Acquired
01:03:07 · David Rosenthal, Ben Gilbert
[01:03:07] S1: Yep. Yep. Yep. So back to the writing tablets. They take off and do huge, huge sales. Disney doesn't even know how much sales because all they have is $300 in a handshake from this guy. So Walt and Roy figure, alright. We need to get smarter about merch. So they contact an ad man in Kansas City that Walt admired named Kay Kamen, who had owned an advertising firm, and they agree to do a deal where Kay becomes the exclusive commercial products agent for all Disney merchandise licensing beginning in 1933. And the deal they do is that Disney would get 60% of the first $100,000 in royalties that Kay is able to generate from licensing Disney brands and mascots. And then after the first 100 k, they would split every dollar of licensing revenue $50.50. And there would be a lot of dollars after the first 100 k. This is a huge moment. I mean, there there is a real case to be made that besides Walt and Roy, and and of I works too. But at least on the business side, besides Walt and Roy, Kaye came in was the third most important person in the first, you know, half century of Disney. [01:04:31] S0: Alright. So make your case. What what what goes on to happen here? [01:04:34] S1: So within six months, Kay takes Disney merchandising from this hodgepodge of random licenses of guys that Walt met on the street. [01:04:45] S0: And many of which were a lot more than $300.
01:04:45 · Ben Gilbert, David Rosenthal
[01:04:45] S0: And many of which were a lot more than $300. [01:04:47] S1: Yes. Yes. To a real professional operation doing $6,000,000 of gross merchandise sales within six months. That then grows over the next two years to $70,000,000 annually of gross merchandise sales all around the globe from over 40 separate super high quality consumer product partners. So the most successful and famous example of this is the deal that Kay does in 1933 right after he takes over with the Ingersoll Watt Company. [01:05:29] S0: This is crazy that within just a few years, they can be at a $70,000,000 level in 1935 of merch. I mean, there's so much pent up demand to buy Mickey Mouse stuff that you can sort of explode out of the gate. I don't even really understand how Kay lined up 40 merchants and got all this stuff manufactured and distributed in such a short period of time.
01:05:29 · Ben Gilbert, David Rosenthal
[01:05:29] S0: This is crazy that within just a few years, they can be at a $70,000,000 level in 1935 of merch. I mean, there's so much pent up demand to buy Mickey Mouse stuff that you can sort of explode out of the gate. I don't even really understand how Kay lined up 40 merchants and got all this stuff manufactured and distributed in such a short period of time. [01:05:54] S1: Well, I think part of it, is that he's, like, a real professional and well respected in the industry with contacts. But, yeah, to your point, Ben, there's just so much demand for Disney merch. So the $70,000,000 is a, like, gross sales to the end consumer number. So most deals that Kay would do would be for 5% royalties on the wholesale price of the goods, and the $70,000,000 was retail. So if you assume a 100% retail markup, that's $35,000,000 in wholesale revenue. Yep. Disney and Cayman are splitting 5% of that number between them. But even that is $1,750,000 split $50.50 between Disney and k. This is, like, an astronomical number, and it is a way, way bigger and better business than the cartoons themselves at this point in time. [01:06:56] S0: It's funny. I I found the comment on the Disney Family Museum site that by the late nineteen thirties, royalty income from merchandise had exceeded revenue from film rentals. But [01:07:08] S1: It wasn't even by the late nineteen thirties. It was 1934. [01:07:11] S0: It was quick, and it was by a lot.
01:07:11 · Ben Gilbert, David Rosenthal
[01:07:11] S0: It was quick, and it was by a lot. [01:07:13] S1: Yes. Yes. So just to illustrate the difference, the distribution deal that Disney does with United Artists for the Mickey films and for the Silly Symphonies, which is the second cartoon series that Disney starts in the thirties. Disney gets an advance of $15,000 per film, but Walt is always investing ever more and more in the production of the cartoons themselves. By this point in time in the mid thirties, he's investing, like, $30,000 plus per cartoon. He's only getting a $15,000 advance. So it's not even guaranteed that each individual cartoon would be profitable. Usually, they were, but they would have to earn out on the back end. Compare that to, you know, half of basically $2,000,000 in pure margin, almost pure margin revenue coming in from k every year. It doesn't even matter that Walt is investing everything back into the cartoons. He's got this money spigot coming in. [01:08:12] S0: Right. So summarizing that, films are tens or low hundreds of thousands of dollars of profit coming in, and the merch is on the order of $1,000,000. [01:08:22] S1: Yep. And film profitability is highly dependent on a film by film basis. It's gotta play out in theaters, etcetera, etcetera. [01:08:30] S0: Alright. So I cut you off on the Ingersoll watch company.
01:08:30 · Ben Gilbert, David Rosenthal
[01:08:30] S0: Alright. So I cut you off on the Ingersoll watch company. [01:08:33] S1: Yeah. Just as one example of, like, the deals that Kay is doing. In 1933, right after he takes over, he does a deal with the Ingersoll watch company to manufacture the famous Mickey Mouse watch. That watch would sell two and a half million units over the next two years. The Ingersoll watch company was about to go bankrupt during the depression. It saves the company. [01:09:01] S0: And wasn't it the most popular watch in America? [01:09:04] S1: I think that's right. At least for some point in time during the thirties. [01:09:07] S0: It's fascinating. And, of course, the the modern Apple watch Mickey watch face is a reference to this because he's using his arms to point to the the times on that original Ingersoll watch. This is a whole different shape of a business than has ever existed before. I mean, it's funny. We started the episode comparing Disney to other Hollywood studios, but this is not a Hollywood studio. They're not shooting live action films. They're making these cartoons. The rest of the industry is is kinda doing slapdash ones. They're doing, like, really high production value sound synchronized cartoons, and they're actually making more of their money from merchandise. They've got these Mickey Mouse clubs. [01:09:48] S1: The comic. [01:09:48] S0: This is a new thing that no one else is doing. [01:09:51] S1: Yep. This is the birth of the Disney flywheel, and nobody else has it.
01:09:51 · David Rosenthal, Ben Gilbert
[01:09:51] S1: Yep. This is the birth of the Disney flywheel, and nobody else has it. [01:09:57] S0: So is this a point where, David, I could make my pedantic aside that I've been telling [01:10:00] S1: you about? Yes. Yes. Go for it. Alright. We had a great email from a listener a couple months ago about how flywheel, this term that everybody uses in business, is actually completely the wrong term for what you're [01:10:14] S0: Yeah. [01:10:14] S1: Wanna describe. [01:10:15] S0: So Disney is famous for this concept as is Amazon, and it inspired a zillion other founders to try and articulate their own flywheel and and draw it out. But hilariously, David, as you say, it is a misnomer. It describes the wrong physics phenomenon. People are trying to describe a system that has a positive feedback loop where inputs into one element of the system are amplified and add energy to other parts of the system. But that is not actually what a flywheel is. A flywheel is a primitive battery. It it is a way to store energy to be deployed later. [01:10:50] S1: Yeah. It's like a version of the same mechanism that a spring serves in a mechanical watch. [01:10:55] S0: Right. Exactly. But in reality, there's not really a better shorthand for system of integrated components that creates positive feedback loops. So, we will continue, alas, to use the phrase flywheel. But, the important thing here is that Walt really did sort of either discover or invent this business model of the intellectual property flywheel that we see replicated all over the place today.