The Keys to the Kingdom (54 page)

Eisner and Katzenberg met late in the day, and within a few minutes, they started arguing about money. Eisner not only rejected Katzenberg's math but said he couldn't get the board—especially Roy Disney—to approve the type of payment that Katzenberg was demanding.

Katzenberg was enraged. Angry words poured from his mouth. He could not remember ever speaking to Eisner like this throughout their years together. If members of the board wouldn't approve the payment, he asked, who had poisoned their minds? Eisner was responsible. He didn't give a damn about Eisner's problems with the board. Katzenberg would see Eisner in court. With that, he walked out.

Katzenberg returned to the suite where his attorneys were waiting. The meeting with Eisner was a failure, he told them. They talked about the upcoming trial for about an hour and then adjourned for the night.

But as Katzenberg waited for the valet to bring his black Mustang, he noticed that Eisner's car and driver were still in front of the hotel. If Eisner was going to trial, Katzenberg reasoned, he would have been long gone.

Sure enough, before Katzenberg's lawyers had left, Sandy Litvack approached Bert Fields in the lobby. Finally it was time to talk.

On Monday, November 7, Hollywood learned the disappointing news. Ten days before the trial was to begin, the parties announced a “partial settlement.” Without admitting that it owed Katzenberg anything, Disney agreed to pay him 72.5 percent of the 2 percent bonus. When it came to figuring that sum, however, the two parties were still oceans apart. They had agreed to a trial before a referee who would come up with the final tally.

Disney also agreed to pay Katzenberg $117 million. Of that sum, $77 million would be a down payment against the final figure. The remaining $40 million would buy out his claims to profits from the merchandise based on his film and television productions. It would not count against the lump sum to be designated by the referee.

At the time, these payments were kept confidential. Disney appeared to have caved on Katzenberg's claim that he was owed money. What no one knew yet was that the company had agreed to cough up a minimum of $117 million. Considering that Katzenberg at one time would have settled
for as little as $90 million, Disney had already sustained a serious blow. But there wasn't so much as a rumor about the payment, and for Disney, the silence was almost as good as not having to pay at all.

Disney had every intention of keeping its secrets. Both sides agreed that the trial before the referee would not be open to the public. In the wake of the Ovitz debacle, no doubt, Eisner was not eager to write Katzenberg a big check and face the wrath of his shareholders. But if the matter could be decided in a closed chamber—with an agreement that the sum be kept quiet—he could tell the public that he had fought to the bitter end and finally paid the least amount that he could in the circumstances.

 

WHILE KATZENBERG WAGED
war, the seemingly unsinkable Disney moved into one of the roughest patches it had hit in years. Everything seemed to go awry.

In September 1996, Disney had announced that it was not only taking on the cruise business, but would improve it. The company had been so confident that it could sail easily into these waters that it had handed out countdown watches that ticked off the minutes until the first ship's scheduled launch in early 1998.

But the $350 million
Disney Magic
ran into expensive delays. Instead of launching that spring, the ship's first forty sailings had to be canceled. The company offered 50 percent discounts to travelers whose trips were postponed twice, and 25 percent discounts to those who had a trip pushed back only once. Those who canceled got refunds and the company had to pay the commissions for travel agents. Disney also had to pay the crew that had been hired for the original launch date.

Disney blamed the delays on the ship's Italian builder, Fincantieri Cantieri Navali Italiani SpA. Fincantieri acknowledged problems keeping up with demand in the burgeoning cruise-ship business, but Disney competitors at the Carnival cruise line scoffed at the idea that the builder really was to blame. The real problem, they suggested, was Disney, which constantly changed its specifications. After the second delay, some Italian workers began to criticize Disney. Gianni Alassio, chief of engineering for the Italian firm Demont Srl, said Disney had insisted on adding pipe supports and new welds, requiring some areas of the ship to be redone four or five times. “They are too meticulous about unimportant things,” Alassio complained. “Maybe Disney is not ready to work on ships.”

Though most companies sent half a dozen executives to monitor construction, Disney had sent more than a hundred people to Italy. “We've probably driven them nuts,” said Robert Collins, one of Disney's specialists. But he said the goal was perfection, which takes time. Workers at the site came up with a new name for the
Disney Magic:
the
Disney Tragic
. Its sister ship, the
Disney Wonder
—set to launch in 1999—was dubbed the
Disney Blunder
.

As usual, Eisner had been immersed in the design details. He wanted the
Disney Magic
to be a ship in the tradition of the grand ocean liners. There was to be a fifteen-foot Goofy hanging from the stern, and the company wanted the whole ship to be color-coordinated. Disney wanted the lifeboats to be yellow, requiring the company to get a special exemption from international rules requiring them to be orange. Disney's insistence on a long, slender hull also meant twenty fewer passenger cabins than most cruise ships hold.

There would be two smokestacks—one purely for looks—that would weigh down the ship and possibly render it unstable. Fincantieri contracted for special lightweight fiberglass shells for the smokestacks, upping the cost. When Disney decided to scrap plans for a casino and instead install a country-music dance area, the change required more than a hundred new detailed drawings. Meanwhile, Visions In Scale, a Florida-based firm, sent artists who put in ten-hour days for weeks hand-painting ceiling panels to create the effect of wood branches for one of the ship's restaurants.

Travel expert Arthur Frommer noted that Disney's prices were higher than its competitors' and questioned whether that would hurt business. Most families of four traveling during vacation times would have to pay about $5,600 for a Disney cruise, Frommer said, while a comparable trip on the Carnival line would cost about $4,098.

The ship finally sailed on July 30, 1998, well after most families had taken their vacations and the hurricane season was only weeks away.

 

DISNEY HAD OPENED
its new Animal Kingdom park in Orlando during the summer of 1998, but only after so many animals died that the federal government launched an investigation (Disney was cleared of wrongdoing). At first, the Animal Kingdom was cannibalizing other Disney attractions in the area at a much higher rate than anticipated. Families weren't staying longer so they could spend time at each attraction, but merely paid shorter
visits to each park. “They did not get the lift that they had anticipated,” said PaineWebber analyst Christopher Dixon. Within a year, however, Disney added an Asian extension to the original African display. The theme parks became the most vibrant sector of a troubled company.

In September, Disney warned that its fourth-quarter profits would reflect a 31 percent drop over the previous year and that profit for fiscal 1998 would be up only slightly over 1997. The stock had dropped 43 percent from its high in April because most Wall Street analysts had cut their future profit estimates and downgraded their recommendations on the company.

One reason for the company's disappointing results was the film studio. Disney had released a string of losers like
Krippendorf's Tribe
and
Holy Man,
the Eddie Murphy bomb. Even its big summer movie,
Armageddon,
had been so expensive that it couldn't make up for the other flops. Now Disney was cutting back on the number of films it put out each year, and the Hollywood Pictures label was effectively folded.

ABC also presented an ongoing problem. Naturally, Eisner had plunged in when Disney acquired the network, undoubtedly expecting to replicate his earlier success in programming. “Here's a guy who left network television in 1977 but who had a strong love for it,” says Ted Harbert, who was head of programming when Disney bought ABC. “So a certain exuberance would be expected. He certainly has passionate opinions on all sorts of subjects, from the quality of a program to a particular actor to the business deal. Michael can talk about a show all day, which is great. But we didn't always agree. His management style is to make you prove your case, not just once but two or three times, and to chip away at his resistance. Occasionally that was frustrating, but in hindsight, I understand it. Sometimes I wondered, ‘How does the chairman of the board of the huge company get involved in this level of minutiae?' But that's what he did.”

Eisner promptly reinstated Disney's Sunday-night movie even though it had never made money for the network. For Eisner, reinforcing Disney's brand name with a regular network show—and using the program to promote the theme parks—was too good an opportunity to pass up. Although Harbert vigorously resisted giving up valuable Sunday-night real estate to the Disney show, lobbying instead to put it on Saturday nights, Eisner wouldn't hear of it. More Americans were sitting in front of their televisions on Sunday nights and Eisner wanted the Disney show to occupy that space, even if it meant taking the slot away from the eroding but still viable
America's Funniest Home Videos
. The new Disney show performed erratically.

Overall, Eisner's frame of reference was some twenty years out of date. There was a lot of eyeball rolling among some at ABC as Eisner continually alluded to
Happy Days, The Mod Squad,
and
Charlie's Angels
—all of which had debuted in the seventies. Eisner clearly was unfamiliar with the current schedules of other networks. In fact, the entire business had changed considerably in ways that he did not seem to understand. “I had the rather difficult task of reeducating him—how ridiculous the deals had become, star salaries, license fees, terms of deals,” says Harbert. “He was quite appropriately shocked and upset about it. He felt that we couldn't make the same mistakes everybody else did. He didn't want to play ball the same way other players do.”

While the other networks had started to push for more ownership in programs that they put on the air, Eisner thought that was an unnecessary risk—that this was “spending money for failure,” as Harbert put it. He was content to let outside production companies spend their money developing new material, even though they would reap the bulk of the profit if there was any. But within a couple of years, Disney would start to see the wisdom of the other networks' strategy. It began to negotiate with producers for a stake in some shows.

Eisner also vetoed the idea of doing a costly program with
Cheers
star Ted Danson—which may have been a good call. DreamWorks subsequently failed expensively with the short-lived
Ink
. Eisner declined to do a show with another
Cheers
veteran, Kirstie Alley. She went on to do
Veronica's Closet
for NBC, a show that performed disappointingly even though it was given the desirable spot behind
Seinfeld
.

Eisner's level of involvement was a huge contrast from the management style of former Capital Cities/ABC chiefs Dan Burke and Tom Murphy, who gave their programming executives considerable autonomy. Eisner was hands-on and still sticking to his old credo, insisting that the network find new talent rather than pay top dollar for established names. “He said, ‘Go make your own stars,'” remembers Harbert.

Harbert says Eisner's opinions were “valid and credible.” But nothing seemed to pull ABC out of its doldrums as ratings dipped to historic lows. Even
Good Morning America,
the network's most profitable news show, wasn't having such good mornings anymore. The program, which had dominated from 1985 through 1995, had lost more than 25 percent of its viewers. Estimates showed that for the first half of 1998, the rival
Today
show—with the engaging team of Katie Couric and Matt Lauer—pulled in about $117
million for NBC, while the once stronger
Good Morning America
earned only about $77 million in the same period.

Eisner often argued that ESPN threw off such great profits that the cable service alone, with its famous brand name, made the Capital Cities/ABC acquisition worthwhile. But some questioned whether ESPN could sustain its momentum considering the staggering sums Disney had paid for contracts with the National Football League and National Hockey League.

Disney agreed in January 1998 to pay a record $9.2 billion for the eight-year rights to television football games. And in August 1998, even with the NHL's television ratings dropping, Disney anted up $600 million for a five-year contract. The amount was more than two and a half times what Fox Sports and ESPN had previously paid. Steven Bornstein, then president of ESPN and ABC Sports, predicted that Disney could boost ratings and increase ad rates. But this seemed like a tough promise to keep.

Even if ABC broadcast the maximum number of hockey games allowed by the contract, the network would have to charge $50,000 for each commercial just to break even. But advertising sources said Fox had been able to get $45,000 for commercials only once, for a Stanley Cup finals game, and had accepted much less for regular-season matches. “Maybe Disney knows something we don't know,” said Ron Frederick, a media buyer at the J. Walter Thompson advertising agency. “On the face of it, it looks like too much money.” In football, 1998 brought a ratings slump and
Monday Night Football
limped to an embarrassing finish of the season with the lowest ratings in the show's twenty-nine-year history.