annals of communications
The New Yorker - August 14, 1995
Michael Eisner's comeback and his probable peace with Jeffrey Katzenberg crown a succession of mogul mergers and breakups that tops anything on TV.
In a season of media madness topped off by the announcement that the Walt Disney Company was buying Capital Cities/ABC, consider these bombshells. Since Jeffrey Katzenberg left the employ of Michael Eisner and Disney last year and announced that he and the director Steven Spielberg and the record impresario David Geffen would launch a new studio, DreamWorks SKG, otherwise cautious companies have been throwing money at them--including Cap Cities/ABC, which has committed a hundred million dollars to a joint venture. Then, in June, Seagram's chief executive officer, Edgar Bronfman, Jr., acquired MCA, and soon thereafter he also threw a bundle at DreamWorks and agreed to distribute the new studio's movies overseas and its videos worldwide. Michael Ovitz, the chairman of Creative Artists Agency, who was said to want to be as rich as his friend Michael Eisner, en-gaged in an excruciating courtship with Bronfman before fleeing his embrace--or did Bronfman dump him? A couple of months ago, Barry Diller again made noises about buying CBS--a move said to have been secretly encouraged by Eisner. ("That I will not comment on," Eisner says.) A close Diller associate says, "Eisner would have been willing to be a major investor in a CBS run by Barry." Another Diller adviser discloses that, with Eisner on-board, Diller received ex-pressions of interest from Bronfman's MCA and from John Malone, of TeleCommunications, Inc., but Dil-ler backed away because he "thought CBS was grossly overpriced at eighty dollars a share." Meanwhile, Eisner, who had known only adulation since arriving at Disney, in 1984, was being derided as too paralyzed by fear to buy, say, a television network.
For Eisner, the past year and a half has been brutal. In April of 1994, his closest business associate, Frank Wells, died in a helicopter accident. Eisner was lambasted for walking away from a deal to buy NBC. In July of 1994, while attending Allen & Company's annual mogul retreat in Sun Valley, Idaho, he suffered chest pains and subsequently underwent a quadruple-bypass operation. While he was recuperating, he and Katzenberg endured a noisy divorce. Katzenberg wanted to fill Wells's role, but Eisner thought he lacked the same sophisticated judgment, so Katzenberg left. Waves of unpleasant publicity, including bitter words from Spielberg and Geffen, drowned Eisner's good name. And, though Disney had a record-setting year, the bad publicity did not abate. By early this year, Jeffrey Katzenberg had been crowned as the new media prince; Michael Eisner was viewed as the frog--and the frog was unhappy.
This past April, Eisner hired a new chief financial officer, Stephen Bollenbach, and Bollenbach helped persuade him that Disney could afford to buy a network, even one whose price tag might be triple what Eisner had already re-fused to pay for NBC. At this year's Allen & Company retreat, Eisner would impress his peers. He dreaded running into Katzenberg and Geffen, whom he loathed. He knew that, among those who were keeping score at this summer camp for media moguls, this was the place to launch a comeback. Various communications-company C.E.O.s are asked by Herbert Allen to make morning business presentations at the retreat, and the first presentation this year was made by Bronfman. Eisner knew that Bronf-man had made a good impression. "I did O.K. because of low expectations," says Bronfman, who at forty was stereotyped as the lucky heir of a family fortune. Time Warner's C.E.O., Gerald Levin, fared less well, the widespread feeling being that he was lugubrious. And, before Eisner spoke, Ronald Perelman, the chairman of New World Communications Group and of Revlon, attracted a certain amount of derisive laughter when he arrived for what had always been billed as a relaxed gathering accompanied by two beefy, grim-faced bodyguards.
When Eisner rose to speak, he no doubt took comfort from the fact that Katzenberg was not in the room. ("I thought it would be rude to go to his presentation," Katzenberg told me.) By many accounts, Eisner dazzled his colleagues with figures on Disney's sterling financial performance, on its buoyant stock price. And he put on a show, implicitly reminding those who are sometimes disparaged as "suits" that they were in the entertainment business. "Everything he said was funny," another noted media figure says. "He really hit it out of the park." Eisner, doing what he likened to "David Letterman's Top Ten," predicted the five top rumors that would come out of the retreat this year, among them that DreamWorks would announce that it was leaving the entertainment business and entering the "corporate-alliance business," and that Universal Pictures would change the name of "Waterworld" to "Apollo 14."
One rumor that did not surface, however, was that Disney would merge with Capital Cities/ABC, creating a communications colossus. Even after Eisner was seen at the retreat huddled with Thomas Murphy, the C.E.O. of Cap Cities/ABC, and the company's chief shareholder, Warren Buffett, no one suspected that a merger was in the works.
Two weeks later, media executives were talking about little else. The day before the blockbuster announcement, ABC's counsel told Robert Iger, the Cap Cities/ABC president, "The story is out. It's leaking."
"Our own place. 'Good Morning America' is working on something called 'Project Mickey.' "
Iger felt sick--until he remembered that his fiancee, Willow Bay, was substituting for co-host Joan Lunden the next day because Lunden was off interviewing Mickey Mantle.
The negotiations commenced when Eisner bumped into Warren Buffett at the Allen conference. This encounter was not an accident. "I was going to find a way at some point to make contact with Tom Murphy," Eisner said to me in a telephone interview last Thursday. Disney--as Eisner told a jammed press conference at ABC in New York last week--had conducted an internal strategy session the day before he flew to Sun Valley. Those involved agreed that Eisner would pursue Murphy and Buffett. "We've been flirting for ten years," a member of the Cap Cities/ABC board says. This time, the talks proved fruitful. Even competitors, once they've over-come the shock, stand back in awe at the deal. "It's a big win for both Disney and ABC," Sumner Redstone, Viacom's chairman, says.
Eisner's triumph has transformed him once again, from the frog back into a prince. Like Barry Diller and David Geffen, Eisner is a comparative rarity in the entertainment field--a tough businessman who is also creative. Such people are inventors and managers. But, despite Eisner's success in rejuvenating Disney, there have always been questions about qualities he was thought to lack. To many associates, he sometimes appeared insecure, insular, mistrustful. One reason that Eisner lost the services of talented executives like Katzenberg and Richard Frank, the head of Disney's TV division, who left this past March, is that he seemed to trust virtually no one. His executives urged him repeatedly to seek acquisitions, but, except for some smaller deals, like the acquisition of Miramax, he always seemed reluctant. He jeered at new technology, sometimes sounding like a philistine. "He was stating both publicly and privately how bad an idea a broadcast network was--until last Monday," Robert Wright, NBC's president, jokes.
"I was his leading critic," Katzenberg says. "Everybody on that list of critics, starting with me, was wrong. We were all wrong. And it's not as if we were a little wrong. This was a moment in time when he saw the value of a combined enterprise, the value of his stock and what he would have to pay, and he had the confidence to act. Up to now, he didn't have the confidence to do it."
Barry Diller, who was Eisner's boss when they worked at ABC, starting in the late sixties, and, later, at Paramount, and remains a friend (but sometimes shows a competitive streak), affectionately says of Eisner, "It's never been easy for Michael to buy anything. He's too cheap. But this merger says, more than anything, that he has graduated."
Once again, we are reminded how quickly certitudes change. A short time ago--in 1991--the three television networks collectively lost money. Today, everyone is buzzing about the value of a network brand name and platform. In 1993, cable, with its promised switched and digitalized interactive network, was king of the media. A year later, the telephone companies were said to be king. Now broadcasting is back. Yesterday, Katzenberg and DreamWorks were heralded as ABC's lifeline to good programming and as the domestic distributor for ABC of reruns to local stations. Today, they are allied with a company run by their onetime nemesis, Michael Eisner. Yesterday, Katzenberg was threatening to sue Eisner and Disney over the terms of their business divorce. Today, a Katzenberg intimate confides, he ex-pects an amicable settlement. Yesterday, Michael Ovitz was hailed as the most powerful executive in Hollywood, the agent who so brilliantly negotiated deals for others because he was always clear about what he wanted. Yet he was ambivalent when he was negotiating for himself to run MCA--seemingly wanting to leave the agent business but not wanting to work for someone else. So Ovitz remained where he was while his partner, Ron Meyer, decided to leave to become president and chief operating officer of MCA. Barry Diller and Ovitz both say that they are contented, but both are watching the field and waiting, perhaps hoping that the Time Warner board will oust Gerald Levin and turn to one of them.
THE recent media madness serves as yet another reminder that the most powerful executives are also proud men. As communications-company leaders become the objects of intense media attention, they assume the trappings of show business, entering a realm where they are judged as hits or flops, players or spectators. Michael Eisner didn't just want to do a deal. He wanted vindication. And, understandably, he wanted to be known as a winner again.
Of course, there were compelling business reasons for Disney and Cap Cities/ABC to join forces. "For the first time, a studio is directly attached to one of the Big Three networks," Michael Ovitz says. "This gives Disney distribution of its product, and amazing vertical clout." To put it another way, although capitalists proclaim their devotion to competition, their real mission is to maximize profits by minimizing risks. Eisner now runs a company that manufactures a product, owns the network distribution system for it, and controls how long the product stays on the network (one source of revenue), thus banking a vast supply of episodes to be sold to local stations in the incredibly profitable rerun market (a second source of revenue), whose programs can be cross-promoted and also shown on the Disney cable channels (a third source of revenue), which seeds interest in the bustling overseas marketplace (a fourth source of revenue), and whose products can be translated into Disney merchandise (a fifth source of revenue).
Since the announcement of the merger, much has been said about the network as a distribution system. But, thanks to newly relaxed government rules, a network is more than a mere distributor. Networks are now permitted to produce their own shows and are expected to be soon permitted to sell those shows and to own more of the stations that carry those shows; in other words, a network can own both the water and the pipe. "I believe that what people are missing is that a network is no longer about distribution," says Alan Schwartz, the investment-banking chief at Bear Stearns, who is a longtime adviser of Eisner's and was retained by Disney to serve as an adviser on the merger. "A network is about programming. In communications, if your company does not grow and consolidate with others, then you run the risk of lacking the outlets to justify spending for a quality product. By consolidating, you can sell your product to your network, to your cable channel, as reruns, as merchandise, as overseas product. There are now so many more ways to get paid for it."
In turn, consolidation brings leverage, as Eisner noted at last week's press conference. Cap Cities/ABC's sports channel, ESPN, already has a beachhead in a hundred and thirty-five countries, he said, and "nonpolitical" sports and family entertainment can be sold in a package. The broad appeal of sports and, say, Disney cartoons can be a wedge to promote the sale of other Disney products. Consolidation also introduces another concept much in vogue: synergy. "I am totally optimistic that one and one will add up to four here," Eisner declared at the merger announcement. Eisner has a record of achievement in this regard. Katzenberg, who is undoubtedly sincere but is also shrewd enough to want to appear magnanimous, says, "Most peo-ple talk synergy. At Disney, Michael made it work."
Critics have reason to worry that consolidation will translate into monopolistic practices. They ask whether, as distribution systems become more plentiful--over-the-air broadcasting, telephone wires, cable wires, direct-broadcast satellite dishes, wireless transmission, the computer--giant software companies like Disney will hog so much product that they will assume the attributes of a monopoly gatekeeper.
News poses a related concern. Eisner has no natural predilection for journalism. He tends to take a dim view of reporters; last week, he thanked several journalists for generally favorable pieces, as if they were choosing his side rather than just reporting his coup, and he tends to freeze out those whom he views as critics. Now that Eisner will have responsibility for the most successful broadcast-news division as well as Cap Cities/ABC's newspapers and magazines--more than a hundred publications--the questions that are already being asked about him are these: Does he care about the news product, or only about profit margins? Does he feel some public-trust obligation--as ABC obviously did earlier this year when it broadcast a low-rated prime-time hour on the war in Bosnia because the story was important--or does he only track ratings? Will he find that news, with its attendant controversy and sometimes uncomfortable questions, detracts from the friendly Disney image? Whatever the flaws of Murphy and Daniel Burke, the former C.E.O. of Cap Cities/ABC, as longtime broadcasters they often displayed an almost religious belief in the sanctity of network news. Will Eisner? "ABC News is the best news organi-zation in the world," Eisner told me. "I know it well. Roone Arledge has brought to ABC News the same kind of invention that he brought to ABC Sports. They will be left alone to oper-ate autonomously."
And what will Eisner do about Katzenberg? "The dynamic there is one part rational and one part psychological," a Cap Cities/ABC executive observes. On the rational side, Disney can of course provide Saturday-morning programming for ABC, despite the contract with DreamWorks, and also control domestic distribution of it, which would reduce DreamWorks' role. As a business matter, Eisner cannot be pleased that Cap Cities/ABC agreed to eventually share network ad revenues with DreamWorks.The psychological part involves Eisner and Katzenberg. On July 31st, when Katzenberg was asked about the status of DreamWorks' relationship with the new ABC, he said, "We have no idea." To seek clarification, he cancelled a scheduled dinner with Viacom's Sumner Redstone, and instead he and Geffen met Monday evening with Robert Iger, who will continue, under Eisner, to oversee the Cap Cities/ABC properties. By midweek, Katzenberg and his partners were hinting that they might go elsewhere. DreamWorks does have a clause in its contract allowing it to leave if there is a change in ownership at ABC. However, by the end of the first week in August, Eisner had approached Katzenberg, Geffen, and Spielberg. Eisner has told associates that Katzenberg said to him, "Michael, we have nineteen great years together, and we've had ten terrible months. Let's not make it eleven."
Eisner agreed. So did David Geffen, who in the past had verbally savaged Eisner. "The relationship will likely be different," Geffen told me on August 4th. "But I expect there will be a relationship with ABC."
THE impact of the Disney-ABC an- nouncement can be better understood when it is contrasted with an event that occurred the day after Eisner sprang his surprise: the proposed sale of CBS to Westinghouse. Unlike ABC, NBC, and Fox, which elbowed into cable and other businesses that pro-vide growth opportunities, CBS, with Laurence Tisch as chairman, shed its nonbroadcasting assets. Tisch refused to expand, and Westinghouse can't afford to. "With Westinghouse, we simply add to what we already have," a ranking--and depressed--CBS executive says. "The fear is that this will be a highly leveraged deal, and that, consequently, this new company won't have the money to go out and extend itself. In the last four, five years, if we went to Larry and asked him to extend our business--to start a cable network--he would just no you to death. Now we won't even have to go and get a no. There might not be any money."
Of course, there are benefits for both sides in the Westinghouse-CBS deal. Between them, they own twelve TV stations and thirty-nine radio stations, providing more sales and distribution muscle than either had alone, and fresh opportunities for cost savings. But real money is made from product. Without the resources of Disney or General Electric, which owns NBC, the new CBS cannot easily expand from distribution to manufacturing. It is worth noting that the expected profits of the CBS network this year (exclusive of its seven TV stations)--about a hundred million dollars, a knowledgeable CBS official says--pale in comparison with ABC's four hundred and fifty million dollars.
So why did Michael H. Jordan, the C.E.O. of Westinghouse, push so hard to consummate this deal? Again, vanity played a role. After failing for two years to transform Westinghouse into a growth company, Jordan, a former McKinsey & Company part-ner, desperately wanted to change the subject. By acquiring CBS, he instantly becomes part of the new Hollywood--a Master of the Universe, in Tom Wolfe's phrase about the Wall Street players of the eighties. He receives a shower of publicity and, no doubt, an invitation to the next Allen & Company conference.
Westinghouse may, of course, be outbid. Those with deeper pockets but no ownership of one of the Big Three networks--companies like Time Warner, Viacom, Sony, MCA, and Turner Broadcasting--are shaken by Eisner's move. Not only did Eisner's play succeed offensively, it also put competitors on the defensive. With NBC acting like a buyer, not a seller, competitors know that CBS is the last available network prize. Yet Turner and Time Warner and Viacom are hobbled by huge debt, and so are unlikely to top Westinghouse's bid for CBS--five billion four hun-dred million dollars. Turner and Time Warner are also burdened by partners with interests that are difficult to synchronize. Under current federal regulations, Sony, as a foreign-owned entity, may not claim more than twenty-five-per-cent ownership of a broadcast station. As a Canadian company, Seagram has a similar impediment. And, after its recent acquisition of MCA, Bronfman says, "I can think of lots of ways to grow our company. At the moment, we earn next to nothing from television. So the idea of spending five to six billion dollars buying a TV network has no appeal to me"--not at the present time, anyway, he added. What might have appeal to studios seeking access to a major network is an investment in CBS alongside Westinghouse.
The Disney move also puts pressure on existing network owners, like Rupert Murdoch, with Fox, and GE, with NBC. Murdoch, with his ownership of satellite-distribution systems in Europe and Asia, leads the race to build a global network. But he cannot match the combination of Disney and ABC as a software factory. Already, Fox executives are said to be discussing whether to create a sports network to challenge ESPN. For NBC, there are also decisions to make. Last year, GE tried--but failed--to become partners with Turner and Time Warner. Will Disney provoke GE and NBC to seek a megapartner? "If we could be involved with Time Warner in some significant way, I'd be very happy," Wright, NBC's president, concedes, adding, "These announcements may bring people back to the table."
There will be a lot of frenzied activity and many rumors, as business leaders again prove that they panic just like the rest of us. New Masters of the Universe will come and go, but for the moment Michael Eisner occupies center stage alone. (c)