Mere $440 Million Separates Parties in Disney Dispute

The future value of the movies and TV shows created at Walt Disney Co. during the 10 years Jeffrey Katzenberg ran its studio is either in Tomorrowland or Fantasyland, depending on whom you believe.

With the next phase of Katzenberg’s breach-of-contract claim against Disney starting Tuesday, the two sides are a whopping $440 million apart in what they believe Katzenberg deserves for the final bonus Disney owed him after he left the company in 1994, according to court filings.

For a case that is partially settled, the two sides appear to be growing further apart rather than closer to resolving an increasingly bitter and public dispute.

Under his employment contract, Katzenberg was to get a final, lump-sum bonus after he left Disney based on 2% of the projected future profit of the films and TV shows launched during his tenure, including “The Lion King,” “Aladdin,” “Sister Act” and “Beauty and the Beast.”

His lawyers have come up with three estimates for what he’s owed: $342 million, $438 million and, finally, a staggering $580 million. The latter number is the one they prefer.

Using its experts, Disney is arguing for a more conservative $140 million, which would get it off the hook relatively easily. After subtracting money Katzenberg received in a partial settlement of the case in 1997 and discounting the number according to an agreed-upon formula in the settlement, the company would have to write him another check for only about $20 million.

At the heart of the dispute are wildly differing arguments about not only the future of Disney but also of the entertainment industry itself, especially its ability to exploit value from older classic films in entertainment libraries. It also raises questions about whether Hollywood’s prospects for several lucrative new markets--such as China or the kind of businesses new technologies will open up--are realistic or pipe dreams.

Ironically, it puts Disney in a position of having to talk down its future business prospects, such as noting the saturation of the video market with animated films. Disney in court papers also dismisses China, which the company has targeted as a priority for a theme park and other ventures, as a market with limited potential because of low income levels and rampant piracy as well as cultural and political hurdles.

To Katzenberg, the future value of what he launched will be enormous in a world in which technologies will allow people to watch an unlimited supply of movies with the push of a button, when China’s growing middle class become voracious buyers of Disney videos and in which new generations of children will want to watch animated films such as “Beauty and the Beast.”

Referring to the future values placed today on Disney films, Katzenberg’s side is so optimistic about the growth in entertainment that it argues that “one looking back on all of these predictions in 2040 will laugh at how small they are in comparison to what really happened, just as we would laugh today at how minuscule the predicted revenue of ‘Snow White’ and ‘Cinderella’ would have been if that prediction had been made back in 1940 or 1950.”

Katzenberg’s side reached its $580-million projection by calculating what Disney was willing to pay investors in a film partnership it bought out for $500 million in 1995. The partnership had an interest in 66 films, all but three of which are included in the pool of films used in calculating the Katzenberg bonus.

Disney, by contrast, calls Katzenberg’s projections “imagined future profits generated by a variety of technologies that have not been invented, prospective exploitation that responsible businesspeople have rejected as both creatively and financially impossible and projections refuted by all available data.”

As an example, Disney says, “Katzenberg contends he should be paid tens of millions of dollars based on the assumption that the people of China, who now eke out a bare subsistence on $365 in income per year, will each soon spend $368 per year on videos.”

Disney also argues that the value of its films declines over time, that its success depends more on fresh movies than old ones and that competition in family entertainment, especially in animation, is increasing.

Katzenberg reached a partial settlement with Disney in 1997, with a separate trial set before a referee to determine how much he’s owed. Katzenberg received $117 million in that settlement, but only about $77.5 million of it will apply as an advance toward what he eventually receives because $40 million settled a separate and unrelated issue.

Once the referee comes up with a number, it will be discounted by multiplying the amount by 72.5%, a figure agreed upon in the settlement. The $77.5 million is then subtracted, along with a separate $14.3-million bonus overpayment Disney previously paid Katzenberg. Finally, $1.6 million is added, stemming from the sale of a radio station.

Thus, if the referee decides Katzenberg deserves $500 million, the actual amount, after the discount and previous payments are credited, would be about $272 million, plus interest.

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Two Sides of the Coin

Walt Disney and its former studio chief, Jeffrey Katzenberg, are growing further apart over what he’s due in his breach-of-contract lawsuit. Here are some of the major differences between the two sides:

What Katzenberg says:

* The value of movies and TV shows created during Katzenberg’s 10 years at Disney will grow substantially as new technologies develop, just as old films such as “Snow White” and “Cinderella” proved to be gold mines when home video came into existence.

* China and India, the world’s two most populated nations, will become huge markets.

* Disney bought out an investment partnership in movies at a huge price. Using that formula, the amount Disney should pay Katzenberg is at least $580 million.

What Disney says:

* The boom in Disney’s home video business in the mid-1990s was driven by demographic and competitive factors that might not occur again.

* China and India may never develop into lucrative markets because of poverty, rampant piracy of films, and political and cultural factors.

* The prospects for new technologies, such as TV sets offering videos on demand, are uncertain and may just replace existing businesses such as home video.