POWER LUNCH by Ronald Grover November 12, 1999

Fixing Disney: Some Unsolicited Advice for Chairman Eisner
Here's my plan: Get a partner for ABC. Make one flick a year. Close half your stores. And woo Gen Y, any way you can

Walt Disney Co. isn't the happiest place on earth these days. Chairman Michael Eisner and his top lieutenants are desperately looking for a way out of a slump that has shadowed the world's second-largest media company for more than a year. On Nov. 4, the company announced a 27% drop in earnings for the last year. Worse, as Eisner told a hastily called meeting of more than 120 analysts and large investors on Nov. 10, it may take as much as a year for the company to turn things around.

In fact, it may take even longer than that. Sure, Disney can cut overhead -- Eisner's plan is to slash around $500 million a year by 2001 by paring the number and cost of movies it makes, and by closing some stores. But take a closer look. Disney's largest single market -- young kids and their families -- is no longer the vibrant business it was when Eisner & Co. launched their spectacular turnaround in 1984. In fact, the hot market now has grown up into Generation Y, the 20something crowd. They don't come running to the Mickey Mouse Club on the tube (like their baby-boomer parents used to do) or crowd Disneyland's Main Street. And like any media company, Disney faces a much more competitive marketplace for consumers eyeballs, fighting not only other studios and networks but a rush of new cable channels and, of course, the Internet.

On top of all that, Disney today is a huge company, generating $23.4 billion this year in revenues, or nearly double its sales in 1995. Turning around a company that large just doesn't happen overnight. Eisner has his work cut out for him.

PRIORITIES. I'm certainly willing to give Disney all the time it needs. But at the same time, if I were Michael Eisner (I'm not nearly as creative, of course, and too short besides), here are the priorities I'd tell my strategic planners to focus on.

Start with the big one: ABC. Ever since Disney paid $18.9 billion in early 1996, the company has seemingly been in a funk. Its earnings have fallen two of the next three years, its vaunted animation unit went through a period of disappointments, and the network's ratings have gone from bad to worse. Disney insiders defend the deal by pointing to the ESPN sports network, a largely forgotten but hugely profitable part of ABC. Still, even ESPN faces intense competition and seemingly ever-increasing sports programming costs.

ABC isn't going to get better anytime soon. Even if ratings turn around (it's currently third among the Big Three), falling viewership makes owning a TV network problematic at best. My advice: Find a partner, Disney. One that quickly comes to mind is USA Networks, whose Chairman Barry Diller is desperate for a national presence. Marrying ABC and USA's Home Shopping Network makes perfect sense.

Selling ad time isn't covering Disney's programming costs. So imagine this: Use HSN to sell kids' toys based on the Disney Saturday cartoons they're watching, or peddling NFL gear to couch potatoes watching Monday Night Football. Might work.

WRONG STUFF. Next, get serious with the store closings. Shut half the 600-odd Disney Stores that are now ubiquitious in every mall in America. It's hard to maintain Disney's vaunted quality with that many stores. Little wonder Disney says it stocked its shelves with the wrong merchandise last year. A trip to the Disney Store should be special, but isn't if the same stuff can be bought at Kmart or Sears.

A much tougher fix is the studio. Disney lived for years by making animated films that would sell theater tickets and create new characters that would fuel merchandise sales. The last time that happened for Disney was in 1994, with Lion King. Why? Disney decided to crank out more animated films, going from one every few years under Walt, to two a year, plus a couple more animated movies made just for video. That's too much. And it explains why Disney has picked such unlikely subjects as The Hunchback of Notre Dame to make films. A staff stretched that thin will make bad decisions, and those decisions can cost $100 million a pop -- just like that.

Disney needs to cut back to one animated film a year, giving that film the full attention that it's top execs -- including Eisner -- gave The Little Mermaid and Beauty and the Beast. Films can be put on an assembly line and still have the special quality that Disney demands before showing it to kids and their folks. Someone had a good idea in linking up with Pixar, the Steve Jobs-owned studio that made Toy Story and A Bug's Life. Disney gets the next nearly dozen films under a contract with Pixar, which makes only one film a year to ensure quality. Just like Disney used to do.

JUST YUCKY. Disney's biggest problem is how to grab the large and fickle Gen Y'ers that left it long ago for MTV and the WB network. The company recently redesigned The Disney Channel, giving it a dose of MTV-like music videos. The problem is, it still carries the Disney name. As my 15-year-old might say, that's just yucky. Disney knows better than most that brands stand for something. The brand that Disney has nurtured is for kids. Just as it did with Touchstone Pictures -- set up back in the early 80s to make more-adult films without the Disney name -- Disney needs to create its own Gen Y identity. MTV isn't for sale, and neither is WB, but neither were around 20 years ago either.

None of these are exactly bolts from the blue for a guy like Eisner. Indeed, some say he may be the most creative media executive since Walt Disney himself. Yet for all of Walt's legendary creative spark, he never would have been the success he became without a partner -- in his case, his older brother Roy. Eisner desperately needs a partner.

When he first came to Disney back in 1984, Eisner's comrade in arms was Disney president Frank Wells. An accomplished Hollywood lawyer and one-time head of Warner Brothers, Wells was the yin to Eisner's yang. When Eisner got too excited about something, it was Wells who would bring him back to earth. Eisner would want to build a Mickey-shaped hotel, Wells would remind him of how much it would cost.

YES, BOSS. I remember traveling with the Disney crew to Houston, where the stage show Beauty and the Beast was in a pre-Broadway run. Eisner stomped around a parking lot, with ideas spewing out about how the stage could be split into two and come together behind the stars. The costs of pulling it off would have been prohibitive, and the other Disney execs stared absently, not knowing what to say. None of it ever happened. Wells later told the show's producers to move on to something else.

Eisner would be the first to say that he has sorely missed his yin since Wells died in a 1994 helicopter accident while on a ski trip. If Wells hadn't perished, Disney might not have bought ABC, and it almost certainly wouldn't have expanded so fast into everything from cruise ships to sports teams.

In recent interviews, Eisner has made a big deal about having a full bench of executives who could be his No. 2. Maybe so, but no other major media company is run with a single guy at the top. Even Rupert Murdoch, who for decades has run News Corp. like the family-owned kingdom it is, recently named Peter Chernin as No. 2 until Murdoch's own son is old enough to succeed him. In short, world-class media empires need more than one guy calling the shots.

Who would that person be? Hard to say. In fact, Eisner has a bunch of top-flight executives heading various units, including Joe Roth at the studio and Bob Iger at ABC, who also heads Disney's international expansion. But none of them has the sweeping knowledge of how Disney runs or the business experience needed to make sure the top guy doesn't get carried away. One who could have stepped in, former Disney CFO Richard Nanula, recently joined an Internet startup. The closest to an Eisner partner is Sandy Litvack, the company's former top lawyer and current vice-chairman. But Litvack spent most of his life at a Wall Street law firm, not in the entertainment industry.

MAGIC ANSWERS? Eisner tried to pick a No. 2 once, in the now-celebrated failure that came with former superagent Michael Ovitz' 14-month stay as company president. Ovitz failed because he wasn't willing to learn the Disney business and to coordinate with Disney's other strong-willed unit heads. Eisner knew then -- and probably knows now -- that he needed help at the top. The idea is still a good one.

Will Disney take my advice? Who knows? But the company is now searching for its own set of magic answers to reignite what was once Wall Street's charmed company. A restless group of analysts spent 10 hours on Nov. 10 eager to hear the slightest hint of a compelling strategy for rescuing Disney from its financial doldrums -- beyond merely cost-cutting. It's going to take more than wishes upon a star to spark a revival anytime soon.

Grover covers the media industry from his post as Los Angeles bureau chief

EDITED BY DOUGLAS HARBRECHT _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

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