economist The numbers behind the industry.
Did Michael Eisner Make Disney Profitable?
By Edward Jay Epstein
April 18, 2005
Q. "How's your wife?"
A. "Compared to what?"
—Henny Youngman routine
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.
Consider the recent frenzy of items about Michael Eisner,
which ended in his announced resignation from Disney. 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. 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:
Disney's Revenues $1.5 bil. $30.8 bil.
Disney's Income $294 mil. $4.49
Tax-Free Cash Flow $100 mil. $2.9 bil.
$1.9 bil. $57.4 bil.
Enterprise Value $2.8 billion $69
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.
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.
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
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.
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).
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 he should continue Disney's transformation into a home-entertainment