Case Analysis: Michael Eisner has More Problems than He Can Face

Eisners Mousetrap Disneys CEO says the beau monde has a lot of varied problems he can fix. nevertheless what if the real issue is something he cant face? By Marc Gunther Reporter Associate Carol Vinzant September 6, 1999 FORTUNE Magazine) Michael Eisner, the famously hands-on CEO of Walt Disney, is up to his of age(predicate) tricks. Last night he screened a rough cut of Dinosaurs, Disneys grownup animated mental picture for next pass he dod the story further complained that some jokes were stale. Today hes holding a four-hour brainstorming session to the highest degree Mickey Mouse, looking for ways to delay the 71-year-old rodent relevant. One idea a skateboarding Mickey. ) Later, hell watch Peter Jennings naturalscast on Disney-owned first rudiment and surf the Internet to see how the keep confederations Websites stack up. Is this both way to run the worlds most troubled pleasure giant? After all, as Eisner sweats the details, earnings ar dropping, outperform ex ecutives are defecting, and Disney stock is plunging like a ride trim back Splash Mountain. by chance Im crazy, Eisner says, alone I dont consider this a crisis. I dont call up our problems are in the fabric of our keep company. And I dont know my head in the sand. Sitting down for a two-hour interview, he admits mistakes. He says, for instance, that he should have settled fountain studio chief Jeffrey Katzenbergs suit against the company earlier to avoid a march of horrors (see box). And he concedes that the company has sustained real damage Its like a train wreck, just nobody got killed. notwithstanding Eisner denies that he has lost his touch. The criticisms of me and Disney today, says the 57-year-old chief executive, are as shortsighted as were the praises of me and Disney in the high economic times. Sunday nights on rudiment, Michael Eisnercelebrated CEO, business magazine cover boy, and author of his own invigoration storystill hosts The Wonderful knowledge base of Disney. The emit of the week, life is not so sweet in the Magic Kingdom. Certainly shareholders have reason to intent grumpy, with the stock trading at or so 37% below last years high. Theres no quick fix in sight either. Tarzan, the $160 cardinal summer blockbuster, wont have much impact on earnings the movie cost too much to show and isnt selling enough T-shirts and toys because the grocerys glutted with Star Wars stuff.Thats bingle of the scary things about todays Disney The company has grown so big and its problems are so far-r separatelyingranging from the phenomenon of age compression to the explosion of media choicesthat they cant be fixed by a couple of micturate movies or TV shows or much than Disney stores. The some other scary thing is this Disney seems less able than ever to cope with adversity. Thats because Eisner, for all his creativeness and charisma and grand plans, presides over an insularsome say arrogantcorporate culture where decision-making is h ierarchical, centralized, and slow.Its an utter mismatch for the Internet age. This isnt Mickeys house anymore, says a former Disney inner(a)r. Its a multibillion-dollar company. Eisner does have a plan. He is cutting costs and reengineering a company that got bloated with success. Hes making overseas growth a top priority. He wants Disney to be an Internet giant, taking on chawbacon and America Online. And, yes, hell keep on tweaking theme park rides and screening first rudiment pilots and driving subordinates up the wall with his meddling, because he fervently believes that if you demand high quality and develop synergy, financial results leave behind follow. The interesting thing about our company, Eisner says, which I think is extremely flattering, is that everybody takes for granted that we make good products. They think, Oh, the Disney cruise ship, they take a wand and a little pixie dust and all of a sudden you revolutionize the cruise industry from floating Vegas hotel s to romantic ocean liners. There are zoos all over the world, and up comes the Animal Kingdom. Or Tarzan, or the Lion King on Broadway commonwealth say, They have no trouble with the creative thing. Well, its the creative thing that turns the company around. Besides, he declares, a bit impatiently We are the most profitable media company in the world. Were being buried a little prematurely here. Hes right about the bottom line. Last year Disney reported r yetue of $23 billion, operational income of $4 billion, and net income of $1. 9 billionits net was far more than that of Time Warner (owner of FORTUNEs parent), News Corp. , and Viacom combined. For the current fiscal year, which ends Sept. 0, Disneys revenue is expected to reach $24 billion. But all other key indicators are down, some shockingly so. For the first golf-club months of fiscal 1999, excluding a one-time gain from an asset sale, Disney reported declines in in operation(p) income of 17%, net income of 26%, and ear nings per share of 27%. Some Wall Street analysts have cut their fiscal 1999 earnings estimates as some(prenominal) as five times since last summer, and 13 of 25 analysts have a hold on the stock, according to Zacks Investment Research.The company has entirely stopped growing, and it isnt a momentary dip either Operating income drop slightly last year too, and Disney isnt expected to match its fiscal 1997 earnings until 2001 at the earliesta startling comedown for a company that, for a decade after Eisner took over in 1984, delivered annual profit increases of 20% and a reelect on equity of 20%. Return on equity, a key benchmark that has been sliding ever since Disneys 1996 conjugation with cap Cities/first principle, has slipped below 10%, estimates analyst Laura Martin of Credit Suisse First Boston. Some people have the impression that Disney still is what it wasan animation company that generated abundant returns on capital, Martin says. But that may be over. Until of l ate Disney was propelled by a handful of big ideas that were executed almost flawlessly. First, Disney released its library of beloved animated films on video reasonable as VCRs took off nine of the ten bestselling titles of all time are Disney movies, and most, like S straightaway White and Cinderella, were paid for long past.Second, Eisner and Katzenberg revived Disney animation with instant classics like Aladdin and The Lion King, which do big profits at the box office and on video and spawned even bigger ancillary revenues from licensing and merchandising. Third, Disney built more than 700 retail stores in the U. S. , Europe, and Asia. Finally, the company embarked on a vast expansion of Walt Disney World, creating and updating dozens of attractions and building an astonishing 15,000 hotel rooms since 1988. (They accosted the schema Put the heads in the beds. ) Disneys market capitalization soared from about $2 billion before the Eisner era to $85 billion at its peak in Apr il 1998. Thanks to the rising stock price, Eisner got fabulously rich too, exercise accumulated stock options that gave him pretax gains of more than $500 million since 1992. He still holds 12. 7 million shares, according to Disneys latest SEC filings, worth about $330 million at todays prices. So whats gone wrong? Start with the fact that all the businesses that powered Disney, with the exception of the theme lay, are slumping.Home-video earnings have tumbled, partly because consumers now have shelves filled with Disney animation. Revenues from licensing and merchandising are down, partly because of the economic downturn in Asia, and sales and profits from the Disney Stores have declined because product lines have grown stale. How many Mickey Mouse T-shirts can you sell? asks Christopher Dixon, entertainment industry analyst for Paine Webber. Altogether, Disneys all-important Creative Content segment, which includes movie and TV production, home video, licensing, merchandising, and the stores, saw its operating income fall from $1. billion in 1997 to $1. 4 billion in 1998 it decreased by another 42% during the first nine months of fiscal 1999. If that were a movie, theyd call it Honey, I Shrunk the Earnings. In Eisners view, the problems are unrelated. A lot of things happened together to make our earnings slide, he says. Disney is attacking each concern, slashing costly production deals in the movie business, releasing fewer live-action movies, resting its classic video titles longer between releases to rekindle demand, and merging overseas distribution forces for film and video.To boost demand for consumer goods, the company will try to coordinate marketing in big retailers such as Wal-Mart. Wed like to have a Disney boutique to sell the T-shirt, the lunchbox, the sheets and towels, says Peter Murphy, Disneys self-confident 36-year-old head of strategic planning. Suppose, though, that the declining sales of videos and merchandise reflect a more profoun d issueweakness in the Disney brand. This notion is such heresy inside Disney that everyone, including Eisner, dismisses it out of hand. We have research on our brand in 20 or 30 countries, and we are almost without exception the no(prenominal) 1 or zero(prenominal) 2 brand, Eisner says. Disney executives say that if the brand were in trouble, Disneys theme park would be suffering along with the rest of the company as it is, theyre thrivingeven the one in France. In the theme parks and resorts segment, revenues and operating income grew by 10% and 13%, respectively, in 1998, and theyve grown by 14% and 13% so far this year. We have as many kids lining up to see Mickey Mouse as ever, says capital of Minnesota Pressler, 43, the president of Walt Disney Attractions. And our merchandise has done great. Disney World has reached beyond its core audience of young families to beckon convention-goers, older people, and pre-families, which is Disney-speak for single people. And its capturin g more money from visitors who stay in all those new hotels. Sure, Disneys theme parks ruleits parents who decide on family vacationsbut the brand isnt holding up as well in crowded arenas like videogames and cable TV, where kids are more autonomous. Disneys interactive unit is an also-ran in the booming videogame business.On cable, the Disney Channel ranks a poor third in viewing among kids ages 2 to 11, behind market leader Nickelodeon and the Cartoon Network. Both Nick and Cartoon, relative newcomers to the kids business, exploited Disneys vulnerabilities. The Nickelodeon opportunity was to get inside the lives of todays kids, says Nickelodeon President Herb Scannell. Weve been contemporary. Theyve been traditional. dapple Disney characters are drawn from myths, history, and storybooksjust about every big Disney animated feature could begin with the phrase long ago and far awayNickelodeons TV shows and movies tell stories about real kids.Today the Viacom unit captures more than 50% of the audience of all childrens TV programming. When Disney tries to exude a hipper aurathink of the bestselling Phil collins soundtrack from Tarzanthe company is more likely to speak to baby-boomer parents than to their offspring. Heres where that idea of age compression comes into play. Kids grow up faster these days, the experts say, and start emulating teenage behavior when theyre 9 or 10. They rebel against their parents and shy away from a good for you brand like Disney.Ten-year-old boys who watch wrestling or South Park on cable and 9-year-old girls who love Ricky Martin think Disney is for little kids. Theyve never gotten past the problem that their core audience is girls 2 to 8 and their moms, says a former Disney executive. And even among young kids, the hot properties latterly are Nickelodeons Blues Clues, PBSs Tele-tubbies and Nintendos Pokemon, now a hit TV show on the kids WB, yet another new kid-vid network. The cluttered kids marketplace points to another fund amental problem facing Disneycompetition on a scale the company hasnt faced before, across all its businesses.Warner, Dreamworks, and Fox do feature animation. Universal just opened a second Florida theme park. Fox Sports is taking on ESPN. Can you begin to see why managing Disney today is harder than it was a decade ago? What compoundd everything, of course, was Eisners boldest stroke as CEO his $19 billion merger with Cap Cities. That deal, cheered at the time, still appears strategically soundthe idea was to marry Disney content with first principle broadcast and cable distribution. The problem has been execution. While ESPN and other cable properties have grown, no unit of the company is as besieged as ABC.It will leave out money this year for the first time in a decade, despite a fantastic advertising marketplace, because audiences are splintering and programming costs keep climbing. (Disney agreed under competitive pressure to spend $9. 2 billionthats right, billionfor NFL r ights for ABC and ESPN through 2008. ) Operating income for the companys broadcasting segment, which includes ABC, its TV stations, 80% of ESPN, the Disney Channel, ABC Radio, and stakes in Lifetime, A&E, the History Channel, and E Entertainment, grew by just 3% last year its down 18% so far this year, by and large because of ABC. Id be the first to say the results of the ABC tele deal network, particularly in prime time, have been disappointing since the merger, says Robert A. Iger, 48, the lifelong ABC executive who is chairman of ABC Inc. While Igers bailiwick extends way beyond the network, he keeps a close watch on programming and told FORTUNE in 1997, Prime time is my No. 1 priority. Since then, ABCs ratings for its 18- to 49-year-old target demographic have fallen by another 13%, leaving the network No. 3, behind NBC and Fox. Oops. Wait, it gets worse. Remember how the merger was supposed to marry content and distribution?Thats not working well either. Owning and broadcastin g a hit, then selling the reruns, is the best way to make big money today in television. Just ask Rupert Murdoch, whose Twentieth Century Fox TV studio not only owns the biggest hits on FoxThe Simpsons, The X-Files, and accomplice McBealbut also produces The Practice and Dharma & Greg for ABC, as well as key shows for NBC, CBS, and the WB. By contrast, Disneys Touchstone Television production studio has failed to develop a prime-time hit for ABC or anyone else since creating Home Improvement in 1991.Out of sheer frustration, Eisner last month merged the Touchstone studio into ABC the idea is to hold back money and force the two units to cooperate. Its a fantastic opportunity to reengineer the way television is done, says Lloyd Braun, the studio president who co-chairs the merged unit with ABCs Stu Bloomberg. Like a movie studio, ABC Entertainment now will develop, own, finance, and distribute more of its own content. The trouble is, the new model could seal ABC off from the rest o f the television world. While ABC executives say theyll still buy shows from studios like Warner Bros. nd Fox, the studios worry about doing business with the new, vertically integrated ABC. Youre way out to have to demonstrate to me in tangible ways that Im going to get a fair shake, says Sandy Grushow, president of Foxs Twentieth Century Television. The other networks, meanwhile, suspect that any show they get pitched by a Disney entity will be an ABC reject. Beyond that, the merger adds another layer and the prospect of infighting at ABC Entertainment, now run by a posse that includes newcomer Braun, programmers Bloomberg and Jamie Tarses, network President Pat Fili-Krushel, ABC Inc. resident Steve Bornstein, and Bob Iger, who still reads scripts of key ABC shows on weekends. Nor is Eisner shy about weighing in he helped shape the fall lineup and ordered ABC to negotiate tougher deals with its affiliates and program suppliers, which are not happy. This anxiety by committee has never worked in television, and its not working at Disney-ABC. There is much more at stake here than the uncontrollable operation of the TV unit. The new ABC structure is emblematic of what may be Eisners thorniest problem, if only because he doesnt seem to recognize it Its Disneys corporate culture.Under Capital Cities, ABC was run in a determinedly decentralized way executives were given authority and responsibility as long as they exercised fiscal discipline, and the company was generally well run. The Disney approach reflects different values centralized control, an obsession with synergy at the expense of individual business units, a suspicion of outsiders, and a muddying of responsibility. The results speak for themselves. Writing about the Disney culture is tricky because knowledgeable critics are unwilling to speak on the record the companys just too powerful.But twaddle to enough people and you hear similar complaints. One persistent theme Eisner insists on making too man y decisions himself, which clogs the decision-making process. So do the roomfuls of strategic planners who read everything. A second complaint Eisners too tough. Working with Disney is notoriously difficult, so much so that a group of partners, including Coca-Cola, ATT, Delta, and Kodak, used to meet informally to trade tips on how to cope. A related point about Eisner In spite of his affability, he doesnt really value other people.Thats one reason the dying of his longtime second-in-command, Frank Wells, in 1994, was a seminal event. Wells commanded Eisners respect like no one else, told him when he was off-base, and deftly softened his edges. They were a great team. Eisner tried to replace him with Michael Ovitz, a crucial error at just the wrong moment. Ovitzs management got the ABC merger off to a dismal start, and his 16-month term of office scarred the company. Since then, strong executives have left, among them former CFOs Stephen Bollenbach and Richard Nanula, Internet gu ru Jake Winebaum, and former ABC executives Geraldine Laybourne and Steve Burke.Finally, the critics say, the company has simply grown too big to be run from the top down. Eisners approach worked for the old Disney, where the focus was on a single brand he could gather a cadre of executives at his Monday lunches and get things done. Now Disney mustiness manage multiple brands in a world where speed counts and partnerships are vital. A respected ex-Disney executive told me, The company has changed and the world has changed, but Michael hasnt changed. Now hes got to change. Eisner and his lieutenants get up at the criticism from unnamed sources, and you cant blame them.Yes, they say, Disney is tough, but so are GE and Microsoftwhich, by the way, lose lots of executives, too, because they have an abundance of talent. To the charge that he meddles, Eisner pleads guilty with an explanation He wants Disney to excel. (Even his detractors say he has great instincts. ) When he heard from a friend that the cast members at Disneyland Paris werent as cooperative as those at Walt Disney World, he recommended better training. Is that meddling or is that insisting on a high standard of excellence? Eisner asks. If theres an area where I think I can add value, I dive in.Yes, at certain times I paralyze people. Im never satisfied. It gets people crazy, I know that. But Eisner also says he leaves his best executives, like theme park chief Pressler, alone. Theres no brain drain, he says. We have unbelievably strong management. Eisners turnaround strategy focuses not on Disneys culture but on operations, fiscal engineering, and growth. Consolidation and cost cutting are already under way across the board, with the movie division leading the way. Studio chief Joe Roth has already cut spending by about $550 million annually, by making fewer movies. It focuses everyone much more closely on the films at hand, Roth says, and ironically, I am quite sure thatfor the fifth time in six yearswe will be No. 1 in market share again this year. Disney is also looking to sell Fairchild Publications, a magazine company. Sources say Disney also expects to write off a big chunk of the $9. 2 billion NFL deal. In a move that should please Wall Street, CFO Thomas O. Staggs is reworking Disneys compensation system so that executives will be evaluated on cash flow and return on equity as well as on reported earnings thats designed to support business units to use capital more efficiently.The theme park segment, in particular, has been a huge consumer of capital, but it will use less after new parks open near Disneyland and Tokyo Disneyland in 2001. Disneys best growth opportunity probably lies overseas. Right now, the company gets about 21% of its revenues from abroad, less than other global brands like Coca-Cola (63%) or McDonalds (61%). Thats why Bob Igers recent promotion to president of Walt Disney International puts him in a crucial role, spearheading what Eisner cal ls a monumental change in the way the company is structured. Iger has begun to overhaul all of Disneys operations outside the U. S. , which grew up haphazardly as each businessfilm, TV, the stores, cable, or theme parksbuilt foreign outposts that reported back to the home office. Now those businesses will also report to regional executives in charge of continents or key countries each territory will also get its own CFO and brand manager. That may sound like more Disney layering, but Iger says it offers major advantages. First, the company will save money through consolidation, whether in renting office space or buying advertising.Disney also expects to do a better job of tapping into topical anesthetic trends. Iger cites a revealing example Its having someone in Japan who would see the Pokemon phenomenon at an early stage and have the clout, really, through me, someone who has a office at Michaels table, to be able to raise the consciousness level of the company about that potent ial quickly and effectively. Interestingly, the idea is not to delegate authority but to shorten the distance between the rest of the world and Eisner. Eisners other major focus is the Internet.Here, too, centralization is the watchword. Last month Disney agreed to combine its Internet assets with Infoseek, a search engine and portal company that it is buying outright the properties, including the Go portal, ABCNews. com, ESPN. com, Disney. com, Family. com, and others scattered in five locations on both coasts, will operate as a single unit under a CEO to be named later. This is to consolidate the Internet assets so that we can have them under common management with one agenda and one vision, says CFO Staggs, the 38-year-old architect of Disneys Internet strategy.The company will then issue a tracking stock called go. com that can be used as acquisition currency and a way to compensate talent. Disneys assets should make it a force online. Its ESPN. com and Disney family sites are category leaders, and the company has unparalleled promotional platforms in ABC and ESPN. In a matter of months, they helped make Go the fifth-ranked portal, behind AOL, Yahoo, Microsoft, and Lycos. And all the Disney Websites should sing when high-speed access makes it easier to watch video online. As bandwidth expands, Eisner says, content becomes more important.You must have sports and news and entertainment, or you are going to be a Western Union messenger in a fax world. He envisions a universe in which ABC News clips, ESPN game highlights, and movies like Aladdin are distributed online, cutting out middlemen like cable operators or Blockbuster Video. I believe the entire companys product will mostly be distributed through the Internet, Eisner says. Hes a passionate Internet user too, peppering his nett guys with suggestions. Says Staggs The only person I get more e-mail from than Michael is my mom. The strategy sounds smart. Of course, buying ABC sounded smart too.Once agai n, itll come down to execution. Patrick Keane, a Jupiter Communications analyst, likes Disneys web assets but worries that diversified media companies move at glacial speed when it comes to the Internet. Disney cant be as focused on new media as people at AOL and Yahoo are every day. And the straitlaced Mouseketeers will have to learn to live in an unbuttoned Internet culture, says new-media consultant Gary Arlen of Bethesda, Md. Have you ever been to Disney World? he asks. You walk out of a ride and land in a place that sells souvenirs. Theyd like to manage the Internet that way. Even with perfect execution, Disneys Internet investments exigency time to pay off in the meantime, theyll dilute earnings. Time is what Eisner needs too. Time for the cable and phone companies to help make his broadband Internet vision a reality. Time to build overseas. Time for DVD to take hold and provide another chance to resell the library. Time to create the next Tarzan and a hit for ABC, time for new theme parks to open, time to reinvent Mickey once more. Time, perhaps, to appoint a strong second-in-command with clout, whether its Bob Iger or Paul Pressler or a dark horse who has yet to emerge.Because he enjoys the support of the Disney board, Eisner can be patient. Were in a transition period, he says. I would or else have every quarter be up. It was for 13 years. Everybody loves you. But you cant manage a company like ours quarter to quarter, maniacally, so that the media will write good things about you. He likes to quote Warren Buffett, whose Berkshire Hathaway, at last count, owned 51 million Disney shares I close my eyes and think about what a companys going to look like in ten years before I invest. Paine Webbers Chris Dixon says Disneys assets are top-notch It may take time, but we believe the values are there. other investors wont wait. They note that despite the earnings downturn, Disney is still priced as a growth stock it trades at about 35 times this years projected earnings, a 25% premium to the SP 500. The Capital Research Management Group, whose entertainment industry investments are managed by respected media analyst Gordon Crawford, used to be Disneys largest institutional shareholder, with 41 million shares as recently as last year.Crawford has sold them all. So be it, says Eisner. You can always tell your friends through the rough times, he says. He still gets to go to the movies, test-drive theme park rides, surf the Net, and call it work. And maybe its just his turn to suffer in the media doghouse. After all, CEOs Gerald Levin of Time Warner and Sumner Redstone of Viacom fell out of favor when they struggled to get their arms around companies engorged by big acquisitions. Such mergers arent easy.The challenge for Eisner is to learn from experience, show a little humility, charm the opportunity to shake up his company, and, perhaps, change his own stripes and let go a little. Thats a lot to ask of anyone whos been as success ful as he has for so long. But this isnt the old Disney. And the old Disney magic just isnt working anymore. REPORTER ASSOCIATE Carol Vinzant http//money. cnn. com/magazines/fortune/fortune_archive/1999/09/06/265291/index. htm