Book review: Work in Progress / Michael Eisner

By | January 3, 2016

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To give you motivation to read this post I think I’ll start with a fact: the book was written in 1998, from the time Eisner took over till the time the book was written the share price of Disney increased thirty-fold. That is a CAGR of 27.5% over a 14-year period, not too bad, isn’t it? with that, let’s get started.

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I really liked how Eisner paid respect to John Malone in the first chapter of his book (the first chapter is actually the latest period):

…We spoke briefly before being interrupted by another group of guests, Malone among them. When it came to talking with him, I felt as if I were guarding Michael Jordan one-on-one.

Good start!

note: I don’t have an investment with Disney and I don’t intend to make one any time soon. This is just for the sake of intellectual curiosity and expanding my knowledge of that industry.

The Movie Business

The movie business is a tricky one and to some people it may seem like a random, hit-driven business, but in reality this is far from the truth. There are many factors that impact performance and are under the control of the management: do you buy scripts or develop your own? do you work with proven stars or emerging actors? and so on. The first seven chapters of the book initiate the reader on what it takes to succeed in the movie business, and unsurprisingly it seems very similar to what we see in other business.

Eisner ran Paramount as a business, which as trivial as it may sound today, wasn’t that much of a common practice in Hollywood:

In contrast to the blockbuster mentality that prevailed at most of the other major studios, we evolved the concept of hitting singles and doubles. That meant making movies for modest budgets base on strong ideas that we developed ourselves. Profligacy and irresponsibility about money were frequently mistaken in the movie business for style and daring. Our inclination was to treat the company’s money as if it were our own. We took a certain pleasure in resisting the lemminglike tendency to overpay for stars, or to approve budgets that made no sense.

Barry and I had begun to run Paramount like a real business. It wasn’t possible to pick hits every time out but it was possible to protect ourselves financially… Our movies were financed by doctors and dentists and lawyers… We also began pre-selling our movies to the television networks… Between our pre-sells, our tax shelter financing, and our focus on keeping production costs below the industry average, we almost never lost money on a film.

For investors in the sector, it is very important to look for studios that see movies as products and not as a way to get fame and awards. High budget film doesn’t mean it will be successful. Some studios, like Paramount under Eisner, were very successful on films with small budget but good ideas and stories.  Here is a part from a memo that Eisner sent to Paramount’s employees:

I also reiterated the tenets of smart moviemaking, and the kinds of mistakes that are all too easy to make: “An apparently no-risk deal is never a valid reason to produce a mediocre movie. A low budget can never excuse deficiencies in the script. Not even the greatest screenwriting or actor or director can be counted on to save a film that lacks a strong underlying concept. And we should generally resist making expensive overall deals with box office stars and top directors, because we can attract them later with strong material.

According to Eisner, a studio can only make 12-15 movies a year and still give them the close attention that they require, both creatively and in marketing. At the time he was about to join Disney, Paramount was already reaching that limit but Disney was far from it so Eisner saw a lot of potential there. Here is an interesting piece from the chapter called “Keys to the Kingdom” and happened shortly after Eisner became Disney’s CEO:

Sid offered Jacobs $60 per share for his 8 percent stake, and settled for $61…That gave Jacobs a profit of nearly $30 million on his year-long investment in Disney, but it was probably one of the most costly financial decisions Jacobs ever made. Had he simply held on to his Disney stock over the next ten years, his gains would have exceeded $2 billion.

With that, the Disney chapter begins.

In Disney, much of the same techniques that worked for Eisner at ABC and Paramount were implemented but Eisner never succumbed to the Hollywood mentality:

Journalists covering Hollywood continue, even today, to measure success in the movie business primarily by box office revenues. By that measure, we continue to finish among the top studios, in large part because we now released so many movies. In reality, all that finally counts is net profit–after the costs of production, marketing, and overhead. Those numbers rarely attract much attention.

This was written at a time when Disney wanted to make more movies so given that Eisner believed that a studio can only handle about a dozen movies, they created and additional studio that doubled the capacity and as expected, the quality of the movies, and with it the profits, decreased. To me, Eisner is the movie-business value-investor. Throughout the book he writes about how important it is to manage the downside very carefully and make sure that even bad movies won’t cause too much damage. Also, apart from working with emerging actors, Eisner also worked with actors whom their career interrupted by temporary problems and at one time, people in Hollywood thought the Disney does it’s recruiting at the drug rehabilitation center in Hollywood.

Animation, the brand, Euro Disney, ABC and getting off track

The next few chapters had less interesting insights to be gleaned from but were interesting nevertheless. Few words about animation: that segment was treated more as an art than science at Disney and Eisner implemented here the same discipline he did in live-action movies. That is, strict and conservative NPV calculations, video releases for home when it made financial sense even though the artists objected to it because they said it would “dilute the magic” only to find out that kids like to watch the same movie over and over and so on. His actions propelled Disney’s animation business and got it back to it’s glory days when Walt was still there.

The next two chapters dealt with extending the brand to retail shops, theatre, parks and so on. A quick glance at the 2015 annual report shows that the theme parks and venues segment produced an operating income of $2.6bn on asset base of $23.3bn. This is a high-fixed-cost business that can easily be in the red in bad years, takes a lot of the management’s time and attention and actually produces poor after tax rate of return. If we make a back-o-the-envelope calculation and assume that this segment makes a NOPAT (net operating income after tax) of $2bn on an asset base of $23.3bn, this translates into an ROIC of well under 10% and that’s really nothing compared to what Disney’s core business produces.

As taught in every business school, losing focus is the number one enemy of success in business and I think that Eisner sinned on this point, big time. Planning and building those huge theme parks with many attractions, thousands of hotel rooms, restaurants and so on seemed to be taking a lot of Eisner’s time and attention. This craze about parks and venues ended up with Disney building a town for 20,000 people called Celebration, that Disney later divested. Towards the end of the book it seemed like the core-business was getting less and less attention and more attention is given to meeting with architects, building various theme parks, hotels, attractions and even cruise ships.

While Eisner soberly writes about the bad economics of theatrical plays (they cost a fortune to make and you can play only at one venue at a time) Disney went on to build theaters and produce plays. It is funny that the same Eisner that in the beginning of the book wrote a lot about numbers and mocked studios that only cared about getting Amy/Tony awards at any costs without regard to financial performance, goes on to do the very same thing by the end of the book. I guess that too many years in Hollywood did it to him.

One good quote from the chapter about the Euro Disney is from a part that describes the many problems that Disney ran into when opening the parks. We all know that the French government is not pro-business but I was amazed at how bad things can get when a president speaks like that about a venture that was made possible by investment of billions of euros and created tens of thousands jobs for his country:

It didn’t help that Francois Mitterrand, the French president, refused even to visit the park. “It’s just not my cup of tea,” he was quoted as saying the day before we opened, and then went on ignoring his country’s largest new tourist attraction.

Unbelievable.

A short time before the acquisition of CapCities/ABC, Eisner gave a presentation at Sun Valley and among the people in the crowd was Warren Buffett, who held Disney’s stock before. During the presentation Eisner addressed Buffett:

I ended by reading a letter than Buffett had sent me 2 years earlier. “In 1965,” I quoted him,”I bought 5 percent of Disney for approximately $4m. That’s the good news. The bad news is that I sold it a year or two later at about a $2m profit.” I explained that I hadn’t been able to resist writing back to Warren, to tell him what his position in Disney would be worth had he chosen to keep it through 1993, when he wrote to me–namely,$552m”

“Since Warren’s here today,” I added, “I just thought I’d bring him up to date. If he had held on to that original investment over all these years, today his $4m would be worth $869m. But don’t feel too badly for him. If Disney had purchased $4m worth of Berkshire Hathaway stock in 1965… it would be worth in excess of $6 billion today”

It is funny how Eisner soberly wrote about most M&A not creating any value in the beginning of the “Making it Work” chapter that tells the events post the deal to purchase CapCities/ABC. The reason I’m saying it’s funny is this chart below that shows what the Disney stock had done between the time of the acquisition and until Eisner was replaced as a CEO:

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You are right Mr. Eisner M&A rarely creates any value, and, releasing the book in 1998 was a brilliant choice indeed.

Final words

This book is definitely worth your time if you have any interest in the media business. It could have been more interesting if Eisner were a bit more quantitative about some of the things they did and less detailed about every movie and play that Disney produced at the time he was at the helm.

Something happened to Disney’s stock post 2009 when it started to fly high… but this is out of the scope of that book review and I might (no promise) write about it in the future but now it’s time to summarize 2015, and that will be the topic of the next post.

Happy New Year to the readers of my blog and thank you for your continued interest!

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