Commentary: ABC Needs More Than Letterman

Walt Disney Co. (DIS ) Chairman Michael D. Eisner's favorite show may turn out to be The Funkhausers. That's if the comedy turns into a hit when it airs this September on Disney's ABC network. But the show, featuring a good-natured family that refuses to change, might just as easily be based on Disney and its woebegone TV network. Since paying $19 billion to buy ABC parent CapCities/ABC in 1995, Disney, too, has been in a rut. Weak shows, falling ratings, and a revolving-door management have hobbled ABC and it, in turn, has hobbled its parent.

Indeed, Disney has handled the biggest acquisition it has made during Eisner's 17 years miserably. The network was declining when Disney bought it. Audiences were shrinking and programming costs were rising. Since then, things have only gotten worse. The combination of Disney's famously controlling management culture, as well as the decision to stick with Disney-produced shows, have driven top TV producers away. Ratings have fallen steadily. Worse, ABC's woes have distracted Eisner and top managers from the company's other problems: Its studio has overspent on marketing, it has glutted the video market, and its merchandise has fallen from favor with shoppers.

Some fixes are being made. ABC is bidding to lure late-night host David Letterman from CBS. It also gave Fox football announcer John Madden a rich contract to buttress its weakened Monday Night Football. And Disney can't be held accountable for the events of September 11, which savaged theme parks' attendance and slashed ABC's ads.

Even so, Disney has missed key opportunities to build up ABC. It has failed to expand the network's most profitable business, its group of 10 TV stations. They generate margins north of 40% annually. Eisner thought buying more stations too expensive, but rivals such as Viacom Inc. and Fox have bought them anyway. The additions have buttressed their cash flows and profit margins.

Eisner admits to problems. "We knew ABC was starting to atrophy in 1995," he says. The hit show Who Wants to be a Millionaire "was a false positive." ABC, he concedes, stuck too long with Regis Philbin and failed to develop new shows. Now the chastened CEO insists they will be key to a turnaround. ABC needs "a hit every semester, a hit in the fall, a hit in March," he says. "In two years, you're No. 1."

Problem is, producing popular entertainment was supposed to be Disney's big strength, but in 6 years of owning ABC it has failed to do that. True, Eisner and Disney President Robert A. Iger, both former ABC program executives, are now taking a hand in developing new shows. But Disney's pilots are still dominated by homegrown projects from its own Touchstone TV unit. That has chased out strong pilots from independent producers or other studios. David E. Kelly, producer of ABC's hit The Practice, took his next show to Fox, even as Touchstone produces low-rated programs such as Bob Patterson.

Even if Eisner & Co. can turn ABC into a hitmaker, it could take years for the network to elbow past hot upstarts such as the WB network, with its lock on younger viewers, or Viacom's much-strengthened CBS franchise. Moreover, falling network viewership makes being No. 1 less profitable.

ABC's other assets aren't likely to greatly boost the network's fortunes either. ABC can recycle shows such as the spy thriller Alias through the Family Channel, which it purchased last June. But the steep $5.2 billion price it paid for the cable channel may never be justified by the unit's returns. There are even signs of trouble at ABC's powerhouse sister unit, ESPN, which Eisner often hails as a hidden winner in the ABC deal. Its ratings are off as well, and higher sports fees have cut margins to 27%, from 35% at the time of the acquisition.

The big question is whether Disney investors will wait for Eisner to fix ABC. At $24, Disney's stock rests stubbornly near its price when he bought ABC. Takeover rumors continue, even though the $50 billion price tag would be pricey for any acquirer. Still, the failed ABC acquisition has stoked concerns anew about Eisner's strategy and his execution. Laying those concerns to rest will take a lot more than a hit every season.

By Ron Grover in Los Angeles, with Tom Lowry in New York

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