Disney CEO to Investors: `We Don't Have a Crisis' (Correct)
By Adam Levy
Disney CEO to Investors: `We Don't Have a Crisis' (Correct)
(Corrects typographical error in 17th paragraph. Published in the September issue of Bloomberg Markets)
New York, August 30 (Bloomberg) -- On a mid-May afternoon in New York, a crowd of advertising executives in Broadway's New Amsterdam Theatre roared with laughter as comedian Jimmy Kimmel introduced his new show coming to Walt Disney Co.'s ABC television network.
``I could be the best thing to happen to this network since Mike Ovitz joined the Disney empire and took all your money,'' Kimmel said, referring to the $140 million severance pay Disney gave its former president after ousting him in 1996, 15 months into the job.
Disney Chairman and Chief Executive Officer Michael Eisner, 60, seated in the seventh row, stretched his long legs into the aisle and didn't crack a smile.
``I got the joke, but I guess I don't find the topic all that amusing,'' Eisner said at an ABC-hosted party held at Cipriani's catering hall in midtown Manhattan that evening, following the unveiling of ABC's fall 2002 lineup.
There's not much to smile about in the Magic Kingdom these days.
Rival Hollywood studios are muscling in on Disney's film business with such instant classics as AOL Time Warner Inc.'s ``Harry Potter and the Sorcerer's Stone'' and Sony Corp.'s ``Spider-Man.'' Disney's main studio, Buena Vista Motion Picture Group, has sunk to fifth after ranking at or near the top of the box office charts for a decade.
Dispute With Eisner
DreamWorks SKG, the studio cofounded by Jeffrey Katzenberg, former head of Disney's movie business who quit after a dispute with Eisner, had last year's animation blockbuster ``Shrek.''
The Sept. 11 terrorist attacks in the U.S. are still keeping visitors away from Disney theme parks, normally the company's biggest and steadiest generator of profits and accounting for 40 percent of annual operating earnings.
Profit at Disneyland, Walt Disney World and other Disney attractions fell 2 percent in fiscal 2001, which ended Sept. 30, the first down year in 10. In the first nine months of fiscal 2002, theme park revenue dropped 10 percent to $4.81 billion; operating income tumbled 27 percent to $934 million. Chief Financial Officer Thomas Staggs said in August that hotel bookings for the parks were down 10 percent for the fourth quarter.
ABC is struggling. The network ranked fourth last season among advertisers' prized audience: 18- to 49-year- olds. It will lose $850 million in cash flow during its next two seasons amid an advertising slump and concern about its lineup, analysts predict.
Lowest of the Six
Grey Global Group Inc.'s Mediacom unit, which oversees $11 billion in ad spending, graded ABC's fall slate a D -- the lowest of the six U.S. networks -- because of poor scheduling and shows like ``Bachelor II,'' which depicts singles searching for a mate. Mediacom forecasts that ``Bachelor II'' and two other shows -- ``MDs'' and ``That Was Then'' -- will fail.
``ABC is Disney's principal problem,'' says Tom Wolzien, senior media analyst at Sanford C. Bernstein & Co. ``It's bleeding money, and history suggests that it will take years to turn around.''
Eisner, whose 18-year tenure as CEO has made him the public face of Disney much as Mickey Mouse is the company's icon, can't count on stability in the management ranks to revive his main businesses: Four top executives in the entertainment division, which oversees ABC, have left since 1997. And Disney has gone through three film studio chiefs in as many years.
Possible Heirs
The list of people whom analysts considered possible heirs before they quit includes Steve Bollenbach, Disney's chief financial officer from May 1995 to February 1996, who's now CEO of Hilton Hotels Corp.; Richard Nanula, who replaced Bollenbach and now is CFO of Amgen Inc.; and Stephen Burke, who ran ABC and now is executive vice president of Comcast Corp.
Eisner's first No. 2, President Frank Wells, died in a helicopter crash in 1994. After Wells's death, Eisner passed over Katzenberg and tapped Ovitz, founder of Hollywood talent agency Creative Artists Agency Inc., for president in 1995.
Now, President Robert Iger's job may be in jeopardy, given ABC's lousy showing, investors and analysts say. In January 2000, Eisner elevated Iger, a 20-year ABC veteran who gave the green light to TV hits ``Twin Peaks'' and ``NYPD Blue,'' to be his No. 2.
`Millionaire' Peaked
Disney's slide started in May 2000, when the ``Who Wants to Be a Millionaire'' quiz show peaked in popularity. The latest blow came on Aug. 1, when Disney reported a 7.1 percent drop in net income for the quarter ended June 30 as revenue slid 2.8 percent to $5.8 billion. Staggs said fourth- quarter results are likely to fall below year-ago levels. On Aug. 26, Fitch Ratings lowered its ratings on about $14 billion of Disney's debt to BBB+ from A-, citing higher debt and ``persistent weakness'' in its main businesses.
``Iger is in great disfavor right now because he's bombed at turning around the network,'' says Porter Bibb, who runs Technology Partners (Holdings) LLC, a merchant banking and consulting firm in New York. ``Eisner handpicked Iger, but it soon became clear that the job Iger was doing was less than adequate. This raises the old, important question of why Eisner hasn't been able to identify a capable successor.''
Work Well Together
Eisner says he and Iger work well together.
``There have only been me and Frank and me and Bob,'' Eisner says. ``The rest of the time it was me alone or one thing that didn't work -- and that was my mistake,'' he adds, referring to Ovitz.
Investors are losing patience with Eisner's lack of progress in righting Disney's businesses, grooming executives and boosting the stock price. A former programming wizard who nurtured hits like ``Welcome Back, Kotter'' at ABC and ``Airplane!'' at Paramount Pictures in the 1970s and early '80s, Eisner drove up Disney's stock 27 percent a year in his first 13 years as CEO. Market value soared to $65 billion in 1997 from $2 billion when he joined.
``It's hard to knock Eisner, because he's delivered before and Disney has some great franchises,'' says Scott Black, president of Delphi Management Inc. in Boston, which holds 401,000 Disney shares. ``But let's face it: A lot of Disney needs fixing, and Eisner hasn't delivered for five years and counting.''
Recent Drubbing
Disney's shares have dropped 30 percent since the beginning of January 1997, while the Dow Jones Industrial Average, of which Disney is a member, is up 35 percent even after its recent drubbing. In early August, shares of Burbank, California-based Disney hit $13.48, a low last seen in November 1994. Disney stock closed yesterday at $15.77.
During the same period, Eisner has been well rewarded. His $590 million total compensation in 1998, mostly in options, made him the best-paid executive that year and stands among the biggest payouts in corporate history. In 2001, Eisner's salary was $1 million. He didn't get a bonus because Disney had failed to meet financial goals.
``Eisner's made a lot of money-for himself,'' says Theodore Parrish, who invests $800 million at G. W. Henssler & Associates Ltd. in Atlanta and holds 250,000 Disney shares. ``If he can't get the ship moving, it's time for him to move on so someone else can.''
`The End is Nigh'
Some investors say they foresee Eisner's departure.
``The end is nigh,'' says Dan Peris, a senior analyst at Federated Investors Inc., which held 2.1 million Disney shares at the end of March. ``He's become too complacent and believes he can do what he did in the 1980s.''
In July alone, directors drove out Jean-Marie Messier of French media company Vivendi Universal SA and Thomas Middelhoff of Germany's Bertelsmann AG. Eisner hasn't faced the same pressure, because he's stacked the board with loyalists, say shareholder activists.
Half of the 16 directors are former or current Disney executives or people who've done business with the company. Among the others are people like Reveta Bowers, principal of the Los Angeles elementary school Eisner's three children attended. In August, Disney disclosed that Bowers's son Craig earned $81,863 working for Disney's Internet group during part of the fiscal year that ended in September 2001.
`Most Egregious Pay'
``He's had one of the most egregious pay packages in corporate history and a board of cronies about as bad as I've ever seen,'' says Nell Minow, editor of the Corporate Library, a Web site that monitors corporate governance. ``This board is under his thumb.''
Eisner says he doesn't see a need for concern.
Disney's setbacks will be short-lived and are easily reversible, he says. The company's assets are the envy of the industry.
In April, to blunt criticism about his board, Eisner hired New York attorney Ira Millstein to review governance issues, and he mandated that non-employee directors own at least $100,000 in Disney stock. In early August, he said he'd reduce the board's size and take as-yet-unspecified steps to enhance its governance policies.
As for shareholder complaints that he drives away top executives and possible successors by limiting their independence, Eisner says: ``You want autonomy? Be a poet.
`Maybe I'm Crazy'
``Maybe I'm crazy, but we don't have a crisis,'' Eisner said during a mid-June interview at ABC headquarters on New York's Upper West Side. He appears relaxed, wearing a dark sweater and khakis, sipping a Coke and ignoring his BlackBerry pager's constant buzzing.
``I feel sometimes like Odysseus,'' he says. ``I'm tied to the mast and ignoring the wailing of the Sirens: everybody who thinks they know what we should be doing.
``Right now running the Disney company is the greatest opportunity,'' he says. ``The perception is that we're on the floor, and of course, you can't fall off the floor. Everything is upside. If I worked at another company, I'd be sending my r,sum, here.''
Many Disney watchers are less optimistic.
Slow-Growth Businesses
Broadcast television, film studios and theme parks are slow-growth businesses, says Paul Kim, an analyst at Kaufman Bros., who rates Disney stock a sell. In July, TV Guide magazine rated Mickey Mouse as only the 19th-greatest cartoon character of all time, behind Bugs Bunny, Fred Flintstone and Beavis and Butt-Head.
Other analysts say that Donald Duck, Winnie the Pooh and Mickey are lucrative franchises that will sustain Disney.
``No matter how badly management does, there's still value,'' says Nicholas Truitt, an analyst at Strong Capital Asset Management, which holds almost 700,000 Disney shares.
Four things will turn Disney's fortunes, Eisner says: cost cutting, acquisitions, international growth and creativity.
In late 2000, Eisner ordered a $500 million reduction in expenses, which run about $21.5 billion a year.
Managers responded by paring $850 million: slicing 4,000 jobs, forcing ABC staffers to take up to 25 percent pay cuts, curbing the hours of 40,000 theme park workers, producing fewer films, and shuttering 100 of almost 750 retail stores.
Mighty Morphin Power Rangers
In October 2001, Disney paid $5.2 billion to News Corp. and Saban Entertainment Inc. for the Fox Family cable TV network, for children's programming such as Mighty Morphin Power Rangers and for TV assets in Europe and Latin America.
Eisner says he's now looking to buy TV stations to add to the 10 Disney owns.
``Prices are starting to get more reasonable,'' he says.
Eisner wants to expand overseas. Even with theme parks in Paris and Tokyo, Disney's international business chips in only about a fifth of overall revenue.
In July, Disney reached a preliminary agreement with the Shanghai government to open a theme park in China's largest city -- a move Eisner wants to leverage into an expansion of TV, film and consumer products for the country's 1.3 billion people. Disney is also planning a park for Hong Kong in 2006.
Ephemeral as Pixie Dust
Eisner is pinning his hopes for Disney's recovery on something that can be as unpredictable and ephemeral as pixie dust.
He says he's waiting for ``lightning'' to strike, as it did with ``The Lion King.'' The company's biggest-grossing movie ever turned into a blockbuster franchise -- with toys, TV shows and a play that still sells out four years after it opened on Broadway. Since the film's debut in 1994, ``The Lion King'' has added $1 billion to Disney's bottom line. Who Wants to Be a Millionaire, another hit, generated about $200 million in profits in 2000.
``We need some kind of creative lightning, whether it comes from our executives, outside directors or some spiritual being,'' Eisner says. ``When the economy turns, when the fear of flying goes away, when we get a hit or two on ABC, this company becomes a gusher.''
Waiting for a Hit
Some analysts and investors say they're troubled that a big chunk of Eisner's strategy comes down to waiting -- waiting for the economy to turn, waiting for a hit.
``When does the economy come back?'' asks Cr,dit Lyonnais analyst Richard Read, who rates Disney a buy. ``If it's not until the middle of next year, that probably wipes out 60 percent to 70 percent of (Disney's) year.''
Iger, 51, says not to worry.
``Michael has always found growth,'' he says. ``He may not be able to tell you exactly where he'll find it, but he always has.''
In 1984, Eisner's reputation for spotting hits won him an interview for the CEO post vacated by Ron Miller, son-in- law of Walt Disney, the mustachioed animator who founded the company in 1923 and ran it until his death in 1966.
`Starsky and Hutch'
Eisner's accomplishments included giving the go-ahead to TV shows ``Happy Days'' and ``Starsky and Hutch'' during his time as head of ABC and films ``Raiders of the Lost Ark'' and ``Ordinary People'' in his eight years at Paramount Pictures.
Disney's executives, in contrast, were bogging down under flops like ``Something Wicked This Way Comes,'' a suspense fantasy about an evil carnival. Annual attendance at California's Disneyland had fallen to 9.5 million in 1983, down 20 percent from 1980.
Disney was barely profitable, earning $93 million on $1.3 billion in revenue in '83. Disney was on the verge of succumbing to a hostile takeover by financier Saul Steinberg. Texas's billionaire Bass family came to the rescue by buying a 25 percent stake.
Eisner says he told the board he'd run the company from a creative perspective like Walt Disney had: He'd produce live-action hits for adults rather than for the company's traditional children's market. He'd put Disney cartoons on Saturday morning TV. And he'd get into TV production.
`A Harvard MBA'
``The Disney board didn't look at me and say, `Now here is a business guru, a Harvard MBA','' says Eisner, who studied English and theater at Denison University in Ohio. ``They were much more interested in whether I could recognize a good script.''
The board paired Eisner with Wells, an entertainment lawyer and financial whiz who'd been vice chairman of Warner Bros. When Eisner became CEO on Sept. 22, 1984, Wells joined as president and chief operating officer.
For years, the duo had the Midas touch.
They found hundreds of Mickey Mouse cartoons that had never been syndicated to TV, and they began releasing on video animated classics like Pinocchio. They installed new theme park rides like Star Tours, a simulated trip through the heavens, and raised prices, adding $150 million of profit in two years.
Eisner cut thousands of jobs and brought in new executives, including Katzenberg, who began developing animated hits like ``Beauty and the Beast'' along with live- action films like the comedy ``Down and Out in Beverly Hills.''
Disneyland Paris
Not everything went smoothly.
In April 1992, Euro Disney SCA opened the gates of its theme park -- and almost shut them in two years after losing more than $1 billion. Disneyland Paris, as the park is now called, turned its first profit in 1995, only after Disney agreed to forgo royalties and creditors froze interest payments on the company's debt. Saudi Arabia's billionaire financier Prince Alwaleed bin Talal bought a 25 percent stake in the business, helping Disney reduce its exposure.
Tragedy struck in April 1994, just weeks after Eisner and Wells had put the finishing touches on Euro Disney's restructuring. Wells was killed in a helicopter crash in northeastern Nevada while returning from a ski trip.
Three months later, Eisner, then 52, underwent emergency heart bypass surgery. The sudden operation worried Wall Street and Hollywood executives, who fretted over the lack of an heir-apparent.
`A Bum Ticker'
``He's a man with a bum ticker running a company with no backup,'' rival media executive Ted Turner told Bloomberg News in December 1996.
Disney's leadership vacuum lingered. When Eisner didn't name Katzenberg president, the studio chief quit in August 1994. He sued Disney in 1996, claiming he was owed a $250 million bonus for the films and TV shows he'd overseen.
Disney settled in July 1999 for an undisclosed amount. During the court battle, Eisner produced notes he'd written -- for his autobiography -- that said of Katzenberg, ``I think I hate the little midget.''
``What a huge distraction,'' says Guzman & Co. analyst David Joyce. ``Eisner should have focused on the business, not on this squabble. To me, it showed that Disney isn't really run for the shareholders, but for the executives, and that the board basically lets the CEO go unchecked.''
CFO Bollenbach took a more prominent role advising Eisner. In July 1995, Bollenbach prodded his debt-averse boss to take on $9.5 billion in liabilities and bid $19 billion for Capital Cities/ABC Inc.
A Dozen TV Stations
The deal, which closed in February 1996, included the ABC TV network, almost a dozen TV stations, a radio network and sports cable network ESPN.
With his empire growing, Eisner tapped Ovitz as president. The relationship was rocky from the start.
On an August 1995 conference call announcing his appointment, Ovitz said he didn't want to be called Mike. Eisner countered that having two Michaels was confusing. ``He's been trying to graduate to Michael, but I think he should be Mike,'' Eisner said. Ovitz hung up early from the call.
With Ovitz unable to get any projects going or to define his role, he resigned in December 1996.
Part of the difficulty with working for Eisner, say people who have quit, is that he's a micromanager who insists on getting involved in all aspects of the business.
Animal Kingdom Lodge
For instance, Eisner hired the architect for the Animal Kingdom Lodge in Disney World in Orlando, Florida. He vetoed three design versions, picked every piece of furniture and met with every decorator, says a person familiar with the decision.
Cable chief Geraldine Laybourne, who left in 1998 to found cable and Internet company Oxygen Media Inc., says she wanted to be more of an entrepreneur than Eisner allowed.
Comcast's Burke -- who helped develop the chain of Disney stores and ran ABC as well as TV and radio stations -- left that same year, telling Bloomberg News, ``I'd rather be in a company where the environment is more entrepreneurial.''
Eisner shrugs off the defections.
``I think we're pretty stable,'' he says, naming such veterans as theme park chief Paul Pressler and studio head Dick Cook, who started as a park monorail operator 30 years ago. Some investors are tired of Eisner's unbridled optimism.
`He's Smiling'
``He's smiling, but I'd rather he deliver,'' says G. W. Henssler's Parrish, who adds that Disney's aggressive cost cutting may hinder its ability to bounce back.
``Maybe they overdid it,'' he says. ``In the parks, there used to be five Mickey Mouses running around. Now, you're lucky if you find one.''
Eisner says cutbacks haven't hurt.
``Anyone who has been to the parks will tell you they won't see a difference,'' he says.
Several cost-cutting moves have fallen short.
In July 1999, Eisner melded Disney's production team with ABC's. The strategy had the potential to pay big dividends: Disney would keep the money its hit TV shows fetched when they aired in syndication as reruns.
Instead, the plan backfired as programming executives passed on shows like ``Survivor'' and as none of ABC's shows struck it big.
Soliciting Shows
In August 2002, Disney returned to soliciting shows wherever it can find them, reaching a two-year agreement under which AOL Time Warner's HBO unit creates new programming for ABC.
In another effort, Disney slashed annual movie production to 14 films last year and to 19 in 2002 from 35 annually in the late 1990s.
Eisner is betting on lower-cost movies like ``The Princess Diaries,'' in which Julie Andrews plays the grandmother of an awkward teenager. The film cost $35 million to make and took in $108 million, according to Web site imdb.com, which tracks films' box-office performance.
Profitable? Sure, though Sony's ``Spider-Man'' raked in more than $400 million on a budget of $139 million, imdb.com says.
Top-Selling Movie
In August, Disney's supernatural thriller ``Signs'' debuted as the top-selling movie in the U.S. and Canada, and has brought in $151 million through August 18. The film cost $62 million to make.
Disney's ties to Pixar Inc.'s Pixar Animation Studios may be in jeopardy, some analysts say. Pixar, run by Apple Computer Inc.'s CEO Steve Jobs, has created some of Disney's most popular recent releases, including ``Toy Story'' and ``Monsters, Inc.''
In 2005, Pixar is scheduled to deliver the fifth and final film it owes Disney under a 1997 contract. Disney markets and distributes the films and gets an equal share in the profits, including related toys and videos.
Analysts expect that when the two renegotiate, Pixar either will wrest a better split or will bolt to another studio.
``Disney's reaped more than $1 billion in operating income from Pixar,'' says Gerard Klauer Mattison & Co. analyst Jeffrey Logsdon. ``I shudder to think of what Disney would look like without that.''
Pixar's Ties
Jobs, during a May conference call, wouldn't commit to extending Pixar's ties to Disney.
``We have a lot of possibilities, and one of them, certainly, is to continue our relationship with Disney,'' he said.
Disney's own animation team has a spotty record. ``Lilo and Stitch,'' a story about a Hawaiian girl who adopts an alien, earned $139 million through August 18, according to imdb.com. The film is this year's No. 7 movie through Aug. 18.
Two 2001 films -- ``Atlantis: The Lost Empire'' and ``The Emperor's New Groove'' -- each failed to crack $90 million at the U.S. box office, although they cost at least that much to produce, according to imdb.com. DreamWorks' ``Shrek'' cost about $60 million and took in $268 million, about the same as all three Disney films.
TV Business
Investors and analysts are most concerned with ABC. Disney gets a quarter of its $25 billion in annual revenue from advertising, mainly in its TV business.
Two years ago, ``Millionaire'' helped ABC top the ratings. The network began airing the show four nights a week and failed to replenish its schedule, instead renewing aging comedies ``The Drew Carey Show'' and ``Dharma & Greg.''
``They bet the farm on `Millionaire','' says Strong Capital's Truitt. ``They definitely overplayed their hand.''
ABC's prime-time ratings have tumbled 34 percent in the past two seasons. In January 2002, Disney fired ABC programming chief Stuart Bloomberg, a 22-year veteran who'd overseen such popular programs as ``The Wonder Years'' and ``Home Improvement.''
Disney promoted Susan Lyne, the head of ABC's movies and miniseries, to president of its ABC entertainment division.
Job is Daunting
Lyne, 52, says her job is daunting: Not only is ABC No. 4 behind NBC, CBS and Fox among 18- to 49-year-olds, but also, the networks as a group are losing about 4 percent of their audience to cable TV annually, says Sanford Bernstein's Wolzien.
``It's a huge task,'' Lyne said in May in New York. ``We're clearly a challenged network. All we're trying to do is lay the groundwork for a turnaround. It won't happen in one season.''
Lyne is getting support from up high. Iger, a former TV reporter and weatherman who's married to CNN Moneyline anchor Willow Bay, has rearranged his days -- which already start at 4 a.m. -- to spend more time on programming.
Eisner chimes in too. He wants to air more comedies and focus the 8-9 p.m. slot on family programming, called the ABC Happy Hour.
`Very Good Sleeper'
Iger is pragmatic when it comes to producing results.
``We're going to need time,'' he says. ``My heart is into it. It keeps me awake at night, and I'm usually a very good sleeper.''
As for his role as Eisner's successor, Iger says: ``It's a board decision. It doesn't motivate me. I'm a competitive person, and what I really want is to turn around ABC.''
One role Iger has assumed is that of Eisner's heat shield. He negotiated for channel space on Time Warner's cable systems and took the lead in a spat for similar access with satellite TV provider EchoStar Communications Corp.
In February, Iger courted CBS talk show host David Letterman to replace Ted Koppel's ``Nightline.'' The discussions created an uproar within ABC News because Iger had kept in the dark both the head of the news division, David Westin, and Koppel, a 30-year veteran. Both say they read about the talks in newspapers.
`Desperate People'
``ABC is starting to do things in careless ways that suggest the acts of desperate people,'' says Robert Thompson, media professor at Syracuse University.
Eisner says he'd make the ABC acquisition again. ESPN is ``alone worth more than ABC when we bought them,'' he says. Analysts like Wolzien say he's probably right.
Capital Cities' then-CEO Tom Murphy rejected Eisner's all-cash takeover offer in 1995, opting for a 40 percent payout in Disney stock. He said at the time he wanted to reap the rewards of the merger.
Murphy, a board member who declined to comment for this article, sold 1 million Disney shares -- more than one-third of his holdings -- in November 2001 at $19 a share. That's $2 less than Disney's price when the merger closed six and a half years ago.
Others Squeezed Too
Other big holders have gotten squeezed too. In September 2001, the Basses, caught in a margin call, sold 135 million Disney shares, a centerpiece of the family's investments for two decades. They sold at $15 a share, $2 billion in all. Eighteen months earlier, the stake had been worth $6 billion.
That fall, Eisner tried to persuade billionaire Warren Buffett -- who in 2000 had sold the last of his 74 million Disney shares -- to buy the Basses' stake.
Two summers ago, Buffett was among 400 attendees at New York investment bank Allen & Co.'s Sun Valley, Idaho, York investment bank Allen & Co.'s Sun Valley, Idaho, invitation-only conference when Eisner wrapped up a 45- minute talk and opened the floor for questions.
``How will you get Disney stock up and out of its narrow trading range?'' asked an investor in the back of the room.
Eisner shrugged.
``I don't know,'' he said. ``I'm looking for answers.''
More than a year later, investors are still waiting for Eisner to find some lightning.
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