1989-2002: Television commercials, visual effects and Bunny

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Throughout the late 1980s and 1990s, Blue Sky Studios concentrated on the production of television commercials and visual effects for film. The studio began by animating commercials that depicted the mechanisms of time-release capsules for pharmaceutical corporations. The studio also produced a Chock Full O' Nuts commercial with a talking coffee bean and developed the first computer-animated M&M's. Using CGI Studio, the studio produced over 200 other commercials for clients such as Chrysler, General Foods, Texaco, and the United States Marines. They made a cartoon bumper for Nicktoons that features an orange blob making a dolphin, a dinosaur, and a walking person.

In 1996, MTV collaborated with Blue Sky Studios on the film Joe's Apartment, for which Blue Sky animated the insect characters. Other clients included Bell Atlantic, Rayovac, Gillette and Braun. The Braun commercial was awarded a CLIO Award for Advertising. Recalling the award, Carl Ludwig stated that the judges had initially mistaken the commercial as a live action submission as a result of the photorealism of the computer-animated razor. In August 1997, 20th Century Fox's Los Angeles-based visual effects company, VIFX, acquired majority interest in Blue Sky Studios to form a new visual effects and animation company, temporarily renamed "Blue Sky/VIFX". Following the studio's expansion, Blue Sky produced character animation for the films Alien Resurrection (1997), A Simple Wish (1997), Mouse Hunt (1997), Star Trek: Insurrection (1998) and Fight Club (1999).

Meanwhile, starting in 1990, Chris Wedge had been working on a short film named Bunny, intended to demonstrate CGI Studio. The film revolves around a rabbit widow who is irritated by a moth. The moth subsequently leads the rabbit into "a heavenly glow, reuniting her with her husband." At the time, Wedge had been the thesis advisor for Carlos Saldanha while Saldanha was a graduate student at the School of Visual Arts; Wedge shared storyboard panels for Bunny with Saldanha during this time. After Saldanha's graduation, Blue Sky Studios hired him as an animator, and he later directed a few commercials. It was not until 1996 when Nina Rappaport, a producer at Blue Sky Studios, assigned Wedge to complete the Bunny project, which required CGI Studio to render fur, glass, and metal from multiple light sources, such as a swinging light bulb and an "ethereal cloudscape". In the initial stages of the Bunny project, Carl Ludwig modified CGI Studio to simulate radiosity, which tracks light rays as they reflect off of multiple surfaces. Blue Sky Studios released Bunny in 1998, and it received the Academy Award for Best Animated Short Film. Bunny's success gave Blue Sky Studios the opportunity to produce feature-length films.

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