DisneyWar

by James B. Stewart

  Now Bass told Eisner that he, his brother Lee, and their father had no choice but to sell a combined 135 million shares in Disney, representing a 6.7 percent stake in the company and virtually their entire position. (Neither Robert nor Edward was involved in the transaction, and in any event, had already reduced their Disney stake.) Such was the urgency of the Basses’ plight that they needed the proceeds by the close of business the next day.

  Eisner was startled but impressed with how calm Bass seemed. The news set off a frenzy of calls to Disney directors and Goldman Sachs. With Disney shares hitting a low that day of $17.50, the Bass stake had a value of $2.2 billion, and there was no telling how much news of the forced liquidation would further depress the price. A stake of 135 million shares was far too large to simply dump on the open market, especially with investor confidence already precarious. When Eisner broke the news to Stanley Gold, Gold was upset. According to Eisner, he was “hysterical.” With Roy and related entities holding a stake of approximately 30 million shares, the fall in the stock price had already cost Roy millions. This news could lead to a further rout. Gold argued forcefully that Disney itself should buy back the shares, which would demonstrate confidence in the company’s future, help put a floor under the stock price, and would also, he argued, be a good investment.

  Other directors disagreed. So did Tom Murphy and Warren Buffett, whom Eisner consulted. Having just issued $1 billion in debt for the Fox Family acquisition, the Disney balance sheet couldn’t support another $2 billion in debt—certainly not if it hoped to complete the Fox deal. Some resisted the idea because they weren’t sure Disney shares were a good investment, given the changed economic circumstances, and, as one put it, “the lack of strategic direction.” They were also suspicious of Gold’s motives. He represented Roy’s interests, and Roy had a large financial stake in propping up the stock price.

  Already irritated with Gold and Roy for their dissent on the board, Eisner fanned the directors’ suspicions by alleging that Gold and Roy, like the Basses, were facing their own margin calls, which he claimed Gold had admitted. Eisner knew that Gold and Shamrock had substantial investments in Israel, and the Israeli market was hard hit after September 11.

  Ultimately, Eisner compromised, agreeing that Disney would buy 50 million shares from the Basses at a below-market $15 a share. Gold called that morning. “Did you buy it all?” he asked Eisner.

  “No, fifty million shares,” Eisner said. Before he could explain, Gold slammed down the phone. Eisner was furious. Here he was, worrying about a bomb going off in one of the theme parks, and all Gold seemed to care about was the stock price.

  (Gold acknowledges that his conversations about buying the Basses’ stake with Eisner became heated, that he raised his voice and used profanities to make his point, that he hoped to boost Disney’s share price, and that Shamrock faced margin calls. But he argues that buying the shares was as much in Disney’s interest as Shamrock’s. He says Shamrock often uses leverage in its investments, and that it had no difficulty meeting its margin calls. In contrast to Bass, who had to sell Disney shares to meet the calls, neither Gold nor Roy nor Shamrock sold or divested any Disney shares to meet a margin call. Gold maintains that their Israeli investments have in the aggregate been highly successful. He also points out that, had Disney bought the shares at $15, it would have been a good investment.)

  At 10:00 A.M. on Thursday, Disney announced that it had bought the 50 million shares and Goldman Sachs had bought the remaining 85 million at $15 a share, well below the market price, enabling the Basses to realize proceeds of about $2 billion. Disney spent $750 million on the buyback, most of the $1 billion it had just raised in the debt offering. Once trading resumed, Disney shares dropped another 16 percent, then rebounded to close at just under $17 a share. Loyal to the end, a spokesman for the Basses stressed that they “have a deep and abiding confidence” in Eisner “and in the future of Disney.”

  The sale was a huge embarrassment for the Basses, puncturing their carefully cultivated reputation for financial acumen. Sid Bass had proven no more immune to the seduction of the technology bubble than had millions of less sophisticated investors. Such a failure of judgment, of course, raised inevitable questions about his unwavering support for Eisner.

  For Eisner, the most important relationship in his corporate life was irrevocably changed. Although the Bass spokesman said the sale left the brothers with a cumulative stake in Disney of approximately 4 percent, or just under 100 million shares, it was no longer anywhere near enough to constitute a controlling stake. Overnight, Sid Bass ceased to be relevant to either Eisner or Disney’s future. The years Eisner had spent cultivating his relationship with Sid Bass had yielded an all but unassailable grip on the chief executive position. In twenty-four hours, it was gone.

  Disney’s acquisition of the Family channel closed on October 24, 2001, at a price of $5.2 billion—a mere $100 million off the price agreed to the previous July. Gold was incensed, convinced he could have driven a much tougher bargain after September 11.

  Now that Disney owned the Family channel, critical decisions had to be made about what to do with it. Would it be part of the cable network group under Anne Sweeney, which included all the cable channels except the ESPN brands? Or, given that the strategy for the new channel was to “repurpose” programming from ABC, should it be part of the ABC Network division? Though arguments could be made for both alternatives, and Iger wanted it in the cable group, Eisner assigned the Family channel to Bornstein in his capacity as president of ABC Inc.

  It didn’t take Bornstein long to realize that he’d been dealt another losing hand. The plight of the Family channel was dire. Sixty percent of the so-called carriage agreements, in which cable operators agreed to carry the channel, had expired or were about to. Because of a change in ownership of the channel, some had the option to cancel. Cable operators were paying Family, on average, seventeen cents per subscriber to carry the channel. Disney’s pro formas for the channel had projected nearly immediate increases to twenty cents. But now operators were threatening to drop the channel entirely. And in return for carrying it, they were asking for discounts on the fees they paid for ESPN and the Disney channel. The leverage was supposed to work the other way—to keep ESPN and other Disney-owned channels, cable operators were expected to cough up more for Family. Things got so desperate that Disney had to ask televangelist Pat Robertson to lobby some carriers, such as EchoStar Communications, after the satellite broadcaster tried to drop the Family channel. In a letter to EchoStar, Robertson wrote that he couldn’t believe the company would deny its subscribers “quality family programs” at the same time as it provided “five channels of pornographic material.”

  There were other problems. The Family channel’s programming assets—eight hundred Power Ranger episodes and a film library—had been repeated so often that viewer fatigue had set in. Due to cost cuts and spending restraints, there was nothing in the pipeline when Disney took over. And despite its “family” name, the channel had no clear identity. It was an awkward amalgam of children’s programming, baseball broadcasts, vintage films, and Pat Robertson’s “700 Club,” all appealing to different audiences.

  As soon as the deal closed, Iger and Bornstein convened a meeting to plan strategy for the new channel. As they started to explain the “repurposing” concept, Mark Pedowitz raised his hand. “You can’t do that,” he said, explaining that ABC didn’t have the rights to rerun most of its shows on the Family channel, a point he’d already made to Bornstein. “And it’s not going to be easy to get them. There are profit participants.” Even Touchstone executives were wary of the concept. Both Braun and McPherson argued that reruns on ABC Family would undercut the syndication value of the shows it owned, which were the most valuable assets any TV studio owned. Discussions got so heated that the meeting nearly aborted.

  For the ABC and cable executives, it seemed almost inconceivable that a deal had been concluded without confronting and res
olving this most basic of issues. Murphy and his strategic planning staff seemed to think that TV producers would simply relinquish those rights. Of course, had anyone asked ABC about the strategy, these points would have been raised. But no one had. It was an egregious failure of the kind of due diligence routinely conducted before a major acquisition. To the ABC executives, it simply confirmed the arrogance of the strategic planners, and Eisner’s blindness to potential obstacles once his mind was made up. When they raised the repurposing problems with Eisner, he seemed irritated and said, “You’ll just have to find a way to work it out.” (Eisner said that contrary to the perceptions of the ABC executives, he, Iger, and Murphy were not surprised and were fully aware of syndication rights, but expected to gain repurposing rights over time.)

  The programming executives at the Fox Family channel, now rechristened ABC Family, waited for guidance. Several deals had been close to completion before the spending freeze, including some movie packages and more episodes of an original series, “State of Grace.” But now Bornstein told them that their marching orders were to “repurpose” ABC shows. Their choices were severely limited, since, as Pedowitz had warned, his effort to get the rights to do so with outside producers were stalled. Desperate for programming, Family took leftovers from ESPN—hours of cheerleading and ice-skating competitions, such as the Hershey Kisses Challenge. From ABC News it took anything about missing persons for a series it cobbled together called “Vanished,” and forged another series out of old “20/20” segments about unsolved mysteries. The quality was embarrassing, and little of this made any sense for a so-called family channel.

  Finally Eisner insisted that Family re-create the once-successful concept of a block of Friday night family-oriented comedies, which ABC had branded as “TGIF.” The problem was that Family didn’t have the broadcast rights to enough family-oriented comedies. Over Touchstone’s objections, it had acquired the rights to rerun the ABC shows “According to Jim” and “Alias,” but that was it. So it added its old episodes of “State of Grace” and patched together a block of the three shows and called it “TGIF.”

  Tom Cosgrove, a scheduling executive from Fox, pointed out to Bornstein that “Alias” and “State of Grace” weren’t even comedies. “This doesn’t make any sense,” he said.

  Bornstein looked annoyed. “I don’t care. Just put them on,” he ordered. He was under orders from Eisner and Iger to make this work.

  Two weeks after the block started running, Cosgrove tried again. “Look,” he told Bornstein, “this isn’t working. Ad sales can’t sell it. The ratings are terrible. The affiliates are complaining. The producers are saying it’s going to hurt syndication. We can’t keep this on.”

  Bornstein was angry, because he knew Cosgrove was right. “Fuck syndication!” he said. “Tell ad sales to do it right and sell the damn shows.”

  But a week later, he conceded defeat. “Take it off the air,” he told Cosgrove.

  It was obvious that Bornstein was under stress and unhappy in his position. At meetings with Family executives, where the news was invariably bad, he would pull out a mesh bag and down several pills. (He was suffering from migraine headaches.) Staff members started placing bets on how long a meeting would run before Bornstein pulled the bag out.

  Despite Iger’s insistence to Gold and other directors that the 2001–2002 ABC season would justify the lucrative new contract for Stu Bloomberg, ratings at the flagship ABC network nosedived. It had fallen to fourth place in the key eighteen- to forty-nine-year-old demographic and lost 22 percent of its household audience in a year—a startling decline. The shows that emerged from the truncated development period of the “Millionaire” era were especially weak: “Bob Patterson,” starring “Seinfeld” veteran Jason Alexander, was canceled before the end of the season, as were “What About Joan,” “Thieves,” and “Philly.” San Francisco Chronicle TV columnist Tim Goodman saluted Bloomberg and Braun as the “worst executives of the year (or more).”

  The fate of “Millionaire” was painful. Having failed to stem the public mania for “Survivor,” ABC aimed its former ratings juggernaut at another embarrassing reminder of its own misjudgment by placing “Millionaire” in the same 9:00 P.M. Thursday time slot as “CSI.” “CSI” crushed the fading “Millionaire,” which barely finished third in the time slot. At the end of the sweeps period in November 2001, “Millionaire” was cut to one episode a week, Braun talked openly about canceling it altogether, and blamed the faltering show for the network’s alarming ratings slide, which angered host Regis Philbin. He accused ABC of using “Millionaire” as “cannon fodder” against a hit like “CSI” and told The New York Times “if ‘Millionaire’ is the reason why ABC is no longer No. 1 in viewers, I’ll eat my hat.”

  The network’s performance was so bad that someone at Disney had to be held accountable, but who? Clearly not Eisner. In an interview with Fortune magazine, he repeated the boast that had so annoyed Bornstein. “I would love, every morning, to go over and spend two hours at ABC. Even though my children tell me that I’m in the wrong generation and I don’t get it anymore, I am totally convinced that I could sit with our guys and make ABC No. 1 in two years.”

  Bornstein had only been in his job for six months, so he could hardly be blamed. That left Braun and Bloomberg. Though Braun had been most visibly on the firing line, bearing the brunt of the press criticism for the “Millionaire” fiasco, it was hard to fault him. While he, too, had championed his share of failures, he had backed both “Survivor” and “CSI.” Susan Lyne, the ABC executive hired by Joe Roth to work at the studio, now running ABC’s movies of the week and miniseries, had argued that ABC had made a fundamental mistake by trying to turn its back on the middle-American, family-oriented comedies that were ABC’s historic strength and consistent with the Disney brand. Braun had embraced the strategy, and in November, he made a presentation to the board, describing the new direction and attributing the network’s failure to the disastrous, Tarses-inspired decision to imitate NBC with programs aimed at young, affluent, urban singles.

  That left Bloomberg. Although Bloomberg was a close ally of Iger, and Braun was not, Eisner now derided his taste in programming as “morose” and “dark,” apparently on the basis of Bloomberg’s support for “Once and Again,” a ratings failure but critical success, and the earlier “Nothing Sacred,” about a controversial priest.

  The day after Christmas, Lyne was on vacation in Florida when she got a call from Bornstein. Earlier, he’d mentioned that he thought she and Angela Shapiro, head of ABC Daytime, were talented executives who could handle more responsibility. Lyne had helped create for ABC fragile hits, such as “My Wife and Kids” and “According to Jim.” “Stu is going to be replaced,” he told her. “Do you want the job?”

  Lyne had always liked Bloomberg, but if he was out, the opportunity to succeed him was an exciting challenge. After she said she was interested, Iger called to discuss her deal, apologizing for the modest salary increase, which was nowhere near what Bloomberg had earned. “I can understand that you’d think it was unfair,” Iger conceded, but after getting the board to approve Bloomberg’s contract, “I can’t go back to the board and ask for more,” he said. Forty-eight hours later, Lyne was on a plane to Los Angeles to take up her new duties.

  That same day, Braun heard the rumor that Bloomberg was about to be fired and would be replaced by Lyne. Braun liked Lyne and enjoyed working with her. Still, it was startling and disappointing that he had never been consulted on the choice or even informed of it ahead of time, despite being co-chairman of ABC Entertainment. (Bornstein hadn’t consulted him out of deference to Braun’s friendship with Bloomberg.)

  On Monday, January 7, 2002, Bloomberg was summoned to a meeting with Eisner. According to his later accounts of the meeting, Eisner thanked him for “taking the bullet” on “Millionaire,” acknowledging implicitly that he knew it hadn’t been Bloomberg’s decision to air it four times a week. He was also granted an extraordinary
exit package: His $9 million contract would remain in effect, and would simply be transformed into a production deal. As he returned to his office in the ABC building, Bloomberg passed marketing head Alan Cohen. Cohen had just gotten a new job at Fox. “I’m leaving,” Cohen told him. “I’m fired,” Bloomberg replied.

  That same day Disney announced that Bloomberg was “stepping down” and would be replaced by Susan Lyne as president of ABC Entertainment, reporting to Braun, who was now sole chairman. Iger pledged his full “support and leadership” to Lyne, who responded that she was confident Iger wouldn’t “micromanage me. He has no interest in reading scripts or hearing pitches or any of the day-to-day stuff. He just wants to know that there is a strategy and a focus to the work we’re doing.” She didn’t sign the contract offered her, but its provisions went into effect anyway as her lawyer tried to wring some concessions from Disney.

  That Bloomberg was fired months after signing his lucrative new contract wasn’t lost on Stanley Gold. At the January board meeting, he confronted Eisner in the corridor. “What the hell is going on?” he asked, demanding an explanation for the continuation of Bloomberg’s contract, which he’d criticized in the first place.

  “Don’t get upset, Stanley,” Eisner said. “We would have had to pay him that much in severance anyway.”