DisneyWar

by James B. Stewart

  “Don’t bullshit me,” Gold responded. “Don’t insult my intelligence by telling me we would have had to pay somebody that kind of severance.”

  Although Disney’s weak results for the fiscal year ending in September and the ensuing months could in part be blamed on September 11, Eisner couldn’t ignore the plight of ABC in his annual letter to shareholders, which was released a few days before Bloomberg’s firing.

  “Our broadcasting business also faces challenges that were partly caused by the overall economic environment,” Eisner wrote. “Because of the softness in the economy, advertising rates were down for all of the broadcast networks. ABC was the number-one rated network in primetime during a very healthy overall ad market in 2000. But, this year, it has suffered the one-two punch of a down economy and a drop in ratings. This is why we are heavily focused on developing new shows that will help propel ABC back to the top. Of course, there is no formula for creating great content. But, it is what we must do to reap the considerable rewards of owning a broadcast network. Both Bob Iger and I grew up professionally at ABC. This is a business we understand, and one of our top priorities is to develop the kinds of programming that will underpin resurgent long-range success….

  “Primetime does present a problem, and we are determined to solve it, so here’s a little primer on the network television business…. You can move from the number-three or number-four network to the number-one network in two years by having one new hit, say, every six months. When I was at ABC in the ’70s, we went from last to first. NBC in the ’80s had the same kind of success and pushed ABC out of the leadership role. Under Bob Iger in the ’90s, ABC recaptured the lead. Now we have to do it again.” In other words, there was nothing wrong at ABC that a few hits wouldn’t cure.

  Not to mention the success of cable. Despite the ongoing turmoil at the Family channel, Eisner hailed the channel’s “remarkably seamless” integration with Disney. “I anticipate a remarkably swift integration into the company, followed by rapid growth and increases in profitability.”

  Despite this optimism, other divisions of the company were hardly firing on all cylinders. At the theme parks, Disney’s California Adventure had opened to weak attendance and tepid reviews. The “second gate” at troubled Disneyland Paris, promised in the previous year’s letter, was still under construction. The once-thriving Disney stores had not turned around despite a redesign. Still grappling with a dearth of new products, results were weak, and Eisner announced the closing of fifty-one stores.

  And despite the optimistic forecasts for ABC Family, in the quarter ending December 31, 2001, Disney recorded a loss of $362 million for the channel after writing down some of the programming assets acquired in the deal, conceding that the programming rights weren’t worth what the company had paid. (Family’s revenues also dropped an alarming 27 percent.)

  On February 28,2002, Eisner made a rare visit to Capitol Hill to testify before the Senate Commerce Committee, which was holding hearings on how “content” could be protected from digital piracy, a subject of obvious importance to Disney. It was also a matter of personal interest for Eisner, who had been in New York the previous weekend, and was infuriated to discover that videos of a Disney movie opening that Friday were already being sold on the street. Digital copying over the Internet was an even more serious threat to Disney’s burgeoning DVD business.

  Eisner’s prepared remarks were carefully crafted to draw attention to the problem without stepping on the toes of Disney’s many partners in the technology sector. But in the ensuing panel discussion, which included News Corporation’s Peter Chernin, and an executive from Intel representing Silicon Valley, Eisner was far more pointed in his criticism: “It is very hard to negotiate with an industry whose growth, they think…is dependent on pirated content.”

  In response to questions from Senator Ben Nelson of Nebraska, Eisner identified one such company: “As a matter of fact, there are companies—computer companies, that their ads—full-page ads, billboards up and down San Francisco and L.A., that say—what do they say?—‘Rip, Mix, Burn.’ To [get] kids to buy the computer. They are selling the computer with the encouragement of the advertising that they can rip, mix and burn. In other words, they can create a theft and distribute it to all their friends if they buy this particular computer.”

  This, of course, was an explicit reference to “Rip, Mix and Burn” television ads for the Apple iPod, showing how easy it is to burn CDs with Apple’s iTunes program. Steve Jobs, Disney’s partner in his role as chairman of Pixar, was also Apple’s chairman.

  Thomas Schumacher, head of Disney feature animation, was at his office in Burbank when he got a call from Steve Jobs. “Do you know what Michael just did to me?” he practically shouted.

  “No,” Schumacher said. He’d heard nothing about Eisner’s testimony.

  Jobs was irate, saying that Eisner had attacked Apple in congressional testimony.

  Schumacher tried to calm him down. “I can’t believe this,” he said. “It’s a shock.”

  Then John Lasseter called from Pixar headquarters. He was even angrier, saying Eisner had betrayed Jobs.

  Schumacher immediately called Eisner, saying that Jobs and Lasseter were livid about his testimony. “I don’t know what they’re talking about!” Eisner exclaimed. “I didn’t say anything.”

  Schumacher called Lasseter. “John, Michael says he didn’t say anything. There’s been some misunderstanding.”

  Lasseter seemed slightly mollified. “Well, I’ll double check,” he said.

  Minutes later he was back on the phone to Schumacher. This time he was screaming. “I’m holding the transcript! Let me read it to you: ‘They are selling the computer with the encouragement of the advertising that they can rip, mix and burn. In other words, they can create a theft and distribute it to all their friends…’ He’s saying Steve wants to steal his content!”

  Confronted with the transcript, there wasn’t much Schumacher could say.

  Although Eisner continued to boast that he could personally turn ABC around, he shrewdly distanced himself from what was an increasingly troubled asset. In February, Iger assumed more visible responsibility for ABC, announcing, “Michael and I have decided that ABC is our No. 1 priority, and we decided that my time may best be spent focusing on ABC.” Iger elaborated in remarks to the Los Angeles Times suggesting that he had not been involved enough in decision making at the network. “I spent two full years managing the merger process…. I got less and less involved instead of wanting to become more involved…. I didn’t have the time or the ability to focus during those years because I was given so much more to do.”

  Just what this meant quickly became apparent to Steve Bornstein, who’d accepted his position with the explicit promise from Eisner that he would be running the network. After he negotiated a deal to bring comedian Jon Stewart to the network for a late-night replacement for the faltering “Politically Incorrect with Bill Maher,” Iger backed Lloyd Braun’s preference for Jimmy Kimmel, the host from “The Man Show.” Kimmel was hired.

  Iger also stepped into negotiations to bring David Letterman and his late-night talk show to ABC, an idea Braun had proposed after learning that Letterman was disgruntled with CBS president Les Moonves. Letterman hadn’t yet been able to renew his contract at CBS, which was expiring in six months, and under his contract, Letterman was free to negotiate other offers. When Braun first mentioned the possibility to Eisner and Iger, both had dismissed the possibility. But when Braun raised it again several weeks later, Eisner seemed intrigued.

  A move by Letterman to ABC would mean displacing ABC’s acclaimed late-night news program “Nightline,” hosted by Ted Koppel. The news division had some hugely profitable interviews, such as Barbara Walters’s exclusive 1996 interview with Monica Lewinsky, and the news division as a whole was reliably profitable. But it often balked at the idea of promoting other Disney ventures, persisted in making unflattering references to Disney (an investigative piec
e on sweatshops that mentioned Disney products especially infuriated Eisner), and, in general, was sanctimonious, in Eisner’s view. Its ability to appeal directly to the public by invoking its mission of public service journalism—a higher, nobler purpose than making money—also meant that it was difficult, if not impossible, for Eisner to control the New York–based news division from Burbank.

  Braun argued that for an investment of roughly $100 million over three to five years, ABC would gain a profitable franchise (“Letterman” earned more than $50 million a year in ad revenue for CBS, the “Tonight Show” with Jay Leno was making about $150 million, compared to “Nightline’s” profits of barely $10 million). Acquiring Letterman would give ABC’s entertainment division a huge boost, and provide a strong lead-in to the next morning’s “Good Morning America.” Although “Nightline” was drawing a respectable 4 million viewers, that was far fewer than either Letterman or Jay Leno, and it attracted a much older audience. While the prospect seemed a long shot, one of Braun’s strengths was closing talent deals.

  Eisner said to go ahead, but Braun was immediately worried about the Koppel factor. He stressed that they had to tell Koppel, and try to get him involved in planning a new approach for “Nightline.” But Iger rejected the notion, arguing that confiding in anyone from the news division was inviting leaks.

  Still, Braun felt so strongly that he followed up with an email reiterating the need to reassure Ted Koppel, to the effect that “We are not going to succeed if Ted comes out against this. Let’s work out with Ted how ‘Nightline’ moves.”

  He received no reply. (Iger said that it was Braun, not him, who wanted the negotiations cloaked in secrecy. But several people at Disney saw Braun’s email.)

  Iger may well have been correct that briefing Koppel on the negotiations risked a leak. But he evidently failed to consider that the negotiations were likely to leak anyway, whether or not Koppel was told in advance, especially if others at CBS learned that Letterman was talking to ABC. On March 1, ABC’s pursuit of Letterman was front-page news in The New York Times, which reported that ABC “had made a strong bid” in a “move that would displace Ted Koppel and ‘Nightline.’ ”

  That same morning, ABC News president David Westin summoned his irate executives, anchors, and journalists to say that neither he nor Koppel knew anything about the talks. He denounced the possible move of “Nightline” as a “tremendous blow” with “ramifications for the entire news division.” A furious Koppel, who learned of the deal when reporters called for comment, huddled with top producers to plot strategy. It didn’t help that the only expression of support from Disney came not from Eisner or Iger but in a response from Alex Wallau, the president of the ABC Network. Wallau said only that Koppel was “one of the most respected journalists in America” and “We are hopeful that ‘Nightline’ and Ted will continue to make significant contributions to ABC in the years ahead.”

  Letterman issued a far stronger statement of support for Koppel than Disney did, saying he wouldn’t join ABC if it meant displacing Koppel. Moreover, Letterman stated that he had cause to wonder how Eisner and Iger would treat him, if this was how they treated Koppel, one of their most respected on-air talents. A full week after the story broke, Iger apologized to Koppel. “The way the story unfolded we could have been more respectful to the people involved and for that I have apologized,” he told the Times.* But the negotiations continued, with ABC offering Letterman $31.5 million in annual salary and an array of other guarantees. Iger and Braun flew to New York on March 11 to make their final pitch.

  With considerable drama, Letterman announced on his show of March 12 that he would stay at CBS, and that he hoped Koppel and “Nightline” would remain on ABC “for as long as that guy would like to have that job.” Although ABC was also handicapped in its courtship by its faltering primetime ratings, just as CBS’s were surging, in the end, Braun was right that the deal was doomed without Koppel’s endorsement. Once Letterman made his decision to stay at CBS, Koppel broke his silence and issued a scathing indictment of Disney management:

  “We hope the corporate leadership of Disney understands that it would not be reasonable to expect all of us at ‘Nightline’ to continue our work in a climate of ongoing uncertainty. There must be a great many talented comedians who would welcome the opportunity to take over the ‘Nightline’ time slot. Our hope is that Disney will send a clear and unmistakable signal to them, to us, to the advertising community and to all of our loyal viewers interested in the robust future of network television news that ‘Nightline’ can count on serious corporate backing.”

  Disney remained silent. Koppel had won round one. But even though he’d bought some time, he had hardly endeared himself to either Eisner or Iger. The prospect of “serious corporate backing” was remote.

  Even as Disney professed support for Koppel and “Nightline,” Iger was negotiating a more radical approach to the news division: spinning it off into a new company that would merge ABC News with CNN. At least initially, the new company would be 70 percent owned by CNN, and 30 percent by Disney. A reminder of the synergies that might have been realized had Disney and Time Warner merged, it offered economies of scale and an estimated $200 million in annual cost savings, while ridding Eisner of an increasingly unwanted stepchild from the ABC acquisition.

  While Iger and Jamie Kellner, chief executive of Turner Broadcasting, worked out the financial details, ABC News president David Westin met with Walter Isaacson, his counterpart at CNN, to focus on the logistics of merging two global news organizations with high-profile correspondents and anchors. They knew the publicity would dwarf the Letterman negotiations. But by midsummer they’d pretty much worked everything out, even the locations of foreign bureaus. So far, nothing had leaked. All they needed was board approval.

  ABC did have a solid success that spring with its latest entry into the reality genre, “The Bachelor,” developed by ABC’s Andrea Wong and outside producer Michael Fleiss. Ratings for the six one-hour episodes built steadily as a thirty-one-year-old single Harvard graduate, Alex Michel, winnowed a file of twenty-five potential brides to just one, Amanda Marsh, and then proposed marriage on national TV. Though the premise arguably pushed the boundaries of the ABC/Disney brand, and drew a few protests from feminists, its final episode drew 18.2 million viewers, nearly beating “CSI” on CBS. Susan Lyne announced that the runner-up, Trista Rehn, would launch a companion series, “The Bachelorette.”

  At Disneyland Paris, the much-delayed “second gate,” a Walt Disney Studios theme park, opened on March 16. Completed at a cost of $533 million, the park was a budget version of the larger Disney-MGM Studios, including the Aerosmith “Rockin’ Roller Coaster” but not the much costlier “Tower of Terror.” The idea, as with all the new theme parks at existing Disney locations, was to induce visitors to stay longer, a critical need at Disneyland Paris, where hotel occupancy rates remained low. Still, the new park saddled the already troubled enterprise with even more debt payments at a time when the existing debt wasn’t being serviced by attendance at the original park.

  Eisner attended the opening, and invited the entire board to a preopening dinner on Friday night and to Saturday’s opening ceremonies. Instead of the board dinner at Disneyland Paris on Friday, Andrea Van de Kamp, Stanley Gold, and Gold’s wife, Ilene, chose to dine at a bistro in Paris.

  The next day, the few board members toured the new park with Eisner and afterward gathered for cocktails and a buffet at one of the new restaurants. Van de Kamp found herself chatting with Bob Iger, and mentioned that she had some concerns. “I’m not sure there’s enough here,” she said. “There’s not enough substance to keep people for a full day. People are already leaving, and the park has only been open a few hours.” Others came up, and the conversation shifted as they mingled with other guests at the reception.

  Minutes later, Eisner spotted Van de Kamp and strode toward her. “I understand you’ve been griping,” he said, his tone cold.

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p; Van de Kamp was startled, first that Iger had already reported something she felt she’d told him in confidence, and second that Eisner seemed so angry. “I was just expressing some concerns and observations,” she replied. “We’re here to look. We invested a lot of money in this. As a director, I think it’s appropriate to share my concerns.” But when she reported the exchange to Gold and his wife, she wondered why she was being so defensive. Eisner was the one behaving inappropriately, in her view.

  Later, Eisner complained to Gold that he and Van de Kamp had skipped the Friday dinner. “Most of the board didn’t come at all,” Gold countered.

  Eisner liked to boast that Disneyland Paris was the most popular tourist attraction in Europe, with 12 million visitors a year, more than the Eiffel Tower. Disney’s goal for the Disney Studios attraction was to increase that by 50 percent, to 18 million a year. But by the end of the year, that looked hopelessly optimistic.

  After returning from Paris, Gold had lunch with fellow board member Tom Murphy in New York at Café des Artistes, near ABC’s former headquarters. In Gold’s view, ABC was floundering, the Bloomberg contract had been a fiasco, and the Family acquisition was a disaster. Roy was reporting that morale at feature animation and at the theme parks, the parts of the company he cared most about, was slumping. Gold had told Eisner he was “close” to asking for his resignation. Now he was even closer, and had decided to sound out other board members. “Michael doesn’t know what he’s doing,” he said. “I think it may be time for a change.”

  To Gold’s surprise, Murphy said, “Let me shake your hand. I’m proud of you for speaking your mind. Finally someone is willing to speak the truth.” Murphy, who had been close to Warren Buffett since Buffett acquired his large stake in Cap Cities, added that Buffett had told him that he wouldn’t consider investing again in Disney as long as Eisner was chief executive. Murphy suggested that Gold speak next to Ray Watson.