Pixar Animation Studios is best known for its hit movies"”11 in a row, starting with 1995's Toy Story. Yet behind Pixar's critical and commercial success"”Walt Disney announced in January that it would acquire Pixar for $7.4 billion in stock"”lies the little-known tale of a cash-strapped start-up that endured nine years of losses and failed strategies.

Most people associate Pixar with Apple Computer icon Steve Jobs, Pixar's majority shareholder. But two computer graphics researchers, Edwin Catmull and Alvy Ray Smith, laid the company's groundwork. And while Pixar's products were always top of the line, the market wasn't always ready for them. "It wasn't really working," says Smith. "In fact, that's being gentle. We should have failed."

As a Ph.D. candidate in the 1970s at the University of Utah, Catmull had developed techniques of 3-D rendering that are still in use. In 1979, he joined George Lucas's company, Lucasfilm, and over the next five years he recruited a dream team of computer graphics talent, including Smith and a gifted former Disney animator named John Lasseter. Lucas put the division up for sale, however, and Jobs bought it in February 1986, paying $5 million to Lucasfilm and investing $5 million to recapitalize it.

Problem No. 1 was finding customers for the Pixar Image Computer. If its capabilities had been the only issue, it would have been an easy sale. But the computer's four high-speed parallel processing units came at a stiff price: $135,000. At that cost, Pixar found few customers.

At this point, Catmull, who remains the company's president, and Smith, now retired, were turning increasingly to software. One customer was Disney, for which Pixar designed software that served as a digital substitute for the ink-and-paint and photocopying processes used in traditional animation. The project was the seed of Pixar's collaboration with Disney.

Pixar was also developing a sophisticated software package for rendering 3-D images. The program was released in 1989 as a $3,000 commercial product named PhotoRealistic RenderMan. Computer graphics production houses and special-effects houses embraced the tool. Jobs thought the product could find a larger audience. But again, Pixar overestimated its market. In 1990, the company ran a net operating loss of $8.3 million. To stem the crisis, Pixar sold the hardware division to another firm (now defunct). The following year, Jobs shut down most of the software products and ordered layoffs. "Those were dark days for Steve," recalls Pam Kerwin, then Pixar's vice president and general manager.

There was one bright spot: John Lasseter's animation group. Since 1986, the six-person team had been creating short films that Pixar unveiled each summer at a major computer graphics conference. The quality of the films was very high"”a 1988 short called Tin Toy went on to win an Oscar"”but they brought in no revenue. Still, Madison Avenue took note, and thus was born Pixar's next line of business. In 1991, its peak year of TV spots, Pixar created 15 of them, which brought in $2.1 million in revenue.

The short films and commercials also caught the attention of executives at Disney. In 1991, Disney and Pixar formed a joint venture to produce up to three films. Working with Disney, Pixar's creative team gained insight into how to craft a story for a feature-length film. Pixar also learned how to keep a feature-film schedule and budget on track.

But Disney had imposed tough contract terms. Unless the first film was a runaway hit, Pixar's earnings would be nil. In November 1995, Toy Story was released, and it soon became the highest-grossing film of the year, taking in $362 million worldwide. Pixar had found a business it could make money in.

Sources of revenue pre-Toy Story

David A. Price (daprice@siggraph.org) is writing a book about the early years of Pixar, to be published by Alfred A. Knopf.