The Keys to the Kingdom (61 page)

When it came to debunking Katzenberg's witnesses, however, Disney scored some points. (Katzenberg had considerable difficulty finding experts willing to take his case; Fields had made repeated trips to New York only to be turned down by the leading investment-banking houses. Some said the case would be too time-consuming; others said they did business with Disney and didn't want to get involved.)

Under questioning from Brian Edwards, one of Fields's partners, expert Dennis Soter painstakingly detailed how he had reached the $578 million figure. The next day, Disney lawyer Harry Olivar said Soter had used the wrong multiplier when extrapolating from the figures used in the Silver Screen transaction. That alone would cut Katzenberg's award in half. Olivar attacked other aspects of Soter's math and pointed out that Soter had no experience valuing film libraries.

Michael Wolf from Booz Allen & Co. had an even rougher outing. He testified that ABC had gotten sweetheart deals when it bought Disney films for broadcast. This was a potentially explosive issue, because an array of
profit participants from Disney films could go to court if they thought they could show that Disney had shortchanged them when selling their movies to its own network.

But Litvack got Wolf to concede that his analysis had been based on the broadcast dates of the films in question—not the dates that the sales had been concluded. Wolf was forced to concede that nine of the eleven films cited in his analysis had been sold to ABC before Disney acquired the network and should not have been counted at all. Wolf countered that eliminating those films would not reduce Katzenberg's award substantially.

But Litvack hammered at Wolf, asking if his projections were based on fact or “just your judgment.” Judge Breckenridge admonished Litvack for being argumentative when Litvack suggested that Wolf had “not the foggiest idea” what the market was for certain technologies. He jumped on Wolf's prediction that Disney would derive profits from videos of its stage plays—which Disney said it had no plans to sell in the first place. Even though
Cats,
the most successful video of a play ever, sold only three million units, Wolf had reckoned that a tape of
The Lion King
on Broadway would sell thirty-seven million copies.

Litvack asked why Wolf had used
Cinderella
and
Snow White
to forecast profits from animated films made during Katzenberg's tenure. They were the two most successful films in Disney history, he said. Why not use
Dumbo
or
Lady and the Tramp,
which also had turned profits? Wolf maintained that Katzenberg's films were closer in quality to the two greatest Disney classics.

Litvack also homed in on Wolf's projections that
Beauty and the Beast
and
Aladdin
would each sell seventeen million units when they were released in home video for the second time, while
The Lion King
would sell twenty-two million tapes. “Is it correct that no rerelease has ever sold fifteen million units?” Litvack asked. Wolf conceded the point.

Fields tried to rehabilitate Wolf, who had acknowledged under questioning from Litvack that he had been paid $4 million for his services to that point. Wolf defended using
Cinderella
as a model, and said his calculations were accurate to within 10 percent. He also tried to establish that, despite his error, ABC did in fact underpay for Disney films. Using the price that NBC had paid DreamWorks for the rights to
Antz
and
The Prince of Egypt,
Wolf insisted that Disney—which sold
The Lion King
to ABC for $8.5 million—could have collected as much as $27.9 million more.

 

AS JUDGE BRECKENRIDGE
sifted the often-tedious testimony of the expert witnesses, Gold was still trying to end the spectacle. On June 15, he bumped into Arthur Greenberg, a senior partner in Bert Fields's law firm, at a party for the Israeli consul general. As Greenberg teased Gold about the drubbing Disney had taken in the first part of the trial, Gold held out a tantalizing possibility. He might, he said, be able to talk Disney into “a more realistic number.”

Two days later, Gold was in Fields's office in Century City. The outlines of a possible agreement had started to emerge. Gold had worked on Eisner; Fields had consulted with Katzenberg. The gap between the parties narrowed but did not close. “Do you mind if I continue to involve David?” Gold asked, referring to Geffen. Fields said he did not.

Gold arranged to see Geffen over the July Fourth weekend at Geffen's beach house. The timing was right. Disney had attacked Katzenberg's experts but the company had not yet been forced to downplay its future profits. Eisner was poised to take the stand again—surely a development the company would want to avoid. At last Gold had managed to talk Disney into a higher number. Disney had said in court that it owed Katzenberg another $20 million. But the new number exceeded that by more than $100 million.

Gold and Geffen shook hands on a deal on Monday, July 5. On Tuesday evening, Judge Breckenridge got a call informing him that the details were in place. The next day, July 7, the parties surprised the industry with news of the settlement. Fields liked to say, “When you're a winner, go to dinner.” That night, Katzenberg and Fields did exactly that at the Ivy in Beverly Hills.

The number was to remain secret, but sources close to the situation say Katzenberg walked away with a net of nearly $270 million. It was a tremendous payday. The controversial Ovitz payout paled in comparison. Yet Katzenberg found it hard to accept. In his heart, he had wanted a number that began with a three. But Geffen and his lawyers convinced him to put the ordeal behind him.

Katzenberg threw a victory party at the Palm in West Hollywood. But he was not overjoyed. “It's a little like being in a car accident and the insurance company paid you off,” he explained. “Unfortunately, it doesn't take away from the trauma.”

E
ISNER HADN'T LET
the trial slow him down during what had been a busy summer. Disney continued its pursuit of cyberspace, rushing its plans to buy out the balance of Infoseek, the Internet-search firm. The company announced that all its Internet assets would be combined. Eisner remained committed to establishing Disney as a presence in cyberspace even though the Go Network was off to a bumpy start. The portal had recorded a 36 percent increase in traffic during its first quarter of existence but its revenues were flat, suggesting that advertisers weren't rushing to embrace it. And it had been plagued by technical problems.

Disney stock was also not getting the kind of bang out of its Web operations that Eisner might have hoped. Internet investors were clearly concerned that traditional media companies would stifle innovation with their bureaucracies. In fact, Infoseek employees complained that Disney was doing exactly that, holding up deals and requiring layers of review for designs. Eisner also had been peppering executives there with e-mails about problems with Go. (At one point he complained that the portal's personal stock tracker put the wrong value on his own holdings. It turned out that the system couldn't handle the commas that Eisner had used when entering the numbers. As an Infoseek executive pointed out, Eisner's figures had a lot of commas.)

Disney ultimately put the Go portal and its various online services (ABCNews.com, ESPN.com, and so on) into a separate entity and announced plans to issue a separate tracking stock that could be used to compensate executives. They hoped this would address an ongoing brain-drain problem. In fact, Disney had been losing Internet talent in droves as executives left to mint money in this most entrepreneurial of businesses. For example, Toby Lenk had been a business-development executive until
1998, when he left to help start e Toys Inc. By the following year, his stock in that venture had a market value of $573 million.

In a similar vein, Patrick Naughton, the chief technology officer at a Web-site design firm that Disney had acquired, once told Jake Winebaum, the head of Disney's Internet group, that his team wasn't demanding big salaries but eventually they expected “to live in Michael Eisner's house.” Disney coughed up substantial pay raises and even stock-option awards but still couldn't touch the kind of money that others were making in the field. And with Disney's stock faltering, the options weren't as appealing as they used to be.

The losses continued. Winebaum had toiled at Disney while others at start-up companies had grown very rich. On June 7, 1999—the very day Disney announced its plans to acquire the balance of Infoseek—Winebaum said he was leaving to start e Companies, a firm that would nurture other Internet start-ups.

 

IT MIGHT HAVE
been one thing to have waged a painful losing battle against Katzenberg if the company was performing well. But by July 1999, Disney was in the second year of a deepening slump. Disney announced its third-quarter results and the trend had not reversed itself. Earnings were down 12 percent—or up less than 1 percent if the cost of investing in the Internet venture was factored out. While operating income at the theme parks and resorts was up 12 percent, sales at the stores remained sluggish. The studio's income was down 33 percent to $74 million despite the strong performance of the summer's animated hit
Tarzan
and the video release of
A Bug's Life
. And ABC was a continuing problem.

New York
magazine took the dimmest view in July, stating baldly that “Michael Eisner's extraordinary reign at the Walt Disney Company is coming to an end.”

But Eisner must have considered the views of
New York
magazine to be a fleabite compared with the opinions that were being aired in influential financial publications. Disney got a contrarian, positive cover story in the July 26 issue of
Barron's
. There was, to be sure, “a parade of horribles,” as Eisner might have said. Disney's stock had been the worst performer in the Dow Jones Industrial Average over the previous twelve months. The stock was down 37 percent from the previous year. Disney was a favorite target
of short sellers. Standard & Poor's had warned that it might downgrade the company's debt. But while there was no quick fix for the company's problems,
Barron's
said, Disney was simply too valuable not to recover in the end.

Eisner concurred. “Our problems are momentary, fashion-oriented, and limited,” he said. He was going to pare down costs and simultaneously spend on new initiatives like his Internet venture.

But
Barron's
stopped short of fully endorsing Eisner. Instead, the report noted that some observers thought the solution for Disney “begins with Eisner—or better yet, without him.”
Barron's
acquitted Eisner of causing the company's most serious problems, instead blaming factors like the ongoing Asian economic crisis. “Our bet is Mickey and Michael remain a tight team, not least because the Eisner magic has worked like a charm for most of the past 15 years,”
Barron's
noted, adding wryly, “Besides, the board is packed with Disney insiders.”

Barron's
optimism was tempered by
Fortune
's less sanguine appraisal. “After all,” wrote reporter Marc Gunther, “earnings are dropping, top executives are defecting, and Disney stock is plunging like a ride down Splash Mountain.” Gunther contended that Eisner presided “over an insular—some say arrogant—corporate culture where decision-making is hierarchical, centralized and slow”—and that Disney's style was “an utter mismatch for the Internet age.”

In an interview, Eisner countered that Disney was the most profitable media company in the world. “We're being buried a little prematurely here,” he complained.
Fortune
granted that point but noted that other key indicators were down—operating income for the first nine months had tumbled by 17 percent; return on equity, which had consistently been 20 percent in previous years, had slipped ever since the 1996 acquisition of Capital Cities/ABC and was below 10 percent. Some financial analysts had cut earnings estimates for fiscal 1999 as many as five times since the previous summer. “The company has simply stopped growing,” Gunther wrote, “and it isn't a momentary dip either.”

Eisner also expressed his regret that Disney hadn't settled the Katzenberg case sooner. Only when Wells's handwritten notes emerged at the trial did he accept that Katzenberg had a legitimate claim. Reading these remarks, Katzenberg's legal team was astonished. Surely Eisner must have known about the Wells notes, which Disney itself had turned over from its own
files during the litigation. Eisner had been asked about some of these materials in depositions. His comment that he knew nothing about the Wells material was ridiculous on its face.

 

AS
FORTUNE
HAD
pointed out, the market had grown wary of Disney. Some big investors had gotten out altogether. Gordon Crawford, who had long controlled a major stake in the company through the Capital Research & Management Group investment firm, had sold a position that had been as great as forty-one million shares, his faith in Eisner in tatters. Brian Stansky of the T. Rowe Price Media & Telecommunications Fund had also sold the bulk of his stock.

There were so many problems. Disney was a unique brand but there was a sense that the company had overexploited its most valuable asset—the magic of its name. Its marketing had been too relentless. And Disney's zeal to walk away from every deal the winner had strained relations with licensees and retailers as well.

Disney insisted that its brand appeal was as strong as ever, citing the vigor of the theme parks as proof. But Disney simply wasn't as cool as it needed to be. Kids had not rushed out to buy
Tarzan
products and Disney did not wield the clout that might be expected in video games for children. In cable, it was third behind Nickelodeon and the Cartoon Network. The company's products appealed mostly to the very young, and even among that group, it faced tough competition from Tele-tubbies on PBS and Pokémon on the WB Network. Eisner held brainstorming sessions to figure out ways to make Mickey hip (one idea: have the mouse on a skateboard).

Eisner later addressed the issue of “age compression” in a November 1999 e-mail he sent to staffers throughout the company. (He had taken to sending regular messages to “fellow cast members” the previous summer, presumably as part of Disney's embracing of the Internet.)

Under the heading “Age Decompression,” Eisner insisted that “those who think Disney is only for kids are dead wrong.” The company was actively finding ways to expand the appeal of the brand, he continued. “The Rock 'n' Roller Coaster at Disney-MGM Studios integrates the music of Aerosmith with three inverted loops for an entertainment experience that is truly on the edge (I rode that three nights ago. WOW!!!).”

The company retrenched. It decided to prolong the gap between the rerelease of animated classics from seven to ten years. It cooled its pursuit
of new opportunities to license its products. But that would also mean less short-term income from video sales, and less income from associated merchandise as well.

Disney would keep slashing to save money. There would be fewer movies. The film division was carving $550 million out of its budget. On the television side, the company engaged in a bruising but successful battle to get its 225 affiliate stations to cough up some money toward Disney's $5.5 billion, eight-year deal with the National Football League.

The company's plans to spend as much as a billion dollars to open as many as thirty Disney Quest arcades—sites that were to combine video games and small theme-park attractions—were dropped after only two had been opened. And the idea of building the cruise-ship fleet to as many as a dozen ships within ten years seemed to have fallen off the boards after the launch of the second in the series, the
Disney Wonder
.

Eisner continued his reorganization and belt tightening. Disney sold off publishing assets, including Fairchild Publishing. He looked for a buyer for the Mighty Ducks hockey franchise and the Angels baseball team.

In a major consolidation of television operations, he melded Disney's production operation with ABC's, hoping to achieve the elusive goal of synergy. Disney had developed only one show,
Once and Again
with Sela Ward, that would find a spot on ABC's fall schedule. (After a bright debut, it began to falter in the ratings. Nonetheless, ABC announced that the show would remain in the coveted Tuesday ten
P.M
. slot, displacing the long-running hit
NYPD Blue
. The series cocreator, Steven Bochco, said the network's decision was an “egregious and inevitable consequence of vertical integration.”)

The lack of Disney prime-time programming on ABC was a major frustration for Eisner—especially since the network was quietly exploring a replacement for the underperforming Sunday-night show
The Wonderful World of Disney
. While Fox owned the top shows on its own network (
Ally McBeal, The Simpsons, The X-Files
) as well as strong shows on ABC (
The Practice
and
Dharma & Greg
) and the other webs, Disney had not had a prime-time hit on ABC or elsewhere since
Home Improvement,
which had finally concluded its long run. By having ABC take over production, Eisner hoped that ABC would develop and own more of its programming. Some in the industry were dubious about Disney's strategy. They wondered whether other networks would be wary of Disney's program ideas because they would assume that anything Disney pitched would be a leftover
deemed unworthy of a slot on ABC's schedule. (Some of these concerns were allayed in November, when Disney sold a sitcom pilot to NBC.)

The short-term result of the merger was management chaos at the network. The shuffling of personnel produced a dramatic bloodletting at ABC. Among the most prominent victims: Jamie Tarses, the young executive lured from NBC by Ovitz. Tarses had continued to provide occasional color for the press. (She publicly denied, for example, that she was dating
Friends
star Matthew Perry and then the two were caught making out.) More importantly, she clashed with Lloyd Braun, the head of Disney's television-production operation—almost all of whose pilots had not been picked up at ABC. When his unit was merged into the network, Tarses tried to cut him out of the loop. In the end, she was the loser. After ABC abruptly dismissed her deputy, Steve Tao, without consulting her, she resigned.

In September, Eisner made a surprise move by naming Steve Bornstein to run the Internet venture. Just the previous February, Bornstein had been put in charge of day-to-day operations at ABC. This move was perceived as a sign of Bornstein's strength and the Internet venture's weakness. Eisner clearly hoped that Bornstein, having previously helped build ESPN into a force, could do the same for Disney's Go. com portal site. (Though consistently rated the fifth-most-popular Web site, the percentage of online users who visited had slipped from 24.2 percent in April to 22.8 percent in July, according to Nielsen NetRatings. The time spent on the site also shrank from 32.5 minutes in April to 22.7 minutes in May.) Like other companies, Disney was still groping for a formula to attract users.

Eisner wasn't done. At the end of the month, he promoted Sandy Litvack to vice-chairman of the company. “Sandy has been my key adviser over the past five years and has been invaluable in providing me with guidance and counsel,” Eisner said in a statement. It seemed odd that Eisner, constantly anticipating betrayal, now embraced a man who had led Disney's failed battle against Katzenberg—an episode that had proved so damaging to Eisner.

A company spokesman promptly pointed out that the promotion was not a sign that Litvack was in line for further advancement. “It is not a designation of an heir,” the spokesman said. There were reports that Eisner was under pressure to hire a strong lieutenant who had the potential to run the company, and some speculated that Litvack's promotion was meant to clear the way. Others thought that Litvack's advancement was merely a reflection of Eisner's stubbornness.