Acquired
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.
01:10:55 · Ben Gilbert, David Rosenthal
[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. [01:11:18] S1: I mean, I think it really revealed itself to him and Roy in these early years of Mickey. And it's probably worth taking a moment to talk about why this works so well. So the most important thing, and I and I don't think this was premeditated in any way by Walt, but it was just something he innately cared so deeply about, is to make the highest quality, genuinely most compelling new IP as possible that audiences can build a deeper relationship with. This is like what Walt was building to and up to through all of his early years in animation. All the technical innovations, every step was getting to a character that audiences can fall in love with. Yep. Now critically for Disney, and again, I think completely accidentally discovered by Walt, the IP that works best for Flywheel Dynamics almost has to be animated, I. E, not live action. Because with live action characters, the characters are too bound up in the actors that play them, and that creates all sorts of problems. Like, one, especially today, it makes your economics as a studio just, like, way worse because you gotta pay the stars so much. Right. There's wholesale transfer pricing.
01:11:18 · David Rosenthal, Ben Gilbert
[01:11:18] S1: I mean, I think it really revealed itself to him and Roy in these early years of Mickey. And it's probably worth taking a moment to talk about why this works so well. So the most important thing, and I and I don't think this was premeditated in any way by Walt, but it was just something he innately cared so deeply about, is to make the highest quality, genuinely most compelling new IP as possible that audiences can build a deeper relationship with. This is like what Walt was building to and up to through all of his early years in animation. All the technical innovations, every step was getting to a character that audiences can fall in love with. Yep. Now critically for Disney, and again, I think completely accidentally discovered by Walt, the IP that works best for Flywheel Dynamics almost has to be animated, I. E, not live action. Because with live action characters, the characters are too bound up in the actors that play them, and that creates all sorts of problems. Like, one, especially today, it makes your economics as a studio just, like, way worse because you gotta pay the stars so much. Right. There's wholesale transfer pricing. [01:12:40] S0: A huge amount of the margin you could get ends up getting paid out to effectively your partner in creating the character, the actual actor. [01:12:47] S1: Whereas Mickey works for free. Now, like, you you gotta, like, pay the animators, and they get paid very well to animate them, etcetera.