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MICHAEL EISNERWork In Progress

MICHAEL EISNER and TONY SCHWARTZ

Highlights - Michael Eisner’s Business Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 2

Eisner On Business Branding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 3

‘‘Strengthening the Disney brand, Frank and I soon recognized, wasn’t something that could be achievedin a single broad stroke. We came to think of Disney as a canvas on which many artists paint in pointilliststyle -- one dot at a time. If each of those dots is executed with precision, imagination, and an awarenessof the whole, the painting becomes richer, more vibrant and multidimensional. Walt Disney and his teamcreated such a masterpiece. When a new group of artists comes along, the risk is that they’ll bring adiminished commitment to excellence, or a lack of attention to the whole. Then the opposite process canoccur. Point by point, stroke by stroke, the masterpiece deteriorates into something mediocre andcommonplace, even ugly, until eventually it’s destroyed altogether. A brand is a living entity, and it isenriched or undermined cumulatively over time, the product of a thousand small gestures.’’

Eisner On Cocooning And Connecting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 4

‘‘As I look ahead at Disney’s prospects and my own, the future seems both exhilarating and daunting.Companies are designed to be immortal. Our job is to keep Disney young by forever looking ahead andanticipating what’s next, without sacrificing the wisdom and stability of our past.Technology is evolving at such a furious pace that predicting the future is a sure route to humility. Justthree years ago, no less an authority than Bill Gates warned that expectations for the Internet shouldn’tbe "cranked too high". Gates recognized the potential of the Internet, but underestimated the immediacyof its impact. The moment he caught on, of course, he switched his company’s strategy virtually overnight.Microsoft may be our most daunting competitor. Nonetheless, the experience suggests at least twolessons. One is that the next big wave can take even the most accomplished swimmers by surprise. Theother is that a key to survival in an unpredictable sea is to be nimble and resilient.Fortunately, Disney operates on a basic premise that hasn’t changed. People want to be entertained andinformed. At Disney, we do that through story telling.’’

Eisner On Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 5

‘‘The statistics are humbling. As many as 60-percent of all acquisitions destroy rather than enhanceshareholder value. More than half of the deals since the 1980s produced shareholder returns belowindustry averages. A majority were eventually divested. In short, most fail over time. As Warren Buffettonce put it, acquisitions are typically born of "an abundance of animal spirits and ego". They reflect thedrive among CEOs to be the biggest kids on the block, to command the front page of the Wall StreetJournal and the New York Times, to treat deal making as a grown up version of Monopoly.Even when acquisitions make strategic sense, the first and most common mistake is overpaying.Companies pay a premium to the market for control -- typically 25- to 50-percent more than the stockprice on the day of the offer. Often, the acquired company is overpriced relative to its real value. Synergiesand cost-efficiencies, if they materialize at all, are frequently insufficient to offset overpaying in the firstplace. Finally, disparate cultures are rarely melded smoothly, and ongoing frictions undermine operations.At Disney, we had spent more than a decade resisting major acquisitions for precisely these reasons.ABC was the first one that made sense to us. In our view, we paid a fair price for a great company thatrepresented an ideal strategic fit. Having found the right match, we were determined to beat the odds andmake the marriage work.’’

Eisner On International Corporate Expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 6

‘‘Disney is different. The name plainly stands for something. Walt’s genius had been to make Disneysynonymous with the best in family entertainment -- whether it was a theme park or a television show,an animated movie or even a Mickey Mouse watch. Customers did seek out Disney products, just as theywere drawn to Disney animated movies, or visited Disney’s Magic Kingdom. The name "Disney" promiseda certain kind of experience: wholesome family fun appropriate for kids of any age, a high level ofexcellence in its products and a predictable set of values. By the time Frank and I took over, nearly twodecades after Walt’s death, Disney had begun to seem awkward, old-fashioned, even a bit directionless.But that was misleading. The underlying qualities that made the company special lived on, just the waya person’s character endures. Our job wasn’t to create something new, but to bring back the magic, todress Disney up in stylish new clothes and expand its reach, to remind people why they loved the companyin the first place.’’

Eisner On Corporate Renewal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 7

‘‘One issue we faced was how to invest our excess cash flow. There were three options. One was to payit out in a special, large dividend. The problem is that our shareholders rightly expect that Disney, withthe leverage of its name, ought to be able to earn more with its cash than an individual would by investingthe dividends. The second option was to make an acquisition, and we continued to look for the right oneat the right price. The final option was to buy back our stock. That was the one we chose at this stage.Companies such as Coca-Cola and General Electric have done the same thing very successfully. Ourrationale was simple. By buying back stock when others were selling it, we were focusing on the intrinsicvalue of the company, which we judged to be far greater than its current market price. Further, by reducingthe number of our outstanding shares, earnings per share would be increased for the remainingshareholders.

Michael Eisner - Work in Progress - Page 1

HIGHLIGHTS -MICHAEL EISNER’S BUSINESS BACKGROUND

Michael Eisner (born in 1942) grew up in New York, where heattended several private schools. He studied at DenisonUniversity in Granville, Ohio, starting as a premed student beforechanging his major to English.

While at university, he started working during the summervacations as a page boy at NBC, and fell in love with theentertainment business. His main responsibilities wereanswering phones, running errands and giving studio tours.That, in turn, led to a job as a Federal Communications Corp.logging clerk at NBC for $65 a week when he graduated fromuniversity. On weekends, he got a part-time job doing trafficreports for WNBC Radio in New York.

Three months later, he applied for a new job at CBS as liaisonbetween the programming and sales departments for theSaturday morning children’s schedule. The new job meant agreat pay increase -- all the way to $140 a week. He also spenthis spare time developing his idea for a prime time show -- whichwas rejected by more than 75 companies.

In 1966, Eisner landed a new job at ABC as an assistant to thenational program director where he read scripts, developed newideas for shows and started to learn more about the televisionindustry.

‘‘At ABC, I was achievement-conscious more than imageconscious. My tie was invariably askew, my suits never quitehung right and my hair always had a mind of its own. Competitiveas I was, I never became involved in corporate politics in thesense of trying to figure out what the guy in the next office wasup to, or showing up at the right restaurants, or attempting toingratiate myself with my bosses by figuring out what theywanted to hear.’’

-- Michael Eisner

By mid-1968, Eisner was promoted to the position of director ofEast Coast prime-time development. This was followed byanother promotion the next year to director, feature films andprogram development, working under Barry Diller. He thenmoved to a position as executive assistant for Marty Starger, thehead of programming at BAC.

Michael Eisner’s next promotion was to head of daytime andchildren’s programming in 1971. Even though this wasn’tconsidered a high status job, Eisner had pushed for it since herecognized daytime TV programming was a huge profit centerfor ABC, and he would finally have the responsibility to makesome creative decisions. And, best of all, ABC was last in thedaytime ratings, so he figured you couldn’t fall off the floor.

After achieving some success with developing new shows andincreasing ratings, Eisner, in 1973, moved to Los Angeles to takeup a position as vice-president of prime time development forABC. When Barry Diller was hired away from ABC to becomechairman of Paramount Pictures, Eisner worked closely withFred Pierce on developing new shows for ABC’s prime time lineup.

After a few successful years in that role, Diller offered Eisner ajob as president of Paramount Pictures. It was an irresistibleopportunity, so at the age of 34, Eisner left ABC and took up thenew position.

Paramount Pictures was owned by Gulf & Western. When theCEO of Gulf & Western, Charlie Bluhdorn died in 1983, Eisner

and Diller were forced to work with the new CEO of Gulf &Western, Marty Davis. They didn’t get along well, and Diller leftParamount to become CEO of Fox and Eisner was approachedto consider becoming chairman and CEO of the Walt DisneyCompany in 1984 at age 42..

He took the job, and teamed up with Frank Wells, a previouspresident of Warner Brothers, who was appointed president andchief operating officer of Disney. Frank Wells and Michael Eisnerformed a very close-knit management team at Disney, untilFrank Wells’s death in a helicopter accident in 1994.

Michael Eisner has continued to serve as chairman and CEO ofthe Walt Disney Company from 1984 until the present time. Toillustrate the growth of the company over that same period,consider this comparison:

The Walt Disney Company

1984 1997

Revenues $1.65 billion $22.0 billion

Net Income $98 million $2.0 billion

Employees 29,000 110,000

Market Valuation $2.0 billion $75.0 billion

‘‘The numbers are dramatic, but they offer only a small windowinto a much richer and more multidimensional story. Walt andhis brother Roy built one of the great American institutions in theWalt Disney Company by producing unique family entertainmentfor several decades. Our job during the past fourteen years hasbeen to revive, nurture and broaden the reach of the Disneyname around the world. Companies such as Coca-Cola,McDonald’s and Federal express are largely built around asingle product. At Disney, we must invent new products everyday. Our success depends on the ability of our cast to come upwith a constant flow of original ideas for our motion picture studio,television and cable networks, theme parks, hotels andrestaurants, book and magazine divisions, stores and Web sites.More than 60-percent of Disney’s revenues today come frombusinesses that we’ve started or acquired since 1985. In the pastthree years alone, we’ve started more than 100 new businesses.My job involves juggling multiple roles and finding commonground between conflicting impulses. I serve not as a chiefexecutive officer but as chief creative officer, overseeing a teamthat is far more creative than I will ever be. I’m a cheerleader butalso an editor, an advocate for change but also a fierce protectorof our brand. No tension is as great as the one between qualityand commerce, balancing a passion for excellence with acommitment to containing costs and reaching a broad audience.There is a constant push-and-pull between tradition andinnovation; the company’s good and the greater good; teamworkand individual accomplishment; logic and instinct; leading andletting go. When crises arise, it’s almost invariably because animbalance has occurred somewhere in this complex equation.At a certain level, what we do at Disney is very simple. We setour goals, aim for perfection, inevitably fall short, try to learn fromour mistakes, and hope that our successes will continue tooutnumber our failures. Above all, we tell stories, in the hopethey will entertain, inform and engage.’’

-- Michael Eisner

Michael Eisner - Work in Progress - Page 2

EISNER ON BUSINESS BRANDING

Main Idea

‘‘Strengthening the Disney brand, Frank and I soon recognized,wasn’t something that could be achieved in a single broad stroke.We came to think of Disney as a canvas on which many artistspaint in pointillist style -- one dot at a time. If each of those dotsis executed with precision, imagination, and an awareness of thewhole, the painting becomes richer, more vibrant andmultidimensional. Walt Disney and his team created such amasterpiece. When a new group of artists comes along, the riskis that they’ll bring a diminished commitment to excellence, or alack of attention to the whole. Then the opposite process canoccur. Point by point, stroke by stroke, the masterpiecedeteriorates into something mediocre and commonplace, evenugly, until eventually it’s destroyed altogether. A brand is a livingentity, and it is enriched or undermined cumulatively over time,the product of a thousand small gestures.’’

-- Michael Eisner

Supporting Ideas

To strengthen Disney’s brand, Michael Eisner and Frank Wellstook these specific initiatives:

1. Directly tied executive compensation to both their owndivision’s performance and the company’s performance bysetting up generous stock option plans rather than payinghigh salaries. (This also had the effect of making eachexecutive take interest in how their colleagues were doingelsewhere in the company, since everyone’s salary woulddepend on how everyone else performs.)

2. Held a mandatory weekly lunch for top corporate executivesand division heads to create a casual forum for these peopleto discuss ways to enhance one another’s businesses.

3. Developed an intensive 9-day training course called ‘‘DisneyDimensions’’ to which executives from throughout thecompany went. Ultimately, a real sense of camaraderiedeveloped among those that survived the rigorous 7:00 am- 10:00 pm days of training, with the result that people whohad been on the course would contact their counter-parts atother divisions in the company.

4. Set up Frank Wells as the company’s official ‘‘vice presidentof mishegoss’’. Mishegoss is Yiddish for hassles andcraziness. The vice president’s job was to settle anyinter-divisional squabbles, and to make final decisions onany sensitive internal company matters before they got outof hand and effected productivity.

5. Appointed a personal assistant to the CEO specifically topromote synergy within the company. This person’s role wasto follow-up on ideas that can be cross-promoted by differentdivisions within the company. Due to the fact the personalassistant is not assigned to an operating division, nobodyfeels threatened when new ideas are suggested.

6. Appointed a Disney brand manager, whose role is to overseethe use of the company’s brand name and its protection inthe marketplace. The brand manager had just one sole focuswhen evaluating a new idea -- Will this initiative enhance thebrand or undermine it in the long term?

7. Ideally, the broadening of an established brand isaccomplished by launching successful business in their ownright which also enhance the public perception of the brand.

For example, in Disney’s case, developing a chain of Disneyretail stores and launching the Disney Channel on televisionwere brand building activities, as well as successfulstand-alone businesses. (Revenue streams created by eachof these business units were impressive. For example, theDisney Store concept, launched with one 2,000 sq. ft.Californian store in 1987, by the end of 1991 had grown to125 stores serving more than 14 million customers andgenerating more than $300 million in annual revenues. Thecompany now plans on establishing more than 500 specialitystores).

8. Disney also launched a reinvigorated product licensingmarketing program, which has resulted in a significantincrease in the number and scope of Disney’s licensingarrangements.

9. The Disney cable television channel had been launched in1983, but by 1985 it had run up operating losses of $100million and its programming mainly consisted of old cartoonsand second-tier Disney movies. In 1985, it was repositionedas family network, with a new schedule which offeredprograms for every member of the family and original movies.The channel is also used now to cross promote other Disneyattractions, and has become an important factor in wideningpeople’s perceptions of the Disney brand name. The DisneyChannel has also been involved in developing the DisneyYoung Musician’s Symphony Orchestra and the Americanteacher’s Awards show.

10. Disney also broadened its brand by developing live theatershows based around successful movies -- starting withBeauty and the Beast and later expanding into other projects.These Broadway productions have subsequently turned outto be highly successful.

‘‘I ended by reading a letter that Warren Buffett had sent me twoyears earlier. "In 1965", I quoted him, "I bought 5-percent ofDisney for approximately 4 million dollars. That’s the good news.The bad news is that I sold it a year or two later at about a $2million profit". I explained that I hadn’t been able to resist writingback to Warren, to tell him what his position in Disney would beworth had he chosen to keep it through 1993, when he wrote tome -- namely, $552 million."Since Warren’s here today", I added, "I just thought I’d bring himup to date. If he had held that original investment over all theseyears, today his $4 million would be worth $869 million. But don’tfeel too badly for him. If Disney had purchased $4 million worthof Warren’s Berkshire Hathaway stock in 1965, it would be worthin excess of $6 billion today". ’’

-- Michael Eisner

‘‘Typically and predictably, companies will commit to a newventure during boom times only to find themselves opening forbusiness two or three years later when the economy has movedinto a down period. Investing aggressively in a new businessduring hard times is more daunting. The key is to do it in a corebusiness and to believe deeply in what you’re doing. Standingstill is not an option. Either you take calculated risks to grow, oryou slowly wither and die.’’

-- Michael Eisner

Michael Eisner - Work in Progress - Page 3

EISNER ONCOCOONING AND CONNECTING

Main Idea

‘‘As I look ahead at Disney’s prospects and my own, the futureseems both exhilarating and daunting. Companies are designedto be immortal. Our job is to keep Disney young by foreverlooking ahead and anticipating what’s next, without sacrificingthe wisdom and stability of our past.Technology is evolving at such a furious pace that predicting thefuture is a sure route to humility. Just three years ago, no lessan authority than Bill Gates warned that expectations for theInternet shouldn’t be "cranked too high". Gates recognized thepotential of the Internet, but underestimated the immediacy of itsimpact. The moment he caught on, of course, he switched hiscompany’s strategy virtually overnight. Microsoft may be ourmost daunting competitor. Nonetheless, the experiencesuggests at least two lessons. One is that the next big wave cantake even the most accomplished swimmers by surprise. Theother is that a key to survival in an unpredictable sea is to benimble and resilient.Fortunately, Disney operates on a basic premise that hasn’tchanged. People want to be entertained and informed. AtDisney, we do that through storytelling.’’

-- Michael Eisner

Supporting Ideas

In the mid-1980s, Faith Popcorn, a market researcher, coinedthe phrase ‘‘cocooning’’ to describe the growing trend towardspeople entertaining themselves at home, in a safe environment.Today, this trend is highly visible and apparent. There are nowmore home entertainment options than ever before with cabletelevision, satellite services and the Internet. The furtheradvance of digital technology will very soon deliver highdefinition television that will be compellingly entertaining.

Despite this, however, people will still like to go out to beentertained. People still like to get together in social situations inwhich they can interact with others. In addition, no newentertainment or information medium has ever completelysuperseded older mediums. When television came along, itdidn’t replace radio -- it expanded the size of the overall market.Similarly, the Internet won’t replace all other medium, but willexpand the pie.

To exploit these trends, Disney is following two strategies whichare quite opposite in effect:

1. Disney is developing new theme parks, outdoor gatheringspots and location-based entertainment ventures. Forexample, the company is developing DisneyQuest -- a 2- to3-hour interactive theme park experience aimed atteen-agers and young adults -- which uses cutting edgetechnologies to deliver entertainment. The company is alsostrengthening its operations in animated films, live theatreand the operation of full-scale theme parks.

2. Disney is also becoming increasingly active in Internetdelivered entertainment content. To this end, the companyhas acquired Starwave and a 43-percent stake in Infoseek,the fourth largest Internet gateway as at mid-1998. Disneyand Infoseek are planning on launching Go Network in 1999as a subscription service for high quality family entertainmentmaterials, including the best of Disney’s materials andmaterial from all of Disney’s companies, including ESPN

SportsZone, ABCNews, e! Entertainment Television,Lifetime and the Discover channels.

The consumer launch of high definition television (HDTV) alsopromises to revolutionize the broadcasting industry. Firstly,HDTV will be of better picture and sound quality than anythingin history. But more importantly, multiplexing capabilities madeavailable with HDTV will enable networks to redeliver programsat alternative time slots -- enabling consumers to take advantageof more options on when they watch programs.

In addition, HDTV, the Internet and computers (all being digital)can converge, so consumers will be able to view entertainment,access information and communicate interactively -- all at thesame time.

For example: Using HDTV, a computer and an Internetconnection, a consumer will be able to watch a baseball gamein real time. As each batter come to the plate, the viewer can:

Call up the batter’s previous statistics against the currentpitcher.

Call up a statistical analysis of where the batter has tended tohit the ball in the past.

Call up how efficiently the fielding team have respondedsuccessfully to those type of plays in the past.

While all of that analysis is going on, the viewer can also selectthe source of his video feed:

A long-shot camera showing the entire field.

A camera tightly focused on the home plate.

A miniature camera on the batter’s helmet

A network feed switching between these shots at theappropriate times.

In addition, the viewer will also be able to select which audio feedto listen to, choosing from:

An announcer specifically for the home team.

A visiting team announcer.

A microphone worn by the players or the umpire.

A live audio feed from a seat somewhere in the stadium,creating all the noise you’d hear if you were there in person.

Numerous other entertainment possibilities are also underdevelopment. For example, DisneySpace allows people toexperience a virtual theme park using virtual reality technology,and the continue the experience in person at an actual park. OrE-Toys that can be downloaded directly from the Internet. Or newentertainment technologies that combine esoteric technologiessuch as neural nets and self-optimizing systems into thedevelopment of systems that are currently unimaginable.

‘‘As I look around in meetings now, I’m no longer the youngestperson in the room. Instead, I’ve become the one who’s lookedat for wisdom, maturity, vision. I do my best to fill the role, butdeep down, I don’t think of myself that way at all. I feel like a kid,just the way I always have, and I’m relieved that I do.’’

-- Michael Eisner

Michael Eisner - Work in Progress - Page 4

EISNER ONACQUISITIONS

Main Idea

‘‘The statistics are humbling. As many as 60-percent of allacquisitions destroy rather than enhance shareholder value.More than half of the deals since the 1980s producedshareholder returns below industry averages. A majority wereeventually divested. In short, most fail over time. As WarrenBuffett once put it, acquisitions are typically born of "anabundance of animal spirits and ego". They reflect the driveamong CEOs to be the biggest kids on the block, to commandthe front page of the Wall Street Journal and the New YorkTimes, to treat deal making as a grown up version of Monopoly.Even when acquisitions make strategic sense, the first and mostcommon mistake is overpaying. Companies pay a premium tothe market for control -- typically 25- to 50-percent more than thestock price on the day of the offer. Often, the acquired companyis overpriced relative to its real value. Synergies andcost-efficiencies, if they materialize at all, are frequentlyinsufficient to offset overpaying in the first place. Finally,disparate cultures are rarely melded smoothly, and ongoingfrictions undermine operations.At Disney, we had spent more than a decade resisting majoracquisitions for precisely these reasons. ABC was the first onethat made sense to us. In our view, we paid a fair price for a greatcompany that represented an ideal strategic fit. Having found theright match, we were determined to beat the odds and make themarriage work.’’

-- Michael Eisner

Supporting Ideas

The $19 billion purchase of Capital Cities/ABC by Disney wasthe second largest acquisition in corporate history. The key tomaking it work would be to find ways to combine Disney’s skillsat creating and marketing content with ABC’s distributioncapabilities.

There were several reasons why the ABC / Disney merger couldwork:

1. At the present time, consumers are inundated withinformation and choices. Disney has a powerful brand name.ABC brings to the deal the strengths of its brand names (ABCNews, ABC Sports and ESPN) as well as a highly visibledistribution platform -- all of which will enable the combinedcompanies to cut through the general clutter.

2. Disney could enhance the value of ABC’s distributioncapacity by making available a broad range of creativematerials and content -- ranging from feature films andanimated films to prime-time shows, television movies andchildren’s programs.

3. Putting the two companies together provides an opportunityto cross promote the three main brands (ESPN, Disney andABC), thereby creating leverage in the entertainmentindustry.

4. The acquisition provides an opportunity to broaden anddeepen the management, and the ability to attract newmanagement expertise to the new company.

There were also risks to the acquisition that had to be addressed,such as:

1. How to permit artists in the ABC developed brands thecreative freedom to move ahead without diluting thetraditional values of the Disney brand name.

2. How to fill the company’s responsibilities as a corporatecitizen, balancing freedom of expression with societalstandards and boundaries.

3. The financial risks, especially as both companies operate inintensively competitive industries.

4. The challenge to blend two proud and distinctive culturesbetween headquarters on opposite coasts of the UnitedStates.

The key to managing these risks and making the merger workwas to help ABC and ESPN strengthen their identities in themarketplace by building on what they had already achieved. Atthe same time, an effort was also made to enlist them as keyplayers on a bigger team with broader interests.

Personnel is a CEO’s chief responsibility -- ensuring the rightpeople are responsible for operational and managementdecisions at all various business units. This becomes particularlyimportant in the immediate post-acquisition period, wheneveryone is jockeying around for position.

Disney has also been actively involved in extending the brandsABC had developed. For example:

1. ESPN Zones are starting to be developed -- a mix of anentertainment arena and a virtual reality complex basedaround a sports theme.

2. A major chain of ESPN retail stores is being launched, usingthe same expertise Disney gained by building its own retailstore chain from a start-up.

3. ESPN has also launched a bi-weekly print magazine tocompete more aggressively against Sports Illustrated.

4. Disney and ABC Radio have collaborated together to launchRadio Disney -- a radio show targeting children aged six toeleven.

‘‘Even before ABC turns around in prime time, we seem to havebeaten the odds. The acquisition has been a success -- aboveall, for our shareholders. The intrinsic value of ABC’s assets hasincreased, meaning they’re worth more today than we paid forthem. The key strategic goals of the merger -- to guaranteeaccess and distribution for Disney programs, and to enhance ourability to compete in an increasingly global marketplace -- havebeen achieved beyond our expectations. Through ABC, we’veincreased the reach of the Disney brand around the world, evenas we’ve used our own strengths to help build and enhance ournew brands, most notably ESPN.The melding of the two companies’ cultures is a drama not unlikebringing together two families. Both inevitably require time andpatience. ABC and Disney are now deeply interwoven. Whetherit’s Radio Disney, ESPN Zone, One Saturday Morning or any ofa dozen other projects in the pipeline, the sum of our combinedefforts has begun to exceed what either company could do alone.In the end, that’s what a good acquisition is all about.’’

-- Michael Eisner

Michael Eisner - Work in Progress - Page 5

EISNER ONINTERNATIONAL CORPORATE EXPANSION

Main Idea

‘‘Disney is different. The name plainly stands for something.Walt’s genius had been to make Disney synonymous with thebest in family entertainment -- whether it was a theme park or atelevision show, an animated movie or even a Mickey Mousewatch. Customers did seek out Disney products, just as theywere drawn to Disney animated movies, or visited Disney’sMagic Kingdom. The name "Disney" promised a certain kind ofexperience: wholesome family fun appropriate for kids of anyage, a high level of excellence in its products and a predictableset of values. By the time Frank and I took over, nearly twodecades after Walt’s death, Disney had begun to seem awkward,old-fashioned, even a bit directionless. But that was misleading.The underlying qualities that made the company special livedon, just the way a person’s character endures. Our job wasn’t tocreate something new, but to bring back the magic, to dressDisney up in stylish new clothes and expand its reach, to remindpeople why they loved the company in the first place.’’

-- Michael Eisner

Supporting Ideas

In 1976, Disney started working on the idea of building a themepark in Europe. This interest was based mainly on the fact thatevery year, more than 2 million Europeans were visitingDisneyland in California or Walt Disney World in Florida. Thesuccessful launch of Tokyo Disneyland in 1983 also showed thatthe theme park concept could successfully be transported intoother countries.

For Tokyo Disneyland, Disney had injected $2.5 million, designand management expertise in exchange for 10-percent of thegross revenues on admissions and 5-percent of the grossrevenues on food and merchandise sales. (In the first year thepark was open in 1983, Disney earned $40 million from theseroyalties). However, Wells and Eisner later realized Disneywould have generated far more substantial revenues if Disneywas a primary owner of the theme park.

Therefore, against this background, Disney started looking at a4,400 acre site in Marne-la-Vallee, about 25 km from Paris, oneof the most beautiful and romantic cities in the world. It wasestimated the park would cost about $4 billion to develop, andthat it would attract 10 - 15 million visitors each year and createapproximately 10,000 new jobs.

The development contract was signed with the Frenchgovernment in March 1987. Disney would have a 49-percentstake in the new company, management control and revenuestreams as a percentage of gross revenues and a managementcontract.

The new company sold $1 billion worth of stock in an Initial PublicOffering in 1989, with almost 80 million shares being offered at$13 per share. By the time the park opened in 1992, however,construction over-runs exceeded $450 million. What madematters worse, however, was the fact France had fallen into adeep recession. However, more than 7 million people visited thepark between the April opening and the end of 1992 -- makingEuro Disneyland the single biggest tourist attraction in Europe.

Despite this success, however, Euro Disneyland still had anumber of operational issues -- not the least of which were therevenues being generated were insufficient to service the $4

billion in debt which had been incurred. To offset that, Disneyadvanced Euro Disneyland $150 million, and met with the banksto seek a way to restructure the park’s debt funding structure.

Ultimately, an arrangement was secured under which Disneydeferred all royalties and management fees for a 5-year periodwhile the banks forgave all interest payments for a 16-monthperiod and deferred principal payments for a 3-year period. Inaddition, Euro Disneyland would sell another $1 billion in newstock to the public, with the share offering being underwritten byDisney and the banks.

As a result, by 1994, Euro Disneyland, now renamed DisneylandParis, was put onto a sound financial footing, and the companyhas moved forward from there. After attendance dropped to 8.8million people in 1994, it had rebounded to 10.6 million in 1995.By the end of 1998, attendance at Disneyland Paris has reached13 million people -- a 60-percent increase in just four years.

Disneyland Paris has also continued to expand, with the recentaddition of a large multiplex movie theater, convention facilitiesand a Planet Hollywood restaurant. Future plans now call for asecond theme park to be built on the Disneyland Paris site,creating additional reasons for people to stay at the park forextended periods.

‘‘The key to any difficult negotiation, I’ve always believed, is thewillingness to walk away at any point in the process. It’s criticalto convince the other side that we are willing to do just that, andalso to persuade our own negotiators of the same.’’

-- Michael Eisner

‘‘When an idea can’t be articulated simply, crisply andaccessibly, there is usually something wrong with it. When I heara good idea, it has an effect on my mind and body. Sometimes,I feel it in my stomach, other times in my throat, still others onmy skin -- a kind of instant lie detector test.’’

-- Michael Eisner

‘‘Our extraordinary success with synergy prompted the need topay more attention to protecting the brand. By the late 1980s,we had become so aggressive on so many fronts -- movies andtelevision shows and home video, new parks and attractions andlicensed merchandise -- that the Disney name seemed to beeverywhere. If the company was in danger of being dismissedas irrelevant when we arrived, now we faced the opposite risk.Overexposure was threatening to dilute the integrity of the brand.You can never make too many good products, but it is possibleto promote and market them too aggressively. For the first time,we began to think rigorously about what represented anappropriate use of the Disney name and characters, and whatseemed excessive or gratuitous.’’

-- Michael Eisner

Michael Eisner - Work in Progress - Page 6

EISNER ONCORPORATE RENEWAL

Main Idea

‘‘By early October 1994, our stock had dropped to its low for theyear -- a shade under $38 a share, down from a high of $48 backin February. We believed that the market was reactingemotionally to recent events rather than rationally. Analysts andreporters continued to focus on my health, Jeffrey’s departureand our setback at Disney’s America. In fact, our managementremained very strong, and so did our core businesses, and wewere on the verge of reporting record revenues and earnings.Indeed, one issue we faced was how to invest our excess cashflow. There were three options. One was to pay it out in a special,large dividend. The problem is that our shareholders rightlyexpect that Disney, with the leverage of its name, ought to beable to earn more with its cash than an individual would byinvesting the dividends. The second option was to make anacquisition, and we continued to look for the right one at the rightprice. The final option was to buy back our stock. That was theone we chose at this stage. Companies such as Coca-Cola andGeneral Electric have done the same thing very successfully.Our rationale was simple. By buying back stock when otherswere selling it, we were focusing on the intrinsic value of thecompany, which we judged to be far greater than its currentmarket price. Further, by reducing the number of our outstandingshares, earnings per share would be increased for the remainingshareholders.The key is being able to reliably assess your intrinsic value. Thisis done by taking each business you’re in, predicting its cashflows into the future, and then discounting those numbers backto the present. Only companies that have strong five- andten-year planning can do this with any semblance of accuracy.As long as the intrinsic value of a company substantially exceedsthe market value, it makes sense to buy back stock, becauseover the long haul, markets value companies fairly andaccurately. By the time we finished, we’d purchased nearly $1billion of our own shares. I felt confident that we’d made a terrificinvestment.’’

-- Michael Eisner

Supporting Ideas

A successful company, like Disney, always prompts otherpowerful competitors to launch aggressive plans to win somemarket share from Disney operations. The challenge, for Disney,is to stay a step or two ahead of the pack, so that while thecompetition were developing products that compete, Disneywould be moving on to other areas that were new and improved.

Some of the successful moves that Disney made in reinventingand reinvigorating the company included:

In June 1995, Disney launched The Lion King, which ultimatelygenerated around $1 billion in worldwide revenues. Sinceanimated characters don’t demand a percentage of the grossrevenues, The Lion King is widely acknowledged as the mostprofitable film ever made.

Disney bought a professional ice hockey team in Anaheim,which was named the Mighty Ducks to cross-promoteDisney’s movie of the same name. The move alsostrengthened the company’s ties with the City of Anaheim inCalifornia, where Disneyland is located.

Similarly, Disney also acquired a professional baseball team,the Anaheim Angels, for all the same reasons that madepurchasing the Mighty Ducks such a sound idea.

Disney has started planning work on a new theme park, to becalled Disney’s California Adventure, which will highlighteverything California is famous for around the world.

A new attraction, Animal Kingdom, was developed andlaunched at Walt Disney World in Florida, focusing on creatinga natural habitat for animals that people could visit. (The newattraction was launched in April 1998 and has proven to beimmediately popular).

Disney and ESPN have launched a 200 acre sports facility,called the Wide World of Sports incorporating a baseballstadium, indoor field house, track-and-field stadium, 12 tenniscourts and 15 playing fields.

Launched a new cruise line with two new cruise ships.‘‘We knew very little about big boats, so we did what we alwaysdo when we consider a new venture. We undertook a crashcourse in the business, and then tried to figure out how toleverage Disney’s strengths to create something unique.’’ - Michael Eisner

Started construction of a new town in Celebration, Florida --on a 9,000 acre block of land near Walt Disney World. Thenew town, which will ultimately have a population of 20,000people, focuses on education, health and practical design.

Disney live action movies started to focus more attention onlarger, star-driven live action movies that were expensive toproduce, but played well in overseas markets and stood outof the crowd.

Disney’s other movie label, Miramax, has taken the oppositeapproach with success -- it has focused on lower-cost, lessstar-driven movie projects.

Disney has launched a new made-for-video animated filmdivision.

Disney has also moved aggressively to expand its brand nameoverseas, where its greatest potential for operating incomegrowth lies. Several countries, including China, are currentlyunder evaluation for the establishment of full-scale themeparks and other major projects.

Disney has also continued to expand its presence in livetheatre, developing a stage version of The Lion King that hasbeen a huge success.

‘‘Intellectual property -- led by movies -- has now becomeAmerica’s leading export, exceeding even the aerospaceindustry, the long-time leader. Large, single-product-drivencompanies such as Coca-Cola and Gillette already earntwo-thirds of their revenues internationally. Disney derives just20-percent abroad, even though those revenues have increasedmore than twenty-five fold since 1984. In the United States, theaverage person spends $65 a year on Disney products. Incountries such as Japan and France, where we have our biggestforeign presence, spending on Disney products is $45 per capita.In the next tier of countries, such as Italy, Germany and Spain,that figure drops to $15, while in the third and lowest tier -- LatinAmerica, Eastern Europe, China and India -- it drops to between10 and 15 cents. By increasing spending in these latter two tiersto even a fraction of the first tier, the profit impact would be huge-- as much as 50 percent over Disney’s current operatingincome.’’

-- Michael Eisner

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‘‘The deal is not the essence of Disney, although we are a bigtransaction-oriented company. Operations are the thing. Thedeal is a means to an end, to get television series made, moviesproduced, theme parks built, consumer licenses awarded, talentconnected. But the deal cannot take the lead.’’

-- Michael Eisner

‘‘Even the most talented executives are a blend of strengths andweaknesses. One of the most difficult jobs in running a companyis to keep people’s energies focused by giving them newchallenges. As we looked for the next generation of leaders atDisney, only those who could handle highly variedresponsibilities were going to be candidates. The company hadbecome too interdependent to rely on highly specializedmanagers with a narrow set of skills. I was less drawn to peoplewith perfect credentials for a given job than to those who hadstrong underlying qualities such as common sense, character,creativity and passion. With those traits -- and the right trainingand support -- people tend to succeed at whatever jobs they’regiven.’’

-- Michael Eisner

‘‘The real issue isn’t the next five to ten years. We can continueto grow at 20 percent a year by sticking to our knitting. It’s whathappens to Disney ten years from now, all the way through to2050. The challenge of the future is going to be operating as aglobal entity and creating an entertainment engine around theworld. The players that establish themselves internationally aregoing to be the ones that matter in the future. Cap Cities givesus the chance to do that, not only with ABC, but with ESPN andtheir other cable properties like Lifetime and the Arts &Entertainment Network and the History Channel.’’

Peter Murphy

‘‘I’d never heard anyone talk much about "The Brand" beforeFrank and I arrived at Disney. To me, a brand was a markingthat you put on horses and cattle. Brand management soundedvery austere and serious -- something that people did at proctor& Gamble, perhaps, but not in a creative business. But Disneywas different.

-- Michael Eisner

‘‘Competition brings out the worst in people and the best inproducts.’’

-- General Sarnoff

‘‘Obviously, we don’t have the experience of a major hotelcompany in building and running hotels, but the fact is I’ve nevermuch liked partnerships. I don’t want to be in a position whereevery time there’s an artistic decision or a design choice we haveto consult with a partner, or ask for approvals and makecompromises. Here’s what we’re going to do instead. We’regoing to build up the Disney Development Company. We’regoing to hire the best people in the industry. We’ll make mistakesalong the way, but they’ll be our mistakes and we’ll learn fromthem.’’

-- Michael Eisner

‘‘Gary Wilson introduced strong financial disciplines to Disney.At ABC, I’d learned to operate in what later came to be termeda "financial box", an economic model that forecasts costs,revenues and profits for any business venture. At Disney, GaryWilson and Larry Murphy -- recruited by Gary from Marriott torun our strategic planning group -- took this process severalsteps further. They initiated the concept of five-year plans,requiring each division to lay out clear, long-term financialobjectives and expectations, and to plan their budgets within thatframework. Five-year plans don’t guarantee performance, butthey do force executives rigorously to assess their business andbe accountable for their claims.In turn, Gary introduced to Disney our 20/20 goals -- aiming fora 20-percent annual growth in earnings as well as a 20-percentreturn on equity, a key measure of return on our investment. Byachieving these two markers, which we did over the next decade,Disney came to be seen by investors as a growth company. Thathelped our stock to command a high multiple over our earnings,and to rise in price at a rate that far exceeded most companies.’’

-- Michael Eisner

‘‘Early in 1987, Frank and I had dinner inside Disneyland withGeorge Lucas and several celebrities we’d invited to promotethe opening of Star Tours, among them Jeana Yeager and DickRutan. The couple had made headlines a month earlier bypiloting a single engined plane around the world on one tank ofgas. At some point in the evening, my wife turned to Rutan. "Nowthat you’ve flown around the world and done the mostadventurous thing imaginable," Jane asked reasonably enough,"what are you going to do next?""Well, we’re going to Disneyland," he replied sincerely. As soonas she had a chance, Jane pulled me aside and described theexchange. "This would make a great advertising campaign," shesaid. By the middle of the night, I was addicted to the idea. Thenext morning, I called Tom Elrod. Two weeks later, at the SuperBowl in Pasadena, the New York giants overwhelmed theDenver Broncos. As the Giants quarterback walked to thesidelines, he stopped for the camera crew we had waiting. "PhilSimms, you’ve just won the Super Bowl," an off-camera voiceasks. "What are you going to do next?" He looked at the camerawith a big smile and replied, "I’m going to Disneyland." We hadarranged for Simms to spend the next day at the park with hiswife and children, appearing in our parades, taking his kids onrides and making a slew of media appearances -- each usingDisneyland as a backdrop.To our amazement, the campaign acquired a certain icon status.World-famous athletes were suddenly eager to have the "What’sNext?" ad on their resumes. At major sports events, we wouldtypically make provisional deals with each of the athletes mostlikely to emerge as the standout. During the past decade, we’veproduced dozens of spots at major events. We’ve used thecampaign not just to honor athletes ranging from John Elway toMichael Jordan but to celebrate others who’ve achievedsomething outstanding. The campaign has given our parks andthe company enormous visibility, but it also has a subtler effect:powerfully identifying Disney with excitement and achievement,triumph and joy.’’

-- Michael Eisner

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