In the late 1970s, Chris Wedge, then an undergraduate at Purchase College studying film, was employed by Mathematical Applications Group, Inc. (MAGI).

MAGI was an early computer technology company which produced SynthaVision, a software application that could replicate the laws of physics to measure nuclear radiation rays for U.S. government contracts.

[11]: 12–13  After MAGI was sold to Vidmax (Canada), the six individuals—Wedge, Troubetzkoy, Ferraro, Ludwig, David Brown, and Alison Brown—founded Blue Sky Studios in February 1987 to continue the software design and produce computer animation.

[11]: 13  Following the stock market crash of 1987, Blue Sky Studios did not find their first client until about two years later: a company "that wanted their logo animated so it would be seen flying over the ocean in front of a sunset.

"[11]: 13–14  In order to receive the commission, Blue Sky spent two days rendering a single frame and submitted it to the prospective client.

However, once the client accepted their offer, Blue Sky found that they could not produce the entire animation in time without help from a local graphics studio, which provided them with extra computer processors.

[11]: 14  Recalling the award, 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.

[17] 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), as well as for The Sopranos episode Funhouse.

In the initial stages of the Bunny project, Ludwig modified CGI Studio to simulate radiosity, which tracks light rays as they reflect off of multiple surfaces.

[18] According to Wedge, Fox considered selling Blue Sky as well by 2000 due to financial difficulties in the visual effects industry in general.

[19] Studio management pressured staff to sell their remaining shares and options to Fox on the promise of continued employment on feature-length films.

[19] In January 2009, the studio moved from White Plains to Greenwich, Connecticut, taking advantage of the state's 30 percent tax credit and having more space to grow.

[25] Ownership of Blue Sky Studios was assumed by The Walt Disney Company as part of their acquisition of 21st Century Fox,[26] which concluded on March 20, 2019.

A spokesperson for the company explained that in light of the ongoing COVID-19 pandemic's continued economic impact on all of its businesses, it was no longer sustainable for them to run a third feature animation studio.

In addition, production on a film adaptation of the webcomic Nimona,[30] originally scheduled to be released on January 14, 2022, was cancelled as a result of its closure.

On May 4, 2021, fan site Disney Television Animation News reported that it was rumored that a short series produced by Blue Sky known as Scrat Tales would be coming to Disney+.

[35] Days after the release of The Ice Age Adventures of Buck Wild, it was reported that Disney had lost the rights of Scrat to fashion designer and artist Ivy Supersonic.

Initially, Blue Sky leadership removed the same-sex kiss from "presentations to Disney, despite hoping to ultimately include it in the film, the sources said.