The year was 1985, and all signs suggested that Edwin E. Catmull's dream of making the first computer-generated animated movie was about to come to an end. As head of the computer division of Lucasfilm Ltd., Catmull had been ordered by famed director George W. Lucas Jr. to find a buyer for the money-losing outfit. Trouble was, he couldn't find any suitor interested in financing his cinematic quest. At one point, Catmull visited Steven P. Jobs, the recently deposed CEO of Apple Computer Inc., at Jobs's Woodside (Calif.) mansion. Sitting on his expansive lawn, Jobs proposed using Lucasfilm's technology to build a new computer company -- but he wasn't interested in making movies. Nearly out of money, Catmull faced the ultimate choice: Would he save his company and give up his dream? Catmull didn't hesitate. "That's not what we want to do," he recalls telling Jobs. "That was the end of it."
Hardly. Less than a year later, Jobs changed his mind and agreed to fork over $10 million to buy the Lucasfilm unit and support its movie-making plans. Quickly renamed Pixar Animation Studios (PIXR) it's now the world's leading digital animation house. Pixar has delivered a string of five straight hits -- A Bug's Life, two Toy Story films, Monsters, Inc., and Finding Nemo, which opened Memorial Day weekend. Nemo, a luminous underwater adventure about a clown fish's search for his lost son, already has taken in nearly $200 million. "They're the ultimate pure-play media company," says Merrill Lynch & Co. analyst Andrew Slabin. "You show me another media company that generates 80% gross margins and 40% net margins. There aren't any."
Nemo's success couldn't come at a better time for Pixar. The Emeryville (Calif.) company has a contract with Walt Disney (DIS) Co. under which Pixar gets 50% of a movie's profits after Disney recoups its marketing and distribution costs. With the release of Nemo, however, Pixar can begin negotiating a new contract with any company it wants. Analysts say the company could land a deal similar to Lucasfilm, which keeps 100% of its profits and just pays Twentieth Century Fox (FOX) a distribution fee. Or it might settle for a slightly lower fee -- say 70% of profits -- to stay with Disney. The most likely outcome? Wall Street analysts say Pixar will stick with Disney to take advantage of its clout in theaters, theme parks, and retail stores. "Nemo's success strengthens Pixar's hand considerably," says analyst Lowell Singer of SG Cowen Securities Corp. "It's a bit of a two-edged sword for Disney."
The prospect of a new deal is raising expectations for the company's future. Pixar posted profits of $90 million last year on sales of $202 million. Prudential Securities (PRU) expects that, with a contract for 100% of profits after distribution fees, Pixar's net income would surge to $163 million in 2007 on sales of $361 million. Such hopes have lifted its stock 50% over the past year, to $60.
Whether Pixar can live up to the high hopes will depend in large part on the little-known true believer, Catmull. He doesn't draw the spotlight in the same way as Jobs, the Silicon Valley legend, or John Lasseter, the creative chief. But Catmull, 58, is the one most responsible for keeping Pixar's operations running smoothly. He leads the company's technology division, which pushes the state of the art to make Pixar's creativity possible. He is keeper of the company's unique corporate culture, which blends Silicon Valley techies, Hollywood production pros, and artsy animators. And he serves as a calming counterweight to Jobs and Lasseter. "I'd trust Ed with my life," says Jobs, who spends most of his time overseeing Apple. "He runs the company day to day, and he doesn't get enough credit."
Running the company is getting a lot harder. Pixar is accelerating its production pace to one movie every year, up from roughly one every two years in the past. The question is whether the company can keep making hits if it's doubling the number of films it makes. "You wonder, are they at risk of becoming formulaic?" asks Slabin. To meet the stepped-up production schedule, the company has nearly doubled in size since 1998, to 750 employees.
Catmull is working hard to retain Pixar's culture, and success, even as it grows. He created Pixar University to encourage collaboration among all employees. To meet the faster production pace, he established a story department to manage the process of identifying and starting new projects. And he helped devise ways to avoid collective burnout after a massive rewrite of Toy Story 2 in 1999. A masseuse and a doctor now come by Pixar's campus each week, and animators must get managers' permission to work more than 50 hours a week. "[Catmull] is our touchstone, the heart of what this company is all about," says Sarah McArthur, executive vice-president of production.
His engineering skills come in handy, too. Catmull is overseeing development of new animation software, called Luxo, that will allow fewer people to do more. While the company's old system lets animators easily make a change to a specific character, Luxo adjusts the environment as well. For example, if an animator adds a new head to a monster, the system automatically casts the proper shadows.
Catmull's story is nearly as dramatic as one of Pixar's movies. He grew up in Utah, one of five children of a high school principal. He loved The Wonderful World of Disney TV show and aspired to become a Disney animator. But he lacked the drawing skills and turned to the nascent field of computer graphics. As a grad student at the University of Utah, he came up with concepts that are still elemental in animation. For example, he invented texture mapping -- the ability to paint an intricate skin onto specific graphic elements, even as they move around the computer screen.
The dream of making digitally animated movies led Catmull on a cross-country odyssey. After graduating, he traveled to Old Westbury, N.Y., to work for an eccentric millionaire, Alexander Schure. While both wanted to make computer-animated movies, Catmull realized his boss's enthusiasm was not matched by movie-making flair. In 1979, Catmull moved to the Bay Area to work with Lucas, who was in the midst of creating the first Star Wars trilogy. At Lucasfilm, Catmull developed a reputation as a skilled, supportive manager and attracted other top computer-animation experts, including Lasseter in 1984.
It was Catmull's determination to make movies with computers that led to Jobs's acquisition of what became Pixar -- and ultimately to Toy Story in 1995. A creative and financial hit, the movie paved the way for a blockbuster initial public offering that raised $140 million.
What has allowed Catmull to manage Pixar's eccentric staff is his nearly egoless leadership. Just before the IPO, Jobs named himself CEO and pushed Catmull down to chief technical officer, prompting grumbling among many employees. Catmull calmly accepted the new role, realizing that Jobs would be a better pitchman to investors.
These days, Jobs is Catmull's biggest fan. He promoted Catmull to president in 2001 and marvels at how Catmull, if he senses a problem, will talk with dozens of staffers to find a solution. And Catmull listens for wisdom from Jobs, whatever its form. "Steve will sometimes say outrageous things because he wants to understand things. But I usually don't react anymore," says Catmull. With that kind of steady hand, Pixar stands to pull in quite a catch in the years ahead. And that's no fish story. By Peter Burrows in Emeryville, Calif.