owned all of Disneyland, Incorporated. But that leaves WED Enterprises.

Ben Gilbert

And WED Enterprises is Imagineering today. But at this point WED also owned rights to some elements in the park, and it wasn't consolidated into Disney, it was a separate thing owned by Walt.

David Rosenthal

WED actually owned the railroad outright, negotiated as part of the personal services contract, because it was Walt's side project that he put on Disneyland. He got ticket revenue from it as an annuity, since all the rides cost money. The railroad at Disneyland was Walt's, same with the monorail. These were owned by WED, not Disneyland, Incorporated. And since WED was Walt's personal company, it owned Walt's name and likeness, which led to that ten per cent royalty on merchandise.

David Rosenthal

In 1963, eight years after the park opened, Roy was getting nervous that public shareholders would sue over this tenuous structure, so they reached a deal. WED would be sliced into two: Imagineering, the architectural and engineering department, and everything else. Disney Productions would buy the Imagineering half, finally in-housing it in 1965. The rest would be renamed Retlaw, which is Walter backwards. Inside Retlaw, Walt kept the trains, the monorail, and his ten per cent royalty. That lasted until 1982, nearly three decades after opening, when the company bought out the name rights, the monorail, and the railroad from Walt's family, since this was after he passed, in exchange for forty-three million of Disney stock. In total WED, later Retlaw, got seventy-five million in checks for the railroad and monorail between 1953 and 1981, and another forty-six million for name royalties.

Ben Gilbert

So the question as a Disney shareholder would be, was it worth it?

David Rosenthal

The obvious answer is yes. There are conflicts of interest everywhere, and this would never fly today with modern shareholder and SEC laws, but if you were a Disneyland shareholder then and held through all of it, that worked out great.

Ben Gilbert

And speaking of how great it would have worked out, after the launch of the show and the park, the company is firing on all cylinders again. The combination of the television show and the park added a fifth element to the flywheel. One, compelling IP. Two, maximise distribution in the core vehicle. Three, feed the IP into ancillary vehicles. Four, the re-releases and the vault. And now five, parks and television. Television amplifies interest in all the characters, and parks do almost the extreme bottom of funnel, the most Disney thing you can experience, a huge monetisation event. I just got back from Disneyland, and guess what, we are watching a lot of Toy Story this week at my house, a refresher on your fandom.

David Rosenthal

The parks are almost a hybrid of flywheel plus IP, because all the core Disney IP goes into the parks, the Peter Pan ride, the Star Wars rides, but the parks are also not just a destination, they are a source of IP development, not just a sink. This would literally become true with Pirates of the Caribbean much later, which has got to have grossed billions after all the sequels. A lot of stuff hasn't done as well, Haunted Mansion has never really worked like Jungle Cruise, but the parks feed the rest of the flywheel, not just drain it.

David Rosenthal

So 1955, with the park, TV revenue, Davy Crockett, and the Mickey Mouse Club, is basically the inflection point for the company. Revenue doubled from '54 to '55 and would keep climbing for decades. Disney effectively stops being a movie studio and becomes a new form of diversified, stable entertainment company. In November 1957 Disney finally lists its stock on the New York Stock Exchange. Stock had been publicly held since the 1940 offering but not listed and traded until 1957. Post-IPO, Walt and Roy still effectively control the company, forty-seven per cent of the voting power held by the Disney Voting Trust, so it was still their family company, for a little while, waning over the decades.

David Rosenthal

Once the company is listed and people realise the power of the business, in early 1958 the Wall Street Journal runs a front-page story about Disney's unique model. The title is 'Disney's Land: Walt's Profit Formula, Dream, Diversify, and Never Miss an Angle.' And this article is where the famous Disney flywheel illustration comes from, the one Ben has framed in his studio.

Ben Gilbert

This has been on my office wall for years. The legend everybody believes is that this was a napkin sketch Walt drew. No, it was created by a Disney studio artist as an illustration for the Wall Street Journal piece. Disney confirmed this when we were in the archives, and then we asked the Journal to pull the original out of their archives.

David Rosenthal

It serves as an illustration for what at the time was a difficult-to-articulate concept of a business flywheel. The word flywheel never appears in the article, that nomenclature got added later. But it was the Journal saying, Disney, help us illustrate that you have a wholly unique new business model. Roy has amazing quotes in it: 'Our diversified activities are related and tend to complement each other, helping us to do relatively fine business in the face of otherwise difficult times for the motion picture industry. Integration is the key word around here. We don't do anything in one line without giving a thought to its likely profitability in our other lines.'

Ben Gilbert

And they walk through the flywheel with their plans for their upcoming release, Sleeping Beauty, still a year from release at the time of the article. At Disneyland, which opened in 1955, the centrepiece is Sleeping Beauty Castle, but that movie wouldn't come out for another four years. They were building hype for a movie in pre-production, and the castle was based on concept art of a German castle because it was so far from the film. The article walks through it: at Disneyland they installed animated dioramas of Sleeping Beauty as an attraction charging a thirty-five-cent admission. Disney is producing and selling Princess Aurora dolls and costumes, publishing books of the Disney version of the fable, running segments in the TV show, preparing the soundtrack album to go on sale before the movie, and starting comics of Aurora in the Disney Treasury of Classic Tales syndicated strip.

David Rosenthal

The article also reveals that Disney was intentionally making its TV shows in colour even when TVs were black and white, because they thought TVs would go colour soon and knew the IP would stay valuable for decades. The foresight, they are so bought in on dumping valuable IP onto the pile and wanting it to live forever.

Ben Gilbert

There is one other thing, Disney in-housed their own film distribution right before Disneyland.

David Rosenthal

They create Buena Vista Distribution and leave RKO Radio Pictures, their distributor since about 1936. Howard Hughes ended up owning RKO and it had become a train wreck as he spiralled toward the end of his life, and Disney didn't want to be part of that chaos. At the same time Walt had started thinking about Disney as vertically integrated entertainment, not just a studio relying on others for distribution. In 1953, two years before Disneyland, they incorporated Buena Vista, with The Living Desert nature documentary as one of the first films, then Lady and the Tramp and 20,000 Leagues Under the Sea, a test of whether they could pull it off. They got good at it fast, except internationally, where they relied on sub-distributors for a long time. But Disney had become such a household name, especially because of the ABC show and Disneyland, that they were uniquely suited to self-distribute. This was Walt's dream from the early cartooning days.

Ben Gilbert

It is surprising they didn't start after Snow White, who is going to turn down a Disney picture?

David Rosenthal

Cash flow. You can't distribute films before you actually get paid by the theatres. So Disney didn't have the working capital until their real strength in the mid-fifties. That is why more studios didn't vertically integrate, you need a lot of working capital. In the long run it is an amazing strategy, since they had been paying about a third of total rentals to another distributor, and especially with the re-releases, it is a no-brainer.

Ben Gilbert

At this point Disneyland plus merchandise licensing provides a stable foundation. They almost replatformed the business. Same spiritual entity, but instead of the business being in the films, they have a stable platform of Disneyland, TV, merch, and licensing, and they do the films to add new stuff to the pile. Then in 1961, after twenty-two years of being in debt to Bank of America, Walt Disney Productions finally paid off their last loan.

David Rosenthal

Roy must have been so happy that day, and Walt was already scheming how to blow more money. On Sleeping Beauty, like many films we mentioned, it did not recoup costs at the box office, though since then it has made hundreds of millions in cumulative profit. It had a really high production cost, six million, the most expensive to date, they went whole hog after all the flywheel hype. Walt was distracted with Disneyland, so he wasn't the authoritative voice to help the team find the great story.

David Rosenthal

The weird thing is a financial blip in 1959 into 1960, where the company shows a loss, flipping from increasingly profitable to net income negative, because Sleeping Beauty had that hole, and ABC cancelled Zorro and the Mickey Mouse Club, both Disney-made shows, related to Walt Disney Productions blowing up the Disneyland deal by buying ABC out. So that relationship ended, for the moment. But the company is actually financially stable now. Here is the trend: 1957 they do three point six million in net income, then three point nine, then three point four, then 1960 happens, a perfect storm, a one point three million loss. Then they bounce right back: 1961, four point five, then five point two, then six point five, then seven, then eleven, then twelve. Stability.

Ben Gilbert

And then Walt decided it was too stable and he needed to blow it all up again. He starts wondering, is a theme park really my legacy? Are these animated films really my legacy? Shouldn't I do something actually meaningful to the world?

David Rosenthal

The idea of a physical Disney location worked really well. But what if we don't stop at an amusement park, what if next time we build an entire city? An experimental prototype community of tomorrow, Epcot. And if you think you know what we're talking about because you've been to Epcot, that's not it. That is a theme park named Epcot. Walt had an insane vision that never got built but got pretty far along. Not a place you go for a day, but a place where you live and work, with futuristic transport, where the most innovative companies locate their innovation centres all together, with a beautiful tower in the centre. The ideal future. His final project, the Florida project that never got built.

Ben Gilbert

And it all stems back to Burbank, that brief moment before the strike when the studio really was a utopian physical place, the perfect marriage of art and commerce. I really think that is what Walt always wanted to realise in the world. Now, after the success of Disneyland, his ambition is restored and he wants to build it in this city. The most interesting part is how far it got.

David Rosenthal

Walt works toward it through the 1964 World's Fair in New York. He gets the idea that Disney can partner with big American companies to create Disney-sponsored pavilions at the fair that they can then transfer into Disneyland. More than that, the World's Fair can serve as an undercover test bed for the East Coast city, a partnership between American industry, Disney, and the public. The four exhibitions they create should sound familiar. It's a Small World, sponsored by Pepsi and UNICEF, designed by Mary Blair, this famous designer who brought modernism to Disney, did the concept art for Alice in Wonderland, and was one of the original Imagineers, I believe the first female Imagineer. Two, the Carousel of Progress, sponsored by General Electric. Three, the Magic Skyway, sponsored by Ford. And four, Great Moments with Mr Lincoln, sponsored by the state of Illinois.

Ben Gilbert

And that last one is how Disney Imagineering develops audio-animatronics, for Abraham Lincoln. The whole thing is a test bed for audio-animatronics, which Disney invents and popularises in Disneyland and then Disney World. Because it is Disney, we think, oh yeah, audio-animatronics, robots, that Disney Imagineering is inventing in the late fifties and early sixties.

David Rosenthal

You and I have had the privilege of being at some cool robotics conferences, and you meet PhD researchers who are in and out of Disney. That is still where a lot of cutting-edge robotics happens. Three of the four rides get ported to Disneyland after the fair, all except the Ford one. Part of the deal was that Walt said, you have to pay a million dollars to use my name as part of your attraction, in addition to footing the bill, but I'll forgive that million if you let us put it in Disneyland afterwards. And Ford says, we'll just pay the million.

Ben Gilbert

Poor decision on Ford's part. So all of it leads into planning for the Florida Project. While the Florida Project initially is not a theme park, and Walt is uninterested in building an East Coast Disneyland, he has a nagging concern that an East Coast audience is more sophisticated and there isn't demand for a Disneyland in Florida. I think he uses that as an emotional defence mechanism, air cover for I'm afraid it'll fail. And one big takeaway from the World's Fair is no, people would absolutely love a Disneyland-type thing, especially with all the cool new technology.

David Rosenthal

Obviously if Disney does anything on the East Coast it should be in Florida, warmest year-round weather and, even more important, abundant cheap land throughout the state. So what is this Florida Project? Diving in blew my mind. One, it starts with a brand-new airport of the future paired with a vast entrance complex and park. Two, a new Disney World Magic Kingdom theme park, initially intended to be five times the size of Disneyland. Three, a thousand-acre industrial park to house satellite R&D offices for America's greatest companies, Ford, GE, Pepsi, Monsanto, all the World's Fair partners, moving their most advanced R&D teams to this new city. And four, most important, the heart of the whole project, Epcot. Not the Epcot you know, but in Walt's words 'a living blueprint of the future, where people actually live a life they can't find anywhere else in the world, a showcase to the world for the ingenuity and imagination of American free enterprise.' Basically a sci-fi city.

Ben Gilbert

Meanwhile they couldn't open most of Tomorrowland for the 1955 opening, and they have a hard time keeping up with the pace of technology. I walk through Tomorrowland even today and it feels dated, nothing like tomorrow. Walt himself has a famous quip, that tomorrow comes into today a lot faster than we can keep up with. So if they actually built this, it very quickly would not feel like the future. You plow a bunch of capex into concrete and futuristic concepts, new stuff gets invented fast, and then it's ugly and old.

David Rosenthal

But perhaps you haven't heard the vision for the city. It has a radical radial design, fanning out like spokes on a wheel from a domed central downtown hub. A fifty-acre enclosed, climate-controlled, fully domed downtown with no surface streets, fully pedestrian walkways. The only motorised transport is monorails and a new concept of people movers. Below ground, a vast network of multi-layered tunnels for cars and industrial vehicles. On the edge of the dome, high-density apartments, then a green belt of parks and recreation, then in the outer ring low-density single-family neighbourhoods. Twenty thousand people would live there with full self-governing infrastructure, schools, public services, all founded as a new city in Florida.

Ben Gilbert

Self-governing, but in a special district carved out and controlled lawfully by the Walt Disney Company. It sort of sounds like a utopian or dystopian film, or both.

David Rosenthal

On November 15th, 1965, Walt, Roy, and the then-governor of Florida, Haydon Burns, hold a press conference announcing Disney has been buying land in Central Florida under obscured subsidiary names so no one would catch on, and that a very large new project is coming. They bought twenty-seven thousand acres, the size of San Francisco, twice the size of Manhattan, almost forty square miles, and it is all swampland. In May 1966 they get government approval to drain the swamp and prepare to build Walt's vision.

David Rosenthal

In late October 1966, Walt records a film pitching the full Epcot vision. It is the second-to-last recorded appearance Walt makes in his life, and he has no idea. He ends the video with, 'Speaking for myself and for the entire Disney organisation, we're ready to go right now.' Unfortunately he dies about two months later. His death is both incredibly fast and unexpected, and a slow-motion disaster brewing his whole life ever since he started chain-smoking in France at seventeen.

Ben Gilbert

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

David Rosenthal

That summer of 1966 Walt started experiencing pains, assuming it was stress, old polo injuries, or the cough, but it was cancer. In November, right after recording the Epcot pitch, he checks into the hospital, where doctors find a massive tumour in his lungs and do emergency surgery. He comes back to the studio, and the company announces publicly that Walt is back and will recover, but the cancer had metastasised. On December 15th, 1966, just ten days after his sixty-fifth birthday, Walt Disney passes away, right in the middle of the Epcot project.

Ben Gilbert

What a sliding-door moment. He was always escalating bigger and bigger. It would always have been right in the middle of the biggest thing he'd ever done. Mickey with synchronised sound, Snow White with the first animated feature, the Burbank campus, plowing cash into the expensive failures, Disneyland. Every point in his life he was betting the farm, pushing all his chips in. It would always have felt like this.

David Rosenthal

If they had pulled off the Florida Project, what would he have done next, a colony on the moon? I'll be honest, I don't have the faith. After watching a lot of documentaries about the Florida Project, it doesn't make sense to me. And it may have protected his legacy that he didn't live another ten or twenty years to see it through. Even just building a domed city, how would you actually do it? I could be completely wrong, they invented amazing thing after amazing thing, but this one felt nuts.

David Rosenthal

Immediately after Walt's death, Roy renames the whole Florida Project 'Walt Disney World' in his honour, and postpones his own retirement to finish it. In May 1967 Roy gets full approval from the Florida legislature to build Walt Disney World, and importantly to carve out the Reedy Creek Improvement District, giving the company far more autonomy over the land than they ever had in Anaheim. Walt had always regretted not buying up the land around Disneyland, because he hated all the hotels and crummy stuff around it. But Roy is not Walt, and he is not willing to bet the company. He sees Walt Disney World through but dramatically scales it back, mostly because he doesn't want additional debt. He sets a goal to build it without raising debt.

Ben Gilbert

Which is unbelievable. They built the Magic Kingdom, a copy-paste of Disneyland in Florida, for four hundred million with two hotels and no debt. An incredible achievement, and absolutely not what Walt would have done. There is no city, no Epcot, no airport, no industrial park. It is more or less, we have all this land and we are confident Disneyland will work here, so we'll build it. And it was extremely successful. But it's not betting the company, and it's not blazing a new trail.

David Rosenthal

And there is so much cool innovation there. The underground tunnels, they took everything about Disneyland and made it better. Now we don't have to have people wandering around carrying trash bags, or characters appearing in the wrong land, we've got a network of tunnels where we can do it exactly the way we wanted.

Ben Gilbert

I'm pretty sure the tunnels are actually street level and all of Disney World is up one story. It's the whole concept of, what if we could do Disneyland again, but not as cowboys, as real planners and builders and engineers with a much bigger budget. Which may actually be, to your point, just as likely if not more likely, that Walt Disney's death when it came preserved his reputation, and this might have been the better path for the Florida Project.

David Rosenthal

Regardless, what it is not is shooting for the stars. And after Walt's death, the company basically stops doing that in every dimension. Roy himself tragically dies two and a half months after opening Disney World, at the end of 1971.

Ben Gilbert

It's kind of poetic, he said he was going to see this thing through, and he did, for his brother. And then what follows is basically thirteen years of Disney becoming a parks company. If you look at the film side, the last film Walt worked on was The Jungle Book, coming out after his death in 1967. He was deeply involved, it was a smash hit grossing twenty-three million in its first run, implying a cut of about eleven million for Disney and Buena Vista on a budget of just four million. And this would be Disney's most successful film for the next two decades, bigger than Cinderella, Sleeping Beauty, 101 Dalmatians.

David Rosenthal

So the financials keep growing, but it's all because of the parks. In 1972, the first full year of Disney World, films do seventy-eight million in revenue and forty-four million in profit, parks do a whopping two hundred and twenty-three million in revenue and thirty-eight million in profit, and the rest of the flywheel, consumer merchandising, does twenty-seven million in revenue and thirteen million in profit, all before corporate expenses. So parks and movies are pretty comparable right after Disney World opens. The IP is still in good shape in 1972.

David Rosenthal

But then twelve years later, by the end of this period in 1984, parks and consumer products generate two hundred and fifty million of operating income on over a billion in revenue, while film and TV barely breaks even, only two point two million in operating income. Basically, IP-wise, the company is creatively bankrupt and running a parks and merch business.

Ben Gilbert

I only have the topline numbers from the annual reports we photographed. Revenue goes from a hundred million in 1965 to one point four billion in 1984, and net income after corporate expenses from eleven million to ninety-seven million. So if you look at the whole business, the consolidated financials look great, but the core is rotting. They're not contributing new IP onto the pile that consumers love, otherwise we'd see it in the films division. Name a Disney film from the seventies you can even think of today.

David Rosenthal

They're just harvesting over in the parks. The biggest problem is that American mythmaking moved elsewhere. This is the era when George Lucas makes Star Wars and Steven Spielberg makes Indiana Jones and E.T., and these guys become the new American storytellers, not Disney. Disney animation goes from a staff of roughly five hundred at the time of Walt's death down to just one hundred and twenty-five by the early eighties. The films they make are disasters, the worst example being The Black Cauldron, ten years in development and production, tying up the studio, and a total flop when released in 1985. It was the first Disney film ever rated PG, super dark, a scary kids' movie.

Ben Gilbert

They do have some success in live action since 1964 with Mary Poppins, which won five Oscars, and they lean into that side. They start Touchstone Pictures, which has hits like Splash. But animation, the core of the company, is dying. And Mary Poppins was made during Walt's life, with his involvement. They made 20,000 Leagues, Old Yeller, The Absent-Minded Professor, a bunch of Herbie the Love Bug movies. Not to hate on any of these, my parents loved Herbie, but is that durable IP that feeds the future of Disney? No.

David Rosenthal

So in 1984 the inevitable happens. Wall Street corporate raiders come gunning for Disney. It's an easy target, the financials look great, there's a lot of net income and a lot of hard assets, the parks, the real estate, the old films in the vault. Easy pickings to take over a super undervalued company. The market cap is only about two billion despite one point five billion in topline revenue and about a hundred million in net income. It would be easy to break up Disney, sell off the parks, sell off the IP to other studios, and make a killing.

Ben Gilbert

And that's what Saul Steinberg tries to do, come in, raid the company, break it up for parts. But I think you're getting ahead of yourself, this should be how we start part two.

David Rosenthal

Yes, this is the story for next time, but just know as a teaser that this period ends improbably, not with Disney being broken up, but with three complete outsiders coming in to run the company, none of whom have any history in animation, any familiarity with the flywheel, or any experience operating anything outside film and television. Running parks, no, doing merch, no, nothing. And those three men, Michael Eisner, Frank Wells, and Jeffrey Katzenberg, would pull off probably the greatest media company comeback in history.

Ben Gilbert

So two Paramount executives and a lawyer turned Warner Brothers exec, the other Hollywood studio executives are going to team up and come in and save Disney. Doesn't sound like it's going to work, but we'll have to save the story for part two, because boy did it ever.

David Rosenthal

Should we do some analysis? I think the question should be, why has nobody else built an IP flywheel like Disney? Is it as simple as Disney was the first, so they've been the biggest? No, that's not it, but it is interesting they are the first and the biggest, best IP flywheel company through 1984.

Ben Gilbert

Even to today, I don't think any of the other major movie studios are anywhere near as good a business. And despite going on a hundred years of watching Disney operate, and the Wall Street Journal writing that article in 1958, why has nobody else copied them successfully?

David Rosenthal

To be fair, the terrible-business thing isn't quite right, the business of movie production on its own is a terrible business, but you have to give Universal a ton of credit, they're probably the closest. And that's my point, even then it's not Disney. Isn't Universal running effectively the same playbook but with less valuable IP, or IP they don't own and have to share, like Harry Potter, or just at smaller scale? Still, nobody else is Disney. And to me it comes back to animation being super key. Bob Iger, when he took over in 2005, had that famous quote, 'as animation goes, so goes the company.'

Ben Gilbert

There really is something unique about animated IP, in its timelessness, in the ever-availability of its stars, in the better economics of not sharing on the back end, and in the ability of people to form deep lasting relationships with the characters versus live action. And because Disney has always had animation at its core, that creates all this special IP. And it's all created in house. Universal doesn't own all the rights to everything Harry Potter, but Disney owns all the rights to everything Buzz Lightyear now that they own Pixar, or Aladdin, or Mickey Mouse. True vertical integration.

David Rosenthal

There's also that Disney, for all its ups and downs, made the decision to never sell its catalogue, so they could compound longer than everyone else. A lot of other studios sold their back catalogues, some worthless since they're live action and black and white no one will watch, but Disney owns everything it's ever made. And that ties to Walt's Oswald experience. And there's the vault and the reissue strategy, which only comes when you fully embrace the flywheel and its trade-offs. Let's put Marvel aside.

Ben Gilbert

And Star Wars, because the way you feel about Marvel, I feel about the overexploitation of Star Wars.

David Rosenthal

Core Disney and Disney animation and Pixar have been so disciplined about metering out their content on an infrequent enough basis that it doesn't dilute it. Marvel, ironically, is the counter-example, the Disney-plus-ification of Marvel, developing a lot of content to always have something fresh there.

Ben Gilbert

Maybe the issue we're both describing is a blurring of flywheel points two and three. Point two was maximise distribution of each core IP's primary delivery vehicle, and point three was feed IP into as many ancillary nodes as possible. With direct-to-consumer Disney Plus, those two got confused. What's the difference between ancillary and primary content when it all ends up in the same place? That's how I feel watching some of the overexploited IP now.

David Rosenthal

It goes back to the point that you have to be really clear about giving a nice lane around your primary medium and delivery vehicle, so that stuff still feels scarce, special, and canonical. But for every other studio, their incentives have always been to release as much content as quickly as possible, especially once a franchise is working, get the sequels out fast for the sure profits. Disney is playing a many-decade compounding game that can take three decades to kick in, and all these other studios change ownership every decade, so there's not the right ownership incentive to play a three-decade game. And when you don't need to release content, you can keep working on it and only release once it's truly great.

Ben Gilbert

There's one other point, universe cohesion. Here's my favourite way to make it. What's your favourite Paramount song? Or your favourite Universal song? But everyone's got a litany of answers to what's your favourite Disney song. They managed to associate all this love and heritage and fandom with the studio itself. It's back to becoming the Life Savers of animation.

David Rosenthal

Are there any other companies in the broader entertainment landscape that do this? Nintendo. And Nintendo and Disney, Nintendo started on the back of Disney, the Disney license for playing cards in Japan kicked off modern Nintendo. They have the exact same ethos and flywheel. But interestingly they don't play together now, that's the thing about vertically integrated companies, they don't really work together, and Nintendo has partnered with Universal for their parks. The only way a Disney-Nintendo relationship could work is if one buys the other.

David Rosenthal

Running through Hamilton Helmer's Seven Powers framework for pre-1984 Disney: counterpositioning for days, being willing to invest in a feature-length animated picture leading up to Snow White. Their competitive set would have needed the talent of their animation staff, which is few people, and all the cash from Mickey and the merch, which is almost no one. Capital as a moat to pursue Snow White. Branding played a role as soon as Mickey was established, you'd pay more for a Walt Disney production. On process power, reading old animator recollections, people traded between studios and started rivals that produced great work, so maybe not process power.

Ben Gilbert

The big two once it really kicks in are scale economies and network economies. The flywheel is all about that. These films are scale economies, can I plop down six million and get the entire world to care about my movie for a year, then expand into the flywheel. And network economies of, if you have a big enough release, it's a cultural moment. I see it with my girls buying the Aurora costume that their friends also have so they can dress up and play together. Scale economies to enable the investment in IP, then network economies across all the nodes.

David Rosenthal

But if you asked any very smart executive at a competitive company why they can't replicate Disney, they'd say, because Disney has the cornered resource of all that IP. I can't devise a strategy in the next five to ten years to suddenly beat Disney when they have a hundred years of heritage and the world caring about their IP. Which comes down to Walt always playing the long game, always being willing to bet the whole farm, being right enough times, and managing to survive the times he was wrong.

David Rosenthal

My quintessence: Disney managed to build not only a set of IP and a flywheel, but a cohesive, opinionated universe of timeless stories about durable, emotional story arcs that are universally applicable and work together as one. That can stay relevant and monetise across generations. They can't fully avoid being a hit-based business, they are a movie studio, but they've gotten about as far from it as they possibly can.

Ben Gilbert

That entire passage could equally apply to Nintendo, which shows they are the two intellectual property flywheel companies out there. My quintessence goes all the way back to Marceline. Art and commerce, those two things got married in Walt's head when he was a little kid, and that is Disney. When Disney is at its best, what they make is not just a commercial product, it exists at a higher level, and it's married to an incredible commerce engine that is itself beautiful. Disneyland and Disney World and all the parks are the most perfect expression of that. The sightlines. I like going to Disneyland just to walk around. The rides are free and I have just as much fun not going on them even though I've already paid. Any parent who's been to Disney with their kids knows exactly what I'm talking about, and it is irreplicable at any other company or place in the world.