World of Disney not all that wonderful

By Andrew Gumbel

Failure is not something Michael Eisner is much accustomed to.

In his 15 years as chief executive of the Walt Disney Company, he has transformed an ailing animation outfit into a behemoth of the entertainment world.

Film, television, radio, publishing, theme parks, hotels, cruise ships, shops, toys, the internet - Disney not only has it, but is getting more and more of it each year.

It is an empire that impinges on the cultural consciousness of us all, and had a turnover of $US23.4 billion ($46.8 billion) last year that put the gross domestic product of dozens of nations in the shade.

Yet the company, at least by its own remarkable standards, has just had a dog of a year.

The double-digit growth that accompanied its breakneck expansion in the earlier 90s came to a screeching halt.

Pre-tax profits in the year to last September were down 21 per cent on the previous year; figures for net profit were gloomier, showing a 37 per cent drop.

The share price nosedived 40 per cent, recovering only after the company slashed overheads and promised an urgent strategic rethink of its weakest area, home video and consumer products.

This year Mr Eisner and his fellow Disney executives were denied their customary performance-related bonuses.

If that were not enough, last summer Mr Eisner had piles of dirty linen aired in a highly publicised court battle with his former studio head, Jeffrey Katzenberg.

Mr Eisner, saddled with a reputation for arrogance and insensitive handling of personal relationships, caved in to Mr Katzenberg's demands for several hundred million dollars in unpaid royalties.

More recently, Mr Eisner lost another studio head, Joe Roth, one of the finest producers in the business, who maintained Disney's status as the most profitable film major.

In the past year alone, he was responsible for the monster hit The Sixth Sense as well as The Insider and The Straight Story, both in the running for Oscars.

Mr Roth was said to be frustrated working under the beady eye of his obsessive micro-manager.

His departure two weeks ago was greeted in the industry as a personal triumph (he is expected to thrive as an independent producer) and a thump in the eye for Disney, which, like all studios, is struggling with mounting costs and diminishing profit margins.

Then, the same week as Mr Roth's resignation, came news of the mega merger between Time Warner, the only media company on earth to boast more valuable assets than Disney's, and America Online, the world's largest internet service provider.

This took Disney, along with everyone else, by surprise and forced a rapid re-examination of the company's online strategy.

It is not as though Disney had been caught napping in the new media department - on the contrary.

The company had bought the internet portal Infoseek, stream-lined its online services into one entity called the Go Network, and issued a tracking stock to underline how seriously it believes online delivery will revolutionise the marketing of music, film and nearly every other form of entertainment.

But Infoseek is no America Online, in scope or customer base. Within hours of the AOL-Time Warner merger announcement, speculation was rife that Disney might try to join up with a beefier online partner, such as Yahoo!.

The speculation may have been exaggerated. Yahoo! rapidly put out a statement saying it did not intend to join forces with any corporation, however big or powerful.

But the underlying point remained - Disney, like all big media corporations, runs a serious risk of lagging in the internet revolution and, because of its sheer size, not having the agility to catch up.

Disney is defensive.

"It's funny how we're somehow considered too big while the world applauds this deal [between AOL and Time Warner]," says Tom Staggs, Disney's chief financial officer.

"The merger is seemingly an admission by AOL that having assets rich in content is going to be important, which is why we created Go in the first place. We have a more cohesive set of assets than Time Warner."

But he does not rule out mergers or acquisitions.

"This event will tend to accelerate a lot of things," he says.

It is striking how swiftly perceptions have changed.

A little more than a year ago, Disney's sheer power in the marketplace was unleashing a torrent of criticism from cultural observers unnerved by the company's ability to grasp and control the public imagination.

The acquisition of the ABC television network and its affiliated interests in 1995 had raised eyebrows about Disney's ability to dominate every entertainment and media field and use its resources to cross-market its products.

That power has not diminished.

Disney owns seven theme parks, 27 hotels with 37,000 rooms, two cruise ships, 728 Disney Stores, 10 television stations as well as the ABC network, nine international Disney channels and 42 radio stations.

It also has five internet web sites, the Infoseek portal, interests in nine US cable networks and a highly lucrative film and television library.

In the past 10 years that has expanded by 17 animated films, 265 live-action features, 1252 animated television episodes and 6505 live-action television episodes.

Much of the financial squeeze Disney suffered was due to inefficiencies inherent in growing so big so fast.

Mr Eisner likened his empire to an athlete who has run the 400 metres in the morning and is pausing for lunch before the decathlon in the afternoon.

Maybe, to some extent, he is right.

Since the annual statement was published in November, the company has done a speedy job of convincing Wall St it is on the right track to more virtuous housekeeping.

Cuts included 40 per cent fewer films, fewer expensive stars and tighter shooting budgets.

Disney has also sold non-core assets, such as the old ABC holding Fairchild Publishing, closed its unprofitable Club Disney entertainment centres and installed new management in problem areas.

In home video, Disney has abandoned its strategy of limited releases to make almost everything available immediately, in video and DVD format.

An exception is being made for 10 of its animated and live-action classics, releasing one each year to great fanfare over the next 10 years.

In merchandising, Disney is cutting ties with half its 4000 licensees to make its commercial relationships more efficient, revamping its Disney Stores, cutting inventory and installing computers where customers can order items not in stock over the internet.

Mr Eisner is making promises about the return of double-digit growth, and he insists the company is experiencing only a "short-term earnings hiccup."

But there are deeper questions about the viability of big film studios in an era of paper-thin margins, crippling marketing costs, an erosion of studio-based production in favour of outsourcing to independent houses, and the prospect of a distribution free-for-all once broadband internet links become widespread.

And there are questions about the leadership of Mr Eisner, so successful, in its way, in mastering the scope of the 80s and 90s but arguably in need of major leaps of imagination in the internet era.

In Mr Eisner's latest letter to shareholders, he sounds as though he is talking about himself.

"Our creative cast is maniacal in the pursuit of perfection, about coaxing perfection, about always hoping for it."

That perfectionism encourages a potentially dangerous sense of smugness and alienates strong-minded colleagues.

Two years ago, Business Week magazine voted Disney's board of directors the worst in America because of their lack of distance from Mr Eisner.

At the time, the board included his personal architect, his personal attorney and the principal of his children's elementary school.

This year, with the performance bonuses on hold, the one company officer to be rewarded beyond his salary was Louis Meisinger, the general counsel, and the lawyer who represented Disney in Mr Eisner's courtroom spat with Mr Katzenberg.

Nobody denies Mr Eisner's supreme skill in keeping the disparate parts of the Disney empire so far to the fore, or his remarkable instincts in overseeing the film division (he turned in a similarly sterling financial performance as head of Paramount in the late 70s and early 80s).

But he also cashed in $565 million in stock options two years ago, and a further $50 million this year, the kind of personal enrichment that inevitably raises eyebrows in a community as jealously vigilant as Hollywood.

Are tell-tale signs emerging that his long leadership stint is beginning to outstay his welcome?