April 2023 - Creativity Inc: Overcoming the Unseen Forces That Stand in the Way of True Inspriation by Ed Catmull and Amy Wallace

We continue our exploration of Disney’s history with this fascinating book on managing creativity by one of the best to ever do it, Ed Catmull!

Tech Themes

An Unlikely Start. When Pixar began, it did not set out to produce feature length films for children. In fact, it wasn’t even a movie studio. Pixar began as the computer division of George Lucas’s Industrial Light and Magic special effects studio. Following the success of Star Wars, Lucas sought to improve on his amazing special effects, by employing more digital computers. In 1979,Lucas hired Ed Catmull to lead the division, and begin building custom computers for special effects. As Catmull puts it; “Alvy’s team set out to design a highly specialized standalone computer that had the resolution and processing power to scan film, combine special effects images with, live action footage, and then record the final result back onto film. It took us roughly four years, but our engineers built just such a device, which we named Pixar Image Computer.” The name comes from a Pixer (a fake word) and Radar. In 1983, Catmull met a promising Disney Animator named John Lassester, who had just been fired by Disney after pitching his movie idea, Brave Little Toaster. Shortly after he joined Lucasfilm, the Pixar team set a goal to produce an animated short movie at the 1984 SIGGRAPH animation conference. Wally B. debuted and blew people away. Up until then, graphics was done by technology people, and almost never included storytellers and animators. As Walter Issacson pointed out in our January 2020 book, teams with diverse backgrounds, complementary styles, and visionary and operating capacity execute the best.
Exceptional Talent. Although Lasseter was a perfect fit at Pixar, gloom was on the horizon. In 1983, George Lucas divorced his then wife Marcia, which created financial challenges at Lucasfilm. He decided to sell Pixar, and courted buyers including Phillips, which wanted to use Pixar’s rendering capabilities for CT scans and MRIs, and General Motors which wanted to use its technology for modeling objects. Neither party wanted the team, and they definitely didn’t want to make animated feature films. Steve Jobs also took a look at the business, but couldn’t pull the trigger because of the immense pressure he was under at Apple (which ultimately led to his ousting). It wasn’t until almost 18 months later, and after founding NeXT, that Jobs was ready, and on January 3rd 1986, Jobs acquired Pixar for $5M. Pixar went about trying to sell their high-tech computer for $122,000 a piece, but couldn’t find many buyers (only 300 were sold). They continued making short videos and were even nominated for an Academy Award in 1987 for Luxo, Jr, a short film about a lamp. But the Company was losing tons of money, and by 1987, Jobs had sunk $54m into the company with little to show for it. The Company decided to pivot from selling computers, to making animated commercials for brands, but it didn’t produce enough cash flow to cover costs. Between 1987 and 1991, Jobs tried to sell Pixar three times: “When Microsoft offered $90 million for us he walked away. Steve wanted $120 million, and felt their offer was not just insulting but proof they weren’t worth of us. The same thing happened with Alias, the industrial and automotive design software company, and with Silicon Graphics…His reasoning was this: if Microsoft was willing to go to $90 million, then we mmust be worth hanging on to.” Jobs realized that Pixar had exceptional talent, and that it needed more time to achieve its vision. The combination of Lasseter, Catmull, and Jobs was truly unstoppable. These small acquisitions are reticent of IAC’s acquisition of College Humor, which came with a small video company called Vimeo. Sometimes these small acquisitions that are filled with creative talent can produce unbelievable results.
Unstable Ground. Its incredibly daunting to create something from nothing, whether its a company or a film. You feel unsure of yourself and your ideas, not knowing the right approach, wondering if your time is being used wisely. Managing in this environment requires: Frank talk, spirited debate, laughter, and love. To accomplish this list of positive tactics, Pixar created the Braintrust, a group of writers, directors, and creatives that could give early feedback to new films. The braintrust is made up of “People with a deep understanding of storytelling and, usually, people who have been through the process [of making a movie] themselves. The other important difference is the Braintrust has no authority, Directors do not have to listen to the feedback. The Braintrust has empathy for the Director. It knows: “[Mistakes] are an inevitable consequence of doing something new (and, as such, should be seen as valuable; without them, we’d have no originality.” As an example of this unstable ground, Catmull recalls the development of Monsters, Inc. Originally, Pete Docter (now CEO of Pixar), developed an idea that “revolved around a thirty-year-old man who was coping with cast of frightening characters that only he could see. His mom gives him a book with some drawings in it that he did when he was a kid. He doesn’t think anything of it, and he puts it on the shelf, and that night, monsters show up. And nobody else can see them. They follow him to his job, and on his dates, and it turns out these monsters are all the fears the he never dealt with as a kid.” Over a period of five years, Monsters Inc changed multiple times, but the ethos of “Monsters are real, and they scare kids for a living,” never changed. When approaching a creative project, things meander and wander, where they start is not normally where they end. Catmull believes: “Originality is fragile. Rather than trying to prevent all errors, we should assume, as is almost always the case, that our people’s intentions are good and that they want to solve problems. Give them responsibility, let the mistakes happen, and let people fix them.” New ideas are hard enough, you need to nurture and support them, whichever direction they go, to get to a high quality finished product.

Business Themes

Balance and Feeding the “Beast”. After Pixar was acquired by Disney, Catmull began hearing the phrase, “You’ve got to feed the Beast.” He was referring to “any large group that needs to be fed an uninterrupted diet of new material and resources in order to function. Following the success of the Lion King in 1994, The bureaucracy of Disney grew to the point that the process of making, marketing, and distributing films engulfed the creative process, leading to pressure for quick and fast success. You “feed the Beast, to occupy its time and attention, putting its talents to use. [But] success only creates more pressure to hurry up and succeed again. Which is why at too many companies, the schedule (that is, the need for product) drives the output, not the strength of the ideas at the front end.” In order to manage this all-consuming Beast, organizations must seek balance. You have to manage the goals of all parties involved, while giving time and energy to the best most creative ideas in the company. “The key is to view conflict as essential. A good manager must always be on the look for areas in which balance has been lost.” Its not as easy as it sounds to achieve balance, but experience is a helpful guide. It takes a constant focus and a subtle understanding of an organization’s psychology.
Pixar-Disney: A Love Hate Relationship. In January 2006, Disney acquired Pixar for $7.4B, a fairy-tale ending. But it wasn’t an easy beginning. After the incredible success of Toy Story, Pixar negotiated a five picture deal with Disney to handle its distribution, whereby Pixar would get an equal cut as Disney. Pixar delivered incredible films for Disney including: A Bug’s Life, Toy Story 2, Monsters Inc, and Finding Nemo. But all was not well in the partnership. Following a series of public slights at eachother, Steve Jobs and Michael Eisner essentially put the kaibosh on negotiations, both feeling they were the more important partner in any deal. With Cars and the Incredibles already in development, Disney and Pixar called off their partnership in 2004. This decision was the beginning of the end for Disney CEO, Michael Eisner, who resigned in the fall of 2005. Following his departure, Iger was named CEO, and set about repairing the broken relationship with Steve Jobs and Pixar. We have discussed the deal in length, but one of the subtle features was that Ed Catmull and John Lasseter would become head of Disney Animation, on top of Pixar. Disney animation was struggling. In the eyes of Circle 7 Studio Head Andrew Millstein, “Our filmmakers had lost their voices. It wasn’t that they had no desire to express themselves, but there was an imbalance of forces in the organization - not just within it, but between it and the rest of the corporation - that diminished the vailidity of teh creative voice. The balance was gone.” Wildly, the Pixar team notes that there were three sets of notes for a film: one from the development department, one from the head of the stuiod, and a third from Michael Eisner himself. This feedback was often conflicting and more “you must” then “you should think about.” When Catmull realized the challenge, they created a braintrust purposefully for Disney Animation, called the Story Trust. The first two meetings (for Meet the Robinsons, and American Dog - later Bolt) were unimpressive, and lacked the dynamism of true brain turst meetings. The Directors admitted they were afraid to give negative feedback to colleagues so publicly. Over time though the meetings took on more intensity, and a few years after the merger, Disney Animation produced its first successful movie in a while, Tangled. This was quickly followed by Wreck-it Ralph, and Frozen, and Disney Animation was back on track.
Notes Day. After many years of leading Pixar, Catmull realized that Pixar had become much larger, and: “More and more people had begun to feel that it was either not safe or not welcome to offer differing ideas.” The feeling of complacency was also manifesting in three real business problems. Production costs were rising, external economic forces were hitting the business, and a core tenant of the culture (good ideas can come from anywhere) was under attack. To remedy this onslaught of challenges, Pixar created Notes Day. The company created a digital electronic suggestion box where people could submit discussion topics that would help Pixar run more efficiently, with more innovation. They wittled down 4,000 suggesstions to 120 core topics. A handful of employees volunteered to be facilitators and were coached on how to keep meetings on track. The day started with an all-hands where John Lasseter admitted some personal shortcomings - he had been splitting time between Pixar and Disney and people didn’t like it and he frequently carried emotion from one meeting into the next, which confused employees and made employees more emotional. Then participants went to departmental meeting about efficiency, then broke into blocks of 90 minute sessions. At the end of each session - employees could fill out red forms for proposals, blue forms for brainstorms, yellow forms for best practices. The forms asked various questions about benefits to Pixar, how they could become a reality, why the idea was worth pursuing, and who should own the proposal. Notes Day was a cathartic day for employees, who shared feelings and emotions with eachother across functions and working groups. Catmull believes that Notes Day succeeded because there was a clear and focused goal (efficiency/candor), it was championed by senior management, and it was led from within, by individuals who volunteered to run sessions. The whole day mirrored the Kaizen process that was popularized by the Japanese auto-makers after W.E. Deming brought the practices to Japan. Although it was originally a World War II approach under the Training Within Industry job method, Kaizen was key to the Just-in-time manufacturing process used at Toyota. Feedback is critical to business success. Notes Day and Kaizen are great examples of the benefit of focused small improvements driven by passionate employees with great ideas.
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January 2023 - Ride of a Lifetime by Bob Iger

This month we look at the recent history of Disney and its famous leader, Bob Iger.

Tech Themes

Creative Trust. Bob began his career at ABC Television, eventually working his way into ABC Sports and their newly acquired Entertainment and Sports Programming Network (ESPN). Their Bob came under the toutalege of Roone Arledge, a famous broadcast executive known for his commitment to storytelling, and his lack of compassion for sub-par work. Bob saw first hand how Roone would get close to the start of production, only to make several last minute tweaks to the overall program, sometimes throwing out all of the work that had been done to offer the audience a better program. Bob understood this creative process was messy and inefficient, but crucial to producing high quality programming. After ABC was acquired by Capital Cities, Tom Murphy and Dan Burke promoted Iger into a new role as head of ABC entertainment. Upon being handed a stack of 40 scripts on his first day, Bob wondered what he was even supposed to be looking for in a script. “I started to realize over time, though, that I’d internalized a lot by watching Roone tell stories all those years.” In his first season as president, Iger decided to go ahead with an off-putting, creepy drama directed by David Lynch called Twin Peaks. At one point, Murphy was so concerned about airing the show, that he told Bob, “You can’t air this. If we put it on television, it will kill our company’s reputation.” Iger pushed back, enthralled that the creative community love the risk the network was taking. A 1990 New York Times article spells out the risky show’s language: “The offending usage was in a Wall Street Journal story about Robert Iger, a bold television producer: ''Even if 'Twin Peaks' caves in, it has already won ABC new cache in Hollywood as the hands-off network, eager for ideas that are daring and different.'' Iger learned early, it pays to take big and bold risks, especially with the creative community.
Bob Iger and Steve Jobs. One of the first things Bob Iger did when he became CEO of Disney was call Steve Jobs. Disney’s prior CEO, Michael Eisner, had spent years arguing a battle for who had the better legal position in the Disney-Pixar distribution relationship. Pixar had succeeded everyone’s wildest dreams with films like Toy Story, A Bug’s Life, and Finding Nemo, but Disney wanted full control of Pixar’s characters and the rights to film sequels. Iger describeds the kerfuffle: “Steve’s animosity toward Disney was too deep-rooted. The rift that had opened between Steve and Michael [Eisner] was a clash between two strong-willed people whose companies’ fortunes were going in different directions. When Disney Animation began to slip even further, Steve became more haughty with Michael because he flet we needed him more, and Michael hated that Steve had the upper hand.” Iger, ever the flatterer discussed with Jobs how he loved his iPod and wanted to put Disney shows on future generations of the device. Steve responded by showing Iger the new iPhone prototype they were developing. They agreed on a deal and Iger strode on stage at the iPod video launch in 2005. In his first board meeting as official CEO, Iger proposed buying Pixar. The company was half owned by Steve Jobs, who had bought it from his friend and Star Wars creator George Lucas for a measly $5 million (plus several $20-30m equity checks). After receiving approval from the board to look at an acquisition, Iger called Jobs from his car phone: “I’ve been thinking about our respective futures, What do you think about the idea of Disney buying Pixar?” Jobs responded - “You know, that’s not the craziest idea in the world.” A few weeks later, the two sat in the Apple boardroom sketching a simple pros and cons list on the whiteboard. For all of the math and financial analysis that goes into an acquisition, its hilariously to envision Steve and Bob doing what anyone would do to analyze an acquisition. “Two hours later, the pros were meager and the cons were abundant, even if a few of them, in my estimation were quite petty…’A few solid pros are more powerful than dozens of cons,’ Steve said." The agreement was negotiated an in 2006, Disney acquired Pixar for a $7.4B equity value. Right before the merger was announced, Steve took Bob for a walk around Apple’s campus, and told him that his cancer had returned. “He told me the cancer was now in his liver and he talked about the odds of beating it. He was going to do whatever it took to be at his son Reed’s high school graduation, he said. When he told me that was four years away, I felt devestated. It was impossible to be having these two conversations - about Steve facing his impending death and about the deal we were supposed to be closing in minutes - at the same time.” The deal ultimately closed and Jobs became Disney’s largest shareholder and a board member at the company, during which Disney’s stock performed very well.
BamTECH. When Iger became CEO, he launched a three part plan to return Disney to the top of media and creativity. The plan was clear: “1) We needed to devote most of our time and capital to the creation of high quality branded content. 2) We needed to embrace technology to the fullest extent, first by using it to enable the creation of higher quality products, and then to reach more consumers in amore modern, more relevant ways. 3) We needed to become a truly global company.” If Pixar, Marvel, and Lucasfilm were an answer to part one, BAMTech was the answer to part two. Baseball Advanced Media Technologies was a company founded by Major League Baseball in 2000 to build out a digital radio streaming service for overseas listeners to the MLB playoffs. MLB Advanced Media was funded by a $1 million investment by each of its 30 teams for four consecutive years. Following a successful launch, BAMTech decided to try streaming live video of baseball games and launched MLB.tv, which soon became a major leader in streaming. Other leagues began to pay attention and soon the NHL had signed up BAMTech as its streaming partner, taking a 10% stake in the company. Soon ESPN, HBO, and the PGA Tour all signed on too. Disney used BAMTech as a back-end partner for the launch of its WatchESPN platform in 2010. So it was a natural extension for Iger, fresh off the massive success of the Pixar, Marvel, and Lucasfilm acquisitions, to try to buy the company. In 2015, BAMTech was officially spun out of the MLB, and in August 2016, Walt Disney acquired 33% of the company in August 2016 for $1B, valuing the streaming platform at $3B. In 2017, it upped its stake to 75% for another $1.58B, then in August 2021 it acquired the NHL’s 10% interest. Finally, it bought the remaining 15% interest from the MLB for $828m in October 2022. Amazing companies can come from anywhere. Based on some simple rough math, the MLB earned a 23% IRR on initial $120m investment from 2000 to 2022, a 28x return.

Business Themes

The Guide of Experience. Its clear that Bob Iger was molded into an incredible businessman through a series of experiences that almost no one could predict would create to such a compelling leader. Because Iger began in the TV industry at ABC, he began the habit of waking up absurdly early, a trait shared by many successful leaders. “To this day, I wake nearly every morning at four-fifteen, though now I do it for selfish reasons: to have time to think and read and exercise before the demands of the day take over.” After moving over to sports, Bob learned the importance of high quality from Roone Arledge, but he also developed one of his greatest traits, finding compromise among competing interests. “In 1979, the World Table Tennis Championships were being held in Pyongyang, North Korea. Roone called me into his office one day and said, ‘This is going to be interesting. Let’s cover it on Wide World of Sports.’ I thought he was joking. He surely knew it would be impossible to secure the rights to an event in North Korea. He wasn’t joking. I then embarked on a worldwide pursuit to secure the rights. After a few months of intense negotiations, we were on the eve of closing the deal when I received a call from someone on the Asian desk in the U.S. State Department. ‘Everything you are doing with them is illegal,’ he said. ‘You’re in violation of strict U.S. Sanctions against doing any business with North Korea…’ I eventually arrived at a workoaround that involved securing the rights not through the host country but through the World Table Tennis Federation. The North Korean government, though we were no longer paying them, still agreed to let us in, and we became the first U.S. media team to enter North Korea in decades - a historic moment in sports broadcasting.” When ABC was purchased by Capital Cities, Bob began his relationship with Dan Burke and Tom Murphy. Warren Buffett famously praised the pair: “Tom Murphy and [his long-time business partner] Dan Burke were probably the greatest two-person combination in management that the world has ever seen or maybe ever will see.” Iger learned tons about business, acquisitions, budgeting, and decentralized management from Tom and Dan. They also gave Iger numerous opportunities to prove himself and take risks, like the Twin Peaks launch. Later, when Cap Cities was acquired by Disney, Iger gained a front-row seat to Michael Eisner’s leadership style. Eisner was once regarded as one of the best CEOs in the world, but languished as the stress of managing a massive company caused him to become increasingly defensive and depressed. Despite sharing a complicated relationship, Iger learned a lot about managing Disney from Eisner, including what he didn’t want to do once he got the role. In hindsight, its no surprise that Iger became the leader he became, even though it wasn’t clear as it was unfolding.
A tale of M&A. Although Disney sticks in people’s minds as a family friendly media company, its sprawling empire has grown to include ABC, ESPN, Marvel, the Simpsons, Star Wars, Pixar, Marvel, Hotstar, National Geographic, Hulu, 20th Century Studios, X-Men, Deadpool, Fx, Disney World, Disney Cruise Line, and Disney+. This empire was constructed through many M&A deals. The first major M&A deal was the 1995 $19B Disney, Capital Cities merger, which was the second largest corporate takeover (to KKR’s RJR Nabisco LBO) ever. Warren Buffett became one of the largest shareholders of Disney, which he sold over the next few years, only to massively miss out on the growth of ESPN and eventually the content domination that Iger began. The deal took a while to digest, and vastly expanded Disney’s operations. Eisner’s legendarily poor hire of talent agent Michael Ovitz compounded pressures, and Eisner relied even more heavily on Disney’s Strategic Planning group to make corporate decisions. From 1995 to 2005, Disney’s stock increased only 25%, and Eisner was forced out in a brutal, public proxy battle. Once Iger took over, he collapsed the Strat Planning department under rising star Kevin Mayer, and began the series of acquisitions that marked his tenure. After Pixar, Iger turned to Marvel, which was stumbling along as a comic book and toy producer to a shrinking population of interested buyers. Despite its relatively small size, Marvel had a fascinating corporate history. In the late 80’s, Ron Perelman, billionaire businessman, bought Marvel for a mere $82m. However, after the comic book boom faded, Marvel fell into bankruptcy, and Icahn stepped in to buy Marvel’s distressed debt eventually becoming chairman of the board through a protracted legal process. At the last second, Ike Perlmutter and Avi Arad, managers of the largest susidiary of Marvel, Toy Biz, proposed a better offer to the bankruptcy court, and eventually wrestled control away from both Perelman and Icahn. By the time Disney came knocking in 2008, Marvel was beginning to produce its own films, after several successful Spider-Man and X-men films. While a lot of Disney executives believed Marvel was too edgy for Disney, Iger took a longer term view and bought the company for $4B, which has clearly paid off. Alongside the acquisition of Marvel, Disney invested about $100m for a 30% stake in a new streaming service created by NBC and News Corp called Hulu. Next, Iger turned to Lucasfilm, the maker of Star Wars. George Lucas was very reluctant to sell to Disney, and it took four and half years of convincing: “We went over and over the same ground - George saying he couldn’t just hand over his legacy, me saying we couldn’t buy it and not control it - and twice walked away from the table and called the deal off. (We walked the first time and George walked the second).” Eventually, Disney acquired Lucasfilm for $4.05B, another great content acquisition that has worked out well. While Iger is credited with these amazing acquisitions, his latest and biggest acquisition has raised the most questions for Disney. In 2017, Disney announced it would buy 20th Century Fox for $52B in stock, and the assumption of $13.7B of Fox’s net debt. However, the deal faced a long regulatory approval process, during which the US Justice Department ruled in favor of AT&T buying Time Warner. With what seemed like a favorable M&A environment, Comcast entered the fray, proposing an all cash bid at $35 a share or $64B. Disney upped its offer to $38 a share, half in cash and half in stock. Fox accepted Disney’s new bid (of $71B), and Disney closed the deal in March of 2019. While the deal did bring X-men, Deadpool, Fantastic Four, the Simpsons, Family Guy, it added $19B of debt to its balance sheet. In addition, Disney spent time selling Fox’s Sky ownership to Comcast, and the regional sports networks owned by Fox. These divestitures were necessary for the regulatory approval of the deal and netted Disney $24B ($15B from Sky and $9.6B from the sports networks). Covid through Disney for a loop, and its higher leverage from the Fox deal, caused the elimination of its dividend, and an obvious massive reduction to its parks business. Time will tell if the Fox Deal yields the same great results that Pixar, Marvel, and Lucasfilm produced - I wonder if this wasn’t too big for the integration risk entailed.
Walt Proxy. Disney has a rich history in not only animated characters but business characters as well. The company has repeatedly been subject to proxy battles. Iger’s first proxy battle began slowly then grew into a massive public boardroom debate. In 2002, Roy E. Disney and Stanley Gold, expressed their disappointment in Michael Eisner’s choices as CEO of Disney, sending a letter to the board demanding his removal. Eisner retailiated, “turning to the company’s governance guidlines regarding board member tenure, which stipulated that board members had to retire at age seventy-two. Rather than telling Roy himself, though, Michael had the chairman of the board’s nominating committee inform him that he would not be allowed to stand for reeelection and would be retired as of the next shareholders meeting in March 2004.” Roy began a public campaign called “Save Disney” where he called for Michael’s retirement and for him to rejoin the board. At the same time, Comcast launched a hostile bid for Disney. While Comcast would eventually find its content companion in NBC/Universal years later, this bid added heat to the situation. Comcast was unable to complete its bid, but the shareholder vote still turned out poorly for Eisner, with 43% of shareholders withholding support for him as CEO. He was promptly stripped of his chairman title, and in the fall of 2004, announced his resignation at the end of his contract in 2006. Fast forward to 2023, and Disney is back in the proxy battle world, this time facing up against Nelson Peltz, the famous activist investor. Under scrutiny are Disney’s acquisition of Fox, its exorbitant streaming losses, the cancellation of its dividend, the massive debt load it carries, and its large Netflix-competing content spend. The board recently announced that Iger would come back as CEO, despite clearly saying his time was over in the book. Iger’s successor, Bob Chapek, had a terrible run as Disney CEO, including shutting down the company, a public row with the State of Florida and Scarlett Johansson, and a centralization process that took control away from the creatives. I guess the Ride of a Lifetime is not over.
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September 2021 - Super Mario: How Nintendo Conquered America by Jeff Ryan

This month we dive into the history of Nintendo and Super Mario, the loveable, super-smashing, tennis-playing, go-karting, partier. Jeff Ryan’s book explores the history of Nintendo and the evolution of the Video Game industry to the console competition we have today.

Tech Themes

Constraint Breeds Creativity. Sometimes, challenges drum up creativity like nothing other than having your back against the wall can. This was the case with Nintendo. In 1980, Nintendo’s CEO Hiroshi Yamauchi sent his son-in-law, Minoru Arakawa to Manhattan to launch Nintendo of America. The idea was to launch Nintendo into the large and growing market for arcade cabinet games in the US. Nintendo had developed a Space Invaders knock-off called Radar Scope to take the market by storm. However, it sold incredibly poorly and months after moving to the US, Arakawa found himself with 2,000 large, unsold arcade cabinet games and a disappointed father-in-law. Yamauchi scoured the company for interesting game ideas, not wanting the pre-made cabinets to go to waste, and found one from a young designer named Shigeru Miyamoto. Miyamoto drew inspiration from Popeye and King Kong to come up with Donkey Kong, a revolutionary “platform” style game that involved a character named Jumpman trying to save a damsel in distress Pauline from a giant evil gorilla. After coming up with this crazy concept game, Nintendo still had to re-work the original Radar Scope circuit boards. The boards were shipped from Nintendo’s Japanese headquarters to Manhattan, where Arakawa and his wife carefully removed the Radar Scope game and installed the new Donkey Kong game. Nintendo’s sales network convinced two bars in Seattle to pilot the game and it took off like crazy; people played 120 times per day, yielding $30 of profit to Nintendo every day. Jumpman would later become Mario, Donkey Kong would go on to become a staple character in Nintendo’s video gaming world, and all because of an epic failure and a distressed company.
Cabinet, Console, and Competition. Staying relevant in technology evolution. Nintendo successfully moved from a video game cabinet to the super Nintendo, the Gameboy, the N64, the GameCube, the wii, and now the Switch. At each stop, Nintendo tried hard to leverage all of the resources available in the hardware of the day. By purposefully maxing out its new hardware capabilities, Nintendo was able to build innovation into its games. As an example, Nintendo leveraged a special aspect of code in the NES to build Mario’s initial music theme. While Mario is a silent character, this created a new atmosphere for gamers. Later on, Nintendo would launch the N64 Rumble Pak, which provided haptic feedback through the controller based on gameplay. This became a staple concept for all consoles on the market. However, it wasn’t always fun and games. Nintendo missteps are single-handedly responsible for the creation of Sony’s Playstation. In 1988, a Sony Engineer began secretly developing a chip to help make CD-ROM games compatible with the Nintendo. Nintendo was interested in broadening its capabilities and signed a contract with Sony to produce an add-on device for the Super Nintendo Entertainment System (SNES). Although the two companies had signed a deal, it was clear that Nintendo would have to give up substantial control of the creative rights and hardware to Sony with the add-on. Yamauchi could not give Sony that much control, and in a historic change of direction at the 1991 CES, he went behind Sony’s back to partner with Sony’s biggest rival, Phillips. However, Phillips was not a super-strong development partner and the SNES CD-ROM add-on was plagued with delays. Sony continued the development of a gaming system on its own and Nintendo shifted priorities to its next console, the N64. Sony’s CD-ROM gaming system had a significant advantage over the N64 cartridge-based system in that it allowed much easier and consistent, open standards for developers. Sony went to Square, one of Nintendo’s top game makers, and lured them over to produce its famous Final Fantasy series for the upcoming launch of the PlayStation in 1994. The PlayStation seized significant market share from Nintendo and entered Sony into the gaming space. Nintendo’s decision to opt for control and proprietary formats in the N64 and GameCube helped avoid counterfeit games but left the market open to Sony’s Playstation and consumers that wanted an all-in-one device (games, CDs, DVDs).
Play the Long Game. Miyamoto had the idea for a three-dimensional Mario that would take advantage of all of the improvements in graphics rendering by the early 90s. While the idea gestated, Miyamoto tried to think of how game mechanics for 3D games could work. After serious thought and some development time spent in the early 1990s, Miyamoto shelved the idea because he felt they would need a bigger controller with more buttons to fully realize the vision of a 3D Super Mario. After Nintendo and Miyamoto began development on Super Mario 64 in September 1994, they ran into delays caused by contrasting opinions on camera views and game layout. On top of this, Miyamoto had grander designs than Nintendo had time for, and several courses had to be scrapped to get to a working version. The game shipped after the 1995 holiday season and delayed the launch of the Nintendo64 until April 1996. However, because Nintendo had created such strong, single-player, free-roaming game mechanics, this allowed some of the unused levels to be put into Legend of Zelda: Ocarina of Time, which debuted in 1998. Sometimes it takes time for the world and technology to catch up to your ambitions.

Business Themes

An Intense Family Business. Nintendo was started in 1889 by Fusajiro Yamauchi to produce flower cards, which are a type of Japanese playing card. Despite significant trouble during the Russo-Japanese War of 1907 and World War II, the company survived long enough for third-generation Hiroshi Yamauchi to take the reigns in 1950. Over the next 20 years, Nintendo would ride the wave of post-war popularity to a 1963 IPO on the Osaka and Kyoto stock exchanges. However, in the late 60’s, appetite for cards decreased and Yamauchi was looking for a new market to support the company’s growth. In 1969, Gunpei Yokoi joined the company and set it off on a new trajectory developing simple electric toys. In the 1970s and 80’s the company repositioned itself as a handheld, console, and cabinet video game producer. Since then, Nintendo has gone on to produce millions of games and systems. There is something amazing to be said about a business that finds its next wave of growth in its S-curve and somehow stays alive through multiple wars, products, and competitors.
Counter-Positioning. Nintendo is famous for its numerous licensing deals to promote its characters on everything to build brand awareness and associations amongst consumers (Super Mario Mac & Cheese anyone?). Nintendo leveraged its history selling toys to children to create a strong brand of reputable characters only rivaled by the likes of Disney today. Because Nintendo focused on a family-friendly, younger customer base (no blood in games on the original Nintendo), it left some un-fulfilled customers in the market. Enter SEGA and Sonic the Hedgehog. SEGA was started as a simple amusement game provider for military bases in the 1940s. The company launched its first video game in 1973, its first console in 1982, and created Sonic in 1991. Sonic was everything Mario was not - he was purposely built to be a character built for teenagers. As School of Game Design points out: “Just as the 19th century expressionists use shape and line to evoke emotional responses, character designers today use the shape of a character’s body to communicate the personality of a character to us. Mario is circular, he has a button nose, a pot belly, and his hands, feet, and head, are all round. Sonic’s design on the other hand is all jaggy triangles, he has spiky hair, pointy cat ears, ski goggle eyes, and torpedo shoes…Right out of the gate the personalities clash. Sonic has the image of a mischievous bad boy, while Mario is playful, and aloof.” This is a classic example of counter-positioning - or directly occupying a competitive place in the industry that is the exact opposite of the incumbent firm. Sonic was the anti-Mario, and helped SEGA launch its Genesis platform.
The Video Game Recession & Supply Chain Bullwhip. While Super Mario and Donkey Kong helped launch a massive interest in video and arcade games, there were some periods in the 1980s when people thought videogames were just a fad. In 1983, the arcade game industry experienced a massive recession driven by a common supply-chain issue called the bullwhip effect. As explained in this simple video, the bullwhip effect occurs when a change in demand has an amplified effect across a supply chain from customer to retailer to wholesale to distributor to manufacturer. The effect causes massive forecasting errors and inventory build up due to an over-extrapolation of demand. In the late 1970s and early 1980s, video games were all the rage driven by Atari’s Pong and Space Invaders games. This attracted a flood of competition from Coleco, Mattel, and Phillips. Everyone forecasted that market saturation was years away, and consumers would be itching for video game and cabinet game systems for the next few years. As a result, many video game companies over-ordered from their cartridge and console manufacturers. Once the video game companies had too much inventory on hand, they started discounting it to try to sell more, but it could only sell so much. After being unable to sell several systems, Atari famously buried some of its inventory at a landfill site in New Mexico. This effect can cause compounding losses for companies, because they buy inventory at full or sometimes above full price, sell games at cheaper prices due to market saturdation, and often have to pay to house or destroy extra inventory. The bullwhip effect is a crippling issue that companies like Peloton are facing today.

Dig Deeper

There will Never Ever be another Melee player like Hungrybox - Documentary exploring Professional Super Smash Brothers Athletes
Super Mario Bros 30th Anniversary Special Interview with Shigeru Miyamoto and Takashi Tezuka
CRASH: The Year Video Games Died
The History of the Gameboy
The 10 Biggest Mistakes in Nintendo History

February 2020 - How the Internet Happened: From Netscape to the iPhone by Brian McCullough

Brian McCullough, host of the Internet History Podcast, does an excellent job of showing how the individuals adopted the internet and made it central to their lives. He follows not only the success stories but also the flame outs which provide an accurate history of a time of rapid technological change.

Tech Themes

Form to Factor: Design in Mobile Devices. Apple has a long history with mobile computing, but a few hiccups in the early days are rarely addressed. These hiccups also telegraph something interesting about the technology industry as a whole - design and ease of use often trump features. In the early 90’s Apple created the Figaro, a tablet computer that weighed eight pounds and allowed for navigation through a stylus. The issue was it cost $8,000 to produce and was 3/4 of an inch thick, making it difficult to carry. In 1993, the Company launched the Newton MessagePad, which cost $699 and included a calendar, address book, to-do list and note pad. However, the form was incorrect again; the MessagePad was 7.24 in. x 4.5 in. and clunky. With this failure, Apple turned its attention away from mobile, allowing other players like RIM and Blackberry to gain leading market share. Blackberry pioneered the idea of a full keyboard on a small device and Marc Benioff, CEO of salesforce.com, even called it, “the heroin of mobile computing. I am serious. I had to stop.” IBM also tried its hand in mobile in 1992, creating the Simon Personal Communicator, which had the ability to send and receive calls, do email and fax, and sync with work files via an adapter. The issue was the design - 8 in. by 2.5 in. by 1.5 in. thick. It was a modern smartphone, but it was too big, clunky, and difficult to use. It wasn’t until the iPhone and then Android that someone really nailed the full smart phone experience. The lessons from this case study offer a unique insight into the future of VR. The company able to offer the correct form factor, at a reasonable price can gain market share quickly. Others who try to pioneer too much at a time (cough, magic leap), will struggle.
How to know you’re onto something. Facebook didn’t know. On November 30, 2004, Facebook surpassed one million users after being live for only ten months. This incredible growth was truly remarkable, but Mark Zuckerberg still didn’t know facebook was a special company. Sean Parker, the founder of Napster, had been mentoring Zuckerberg the prior summer: “What was so bizarre about the way Facebook was unfolding at that point, is that Mark just didn’t totally believe in it and wanted to go and do all these other things.” Zuckerberg even showed up to a meeting at Sequoia Capital still dressed in his pajamas with a powerpoint entitled: “The Top Ten Reasons You Should Not Invest.” While this was partially a joke because Sequoia has spurned investing in Parker’s latest company, it represented how immature the whole facebook operation was, in the face of rapid growth. Facebook went on to release key features like groups, photos, and friending, but most importantly, they developed their revenue model: advertising. The quick user growth and increasing ad revenue growth got the attention of big corporations - Viacom offered $2B in cash and stock, and Yahoo offered $1B all cash. By this time, Zuckerberg realized what he had, and famously spurned several offers from Yahoo, even after users reacted negatively to the most important feature that facebook would ever release, the News Feed. In today’s world, we often see entrepreneur’s overhyping their companies, which is why Silicon Valley was in-love with dropout founders for a time, their naivite and creativity could be harnessed to create something huge in a short amount of time.
Channel Partnerships: Why apple was reluctant to launch a phone. Channel partnerships often go un-discussed at startups, but they can be incredibly useful in growing distribution. Some industries, such as the Endpoint Detection and Response (EDR) market thrives on channel partnership arrangements. Companies like Crowdstrike engage partners (mostly IT services firms) to sell on their behalf, lowering Crowdstrike’s customer acquisition and sales spend. This can lead to attractive unit economics, but on the flip side, partners must get paid and educated on the selling motion which takes time and money. Other channel relationships are just overly complex. In the mid 2000’s, mobile computing was a complicated industry, and companies hated dealing with old, legacy carriers and simple clunky handset providers. Apple tried the approach of working with a handset provider, Motorola, but they produced the terrible ROKR which barely worked. The ROKR was built to run on the struggling Cingular (would become AT&T) network, who was eager to do a deal with Apple in hopes of boosting usage on their network. After the failure of the ROKR, Cingular executives begged Jobs to build a phone for the network. Normally, the carriers had specifications for how phones were built for their networks, but Jobs ironed out a contract which exchanged network exclusivity for complete design control, thus Apple entered into mobile phones. The most important computing device of the 2000’s and 2010’s was built on a channel relationship.

Business Themes

AOL-Time Warner: the merger destined to fail. To fully understand the AOL-Time Warner merger, you must first understand what AOL was, what it was becoming, and why it was operating on borrowed time. AOL started as an ISP, charging customers $9.95 for five hours of dial-up internet access, with each additional hour costing $2.95. McCullough describes AOL: “AOL has often been described as training wheels for the Internet. For millions of Americans, their aol.com address was their first experience with email, and thus their first introduction to the myriad ways that networked computing could change their lives.” AOL grew through one of the first viral marketing campaigns ever; AOL put CDs into newspapers which allowed users to download AOL software and get online. The Company went public in March of 1992 and by 1996 the Company had 2.1 million subscribers, however subscribers were starting to flee to cheaper internet access. It turned out that building an ISP was relatively cheap, and the high margin cash flow business that AOL had built was suddenly threatened by a number of competitors. AOL persisted with its viral marketing strategy, and luckily many americans still had not tried the internet yet and defaulted to AOL as being the most popular. AOL continued to add subscribers and its stock price started to balloon; in 1998 alone the stock went up 593%. AOL was also inking ridiculous, heavily VC funded deals with new internet startups. Newly public Drkoop, which raised $85M in an IPO, signed a four year $89M deal to be AOL’s default provider of health content. Barnes and Noble paid $40M to be AOL’s bookselling partner. Tel-save, a long distance phone provider signed a deal worth $100M. As the internet bubble continued to grow, AOL’s CEO, Steve Case realized that many of these new startups would be unable to fufill their contractual obligations. Early web traffic reporting systems could easily be gamed, and companies frequently had no business model other than attract a certain demographic of traffic. By 1999, AOL had a market cap of $149.8B and was added to the S&P 500 index; it was bigger than both Disney and IBM. At this time, the world was shifting away from dial-up internet to modern broadband connections provided by cable companies. One AOL executive lamented: “We all knew we were living on borrowed time and had to buy something of substance by using that huge currency [AOL’s stock].” Time Warner was a massive media company, with movie studios, TV channels, magazines and online properties. On Jan 10, 2000, AOL merged with Time Warner in one of the biggest mergers in history. AOL owned 56% of the combined company. Four days later, the Dow peaked and began a downturn which would decimate hundreds of internet businesses built on foggy fundamentals. Acquisitions happen for a number of reasons, but imminent death is not normally considered by analysts or pundits. When you see acquisitions, read the press release and understand why (at least from a marketing perspective), the two companies made a deal. Was the price just astronomical (i.e. Instagram) or was their something very strategic (i.e. Microsoft-Github)? When you read the press release years later, it should indicate whether the combination actually was proved out by the market.
Acquisitions in the internet bubble: why acquisitions are really just guessing. AOL-Time Warner shows the interesting conundrum in acquisitions. HP founder David Packard coined this idea somewhat in Packard’s law: “No company can consistently grow revenues faster than its ability to get enough of the right people to implement that growth and still become a great company. If a company consistently grows revenue faster than its ability to get enough of the right people to implement that growth, it will not simply stagnate; it will fall.” Author of Good to Great, Jim Collins, clarified this idea: “Great companies are more likely to die of ingestion of too much opportunity, than starvation from too little.” Acquisitions can be a significant cause of this outpacing of growth. Look no further than Yahoo, who acquired twelve companies between September 1997 and June 1999 including Mark Cuban’s Broadcast.com for $5.7B (Kara Swisher at WSJ in 1999), GeoCities for $3.6B, and Y Combinator founder Paul Graham’s Viaweb for $48M. They spent billions in stock and cash to acquire these companies! Its only fitting that two internet darlings would eventually end up in the hands of big-telecom Verizon, who would acquire AOL for $4.4B in 2015, and Yahoo for $4.5B in 2017, only to write down the combined value by $4.6B in 2018. In 2013, Yahoo would acquire Tumblr for $1.1B, only to sell it off this past year for $3M. Acquisitions can really be overwhelming for companies, and frequently they don’t work out as planned. In essence, acquisitions are guesses about future value to customers and rarely are they as clean and smart as technology executives make them seem. Some large organizations have gotten good at acquisitions - Google, Microsoft, Cisco, and Salesforce have all made meaningful acquisitions (Android, Github, AppDynamics, ExactTarget, respectively).
Google and Excite: the acquisition that never happened. McCullough has an incredible quote nestled into the start of chapter six: “Pioneers of new technologies are rarely the ones who survive long enough to dominate their categories; often it is the copycat or follow-on names that are still with us to this day: Google, not AltaVista, in search; Facebook, not Friendster, in social networks.” Amazon obviously bucked this trend (he mentions that), but in search he is absolutely right! In 1996, several internet search companies went public including Excite, Lycos, Infoseek, and Yahoo. As the internet bubble grew bigger, Yahoo was the darling of the day, and by 1998, it had amassed a $100B market cap. There were tons of companies in the market including the players mentioned above and AltaVista, AskJeeves, MSN, and others. The world did not need another search engine. However, in 1998, Google founders Larry Page and Sergey Brin found a better way to do search (the PageRank algorithm) and published their famous paper: “The Anatomy of a Large-Scale Hypertextual Web Search Engine.” They then went out to these massive search engines and tried to license their technology, but no one was interested. Imagine passing on Goolge’s search engine technology. In an over-ingestion of too much opportunity, all of the search engines were trying to be like AOL and become a portal to the internet, providing various services from their homepages. From an interview in 1998, “More than a "portal" (the term analysts employ to describe Yahoo! and its rivals, which are most users' gateway to the rest of the Internet), Yahoo! is looking increasingly like an online service--like America Online (AOL) or even CompuServe before the Web.” Small companies trying to do too much (cough, uber self-driving cars, cough). Excite showed the most interest in Google’s technology and Page offered it to the Company for $1.6M in cash and stock but Excite countered at $750,000. Excite had honest interest in the technology and a deal was still on the table until it became clear that Larry wanted Excite to rip out its search technology and use Google’s instead. Unfortunately that was too big of a risk for the mature Excite company. The two companies parted ways and Google eventually became the dominant player in the industry. Google’s focus was clear from the get-go, build a great search engine. Only when it was big enough did it plunge into acquisitions and development of adjacent technologies.