The Keys to the Kingdom (60 page)

In an interview that apparently took place in New York not even six months before the final rupture with Katzenberg, Eisner gave Schwartz a detailed analysis of Katzenberg's performance in live-action film. From 1984 to 1989, he said, Disney released thirty-five films, thirty-one of which were profitable. The studio made an average of about $200 million a year. Then
came the increase in volume, “through the same overburdened executives,” Eisner noted. It was, he told Schwartz, “a recipe for disaster.” Particularly, it seemed, because Eisner said he “stopped being a partner in the development process.” In the next four years, Eisner said, the studio released seventy-six pictures of which only thirty-three were profitable. The average profit per year: about $62 million—most of it “eaten away by distribution, marketing, executive overhead of at least $100 million per year.” Eisner concluded: “not worth being in the business at anything like this profile.”

Katzenberg kept the three labels—Hollywood Pictures, Touchstone, and Disney—“ 'cause embarrassing to fold one up,” Eisner complained. Eisner seemed to feel that he had let Katzenberg have his way, and these costly examples of ego run amok were the result.

After having written his memo, Eisner resumed, “[Katzenberg] decided was genius and loving person, he excluded me…every time i talked to him it got worse.” Apparently, Katzenberg asked Eisner not to sit in on his meetings. This seemed like chutzpah from someone who, Eisner told Schwartz, was “the end of my pom-pom.” At one point, he said, “JEFFREY WAS MY RETRIEVER.”

Schwartz's notes are a window into Eisner's doubts over his fateful discussions with Katzenberg over his future at Disney. Eisner recalled the talks they had in Aspen in 1993, when Katzenberg had asked if he could have Frank Wells's job. Katzenberg had always insisted that Eisner had promised to advance him if Wells was gone. In Eisner's recollection, Katzenberg had been pushy, reminding Eisner how Wells had made room for him to be the top man at Disney in 1984. “He stepped aside for you,” Katzenberg said, in Eisner's recollection. “I'm more important than you were then.”

He remembered telling Katzenberg, “It's over. You are not getting that.”

But Schwartz's notes continue in Eisner's voice: “DON'T KNOW WHETHER I DID SAY HE COULD HAVE FRANK'S JOB.” Eisner remembered telling Katzenberg that Disney was signing Wells to a new deal: “[I] had talked him out of climbing Mount Everest; got too old to do it; he loved the action at disney, frank.” But Eisner could not or would not quite remember whether he had made a promise to Katzenberg. “I MAY HAVE…” he said to Schwartz, “what i clearly did [say] is frank has signed a new seven-year deal; and frank wouldn't climb mountains and health was perfect…only thing i MAY HAVE SAID IS: if he hadn't signed a perfect, seven-year deal, if he wasn't here…if i didn't have this wife, you'd be great, you would be right.”

Immediately after Katzenberg first broached the subject in Aspen, Eisner apparently told Wells that Katzenberg wanted the president's job. And perhaps surprisingly, Eisner's notes suggest that Wells was willing to let him have it: “i had called frank; would you believe this…i am not giving him that job; frank was kind of heart. FRANK WOULD BECOME VICE CHAIRMAN; i said roy will like that; sharing vice chairman.” When Eisner told Katzenberg that he wasn't getting the Wells job, however, Eisner remembers Katzenberg saying that he only needed “a new mountain to climb.”

Eisner told Schwartz about Katzenberg exercising his option to leave in 1994. He had then gone through “a year of prima donna hell,” he said.

Apparently, Katzenberg became increasingly upset over what he perceived as interference with his prerogatives. Eisner told Schwartz that Katzenberg wrote a letter complaining that Eisner was talking to animation chief Peter Schneider about
Pocahontas,
then still in production. Katzenberg set up a seven
A.M
. screening knowing that Eisner wouldn't make it. Katzenberg was “secretive,” Eisner said.

Eisner recounted the final rupture with Katzenberg and how incensed Katzenberg had been when Disney refused to take a position on whether he would receive his bonus: “…called me a liar…. He HEARS WHAT HE SAYS not what OTHER PEOPLE RESPOND, that is jeffrey k.”

And Eisner fumed: “I can't talk any more to jeffrey katzenberg…everything i ever said to him, he tells geffen, or media, now bringing up whole financial thing in media…. I said to jeffrey…i would suggest you don't negotiate with me in the newspapers, like you did your last situation.”

And Eisner offered this bitter reflection—a comment that, with all his complaints about “bad behavior” and disobedience, might have come straight from his own self-righteous father:

“i spend my life keeping this company on an ethical course.”

 

ON MAY
19, the court ruled on the issue of whether Disney owed Katzenberg interest. The decision was a mere seven pages long. Without explanation of his reasoning, Judge Breckenridge simply reached “the inescapable conclusion” that Katzenberg had never forfeited his bonus. He found that Disney had breached Katzenberg's contract but made no comment on the credibility of the witnesses, on the alleged animus of Eisner,
or on Project Snowball (though he found no evidence that Disney had committed fraud).

With this simple finding, the court made clear what so many in the media had already known: Disney's decision to fight over the interest, to expose Eisner to a disastrous turn on the witness stand, to put the phrase “I hate the little midget” into the public lexicon, had been an enormous miscalculation. The judge held that not only would Disney have to pay interest, but Katzenberg would also get the profits from all the merchandise.

Even before the ruling, veteran journalist Kathryn Harris had written the first review of Eisner's courtroom performance in a column on the Bloomberg Web site. Under the headline
EISNER LOSES HIS COOL (OR WAS IT THE CASE
?), Harris wrote, “The verdict is in: Michael Eisner is a charming, intelligent and facile executive who shouldn't be allowed near a witness stand.” Eisner had lost his composure, she said, but “far worse…was the ebbing of Eisner's credibility—that most precious commodity in a witness, and certainly in a chief executive who has fused his likeness to a company.”

Harris's critique was just the first in a barrage of negative media reports. The day of the ruling, the
Wall Street Journal
weighed in with a devastating commentary by Holman W. Jenkins Jr. Why, Jenkins wondered, would “the only media conglomerate with a brand name worth protecting” expose itself to such a spectacle? Frank Wells's absence was taking its toll. Eisner was rolling the dice on bigger wagers than ever before—ABC, the cruise-ship business, theme-park expansion—but to Jenkins it seemed that Disney was “placing billion-dollar bets all over the table with a gaping hole in its line-up.” If Wells had been around, Jenkins continued, Katzenberg might never have left.

The article was something that Eisner might have seen in a nightmare—and it appeared in an especially influential publication. This was not history as Eisner wanted to see it recorded. The awful conclusion: “an appropriate check on Mr. Eisner's gifts has not been put in place, and his Melvillian pursuit of Moby Jeff may be evidence of impulses to come.” Things had come to a dreadful pass. The
Wall Street Journal
was questioning Eisner's judgment on the same day that the court dismissed Disney's expensively wrought arguments in a few paragraphs.

 

THOSE WHO HAD
a major stake in Disney had been watching these developments with growing concern. Among them was Stanley Gold, who
had gotten in touch with David Geffen during the first part of the trial. The two men had a passing acquaintance and now Gold had determined that the way to approach Katzenberg was through Geffen. In fact, Geffen had made earlier attempts to settle with Disney. When the dispute first erupted, that might have been accomplished for $90 million. Now it was going to cost Disney much, much more.

In early May, Geffen had invited Gold to come over. They met at Geffen's tranquil beach house, with bookshelves lining the walls and large windows opening onto the ocean. Geffen was slight and immaculate in his usual T-shirt and shorts when he greeted the now portly, bespectacled Gold.

Geffen had told Gold that Disney was making a terrible mistake pursuing the interest issue, opening everything that had been resolved by the earlier settlement of the liability question. The two sides were going to piss all over each other, he had said, and in the end, Katzenberg would receive a big lump sum and the interest question would be academic. Gold had told Geffen that Eisner's lawyers—Litvack and Meisinger—had told Eisner the case was worth no more than another $30 million. Based on that, it was clear that the men were poles apart and there were no grounds for settlement.

But after the ruling, Geffen called Gold. “I told you so,” he said. The two men decided to meet again. On May 20, the day after the decision was rendered and less than a week before the second phase of Katzenberg's trial was to begin (in which the court would tote up the amount to be paid), Geffen again played host to Gold, this time at Geffen's beautifully restored estate in Beverly Hills—the former home of Jack Warner. Gold was stunned by Geffen's magnificent twentieth-century art collection. A canvas by David Hockney hung in the entryway while a Jackson Pollock glowed above the stairs—and that was only the beginning of Geffen's collection.

The visit was cordial but again fruitless. Two days later, Katzenberg called Gold and asked to meet. That Saturday, May 22—the weekend before the parties were to return to the courtroom—Gold met with Katzenberg and a clutch of his representatives in a room at the Four Seasons Hotel in Beverly Hills. Gold was treated to a detailed presentation of Katzenberg's case on the value of his 2 percent bonus, complete with an appearance by expert witness Dennis Soter, an analyst with Stern Stewart & Co., who had flown in from New York.

On Sunday evening, Gold went to Katzenberg's house in Beverly Hills and the two met for several hours. Gold was conciliatory. He agreed that
Katzenberg was owed something but he also said that he had reviewed the numbers with Disney's team. Disney's math didn't match Katzenberg's. “Stanley, I understand but they've been wrong,” Katzenberg said. “I think they have a set of numbers that they've put together to serve Michael's agenda, which was to pay me nothing.”

After he left Katzenberg, Gold went to visit Eisner. His mission was unsuccessful. Katzenberg sent Gold a box of Dunhill cigars. And he used his influence at Cedars-Sinai Hospital, where he was a generous donor and a board member, to ensure that Gold's father—who was just being admitted—would receive the best possible care while he was there in what would be his last illness. The second phase of the trial started as scheduled.

 

LOU MEISINGER WAS
shifted out of first position for Disney as the second phase of the trial got under way. Litvack now took the lead. The number-two man at Disney was in court day after day—doing a more effective job than Meisinger had done. Katzenberg's team hoped that his advocacy would be tempered in the judge's mind by his earlier lack of credibility as a witness.

Katzenberg had suggested that Gold come and sit in on the trial. It would be clear, Katzenberg said, that the judge was completely disenchanted with Disney and its attorneys. Gold did come, but to him, the judge seemed exceptionally polite and meticulously evenhanded.

But after the session ended, Gold approached Bert Fields. “Let's sit down and talk,” he said. The two huddled on a sofa in the reception area of Fields's firm. Again, Gold offered his analysis of Katzenberg's case. The two men parted without resolving anything, but Fields was not displeased that Gold was still in there swinging.

Still, the parties appeared to be further apart than ever. Katzenberg's lawyers had adjusted their figures. After initially seeking something north of $250 million, they now said Katzenberg's 2 percent might be worth as much as $578 million. (After subtracting the $117 million that he had been paid and applying the agreed-upon discount, they said Katzenberg was due another $330.8 million.)

The math was based on Disney's 1995 buyout of the Silver Screen Partnership for $500 million. (Silver Screen had an interest in sixty-six films; all but three were to be counted toward Katzenberg's bonus.) Katzenberg charged that Disney had deliberately destroyed documents that had been
generated during the Silver Screen transaction because they might have helped Katzenberg's case. Disney angrily denied it. The company argued that Katzenberg's top number was “a throwaway highball” to get the judge into a higher range. Disney said it owed Katzenberg a total of $140 million—or $20 million more than it had already paid.

Katzenberg's first witness was his friend Nathan Myhrvold, the cherub-faced technology expert from Microsoft Corp. He offered a bright prediction of the future moneymaking opportunities for Katzenberg's films and programs. He spoke about video-on-demand, the elusive technology that would enable viewers to beam the films of their choice into their homes, and “smart” toys that interacted with a television or computer. (A demonstration featuring Arthur, a talking non-Disney mouse, seemed to enchant the judge.) But Judge Breckenridge seemed disinclined to speculate much on technologies that didn't yet exist. Katzenberg's case began to seem less compelling in the second phase of the trial than it had been in the first.

But Disney was also facing a distressing prospect. Already, the company had been forced to attack Myhrvold's rosy projections about how much money it stood to make in China and India. A huge publicly held corporation hardly wanted to tell the world and its shareholders that the future wasn't that wonderful after all. And Eisner had made it clear that he hoped for great things from China in the future, so the two positions would be hard to reconcile.