Pixar Makes a Great Story, but the Big Picture Belongs to Computers
The most eye-catching--though not the most important--news in business last week was Pixar Animation Studios, the stock that shot from $22 a share to more than $40 in its initial trading.
To be sure, Pixar is a great story, the company that supplied the computer-generated animation for the hit movie “Toy Story.” It is owned by Steven P. Jobs, who sold 20% of his stock to the public and, on paper at least, made the big fortune he apparently didn’t make on Apple Computer, which he founded in 1976.
But Pixar is more about the future than the present. Computer generated movies are still much more expensive to make than conventional ones. So the technology will take a few years to come into its full potential; Pixar’s process won’t be used in a movie again until 1998.
Meanwhile, for insight on business and investments today the stories worth noting last week were about distribution, in insurance and entertainment. Travelers Group Inc. agreed to pay $4 billion for the property casualty insurance business of Aetna Life & Casualty Co. And Walt Disney Co. had toys based on Woody and Buzz, the “Toy Story” characters, in retail stores as soon as the movie came out.
What’s the connection? Both Travelers and Disney reflect the great change occurring in distribution, as computers allow companies to bring you more and different products and services through the same pipeline. It’s all part of the U.S. economy’s relentless drive for efficiency--and bigger investment news than Pixar.
It is now clear that the growing capability of computer networks is driving companies to combine into larger units for economies of scale. The trend is disturbing at first glance but ultimately beneficial.
Many of the 1,000 U.S. insurance companies are now merging furiously in a pattern previously seen in the banking industry, which has reduced the number of banks by 30% in five years.
Consolidation cuts costs. Travelers will more than double its insurance business by acquiring Aetna but operate the combined companies at $300 million less in cost per year--mainly by eliminating 3,300 jobs and duplicate functions. “Thanks to computer developments, most insurance companies could do twice the work with the same staff,” says an insurance executive who prefers to speak anonymously.
To what end such efficiency? To deliver insurance at the lowest possible cost and to weed out also-rans in the business of insuring automobiles, homes and commercial property that is taking a turn toward greater profitability. In response to huge losses from hurricanes, earthquakes and exaggerated jury awards, insurers have begun to calculate risk exposure on anticipated rather than historic costs.
“The business is consolidating worldwide and the economies of scale are impressive,” says Michael O’Halleran, president of Chicago’s Aon Group, a major diversified life and casualty insurance company.
Most of all, Travelers--a large firm at $20 billion in revenue a year--wants to add insurance customers so it can deliver a broad range of financial services to them, from investments to consumer loans to life insurance.
The aim is to use computing power to cross-reference customers, their spending habits and credit histories so as to deliver insurance policies, mutual funds, loans or any other service. And to do it cheaply through telecommunications links, dispensing with offices and agents. “The trend in financial services, as in entertainment, media and communications and many other fields today,” says James Schiro, chairman and senior partner of Price Waterhouse, the accounting firm, “is to break down barriers so that many products are delivered directly to the consumer without interference from middle men.”
An example, Schiro says, is the entertainment business in which Price Waterhouse is accountant for several major companies as well as ballot counter for the Academy Awards.
Movies have long been distributed through many channels, from theaters to videocassettes to broadcast and cable television. Disney’s and then Warner’s inspiration was to get more mileage out of images and characters by selling paraphernalia--like Woody and Buzz toys--in retail stores.
But lately entertainment distribution has taken a significant turn with movie companies acquiring, merging or venturing with television networks, cable channels and telephone companies. And you can look for a scramble to buy more television stations when and if a telecommunications bill allowing that clears the U.S. Congress.
The immediate aim is to ensure distribution outlets and speedy repayment of investment on the movie industry’s expensive products--it now costs $30 million to produce a film, $600 million of investment per year for major studios.
But the real spur to merger mania lies in the near future when film and videotape will be digitized--reduced to electronic blips that can be distributed instantly, throughout the world and directly to theaters or homes through fiber optic lines.
The full force of digitization should hit the industry by 1997-98, according to Price Waterhouse technology research--or shortly before the next Pixar movie.
The upshot could be an epochal reduction in distribution costs and an explosion of profitability in the entertainment business--the literal fulfillment of legendary producer Darryl F. Zanuck’s dream of “releasing my movie on Thursday and having cash back Saturday.”
“Cash back faster” allows the same dollar to be used more times for more investment to produce more product. It’s the very essence of rising productivity.
No wonder many insurance and entertainment stocks are standouts in this bull market.
Yes but, do ordinary individuals as consumers and workers benefit from this distribution revolution, which at the very least disrupts employment?
The answer is most Americans get what they increasingly opt for, whether investing in mutual funds over the phone, renting videos at the store or shopping at discount warehouses: convenience and more for their dollars.
To paraphrase the old line from “Pogo”: We have met the economy and he is us.
