Disney's Kingdom

At 11:30 a.m. on the most important day of his professional life, Disney Chairman Michael D. Eisner looked tanned and rested as he stood above a roiling sea of reporters and photographers and explained history's second-biggest corporate takeover. By 11:30 p.m., Eisner had endured countless personal interviews in New York, been uplinked by satellite for worldwide consumption, and had flown to Washington to appear on both CNN's Larry King Live and ABC's Nightline. If by midnight he looked a little worse for wear, he might have been forgiven: Just 12 months earlier he had undergone emergency heart surgery, an event that had launched him on a year as dismal as this day was exuberant.

The deal was like tonic. In a single, remarkable move on July 31, Eisner revived his personal stature with a stunning $19 billion takeover of Capital Cities/ABC Inc. He also shifted the balance of power in the sizzling entertainment business by transforming Walt Disney Co. into a $19.3 billion behemoth. If he can integrate the two companies smoothly--no simple task--the enterprise would become the industry's most influential. And Eisner, for now anyway, would emerge as the game's premier power player. "This rejuvenates him just when he needs it most," says Viacom's chairman, Sumner M. Redstone.

Eisner's move was so dramatic, in fact, that it made the other big deal of the week--Westinghouse Electric Corp.'s $5.4 billion offer for sagging CBS Inc.--seem like a footnote. The vast difference in price highlights ABC's superior array of assets, from cable properties to international investments to magazines. It also illustrates the gap in management vision between CBS Chairman Lawrence A. Tisch, an inveterate cost-cutter, and Cap Cities Chairman Thomas S. Murphy, a champion of growth and innovation.

Added together, though, the staggering total of $24.4 billion on the table sends a clear message: Despite all the ballyhoo about the Information Highway and the growth of cable and satellite delivery, the networks are far from obsolete. In a world with an increasing number of viewing choices, ABC, NBC, and CBS retain awesome power, with the ability to reach virtually every television set in America. "You still have to grab eyeballs," says Thomas S. Rogers, NBC Inc.'s head of business development. "We're the best at doing that."

That's why the networks continue to rake in gobs of advertising dollars and why their businesses continue to grow. The networks' power also is the reason that Westinghouse is taking on $4 billion in new debt, while preparing to slash--perhaps abandon--its old-line industrial holdings to plunge into media. Faced with a future of smokestacks or soap operas, Westinghouse Chairman Michael H. Jordan didn't blink. "Broadcasting will become the cornerstone," he says.

His logic: Recent rule changes soon will permit the networks to own more of their own programming, enhancing their value and spooking outside suppliers such as Disney, which fear they will find less shelf space for their products. The telecommunications bill now moving through Congress would allow networks to own more stations and, eventually, create several new digital channels at each station they own.

That these deals should receive coverage worthy of a foreign invasion is testimony to the media's endless fascination with itself and to the public's preoccupation with all things that sniff of the I-Way. But it also points to the supremacy of both scale and market power as companies such as Disney try to transcend the messy media clutter. Brands such as ABC and ESPN (another Cap Cities property) grab people's attention and hold it. And the more forms of information delivery a company owns, the bigger chunk of profits it potentially can earn.

For years, many companies--Disney, most notably--didn't buy that argument. "Content is king," went the mantra: Since creativity is at the base of success in entertainment, investment should flow there. But as entertainment turned into the fastest-growing business in the U.S., dominance increasingly became a function of owning both programming "content" and the distribution assets needed to deliver it. Rupert Murdoch ably demonstrated this new reality with his Fox Network and satellite delivery systems in Europe and Asia. Once thought a folly, Fox is the most profitable part of his U.S. holdings. It allows Murdoch to broadcast programs produced by his studio that would be a tough sell elsewhere. Last season's $1.6 billion addition of National Football League games ushered Fox into the big time--but Murdoch wouldn't have won them without his distribution.

Following Murdochian logic, Viacom and Time Warner Inc., too, have been building television networks through which to sell their own programming. Time Warner also has huge cable assets. Viacom has its profitable Blockbuster Video unit, which is nothing if not a vast distribution system. TeleCommunications Inc., the nation's largest cable operator, has gone the other way, busily collecting programming assets.

Of the media moguls, Eisner has been most disdainful of distribution investments over the years. But he softened this spring, plunking down $100 million to help manage a few TV venture proposed by three of the Baby Bells. Says one executive close to him: "Rupert Murdoch is one of the few media people that Michael Eisner really, really admires. It suddenly dawned on him that News Corp. had the right idea." Says Eisner: "Consistent is not something you have to be. Being totally consistent is kinda boring."

Cap Cities thrusts Disney into the distribution business in a big way. But Eisner rightly points out that ABC does not fit neatly into a distribution vs. content argument. The company does both, producing programs and delivering them, over the air and on cable. Besides its afternoon soaps, for example, ABC Productions made Thunder Alley, a sitcom for this year's prime-time lineup.

Indeed, Disney-ABC is about more than just captive distribution. Ultimately, the deal makes all kinds of business sense. Disney will have to take on $10 billion in debt, but the combined $5 billion in Disney/Cap Cities cash flow will allow Eisner to ease the leverage within five years. And while half of the deal will be done with Disney stock, ABC's strong profits mean net earnings per share will be only mildly diluted. ABC will add to Disney's cash-flow per share, a key indicator for Wall Street.

More to the point, the deal helps Eisner answer some big strategic questions. No.1: Where will Disney's growth come from? Although earnings are up 30% for the first nine months of the current fiscal year, that's largely due to the outsized success of The Lion King, which has produced about $1 billion in total revenue so far. This year's Pocahontas was big, too, but not as big. And live-action films remain a real weakness, while growth in the theme parks has slowed. Eisner has put some $500 million in EuroDisney losses behind him, but a planned new park in Virginia fell to political problems, and an expansion at Disneyland was shelved. Now Eisner is looking as far away as Hong Kong--but that will be expensive.

Cap Cities is expensive, too, but it offers Eisner the opportunity to double the size of his company immediately with assets that are entirely complementary. It also has the potential to help Disney expand operations overseas, while enhancing much of what Disney does in this country. "We're not sure what the world will look like in five years," says Disney COO Sanford M. Litvak. "But having a broad array of assets certainly positions you better."

While Eisner admits that his international efforts have been lacking, Cap Cities has a number of investments in European media companies. And ESPN has a healthy presence abroad, particularly in Asia. Cap Cities' Murphy, who will join the Disney board, points out that selling Eisner's cable network, the Disney Channel, alongside ESPN will "give us two horses to ride [in foreign markets], not just one." Eisner, who wants to enhance the Disney brand name in foreign markets so he can export theme parks, thinks his company can learn from ABC about developing foreign contacts and building distribution.

Domestically, the advantage of owning ABC is manifold. First, the stations Cap Cities owns, which reach some 25% of the country, are among the industry's best run, and throw off huge amounts of cash. When Disney owns them, it will have a guaranteed platform for its first-run syndication programs--shows that might otherwise die on the vine.

KIDS' SHOWS. The network is less profitable. But because its affiliates cover virtually the whole country, it provides a rich programming opportunity--as well as a platform to advertise other Disney properties from theme parks to films. The best opportunity in the short term is children's programming. Disney's kids' shows were recently booted from Fox. ABC could build the franchise on afternoons and Saturday mornings.

In entertainment, the name of the game is exposure. And the network will certainly provide that for the myriad Disney copyrights. But Eisner's company won't profit by shoving its programs down ABC's throat. The network's strength is its skill in buying the programs it thinks are best for its audience, regardless of the supplier. ABC might now give a Disney show a little more time to prove itself before pulling it. But forcing the issue, Eisner says, "could damage the goose that laid the golden egg."

The beauty of owning ABC is that Disney will reap profits from all the shows the network airs, whether it produces them or not. Eisner likes to tell the story of when he was a Paramount executive and sold Happy Days to ABC. He began developing the program when his son was three months old, sold it two years later, and didn't see a dime of syndication revenue (which pays the development costs) until his son's 12th birthday. ABC, meanwhile, had profited handsomely and used Happy Days to build audience for another blockbuster, Laverne & Shirley. Says Eisner: "I want the money nine years earlier."

Of course there's no guarantee that Cap Cities--or Disney--will remain so robust. Any acquisition of this size can create bigger problems than it solves. And some think Eisner is buying the No.1 network at its cyclical peak, when advertising sales are at all-time record levels. The boom has covered up the fact that ABC--like all the networks--has been forced to boost affiliate compensation and sign agreements lasting up to 10 years in the wake of Murdoch's efforts to steal stations for Fox.

Meanwhile, ABC's own stations recently paid dearly for rights to King World's The Oprah Winfrey Show, Wheel of Fortune, and Jeopardy past 2000. Add to that the highly cyclical nature of ratings and some think Murphy is getting out at the right time. Says a rival: "Anything in this market is overvalued because the advertising is so bullish."

If so, Westinghouse Chairman Jordan has much more to concern him. He is paying dearly for a troubled asset. Jordan, citing the vast potential of his combination, says the Disney deal "vindicates" his strategy. But will other bidders agree, pushing the price for CBS even higher? Viacom's Redstone says CBS is simply too expensive. Sources say Time Warner concurs. But acquisitive Seagram Co. could find a partner and jump in. Then there's Ted Turner. He's frantically trying to buy King World Productions Inc. in order to use its cash to buy out Time Warner's 19.6% stake in his company. That accomplished, he conceivably could bid.

Some speculate that NBC could be for sale. But sources close to the network say General Electric Chairman Jack F. Welch Jr. is more interested in buying than selling. NBC's hope is that after nixing a deal over control issues last year, Turner will see the wisdom of selling his company to the Peacock. The combination, or one involving Seagram, would create a huge rival to Disney/ABC.

PROBLEMS. Eisner has other problems to worry about. The Disney chairman, who has no clear successor, has seen a disruptive outflow of talent since his trusted chief operating officer, Frank G. Wells, died in a helicopter accident last spring. Since then, valued studio chief Jeffrey Katzenberg left in a huff, as did television honcho Richard Frank. More than a dozen top executives have followed, including Disney's two top TV animators. Frank was replaced by Dennis Hightower, a curious choice given that he has no programming experience. The questions are obvious: Has Disney lost bench strength? Does Eisner have the team to manage this mammoth acquisition?

For now, though, all that has been pleasantly blurred by the heady froth of the deal. Eisner admits he's buying ABC at the top of its game. But that, he says, is because he wanted the best network money could buy. "It sounds funny, but I'm thinking about the millennium change. I've got to protect the Disney brand well into the future." Eisner has clothed himself in strong armor for the media wars ahead. But in a business as dynamic as entertainment, power ebbs and flows. History shows it rarely resides in one kingdom for long.

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A snapshot of Disney after the deal