Acquired
01:55:31 · David Rosenthal, Ben Gilbert
[01:55:31] S1: No. I just know that that's what our our very kind tour guide told us. [01:55:35] S0: So if you are in the Northern Hemisphere, the sun moves across the south sky. So if you're north facing windows, your window offers the most consistent and non direct light. And so every animator got a window, and they built the building shape so that there's a whole ton of north facing sides. Like, the whole thing almost looks like a CPU heat sink. It's like got fins so that it's got all these north facing windows. It's for the time, it's an architectural marvel. Yeah. It's one of the first buildings with air conditioning in Southern California. California. The windows had custom built sort of slats that were adjustable so the animator could let in the exact right amount of sunlight, indirect sunlight that they wanted into that room. And once they sort of got this building architecturally laid out on the campus, they're like, yeah. Let's build the entire campus around this. Yeah. And to me, it really symbolizes that animators are the crown of Disney in this era, in the way that at Google, it's engineers, and at Apple, it's designers, and at at Microsoft, it's PMs. The the animators to the extent that anyone but Walt has the power, the animators are sort of the most valuable resource. [01:56:48] S1: Yes. Yes. It's an animation driven company.
01:56:48 · David Rosenthal, Ben Gilbert
[01:56:48] S1: Yes. Yes. It's an animation driven company. [01:56:51] S0: Yes. So it's got this, like, utopian vibe, but there were trade offs. I mean, this was huge compared to the old Hyperion site. People are more sectioned off to do their specific work. You had less access to Walt to know exactly what was going on upstairs if you were the rank and file. But to achieve all this, Walt does need capital. [01:57:11] S1: Yes. Oh, yes. He does. [01:57:12] S0: He doesn't wanna give up any control, but eventually, he and Roy decide, we've only ever taken on bank loans. Maybe we need another source of capital. [01:57:21] S1: Yep. I've got the numbers on all of this. So the Burbank campus construction costs alone were $3,000,000. So that's more than the money they had left over from Snow White proceeds after they repaid the Bank of America debt. But, obviously, they had all the, you know, the revenue from the soundtrack and the consumer products and all the flywheel revenue coming in. [01:57:42] S0: They're they're planning to do Pinocchio. They're planning to do Fantasia. [01:57:46] S1: Right. So the 3,000,000 is just to build the facility. Then they gotta staff it with 1,200 animators. So that's an extra 450 new animation staff they need to hire. And to feed Walt's vision of having multiple films in production at the same time, he green lights production on Pinocchio, Bambi, and Fantasia all at the same time.
01:57:46 · David Rosenthal, Ben Gilbert
[01:57:46] S1: Right. So the 3,000,000 is just to build the facility. Then they gotta staff it with 1,200 animators. So that's an extra 450 new animation staff they need to hire. And to feed Walt's vision of having multiple films in production at the same time, he green lights production on Pinocchio, Bambi, and Fantasia all at the same time. [01:58:16] S0: And all of these were completely different animation styles. Yes. And completely different from Snow White. If you look at these films, we sort of have this notion today of, oh, it's the Disney style. That is not really reflective in the darkness of Snow White, in Fantasia's really experimental artistic vignette style set to classical music. And Bambi is, again, another completely different take of a very naturalist film. These are wildly different skill sets and bigger and bigger investments using completely new techniques. So you're not really just, like, making more Snow White's. [01:58:58] S1: Yep. [01:58:59] S0: You're doing, like, discontinuous unknown high risk bets. [01:59:03] S1: Walt can't help himself. [01:59:04] S0: Yes. [01:59:05] S1: So in total, between the $3,000,000 for the campus and then these three movies that they all have in production, which collectively cost about $5,000,000 in so called negative cost before they get released, so before they earn a dollar of revenue. By early nineteen forty, Disney's, yeah, in this new campus had set up for this next phase of the company, but they're $8,000,000 in the hole. So Bank of America had loaned them another 4 and a half
01:59:05 · David Rosenthal, Ben Gilbert
[01:59:05] S1: So in total, between the $3,000,000 for the campus and then these three movies that they all have in production, which collectively cost about $5,000,000 in so called negative cost before they get released, so before they earn a dollar of revenue. By early nineteen forty, Disney's, yeah, in this new campus had set up for this next phase of the company, but they're $8,000,000 in the hole. So Bank of America had loaned them another 4 and a half [01:59:33] S0: million dollars. They just keep going to Bank of America over and over again, just remortgaging the company. [01:59:40] S1: And then the hope was that Pinocchio, the first of the new films to come out, would be a hit and earn profits quickly. Unfortunately, World War two had started in Europe by early nineteen forty when Pinocchio gets released. So international box office is basically zero, and Pinocchio ends up losing money, like a lot of money, over $1,000,000 in losses on Pinocchio alone. [02:00:04] S0: Yeah. In a scale economies business, if you lose out on potential eyeballs and potential revenue, but your fixed costs stay the same, that's super, super bad news. Mean, I you you there's no ability to retroactively scale back how ambitious you're being with investing in a film. You know? You've already spent all the money to create it, and now you find out that you can't distribute it to half the world's screens. [02:00:29] S1: Half of your audience? [02:00:29] S0: Yeah. Yeah. Not good.
02:00:29 · Ben Gilbert, David Rosenthal
[02:00:29] S0: Yeah. Yeah. Not good. [02:00:30] S1: Yeah. Not to mention the impact on all the rest of the flywheel businesses. Like, not a lot of Pinocchio merch getting sold in Europe in, summer of nineteen forty. No. So after Pinocchio is a flop, Walt and Roy decide they basically only have one recourse at this point because Bank of America is not gonna loan them any more money. They need to sell equity in the company for the first time. So in April 1940, Disney retains investment bankers and sells 3,875,000 of convertible preferred stock with a 6% dividend, which technically is Disney's IPO. [02:01:15] S0: Is it technically? It doesn't go on a stock exchange. It's just over the counter. It's a public offering, I guess, but it's a pretty small group of the public. [02:01:23] S1: Exactly. Exactly. It is a non exchange traded public offering. [02:01:28] S0: And it's got this 6% cumulative dividend Yes. Attached to it. So the expectation when you're investing is this company is gonna pay me 6% of my investment back every year. Yep. So it's it's actually a pretty sweet deal for the investors. They sell 30% of the company to do this, to raise that. It's funny. You said 3.875. A little bit of that went to the bankers. There's some transaction fees. So they only raise about 3 and a half million dollars directly to their balance sheet, but they give up 30% of the company to do that, and it comes with that 6% cumulative dividend to those shareholders.
02:01:28 · Ben Gilbert, David Rosenthal
[02:01:28] S0: And it's got this 6% cumulative dividend Yes. Attached to it. So the expectation when you're investing is this company is gonna pay me 6% of my investment back every year. Yep. So it's it's actually a pretty sweet deal for the investors. They sell 30% of the company to do this, to raise that. It's funny. You said 3.875. A little bit of that went to the bankers. There's some transaction fees. So they only raise about 3 and a half million dollars directly to their balance sheet, but they give up 30% of the company to do that, and it comes with that 6% cumulative dividend to those shareholders. [02:02:04] S1: Wow. So this means they're flying even closer to the sun than I realized because they've got the $8,000,000 in investments that they need to fund, and they have 4 and a half million from Bank of America. And then if they're only getting 3 and a half million in proceeds from the IPO, that's exactly $8,000,000. [02:02:23] S0: They are shaving off every piece of their current self and future cash flows to rebet the farm. Yep. That is the the way to think about this.