In Praise of Eisner

March 19, 2005

by Edward Jay Epstein

The press will no longer have Michael Eisner to kick
around. After become an irresistible magnet for disparaging stories in the past decade, he announced last week that he is retiring as head of Disney in September. At a minimum, he had a real separation problem with the associates he axed. His bad press began in 1994 soon after he forced
out the talented studio chief, Jeffrey Katzenberg, who then sued Disney for additional compensation; greatly intensified in 1997 after he fired-and paid off with $140 million-Michael Ovitz; and turned into a media tsunami in 2003 after he kicked Roy Disney (Walt Disney's nephew)
and his associate Stanley Gold off the board of directors.

The onslaught of criticism ranged from citing his name-calling-Mr. Katzenberg was a "midget" and Mr. Ovitz a "psychopath"-to his second-guessing decisions about movies, e.g. his passing on distributing the crowd-pleasing, pseudo-documentary "Fahrenheit 9-11." Stories about
his bad behavior were sufficiently plentiful to allow journalists
equipped with moral compasses to locate his "dark side."

What is lost in the stories about Mr. Eisner's arrogance, greed and insensitivity is the more illuminating tale of how he transformed a faltering animation and amusement park company into one of the world's most successful home entertainment companies. When he assumed command in
1984, Disney had a market value of $1.8 billion. Today, its market value is $57.2 billion. A 30-fold increase in value is no minor accomplishment
in the mercurial entertainment economy-indeed, one in which News Corporation and Vivendi-Universal almost went bankrupt, and Time-Warner, Viacom and Sony were forced to take multibillion-dollar write-offs. Even correcting for inflation, Disney increased 19 times in value between
1984 and 2005.

The answer to how Mr. Eisner, despite his many tactical errors, added $55 billion in value to Disney lay in his strategic vision that Disney's future would be in home entertainment not movie theaters. Consider just two decisions he made that brought about this incredible corporate transformation. First, in the mid-'80s, he released Disney's library of
animated movies on video over the strenuous objections of many, including Mr. Katzenberg, who opposed the move on the grounds that it would kill their value as re-releases in movie houses. Within a few years, with its animated features accounting for seven of the 10 top-selling videos, Disney had found a new El Dorado. By the early-'90s, video sales were providing almost all of the movie division profits.
Skipping theaters entirely, Disney now releases sequels to features such as "The Lion King" directly on video.

Second, in 1995, Mr. Eisner totally reshaped Disney by acquiring Capital Cities/ABC for $19 billion. With this coup, Disney not only got 10 TV stations in the biggest advertising markets and one of the three broadcast networks, it got control of ESPN, the single most profitable cable network. Since cable operators needed this sports network to
attract subscribers, ESPN was able to ratchet up its charge for cable operators intercepting its satellite signals to $1.75 per subscriber per month. This effective tax on cable households- and ESPN's ability to raise it by 20% a year-gives Disney (which owns 80% of ESPN) not only an
enormous cash flow ($1.1 billion in 2004) but, together with The Disney Channel, leverage over the entire cable industry. Mr. Eisner had moved Disney to the forefront of home entertainment.

In many ways, his corporate success also proved his undoing. The institutions that own two-thirds of Disney's shares came to focus obsessively on his inability to deliver a stock-market payoff. The writing was on the wall last March after 43% of shareholders voted to withhold their support from him. So Michael Eisner picked Robert Iger,
current president of Disney, as his successor. Free of his boss's accumulated baggage-and especially of his bad press-Mr. Iger will presumably continue Disney's transformation. And we can all be sure of one thing: he will be using the Eisner template.

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