The Keys to the Kingdom (2 page)

A
S BOOK WATCHERS
might notice, the subtitle of this paperback edition is different from the hardcover version. The original, “How Michael Eisner Lost His Grip,” turned out to be a distraction for many readers. The subtitle was meant to be figurative, suggesting that Eisner's increasing isolation had led him to make several costly and not completely rational decisions (such as his unsuccessful entanglement in the expensive lawsuit brought by former Disney studio chairman Jeffrey Katzenberg).

But it quickly became clear from questions that readers posed that many were confused. Those who did not follow the company closely asked when Eisner had been fired, which of course had not happened. Accordingly, the subtitle was changed because Eisner remains chairman of the Walt Disney Company and is, in fact, the last chief executive of a major entertainment company to have risen through the Hollywood ranks.

As the hardcover edition was being released in April 2000, Disney—which had suffered from a long spell of trouble in such businesses as home video and consumer products—was enjoying the type of extraordinary break that reverses fortunes at entertainment companies.
Who Wants to Be a Millionaire?
was proving to be more than just a hit. It was a phenomenon—the kind of lifeline that Eisner had hoped for when he had told analysts in November 1999 that the picture at Disney was bound to improve.

Millionaire
not only jolted Disney out of its slump, it boosted the stock of Bob Iger. In February, host Regis Philbin joked—but only partly—that the reason Iger had been promoted to the number-two job at Disney was “because he was lucky enough to be president of ABC when
Millionaire
was put on the air.”

In March, Disney stock surged from a fifty-two-week low of about twenty-three dollars a share into the low forties as analysts became encouraged by
ABC's resurgence as well as the company's prospects in DVD sales and theme-park attendance. It became known that Capital Research and Management Group's portfolio manager, Gordon Crawford, had a change of heart. After dumping a block of Disney stock early in 1999, Crawford bought more than 26 million shares by year's end. And Crawford was still accumulating the stock. What was not yet known—and what wouldn't be disclosed until early 2001—was that while Crawford started to re-accumulate his position, legendary investor Warren Buffett was selling. He got rid of more than 80 percent of his company's stake in Disney in the last quarter of 1999 and the first quarter of 2000. Nonetheless, when analyst Jessica Reif Cohen offered a favorable rating of Disney's prospects in April, the stock jumped nearly 5 percent to $43.63. Cohen said she expected the stock to climb a dazzling 20 percent in the year ahead.

And by the time third-quarter profits were announced in August, Disney showed a 48-percent rise in new income, excluding the impact of its struggling Internet unit, Go.com. Even though analysts were doubtful about Disney's ability to rebuild in the important areas of video and consumer-product sales, they nonetheless turned bullish on the company. Aside from the strength of the
Millionaire
show, which was lasting much longer than many had predicted, the company's theme parks remained strong. The company had new attractions on the boards, including Disney's California Adventure in Anaheim. And Disney was coming up with ways to make the parks more profitable. One approach was the “Fastpass” system, which enabled customers to avoid waiting in long lines for rides. Another was a decision in April to charge ten-year-olds the full adult price for admission to Disneyland.

 

AS HE WAS
trying to steer Disney toward a lasting recovery, Eisner waged a war on the political front. With Time Warner's merger with AOL looming, he set out to do what he could to undermine the deal in Washington. In an atmosphere of enmity, Time Warner unwittingly offered Disney the chance to score a highly publicized victory. The two companies had gotten into a skirmish over the fees that Time Warner would pay to carry Disney-owned channels on its cable systems. In December 1999, Time Warner insisted, Disney had agreed to a fee structure. Disney subsequently claimed there was no final deal. Whatever had happened, after the AOL deal was
announced in January, Disney upped its asking price by $300 million, bringing its fee for supplying the programming to $1.3 billion over ten years.

In an astonishing public-relations blunder, Time Warner retaliated by pulling the plug on Disney-owned ABC at the beginning of the May “sweeps” period, when ad rates are set. Time Warner hoped that outraged viewers would blame Disney, but the opposite happened. The
New York Times
reversed its editorial position, offering the opinion that given Time Warner's behavior, its deal with AOL deserved greater scrutiny from the federal government. Time Warner had achieved the unthinkable: making Disney look like an underdog. The dispute was quickly settled, with Disney winning several concessions.

Disney pressed ahead with an aggressive lobbying campaign to get the Federal Communications Commission to impose conditions on the proposed merger. The government seemed to take a closer look at the deal than it otherwise might have done, but ultimately Disney failed to block the deal or even to get Washington to impose stringent conditions.

 

BY THE TIME
Disney announced what seemed like continuing good financial news in November, the story was overwhelmed by looming weakness in the advertising market. Disney acknowledged that
Millionaire
's ratings had started to slip and that its audience was aging. The change in demographics meant that rates charged to advertisers would have to drop. Disney warned that results for the fiscal quarter ahead would probably be flat. Despite the company's report that operating income doubled in the fourth quarter, the stock dropped about 15 percent, closing at $31.50 by the close of trading that day. (Other media companies, including Fox, Viacom, and Time Warner, also dropped, but not as sharply.)

Analyst Jessica Reif Cohen, among others, cut her rating on the stock and trimmed her formerly optimistic earnings forecast. Certainly, the stock showed no signs of getting back into the low forties, which is where it had been trading six months earlier when she predicted that it would climb by another 20 percent in the year ahead.

Eisner wasn't buying the grim predictions, insisting that the economy remained strong and the advertising market would recover. “We don't see this dismal-looking future that people are talking about beyond this momentary softness,” he told analysts.

In December, Eisner told analysts in London that the company was like a race car, “accelerating nicely but firing on only half its cylinders.” By March 2001, Disney acknowledged that bad times were going to take a toll. The company said it was cutting 4,000 jobs. Continued softness in the economy required Disney to eliminate 3 percent of its 120,000 employees—the first time the company had ever undertaken a worldwide reduction in its workforce. Eisner and Iger offered voluntary buyouts, giving staffers three months to make up their minds about whether to take the severance packages. If the company's goals weren't reached, layoffs would follow with lower benefits to workers. Disney was hardly the first entertainment company to announce cuts: NBC, Viacom, and Time Warner had already gone down the same path.

 

AT THE LONDON
analysts' meeting, Eisner had singled out the consumer-product division and the studio as weak performers in fiscal 2000. The studio had suffered through a less than spectacular summer, falling short of expectations with the Nicolas Cage action picture
Gone in Sixty Seconds
as well as
102 Dalmatians
. In animation,
Dinosaur
was an especially vexing disappointment. The film had been a venture into computer-generated imagery, representing Disney's expensive attempt to build a unit to make the kind of innovative hits produced by its partners at Pixar, the maker of
Toy Story
and
A Bug's Life
.

The follow-up to
Dinosaur
was supposed to be a picture called
Wild Life
, but in a development that stunned some members of the animation community, the plug was pulled in September. A number of animators with knowledge of events said
Wild Life
was dumped at the behest of Roy Disney, and not simply because he was disheartened by the weak performance of
Dinosaur
. Instead, several animators said the project had an inappropriate adult sensibility—including sexual innuendo and what one insider called a “gay-friendly” tone. For example, there were reports that there was a risque wordplay on characters descending into a “manhole.”

Such material apparently led Roy Disney to declare, after viewing an early version of the picture, that
Wild Life
was “not a Disney movie.” The central mystery was how a picture that one Disney insider called “a massive train wreck” got as far along as it did—and at a cost rumored to be about $20 million. Disney animation chief Tom Schumacher said in an interview that he—not Roy Disney—made the decision to pull the plug on
Wild
Life
, and that he did so simply because the story “just wasn't strong enough.” Schumacher said the project was set “in a high-style urban setting,” and acknowledged that “there were things in it that might have gone beyond the wink” that is accepted in other Disney movies. But Schumacher said the film was a work in progress, and material that crossed the line could have been excised. For that matter, the film could have been released under the Touchstone banner (as were
The Nightmare Before Christmas
and
Who Framed Roger Rabbit
) if it was deemed too adult for the Disney label.

In the wake of the debacle, Disney shut down the computer-animation unit. Eisner was said to have asked to review every project in the pipeline, even in live-action. Now Eisner said the company would also cut its budget in the live-action film division by $500 million a year.

Interestingly, many observers believed that Disney would have a hit with an uncharacteristically expensive live-action project,
Pearl Harbor
, set to premiere on Memorial Day weekend in 2001. Produced by action veteran Jerry Bruckheimer, with a cast led by Ben Affleck,
Pearl Harbor
was assembled primarily by production chief Todd Garner and approved by Joe Roth before both men left the studio (Garner joined Roth in his new company). The original budget was whittled from $200 million to $145 million.

Bruckheimer believed that Eisner had given his approval to start the film. But after Roth's departure, Eisner told the
Wall Street Journal
that
Pearl Harbor
had not yet been given a green light. According to an individual close to the situation, Eisner met with Bruckheimer and said, “I don't care what you've heard. We're not green-lighting the biggest movie of all time.” He insisted on trimming the budget by $10 million—a decision that proved difficult to implement, especially because the sets had already been built. “Disney was under enormous scrutiny,” says this insider. “Joe had left. The studio had just had [two box-office flops],
The Insider
and
Beloved
, and they were hemorrhaging red ink…. Eisner was showing the community and his board that he was taking charge. He was making a statement that there's a new sheriff in town.”

In fact,
Pearl Harbor
still had one of the highest budgets ever approved at any studio. Unlike
Titanic
, however, the picture did not go wildly over budget and attract reams of negative publicity. While director Michael Bay was not thought to be the storyteller that
Titanic
auteur Jim Cameron had proved himself to be,
Pearl Harbor
was considered to be such a formidable contender that no studio wanted to schedule a major release against it. Once Eisner saw the movie, said a source close to the filmmakers, “he was
proud of everything about it: the fact that they were tough and that they made this huge movie that was going to be a hit.”

The buzz was less positive about the summer's animated film
Atlantis
. The picture lacked music and was said to be visually impressive but perhaps too sophisticated to engage young audiences. Meanwhile, Dream Works was poised to release the broadly comic
Shrek
with the voices of Mike Myers, Eddie Murphy, and Cameron Diaz. It seemed likely that in the animation wars, Dream Works—which had scored its second best-picture Oscar in two years with
Gladiator
—might prevail in summer 2001. (The previous year, Dream Works had
Chicken Run
, which grossed $106.8 million, while Disney's
Dinosaur
pulled in $137.7 million. But
Chicken Run
cost less than half of the more than $100 million budget that Disney had spent on
Dinosaur
and therefore was much more profitable.) Disney had another project that held hope for the year ahead. In the animation world, there was talk that
Lilo and Stitch
, the story of a little Hawaiian girl and a visitor from space, might be turning into a real hit. The picture was scheduled for a 2002 release.

 

AFTER PASSING UP
a bonus in 1999, Eisner collected $11.5 million (in addition to his salary of $813,000) for 2000. He wasn't granted any new stock options in Disney, but he got 2 million options in the company's struggling Internet group. That brought his total compensation for what had been a roller-coaster year to $14.3 million.

January 2001 brought a major defeat. Eisner, who had seemed to remain confident in Go. com even as the portal struggled, was forced to fold the Go. com portal that had been at the center of Disney's Internet strategy. A year earlier, Disney had announced that it would retool the portal to focus on entertainment and leisure. Meanwhile, Go. com had been plagued with another problem. The company behind a fledgling Web search engine called GoTo.com had sued, arguing that Disney had infringed its trademark. GoTo.com argued that Disney's Internet logo—a green traffic light—was too similar to its own. A federal judge agreed and Disney's appeal failed. Arguing that changing its logo would cost more than $40 million, Disney still balked at making things square with GoTo.com. In March, the court said it might hold the company in criminal contempt if it didn't get down to business. In June, Disney finally agreed to pay $21.5 million and change its Go. com logo.