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Alex Stroup, Editor

The Walt Disney Company

2004 Year in Review

Wednesday, January 12, 2005
by Mark Goldhaber, staff writer

2004 was certainly a tumultuous year for the Walt Disney Company. From a 45 percent no-confidence vote on CEO and former Chairman Michael Eisner to his announced 2006 retirement plans, from ABC's horrible winter to its blockbuster fall, from a string of theatrical flops to a big finish with The Incredibles and National Treasure, the past year has been a roller coaster ride.

Motion pictures

In his recent article, Alex Stroup chronicled the uneven year of Disney's motion picture arm (link). While a couple of late hits with The Incredibles and National Treasure brought the studio's year up to a respectable level, the year was marked by a series of films that, deservedly or not, flopped: Hidalgo, The Alamo, Home on the Range, The Ladykillers, Around the World in 80 Days, King Arthur, and the list goes on.

But not all of the movie news was at the box office. Questions abounded regarding the future of Disney's relationship with animation powerhouse Pixar after Pixar called off contract talks early in the year. A public spat between Michael Eisner and Miramax head Harvey Weinstein over Fahrenheit 9/11 and production costs in general put that production arm's future in question. 2004 also saw the end of traditional animation at Disney, with the shuttering of Walt Disney Feature Animation Florida, the conversion of the California animation studio to a digital-only affair, and the release of Home on the Range, the final traditionally animated feature from Disney.

Television networks

What a difference a year makes! Last winter, ABC was mired in a years-long slump with few prospects of improving that standing. Now, with hits on its hands including Desperate Housewives, Lost and Alias, the alphabet network is in the midst of a major resurgence. Getting credit for the rebound is Disney President and COO Robert Iger, whose mission it has been for the last several years to turn the network around. Many of the key decisions in the process, however, were made by Lloyd Braun (now with Yahoo) and Susan Lyne (now at Martha Stewart Living Omnimedia) who were ousted in the spring, before their decisions bore fruit.

Meanwhile, the prized ESPN network celebrated its 25th anniversary with a weekend of events and broadcasts from the Disney-MGM Studios in Florida. Ratings, sales and income were all up for the network. Overall, the cable channel was a very successful part of the company this year.

Theme parks

Hurricanes in Florida. Refurbishment tarps seemingly covering half of Disneyland Park in California. Big Thunder Mountain Railroad reopening after 2003's fatal accident, then closing again after another accident, then reopening again. Labor contracts with several unions at both domestic resorts are rejected repeatedly over low salary increases and high health insurance premium increases before finally being approved under threat of unilateral imposition by Disney. Those don't seem to be elements of a successful year at the theme parks. And yet, attendance was up at all Disney theme parks worldwide this year. Attendance at the Florida parks increased for the first time since September 11, 2001.

The year saw the debuts of the Twilight Zone Tower of Terror at Disney's California Adventure and Stitch's Great Escape at Walt Disney World's Magic Kingdom. Disneyland Paris averted its impending bankruptcy and pledges to plow the newly generated cash into new attractions for the struggling Walt Disney Studios Paris theme park.

On May 5, Disney announced the coming attractions for the celebration of Disneyland's 50th anniversary in 2005. So where are the bulk of the new attractions opening? Why in Florida, of course. But why would Disney be pushing people to go to Walt Disney World to celebrate the anniversary of Disneyland? Many reasons, actually, most of which come back to the fact that the current Disney administration is more focused on generating revenue than celebrating heritage.

First off, Walt Disney World boasted four of the top five domestic theme parks, with a total attendance of around 40.7 million visitors, as opposed to the two Disney parks in California, which brought in a combined 19 million made up largely of annual passholders. Second, the Florida resort also offers two huge water parks and a much larger nighttime entertainment district, with much less competition than the Disneyland Resort. Third, and perhaps most important, Disney has 22 resort hotels that it owns on its property in Florida. Once you get there, they own you and all of the money that you're going to spend. Disney owns three hotel resorts in Anaheim, only one (the Grand Californian Hotel) of which is themed to the extent of the resorts in Florida.

Most visitors to Disneyland do not stay at a Disney hotel, and many meals are eaten off of Disney property. Visitors go off and explore many other attractions in California, and Disney loses its grip on the pocketbooks pretty quickly. Why drive people to go to a park where they get less of your money when they could just as easily drive people to go to an all-encompassing property where, once you arrive, you and all of your money are theirs. (If you doubt this, look at the new Magic Your Way tickets and packages and the new Disney's Magical Express shuttle service with this principle in mind and decide for yourself.)

While Disneyland Resort's Matt Ouimet appears to be doing a great job of turning the original park around by bringing back the original principles of Disneyland, all is not well in the Disney empire. The limited number of attractions in the first phase of Hong Kong Disneyland is drawing fire, Imagineering projects are getting contracted out and there's been a shake-up in staffing in Imagineering. We'll have to see where this goes in the New Year.

Acquisitions and divestitures

Rather than try to adjust the mix of merchandise to attract the buyers that left when the stores became too child-oriented, the company sold the Disney Stores sold to The Children's Place in October. The only store kept by the company was the flagship store on Fifth Avenue in New York City, which became a World of Disney store run by Walt Disney Parks and Resorts.

In February, Disney bought the Muppets and the Bear in the Big Blue House characters from the Jim Henson Company. The company has moved to reintroduce Kermit the Frog, Miss Piggy, Fozzie Bear, The Great Gonzo, and Dr. Teeth & the Electric Mayhem to what is hoped to be a new generation of Muppet fans. Time will tell if this move is successful.

Corporate and legal matters

In February, feeling that Disney's stock was at bargain-basement levels and having been spurned by Michael Eisner in attempting a friendly buyout, Comcast Corp. launched a hostile takeover attempt, pricing its offer at levels below Disney's historical high, and below its price in early 2001. In response, Disney's share price rose to well above the offer price, effectively putting the bid at bay. Comcast eventually gave up in April, after deciding that it would be better worth its time to pay Disney for content and spend its buyout money on enlarging its market share by buying out competitors, instead.

In late March, a judge threw out the lawsuit by Steven Slesinger, Inc. to get more royalties from Disney on videos, computer games, and other merchandise featuring the Winnie-the-Pooh characters. The ruling was not based on the merits of the case, but rather on illegal and unethical means used by the Slesingers to obtain their evidence. The 13-year-old suit was dismissed with prejudice, meaning that the Slesingers cannot file a new suit on the same claim.

In September, a judge in Delaware Chancery Court ruled that a shareholder lawsuit against Disney could go forward. The lawsuit claims that Disney board members did not exercise due diligence to meet their fiduciary duties in the contract approval, hiring, firing and paying of severance to Michael Eisner's (then-)friend Michael Ovitz as President and Chief Operating Officer following the death of Frank Wells. The trial began in late October, and recessed in mid-December until January 11. During that time, though, some ugly internal corporate laundry was aired, and trial-watchers got to see the unlikely sight of Michael Eisner, Michael Ovitz (who claims that Eisner stabbed him in the back), and Eisner foes Roy Disney and Stanley Gold all testifying on the same side of the case.

In December, Disney came to an agreement with the Securities and Exchange Commission regarding charges that Disney failed to report that family members of “independent” directors were employed by the company. The company did not admit wrongdoing, no fine was assessed, and the company promised not to do it again.

Governance and leadership

The year 2004 started with former Disney board members Roy E. Disney and Stanley P. Gold launching their “Save Disney” Web site and campaign. By the time of the annual shareholders' meeting in March, the duo had mobilized an army of shareholding Disney fans, as well as an impressive array of public employee pension funds and other major investors. The army of fans provided great PR for the campaign, and the institutional investors provided the muscle in what turned out to be a 45 percent no-confidence vote on Eisner.

The company spun the vote as a referendum on the good-governance issue of a need to separate the positions of Chairman and CEO, and removed Michael Eisner from the Chairman's seat, replacing him with ally Sen. George Mitchell. Of course, if they were so concerned about the separation of powers, one has to wonder why they blocked a proposal on permanently separating the positions from going before the shareholders at the 2005 annual meeting.

Before going into an apparent extended hibernation, Save Disney challenged the board to follow through on the apparent will of the shareholders and to find a replacement for Eisner. If they didn't, continued Save Disney, they would find themselves running against an opposition slate of directors. Things were made easier for board members on September 9, when Eisner submitted his resignation. However, always one to want control and final word on every deal, Eisner dictated the terms of his departure. The resignation would be effective at the end of his contract, which likely would not be renewed, and he named Disney President Robert Iger as his preferred successor, angering many who saw Iger as ineffective.

The board announced that they would undertake an international search for a replacement, but that Iger would be the only internal candidate. The search had a targeted completion date of June 2005. In addition, George Mitchell announced that because he would reach the mandatory board retirement age of 70 in 2005, he would not run for reelection at the 2006 annual meeting, and that a search for a new chairman would immediately follow the CEO search. Following that announcement, Save Disney announced that it was not planning to run an alternate slate in light of the board's action, a decision that it affirmed in December.

In the meantime, the board gained two new independent directors. John Chen, Chairman, CEO and President of computer software company Sybase, joined the board after being named a new member in 2003. In December 2004, Fred Langhammer, Chairman, Global Affairs, of The Estée Lauder Companies, was named as an additional independent director, effective in January.

With his resignation announced, the pressure from Save Disney off, and stock prices climbing, Eisner appears to be in the driver's seat. With the sudden success of ABC, Iger appears to be a much stronger candidate as Eisner's successor. However, the fickle winds could cause a course change at any time. It remains to be seen what the results of the executive search will be, though the man considered to be the front-runner among external candidates, Peter Chernin, is at a disadvantage due to the choice of headhunting firm. Spencer Stuart, which has conducted many searches for News Corp., Chernin's current employer, was passed over in favor of Heidrick & Struggles, which has worked with Disney directors in the past, and is likely to lean in favor of Iger. The corporate intrigue promises to be quite an interesting spectator sport for the next six months.

Shareholder issues

After starting the year at about $23.50, Disney stock hit $25 and then $23 until the Comcast bid sent it shooting up to $28.50 before starting a long slide. Disney stock prices jumped about $2 after the settlement of the Slesinger/Pooh case before continuing the downward slide that lasted until early May, when Disney announced second-quarter results that were well ahead of expectations. After a rise through the end of July and a dip until the middle of August, the stock price has been steadily rising since positive third-quarter results were released. Disney closed the year just shy of $28 per share, about a dollar below its post-Comcast high.

Despite Walt Disney Company's improved performance, Save Disney's continued absence from the front lines, and Eisner's apparent control of the situation, Disney announced last week that the annual shareholders' meeting will be held on February 11 in Minneapolis, Minnesota, which averages a high of 27 degrees and a low of 10 degrees on that date."

After last year's annual meeting, it's highly likely that nobody in the Disney executive offices wanted to have to fill four to six hours with endless presentations on the company's various businesses in order to push the Q&A session back long enough to lose most of the audience and miss the deadline for most evening news shows. Therefore, unsure of what acrimony the next year's meeting might see, it was the safe move to locate the meeting where few would be willing to go. And with the meeting on a Friday, it's a good bet that any real news coming out of the meeting will be buried in the weekend newspapers, rather than a lead story in the weekday papers. MousePlanet plans to bring you coverage from the meeting.

Wrapping it up

2004 was a very busy and news-filled year for the Walt Disney Company. 2005 looks to be more of the same, with the upcoming resolution of the Eisner succession question, the worldwide “Happiest Celebration on Earth” theme park promotion, the release of Chicken Little—Disney's first animated feature after the demise of hand-drawn animation—the continuation of the Pixar and Miramax sagas, the wait to see if ABC can maintain its newfound success, the continuation of the shareholder lawsuit trial, and so much more.

We look forward to continuing our coverage on what's going on. Stay with us for what promises to be another wild ride, with or without Mr. Toad.


Thoughts, questions, or comments? Contact Mark here.


ABOUT THE EDITOR

Mark is a veteran of many trips to Walt Disney World starting in 1972, with a few Disneyland trips also under his belt. He is also a Disney stockholder and a Disney Vacation Club member who collects Disney sericels, books, clothing, and just about any other thing with The Mouse on it that he can lay his hands on.

Between visiting WDW, planning trips for himself and others, fantasizing about trips to WDW, and reading everything he can about Walt Disney and his legacy, there's not much time left for anything other than family time, but he's perfectly happy with that.

Mark is a computer geek working for the State of New York. He lives in the suburbs outside Albany, New York, with his wife and son.

Click here to contact Mark.

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