Disney: the struggling magic kingdom

Disney, the global media conglomerate famously denominated as “magic kingdom”, has been the focus of attention since late 2003: 8 years of mediocre, if not pathetic performance; Roy Disney’s grassroots campaign to oust Michael Eisner, the CEO; Disney’s unhappy break with Pixar, the computer animation studio that made reputed films such as Toy Story and Finding Nemo; Comcast’s hostile bid to acquire Disney; shareholders’ non-confidence vote against Eisner in the corporation’s annual meeting

Eisner: two tales of one man

1984, when Disney was facing a directional crossroad, it was Michael Eisner who took over the position of CEO. With his outstanding judgment, strategic vision and his determined leadership, this graduate of English Literature and Theatre was able to transform Disney from a little iconic animated film maker to a cross-media global superpower that competes in theme parks, filmmaking and distribution, television, radio and many other industries across countries. He was able to increase Disney’s total revenue from 1984’s $1.65bn, to 1997’s $22bn, and market value from 1984’s 2bn, to 1997’s 67bn. This performance is sufficient to make him one of the most successful CEOs in America of all time. He himself has a formidable position in the company, and the Empire of Disney, is effectively the Empire of Eisner.

However, Disney started to perform in a surprisingly mediocre fashion since mid-90s. In 2002, the company’s profit was a-thirds lower than that of 1997, and share price has remained the same level as that year. The overall performance of Disney’s stock price was poorer than NASDAQ and S&P. The bad performance of Disney, has something to do with some exogenous factors which are beyond any manager’s control, such as the 911 terrorist attack, which severely affected the tourist industry, and revenues from theme parks suffered; the overall economic underperformance affected advertising, which is a factor that can be used to explain slumps of Disney and all other media firms. However, bad performance of Disney cannot only be attributed to bad luck – it must have to do with Eisner’s bad governance. Arguably not a single analyst or observer in Hollywood and Wall Street would deny that Eisner’s management has serious problems, and it is directly associated with the future of Disney as a whole. In fact, not long ago, Forbes has ranked Eisner as the worst chief executive of America.

A despotic regent

It is difficult, however, to assess to what extent Eisner has made strategic mistakes in key decisions and policies. But many insiders and outsiders have noted that this chief executive, is notoriously bad at first, recruiting talented executives and second, work with them. It is well known that Disney has a long-list of top executives who have left the firm out of anger – they all found Eisner was difficult to get along with. Suffice it to say that Eisner has been creating his own enemies everywhere, and the meantime, talents are leaving the company. Observers found, the top level of Disney has been subjected to a lack of benign partnership Eisner is ruling like a dictator. He is even fond of taking political struggle into corporate governance; he has been keen to expel those who are against him, but promote those who are supporting him, and made them his cronies. The logic goes like this: either you are my crony, or you are my enemy.

Eisner’s difficulty in getting along with others, especially the talented and capable, is extended to the way he deals with his business partners. The cooperation and negotiation with Pixar is a classic example. This studio specialises in making computer animation films, and had made well-known films such as Toy Story, Finding Nemo fo Disney. In fact, approximately half of all the income from studio that Disney earns these years, has been come from Pixar’s products. Eisner and Pixar’s boss, Steve Jobs (i.e. the founder and CEO of Apple), have a difficult the time. Mr Jobs himself is a short-tempered, strong-willed man; the two was not easy with each other, and they literally hate each other. Early this year, Mr Jobs made the announcement that Pixar would stop the negotiation about continuing their contract with Disney. This is a huge blow to Disney, which so much relies on filmmaking of Pixar. Insiders believe that this is a personal vengeance that Mr Jobs made against Eisner, the man he pretty much hates

The ambitious chief executive brought in the television network ABC; but due to poor governance its audience rating and advertising have fallen significantly. ABC was able to make a good deal of profit when it was acquired by Disney, but is now mainly a liability: losing millions of dollars each year. But the dictatorial CEO who has built his empire, would not listen to other analysts who would argue that it is preferable that this firm, whose condition could not be improved in short period, should sold.

Roy Disney: saving his family legacy?

Roy Disney, 74, is the nephew of the founder of Disney Co., Walt Disney; he owns about 2% of the company’s shares; as a ex-director, he has been the latest connexion that the Disney family has with the company. Roy has been born shy and introspective; he never has the disposition of a businessman. He does not care much about the company’s financial matters and business operation, but focuses more on filmmaking and production. In 80s, he was in charge of Disney’s animation filmmaking. <Fantasy 2000> was the masterpiece that cost him effort of a decade. Roy Disney is also a traditional Disneyman: he talks about Disney’s value, culture and soul, and is willing to preserve these values in the faces of commercialisation in the contemporary world. Eisner has personal clash with Roy. As one of the foremost long-term critic of Eisner, Roy Disney is dissatisfied with Eisner’s personality and ways of dealing things and people; his poor governance and the damage he has done to the Disney culture.

Eventually, Eisner’s purge came to Roy Disney. In late last year, Roy was told that the new retirement policy required that all directors over 72 years should quit the board. Roy was clear that this reform was headed towards him, a fervent Eisner’s critic. Roy chose to resign, and he decided to do something instead of just leaving. He wrote a long letter listing seven of Eisner’s key faults in the past years, lambasting the CEO: it includes Eisner’s failure to prevent ABC from losing money; failed negotiation with Pixar; poor human resource management in the top level; poor performance in increasing earnings; failure to provide a succession plan. Another director, Roy’s business partner Stanley Gold, resigned along with Roy. They tried to undertake a grassroots campaign, organising shareholders, utilising their discontent with the management, and urge them to “veto no” against Eisner in the annual shareholder meeting. Roy’s campaign could be said to have been successful, in Mach 3’s Disney annual meeting, 43% of shareholders withheld their support to election of Eisner; he was forced to give up his position as chairman, but remained as CEO.

The hostile bid from Comcast and the future of Disney

On Feb 11, Comcast, the largest cable TV provider in the US, made a $66bn bid to take over Disney. Eisner and Disney’s board rejected this hostile bid. But the bid itself, is a clear result of poor performance of Disney over years, which rendered its assets and shares severely undervalued. Comcast made the bid in a particularly timing, when it is precisely the most difficult time for both Disney and Eisner himself. If the investors of Disney regard the bid as too low, then Comcast may well offer a better deal in the future; the current rejection is not the end of the story.

From the analysis above it can clearly be seen that Disney’s current predicament is very much related to Eisner’s poor management in the past years. On the one hand, the company is facing the threat of hostile take-over, on the other hand, it is encountering a power struggle within. The shareholders, led by Roy Disney, were demanding the board to remove Eisner; but it is no easy thing to complete the task. In fact, Disney has been showing signs of revering in the past months; its market value has risen 35% in 2003, and it is estimated that in the 2004 fiscal year earning per share will increased by 30%. However, the current recovery of Disney has much to do with the box office of Finding Nemo, a film made by Pixar, which has abandoned Disney already.

Furthermore, although increasingly independent, the board of Disney was still regarded as fairly docile, subject to the personal influence of Eisner, and is short of any of his opponent. Therefore, to expect this boardroom to make take bold and decisive steps, was a bit unrealistic. Moreover, the board would naturally avoid to removing Eisner at a time when Comcast is biding for take-over of the firm. It is like offering the enemy a succor. Eisner’s contract is also going to expire in 2006. It is particularly a tough position to sack this star CEO, serving for almost 20 years, at a time shortly before his graceful ending of career in the empire he built. However, it is certain that the board would take the issue of choosing a successor to Eisner into the agenda.

In the eyes of Pixar, Comcast, Roy Disney and most analysts in Wall Street, the problem of Disney is simply Eisner. If Eisner leaves Disney, probably Mr Jobs would negotiate with Disney again; for Roy Disney, under the governance of Eisner, it does not matter how much he improves market value and earnings, because Eisner has destroyed the so-called culture of Disney that Roy values. For most shareholders, however, what they care about is still the firm’s earnings and share price.

Comcast and other potential buyers of Disney are still watching, carefully. Whether legendary ‘magic kingdom’ maintain its independence, is still difficult to judge. We can only watch over the performance of Eisner in the near future now, to see whether he is able to save Disney, and save himself. Perhaps, he needs a miracle.