What, pay retail ?
One of the key issues when partnering with a strategic investor should always be “what makes them so strategic?” One of the key issues when partnering with an individual should be “what value does that person bring and what does that individual want from the partnership”?
All of those issues and more were swimming around my head when I first started Digital Domain. It was pretty easy to get my head around why Jim Cameron was to be my partner, a brilliant filmmaker, a technical wunderkind, a guaranteed revenue stream and as time has proven, a person that knows how to make some serious quan! IBM, was a different story all together.
The IBM Company at the time was going through some serious issues. Their longtime Chairman John Akers was on his way out and their new Chairman, Lou Gerstner, the former CEO of RJR Nabisco was just getting the big blue bit between his teeth. IBM had made some major mistakes in the years prior to Gerstner’s arrival. Gerstner’s belief in the internet, his turning the company’s culture around from the staid 1950′s sensibilities and his focus on the IT services business resulted in one of the great turnarounds in the history of corporate America.
That being said, IBM did not have a product offering that made any sense for a digital film and media company starting in the early 90′s. But they did have some cash. And so when we started talking to some very forward thinking IBM’ers, Kathleen Earley and Lucie Fjeldstad, I made it pretty clear that we would not be willing to commit to purchasing any equipment from IBM. I was pretty set on purchasing SGI (Silicon Graphics) workstations as SGI was the computer company that I had formed a relationship with whilst I headed up Industrial Light and Magic.
Once we received the cash from IBM, I went on a shopping spree. I set up a meeting with the SGI brass, Ed McCracken and Tom Jermoluk at their company headquarters in Mountain View CA. Cameron and I flew up to San Jose. On the way there, we stopped at NASA Moffet Field, where we were given a tour of the new CGI simulation lab. The NASA guys were very proud of their simulation of the Mars Rover being driven around the surface of Mars.
I was shocked. I mean here we were at NASA, the cutting edge space agency of the most powerful and technologically advanced nation on the planet and the stuff they were doing looked like a bad video game! I then realized that there were a lot more resources available to folks making movies about spacetravel than folks trying to land actual spaceships on distant worlds.
We arrived at SGI headquarters where Jim and I were shuffled off to one of their two conference rooms. We were not offered coffee or water by some office babe, after all this was Silicon Valley not LA. The receptionist offered us a choice of rooms, either the TERMINATOR 2 conference room or the ABYSS conference room. I saw the glint in Cameron’s eyes when he chose the ABYSS room, I guess he always felt more comfortable in water.
After a few minutes, Jermoluk and a few others joined us and explained that McCracken, SGI’s CEO was unavailable as he was involved in some political fundraiser. It turned out that McCracken had turned his attention to being very active in national politics and not very active in the running of SGI. McCracken seemed to care much more about being popular than being profitable. He hosted lavish parties, was on the cover of magazines and seemed to know Al Gore and Bill Clinton on a first name basis. I always thought (given my rather large ego) that SGI became the Hollywood household name because of my inviting them to the table with ILM back in 1990. In fact, much of SGI’s marketing patina was based upon its relation to Hollywood and ILM. And now here we were, sitting in the ABYSS conference room with Jim Cameron, the director of the ABYSS and me, the fellow that started SGI’s romance with the movie industry.
SGI dudes wore a specific uniform of the day… the Silicon Valley drag of the 90′s… khaki trousers, replete with pleats ( who ever came up with the idea that pants that made you look fat were cool, I have no idea), a Polo shirt emblazoned with the Company logo and a pair of penny loafers. And so here we were, surrounded by SGI studs in corporate drag. Jermoluk immediately started to press the flesh and tell us about how excited he and his SGI drones were to “hang” with us. I explained the origins of Digital Domain, who our partners were (IBM) and that I was here to forge yet another meaningful relationship with SGI. DD was ready to outfit its facility with SGI boxes and their famous refrigerator multi core machines. DD already had a few SGI Onyx’s and Challenge’s that were shipped over from Stan Winston Studio ( which we paid Stan handsomely for). And given my existing relationship with SGI, and Jim’s celebrity, we were looking for a deep discount as well as a special strategic relationship with SGI.
Jermoluk took the floor and explained to us that SGI was in the process of formalizing a strategic partnership with LucasFilm and given that DD was funded by IBM, the discount structure would be considerably less than I had hoped for. In addition, Jermoluk went on to say that since IBM was a direct competitor ( which at this point, it was most definitely not, for had it been, I would have bought IBM hardware), SGI would not enter into any special relationship with DD. A few months later SGI and Lucasfilm announced the JEDI Collaboration.
Needless to say, I left Mountainview rather upset. There was no other choice for hardware, and as I had set my sights on competing directly with ILM, we needed to have at least, a similar cost basis for our work. If DD did not acquire SGI machines at the same sweetheart deal as ILM, our cost basis for our bids to our clients would not be competitive. A solution was critical. I was pissed.
The expense for hardware, back in the day, was considerably higher than the expense for software but software was still a critical component in pricing. At the time, ILM had been using Alias/Wavefront and Renderman as its basic pipeline, and just as I had negotiated ILM’s SGI deal, I had also built a strong relationship with Alias’s then CEO, Rob Burgess.
DD needed to get up and running quickly, we had a Tim Burton logo to do ( Buried Alive) and Jim was counting on us for the visual effects on his next film, TRUE LIES. So, time was of the essence. While I was knee deep in hammering out our Alias deal and I was expressing my SGI discontent with Burgess, Rob came up with a brilliant solution. It seemed that Alias had what was known as a VAR (Value Added Reseller) agreement with SGI and this agreement allowed Alias to buy and resell SGI equipment as long as it was bundled with Alias software. And it seemed that Alias’ VAR pricing with SGI was lower than any discount I had negotiated with SGI whilst at Lucasfilm. The hitch was that I needed to buy more Alias software than DD needed. Eventually, through the good graces of Mr. Burgess and The Alias software company, DD bought its SGI machines for less than ILM/LucasFilm were able to purchase theirs for and DD bought exactly the right amount of Alias licenses at a very deep discount as well.
DD’s IBM board, though not thrilled with my decision to purchase millions of dollars of SGI computers, did stand by their word and “understood” that the IBM company was just not in the visual computing game and that they offered no hardware solutions whatsoever. A few months later, and a few DD/IBM board seat changes, DD now had IBM’s chief technologist on its board. Very shortly thereafter, DD had been introduced to IBM’s Power Visualization Sytems (PVS) a $350,000 super computer that had an unbelievable I/O and allowed DD incredible flexibility in the early days. Unfortunately there were, to my understanding, only 2 machines built and no spare parts. After about a year of depending on the PVS, and that no one else bought a PVS ( ours was lent to DD for testing), IBM decided to abandon the PVS and DD’s machine was hauled away and crushed.
Sometime in 1996 or so, I read an article in Wired Magazine written by the founder of Pacific Data Images ( later to become Dreamworks Animation), Carl Rosendahl. By this time everyone doing visual effects and CG animation were pretty much fed up with SGI. We used to have a saying about SGI and their utter arrogance …. “we are SGI, we don’t care because we don’t have to”. SGI was overpriced and took their eye of the ball. Carl’s article in Wired changed the way I viewed hardware suppliers. Carl made a statement that Intel architecture companies were spending more money in one year on researching visual computing than SGI’s total revenue for that same year. At last, there was an alternative. Within a year or so, DD had transitioned away from SGI and was now only buying Intel based machines…. at a fraction of the cost. Just eight years later SGI was delisted from the New York stock exchange and in 2009, SGI filed for Chapter 11 bankruptcy.