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This is part six of the 7 types of business Powers series. To read the earlier articles click here.
In late 90’s, early 00’s Disney’s traditional hand-drawn animation was struggling to stay relevant and produce successful films, while Pixar had built an unmatched track-record with hit films like Toy Story, A Bug’s Life and Finding Nemo. I still remember my dad bringing back A Bug’s Life—our first ever DVD— nearly 30 years later.
Disney needed their own come-back story.
Pixar had what Disney wanted. Not just the commercial success of their animated films, but the root of what made them repeatedly blockbusters—the people behind their creation. Two men with two decades of shared experiences and unmatched creative instinct that no amount of money could rebuild from scratch. Disney had animators. They had rendering software. But Disney, the company who invented the form, couldn’t replicate Pixar’s success.
Helmer defines Power as a set of conditions that create the potential for differential returns. Every one of his seven Powers deliveries this through two things: a benefit and a barrier. The benefit must materially improve cash flow and the barrier must stop competitors from arbitraging it away. Helmer’s sixth Power Cornered Resource, has an interesting barrier. One that cannot be built from the inside, but granted from the outside—exclusive access to something that nobody else can have at a price far below it’s value.
In February 1986, Steve Jobs purchased The Graphics Group from George Lucas’ Computer Division for $5m, and renamed it Pixar Computer Group. Along with the acquisition, Jobs would bring together two more extraordinary minds: John Lasseter, an animation genius who two years earlier had been fired from Disney because of his tireless advocacy for CGI in animation, and Ed Catmull, a highly intelligent computer scientist who had the self-confidence and humanity to master high-octane animated movies.
Only two years earlier Jobs had been ousted from Apple Computer after a power struggle with John Scully that was followed by a difficult attempt at gaining traction with Next Computer. After the acquisition he found himself part of a trio that would take not only take the animated movie sector by storm—but Hollywood itself.
Pixar was lucky enough to have three genius founders. And it worked. Jobs became Chairman of the Board and majority shareholder, Catmull President and Lasseter head of their animation department. Pixar film maker Pete Docter said of the relationship: “Here there was a clear definition of power: John on creative, Ed on technical, and Jobs on business and financial. There was an implicit trust of each other, as well as one guy with the final word (Steve).”
In 1991, after layoffs had ended Pixar’s hardware aspirations, Disney granted Pixar a three-picture deal. Their first film had a budget of only £30m, but would go on to take $350m at box office; an 11.7x multiplier on the original investment. The film was Toy Story. Watching the animation, critic Roger Ebert rhapsodised: “Watching the film, I felt I was in at the dawn of a new era of movie animation, which draws on the best of cartoons and reality, creating a world somewhere in between, where space not only bends but snaps, crackles and pops.”
When Disney bought Pixar in 2006 for $7.4 billion, they weren’t just buying a successful animation company. They were giving themself exclusive access to something else nobody else could have: Catmull and Lasseter.
Helmer’s definition of a Cornered Resource
Helmer’s definition of a Cornered Resource is: “Preferential access at attractive terms to a coveted asset that can independently enhance value.” At first this seems overly wordy and looks like it could be sharper, but every word in that sentence is instructive. Every word counts. The two most important words, however, are attractive terms—getting something for less value than what it’s worth. Without those attractive terms you can’t realise the potential value of the asset.
Job’s paid $5 million for an asset in 1986, invested another $5 million to sustain it’s operations, and became it’s majority shareholder with a 70% stake. 20 years later when Disney bought Pixar, Job’s still had just under a 50% stake in Pixar which made him then Disney’s largest individual shareholder with a 7% stake worth $3.9 billion.
It’s the origin moment—not the Disney acquisition—that’s the purest Cornered Resource example in the whole Pixar story.
The Benefit and the Barrier
So where do we start when analysing if a company has a true Cornered Resource like Pixar did with the “Braintrust” (Jobs, Catmull and Lasseter?) As always, Helmer states it must clear these first two conditions:
The benefit: A cornered resource can emerge in many forms offering uniquely different benefits. Preferential access to a valuable patent such as a best-selling weight-loss drug can be a Cornered Resource. So too, can a required input such as a cement producers ownership of a nearby limestone source, or a manufacturers unique approach to cost-saving production. Regardless of the type, it must produce material returns for the business granted exclusive access to it. If it does not materially grow a companies cash flow you can look else where.
The barrier: Like the benefit, the barrier for a Cornered Resource varies depending on what it is the company does. For a weight-loss manufacturer the barrier is the patent; the cement maker the property rights. The barrier is granted or discovered rather than built. For Pixar though, Helmer identifies another kind of barrier: fiat. It was the personal choice and loyalty of the Braintrust to deliberately continue working at Pixar, despite being highly sought after, and despite any potential financial gains they could have made elsewhere. No amount of money could have made them leave Pixar.
If Catmull or Lasseter had decided to leave when Disney acquired Pixar they would have just bought expensive computers. Both would eventually leave in 2018, but not before Disney and Pixar films had sold roughly $14 billion worth of tickets worldwide during their tenure.
The Five Tests of a Cornered Resource
The attribute must have the potential to drive persistent differential margins, with operational excellence bridging the gap between potential and actual. The company in question could have many attributes that are, or are not a cornered resource and the observer must go through each of them in search of finding out. As stated above and before running the five tests, the method must clear the benefit hurdle: it must produce persistent differential returns—not just more volume at ordinary margins. Helmer states clearly that for an asset to be a Cornered Resource it must pass all five tests. It can fail any of the five tests and still be another type of Power, but it cannot be a Cornered Resource without passing all five:
Idiosyncratic: If a company repeatedly acquires coveted assets at attractive terms, the strategists question is “how are they able to do this?” Does an oil and gas company repeatedly secure the rights to desirable hydrocarbon sites? If they do, it’s the process of securing them that is the cornered resource—not necessarily the lease. In Pixar’s case it is the shared experience of the Braintrust; a specific set of individuals who if removed take with them the coveted resource: their shared experience and knowledge.
Non-arbitraged: The coveted asset must not eat away into the differential returns the company can expect to produce from having it. For example, a film director wants Brad Pitt to star in her film because Brad Pitt sells films. The problem is Brad Pitt costs a hell of a lot of money to acquire and so the success, and returns of the asset (the film), are highly dependant on it being a best-seller.
Transferable: The resource must continue to create value if moved from one company to the next. If it does not, something has been missed. When Disney acquired Pixar, Bob Iger could justify the steep price because Catmull and Lasseter—two people behind Pixar’s stellar success—would be brought on board with the expectation they could revive Disney’s animation division.
Ongoing: A strategist must search for casual factors that explain continued differential returns. There’s a contrapositive to this: should the isolated factor be taken away, the differential returns would suffer. This can happen but it could also not.
Sufficient: To qualify for Power the resource must be sufficient for continued differential returns assuming operational excellence is standard practice. For a company that repeatedly acquires high producing hydrocarbon sights it cannot simply run out after 2 years.
Helmer offers these five tests for determining if an asset is truly a Cornered Resource, but an easier question to ask when reviewing what you think is a coveted asset is: could a rival buy their way to the coveted asset? A competitor simply should not be able to buy their way to the asset. A Cornered Resource requires exclusivity granted at a price below its true value.
Final Thoughts
A Cornered Resource is preferential access, at attractive terms, to a coveted asset that independently enhances value. The key word is preferential—not just access, but access a competitor simply cannot replicate regardless of how much capital they throw at it. The gap between what the resource is worth and what was paid to secure it is itself the Power.
Branding builds its barrier through time, Scale Economies through volume and Process Power (our next Power) through accumulated organisational complexity. Cornered Resources barrier is external. Something locked in that nobody else has access to. You either have it, or you don’t. End of story.
Next week they’l be a members only case study on this Power, but i’ve already realised the benefit of following Helmers instructions for this Power. Before you run the five tests, which a Cornered Resource must pass all of them—ask yourself two questions: 1, does it materially grow cash flow, and 2, could a competitor buy their way to the asset.
It’ll save you plenty of wasted time.
Until next time, Karl.
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In the "Cornered Resource" concept you have described, only one type of resource appears to pass all five tests, and that resource is related to human and intellectual capital.