How Did Michael Eisner Make Disney Profitable?Not with cartoons.
Q. "How's your wife?"
A. "Compared to what?"
—Henny Youngman routine
PRINT
DISCUSS
E-MAIL
RSS
RECOMMEND...
Facebook
MySpace
Mixx
Digg
Reddit
del.icio.us
Furl
Ma.gnolia
Sphere
StumbleUponWhat is the proper measure of a Hollywood mogul? For entertainment reporters, it's often a mogul's personal behavior. The more incidents of arrogance and insensitivity they uncover, the more they assume that a mogul is an ineffective leader. During the contentious period surrounding Michael Eisner's announcement that he was resigning from Disney, a frenzy of items appeared, casting him as a villain worthy of one of his animated hits. It will be recalled that Eisner alienated a host of would-be moguls—including Jeffrey Katzenberg (whom he called a "midget"), Michael Ovitz (whom he called a "psychopath"), Roy Disney (whom he kicked off the board), and Harvey Weinstein (whom he forced out of Miramax). These men, by one means or another, yielded an El Dorado of gotcha items to the press. What was lost in this morality tale was the story of Eisner's transformation of Disney. He turned a faltering animation-and-amusement-park company into one of the world's most successful purveyors of home entertainment. He'll depart as Disney's CEO quietly on Friday, without a gold watch ceremony. The lack of fanfare seems to mark him as a man who failed and sullied the good name of Mickey. But if you look at Eisner's metrics—the numbers that Wall Street believes are unambiguous indicators of a company's performance—Disney boomed under Eisner.
Eisner's Metrics, which are all public numbers: | |||
| Category | 1984 | 2004 | Percent change |
| Disney's Revenues | $1.5 billion | $30.8 billion | +2,000 |
| Disney's Income | $294 million | $4.49 billion | +1,600 |
| Disney's Tax-Free Cash Flow | $100 million | $2.9 billion | +2,900 |
| Stock Price (adjusted for splits) | $1.33 | $28.40 | +2,100 |
| Market Value | $1.9 billion | $57.4 billion | +3,000 |
Disney's Enterprise Value | $2.8 billion | $69 billion | +3,200 |
In 1984, when Eisner took command, the "Mouse House" produced only one animated picture every three to five years. Its entire film library had only 158 features, and its single cable channel, the Disney Channel, lost money. In addition, Disney had virtually no income from sales of videos. To keep afloat, the company depended on its amusement parks and its Mickey Mouse licensing. Yet even with these assets Disney had a tax-free cash flow of just $100 million. Its share price, reflecting this precarious financial position, was $1.33 (adjusted for splits).
In 2005, Disney was one of the richest companies in America. Its enterprise value—Wall street's favored measure of an entertainment company—had increased 32-fold since 1984 and stood at $69 billion. Its tax-free cash flow had increased 29 times, to $2.9 billion. Its film library had grown to 900 features, which were licensed on TV and sold on video and DVD, and its home-entertainment division accounted for nearly one-third of the revenues of the entire industry. Its share price, reflecting this robust health, had risen to $28.25.
Eisner's success becomes even more impressive when compared with his peers. Between 1984 and 2005, TimeWarner wrote off $99.7 billion; Vivendi-Universal, $40.6 billion; Viacom, $21.2 billion; News Corporation, $7.2 billion; and Sony, $2.7 billion. Among the six companies ("the sexopoly") that now dominate the TV industry, Disney alone did not write off any loss during this time.
How did Eisner succeed in adding $65 billion in enterprise value to Disney at a time when his rivals were faltering? Having come from television, Eisner saw that Disney's future would be in home entertainment—not in movie theaters.
Consider just two decisions he made that brought about this corporate transformation. The first came in the mid-'80s. At the time, Disney studio executives (including Katzenberg) were arguing that to release the company's beloved animated movies on video cassette would kill any profits to be made from re-releasing them in theaters. Eisner perceived the situation differently, and he put the videos into stores. Within a few years, video sales were providing almost all the profits for Disney's movie division and, by 2004, Disney raked in $6 billion from videos and DVDs sales.
The second decision came in 1995, when Eisner bought his old alma mater, Capital Cities/ABC, for $19 billion. With this single coup, Disney got not only the ABC network and TV stations, it also got 80 percent of a sports network, ESPN. Since the cable operators needed this sports network to attract subscribers, Disney charged them a "carriage fee" just for the right to intercept its satellite signals. Disney was able to ratchet up this charge, which is effectively a tax on cable households, by 20 percent a year, getting as much as $2 a month for every subscriber signed up by cable operators.
With the success of ESPN, Disney gained such enormous leverage over the entire cable industry that, in 2004, the company earned a record $1.94 billion in bottom-line operating income from its cable channels alone. To put this number in perspective, it was nearly triple the $662 million Disney earned from all its movie production and distribution, stage plays, records and music publishing, television library sales, videos, and even its booming DVDs (which accounted for about 80 percent of the $662 million).
These numbers did not go unnoticed by the fund managers who controlled two-thirds of Disney shares. As it became increasingly clear that Eisner had hit the jackpot with ESPN, these fund managers focused more and more on Eisner's inability to convert the enormous appreciation of Disney's assets into a stock-market payoff. One way to bring about that payoff would be to install new management who were willing to sell assets—even ESPN. Although Disney's shares had increased by 10.6 percent since 2001—which was a better performance than most of Disney's rivals—that was not enough to satisfy investors. In March 2004, 43 percent of shareholders voted to withhold their support from Eisner. This vote further fueled the bad publicity, and Eisner picked Robert Iger to be his successor. Fittingly, Iger headed Disney television, and, when he officially takes over as CEO on Oct. 1, he should continue Disney's transformation into a home-entertainment empire.
Happy Birthday, Smokey Bear
Are Gas Grills More Eco-Friendly Than Charcoal Ones?
He-Man: Briefs of Rage and Other Toy-Inspired Movies We're Dying To See
Kaus: Seven Possible Theories Explaining Palin's Resignation
The U.S. Embassy in Djibouti Cordially Invites You to a Fourth of July Cookout
The Week's Best Editorial Cartoons
Remarks from the Fray:
I'm as big a fan of Eisner as you are likely to find in my line of work, preaching the gospel of Hakuna Matata even as the personal relationships between Eisner and the Weinsteins, Eisner and the Pixarians soured. But we should still hold the line on trusting his account in Work in Progress or elsewhere. Did Eisner want to put the videos in stores? Well, he did before he didn't before he did again. In the book, this occasions one of offhanded jabs at Katzenberg (which EJE reiterates) and a classic Eisnerian mash note to the dear, departed Frank Wells, and how they both just looooved debate, so much you never knew where they stood.
It seems the key player in the move to video was Bill Mechanic, as even Eisner admits. After he rubbed the board's noses in Net Present Value calculations for hours, they relented and decided to sell through video at the then-reasonable price of $29.95.
Note though that this only worked because they were selling cartoons: "Children simply are far more likely than adults to watch videos multiple times. It made more economic sense for parents to buy their children's favorite films at $29.95 than to rent them over and over." (WiP, 188) Disney live action is nowheresville; Disney animation (at least in the 90's) was a souped-up profit machine. An event movie each summer, direct-to-video sequels, the McDonald's deal ($100m/10yrs for exclusive promotion rights), etc. etc.
This model of an endless downstream of revenues goosed by some cagey synergy--a model which may, finally, be exhausted--turns out not to be true when your synergistic partners are cable systems, or publishing, or radio, or electronics. And Disney's competitors have all been busy learning this lesson the hard way.
--MatthewGarth
(To reply, click here)
Eisner may be a difficult person, but the truth is Disney would have fallen off a cliff without him. In many ways he is simply a victim of his own success. He raised expectations at the company and when he failed to meet them (sometimes churlishly blaming others), he gathered an enormous amount of bad press. Certainly he has made mistakes, but all visionaries do. That said, it is time for some new blood. And home entertainment is exactly the place the blood should flow.
--rundeep
(To reply, click here)
Eisner got off to a terrific start recasting and revitalizing the company. But much of the financial wizardry came from Frank Wells, who tragically died at the peak of Disney's emergence as an entertainment superpower.
Since the death of Wells, Eisner has become increasingly erratic and overbearing. He's chased off good management and refused to groom a successor.
It's unfortunate, because, had he left a few years ago, he could have gone as a hero. Now he just looks like a jerk despite all of his early successes.
--GratuitousPython
(To reply, click here)
(4/18)