Millionaire Buys Disney Time

While Regis reigns, Eisner scrambles to fix the Mouse House

It has been a while since Michael D. Eisner has been able to crack jokes with Wall Street. But in early May, the Walt Disney Co. chairman and chief executive felt confident enough to jest during a conference call announcing better-than-expected earnings. "If I had told you a year ago that a single quiz show would revitalize the ABC network," Eisner, 58, told analysts, "you would have thought I was sprinkling a little too much pixie dust around."

O.K., so maybe Eisner shouldn't give up his day job for the comedy-club circuit. But his exuberance is understandable. Nine months after Disney imported a British game show and retitled it Who Wants to Be a Millionaire, ABC's runaway hit has single-handedly propelled Disney to unexpected growth. Millionaire dropped an estimated $100 million onto Disney's bottom line in the quarter ended Mar. 31. That made it the sole reason that Disney's net income jumped 31%, to $369 million. Its stock is trading around 41, up from 23 last November and close to April's all-time high of 43 5/8, on an adjusted basis.

The question, of course, is how long Regis and his matching shirts and ties can keep up the momentum. CBS' Survivor walloped Millionaire on June 7, when 2.5 million more folks watched the desert-island reality show than tuned in to Regis. Survivor will air only this summer, but its success has prompted even the biggest Millionaire boosters to worry that the show's domination won't last past next season.

When its fortuitous turbo-boost sputters out, Disney will be forced to make good on a lot of promises it made about a turnaround in 2001. Some early signs are encouraging. The company spent a net $750 million of cash over the past five years to build new theme parks and a cruise line. But with the opening of a massive new $1.4 billion California attraction next February, that unit is expected to generate $1 billion a year of positive cash. Disney continues to find ways to boost prices at its parks and its cable TV unit, whose profits surged 34% last quarter, to $325 million. And the animated movie Dinosaur looks like a runaway hit. "It is all going in the right direction," says Mark Greenberg, whose Invesco Leisure Fund owns 1.4 million Disney shares.

TOY GAP. Still, it's way too early to declare Disney out of the woods. Eisner has yet to turn around his most troubled properties, the consumer-products unit and movie studios that together accounted for 40% of 1999 revenues. The studio turned out big-budget clunkers like Mission to Mars, while lackluster animated films like 1997's Hercules did little to feed Disney's pipeline for home-video and consumer-product sales. Dinosaur will likely generate close to $200 million in box-office sales and $220 million in operating income over the next two years via tons of new videos and consumer products, estimates Salomon Smith Barney analyst Jill Krutick. But home-video sales continue to suffer. And the Disney Store chain is struggling with overcrowded aisles and outdated goods.

Even Eisner--who declined to be interviewed for this article--admitted to analysts last month that the recovery is a work in progress. "It's like a proverbial battleship, it can't turn on a dime," he said. "Maybe a nickel."

Also, the heavy lifting will have to be done by a cast of characters relatively new to their jobs. Under pressure from his board to appoint a strong second in command, Eisner earlier this year promoted Robert A. Iger, 48, ABC's longtime president, to Disney president and chief operating officer. The No. 2 spot had been vacant since superagent Michael Ovitz' brief stint ended in December, 1996. Insiders say Iger is strong on details, allowing Eisner to concentrate on the creative side. But below Eisner and Iger are several newly promoted or hired execs. "The good news is that they have new folks running areas that hadn't been doing well," says PaineWebber analyst Christopher Dixon. "The bad news is that some of them haven't been proven in the areas they need to improve."

How did a company known for its razor-sharp management let some of its most lucrative units atrophy? "We were a victim of our own success," says Chief Financial Officer Thomas O. Staggs. "It's like a superstitious baseball player with his hat turned backwards. When things are going well, you don't change things." But slower sales of consumer products and videos--and bloated movie expenses--caught up. Disney's results were flat in 1998. Then, in 1999, net income fell by 28%, to $1.4 billion, and revenues grew only 2%, to $23.4 billion. Disney reports its unit separately.

Disney is shaking up its consumer-products and home-video units. Later this year, it will launch a new line of clothes, shrinking the Mickey logo to emphasize style. To raise quality, it's chopping about half the licenses issued to companies that make Disney goods. A remodeling of the nearly 600 Disney Stores will cut way back on the number of stocked items to focus on best-sellers. Disney is making 26 of its family movies available full-time in video stores as well as making sure that one of its top 10 animated titles is always on the shelf. To juice up DVD sales, the company is releasing more titles and cutting prices by $5 a disk.

While it waits for those new lines to kick in, Disney is chopping expenses and raising prices at its strongest brands. A $500 million cost-cutting program has already reduced the number of big-budget films the studio makes. Disneyland janitors took a haircut, having to clean their own uniforms. The park recently lowered the age at which it charges full $41 admission from 12-years-old to 10. In its recent spat with Time Warner, Disney won new revenues for the Disney Channel and two smaller channels.

The surest boost Eisner can count on is from his traditional cash cow: theme parks. That cow hasn't been producing much of late. Operating earnings from the unit rose only 6% during the past six months, barely more than the 5% hike in ticket prices. But Disney found a way to shorten lines, instituting a "Fast Pass" system that gives visitors appointments for popular attractions--and more time to buy trinkets or food. Moreover, spending on new parks will end soon. When Disney's California Adventure opens, the company says, the parks will begin to generate net cash instead of spending it.

Until that happens, Disney is leaning heavily on Regis. In the season just ended, Millionaire lifted ABC's overall ratings by 20%. ABC says it also buoyed shows that followed it by 33%. The network intends to air Millionaire four times a week starting in September, up from three. In all, ABC collected an estimated $2.4 billion in upfront ad sales for the coming season, 26% above last year. But Aaron Cohen, executive vice-president at media buyer Horizon Media, worries that Millionaire could be peaking. Witness the attack by Survivor. "This is still a very strong show, but if you put it on four nights a week, it becomes less crucial to see any one night," he says. "I wouldn't be surprised to see ABC pull it back to three or even two nights a week as the season goes on." The answer? Come up with more hits. Regis and corny jokes can only go so far to cheer up stockholders.

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