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This Family Was Really Messed Up

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Times Staff Writers

The scent of money was in the mountain air.

Walt Disney Co. Chief Executive Michael Eisner had come to the resort town of Sun Valley, Idaho, with his company’s wallet wide open -- a risky move at a gathering of voracious moguls.

The year was 2001, and Eisner was under pressure to bulk up Disney, much as his competitors had done through mergers and acquisitions. America Online was now the owner of Time Warner. Media giant Viacom had gobbled up CBS, along with some cable channels.

Everyone but Disney, it seemed, was in the hunt.

“Acquisitions are a tricky business,” Eisner had cautioned shareholders a year earlier. “Companies often pay too much for other companies ... because they are afraid to let cash burn a hole in their pockets.”

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But Eisner thought he finally had found a plum, and he was determined to snatch it at the luxurious Sun Valley confab. The private gathering, hosted each July by investment banker Herb Allen, brings together the world’s most influential media leaders for recreation, speeches and deals. It was there, six years earlier, that Eisner had earned wide acclaim with his surprise purchase of Capital Cities/ABC.

This time, the story would be different.

Eisner left the mountain summit with an ailing cable channel called Fox Family, along with some foreign assets, for which he agreed to pay $5.3 billion. The negotiations lasted less than an hour. One of the beneficiaries, News Corp. Chairman Rupert Murdoch, would later kick himself. He told associates that Eisner was so eager he might have paid a billion more.

Amid the many financial problems Disney has encountered in recent years, few have revealed more about the company’s inner workings and shortcomings than the saga of the cable channel now called ABC Family.

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Today, three years later, the channel is worth billions less than its purchase price.

The acquisition has suffered through a series of miscalculations and missteps, many of which may have been foreseeable, current and former Disney executives say. The financial projections were flawed from the start, they say, and the programming strategy never got off the ground.

When the former chief executive of BBC America takes over as president of ABC Family next week, he will inherit a troubled financial asset that has become a professional liability for Eisner.

Eisner’s critics -- including former board members Roy E. Disney and Stanley P. Gold, who approved the deal -- have used the channel’s struggles as an illustration of the kind of management that they contend led to the company’s financial slide. The ex-directors said they had no way of knowing that management’s projections would fall so short.

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Eisner and other Disney executives today concede that they overpaid. But they say the obstacles to success had more to do with the shifting economics of television than with any failures of management.

During a recent session with media analysts in New York, Eisner assured them that the channel’s fortunes were turning, with ratings and revenue on the rise. Viewership jumped 18% this year, bringing in the biggest audiences since Fox’s ownership.

“The Family Channel,” he told the assembled skeptics, “is the definition of a dog in the minds of everyone in this room, which is turning into a show dog.”

Others aren’t so sure. They think it may take years, if ever, for Eisner’s canine Cinderella story to find a happy ending.

A Plan to Revolutionize TV Broadcasting

Murdoch and his partner, TV mogul Haim Saban, needed someone with deep pockets to bail them out.

They had paid nearly $2 billion in 1997 for a cable channel in the competitive world of children’s television. At the time, Murdoch’s Fox TV network was losing ground to cable outlets such as Nickelodeon. Saban, whose television library included the “Mighty Morphin Power Rangers,” feared being shut out by channel owners that were increasingly airing shows that they produced or financed.

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But within three years -- after management changes and failed programming strategies -- Fox Family Channel was struggling. The two men sent word to Wall Street that they were ready to sell.

Before the first private jet touched down in Sun Valley, Eisner hoped he’d be leaving with a new trophy. He’d been discussing the possible purchase with his most trusted lieutenants for months. When the parties secretly met at the retreat, it became clear that these would be no ordinary negotiations.

Eisner stunned the sellers by promptly asking them to name a price that would shut out potential competitors, sources familiar with the meeting said. Smelling desperation, Murdoch and Saban said they wanted $5.5 billion, far above the approximately $3-billion value Murdoch’s own bankers had privately placed on the asset.

They also told Eisner there would be no dickering over price or they would put the channel up for auction. When Eisner balked at paying for a costly and money-losing Major League Baseball contract that was included in the purchase price, the response was the same: Take it or leave it. In the end, he took it all.

When the deal was pitched to Disney’s board of directors, some wondered aloud whether the company was paying too much. Eisner conceded that the price was on the high end. In fact, it was the richest cable channel purchase of its day.

But Eisner and his top executives assured the board that their financial projections justified the cost, especially at a time when cable channels were hot properties.

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Eisner said Disney would revolutionize broadcasting. His vision: to take shows on the company’s ABC broadcast network and rerun, or “repurpose,” them that same week on the cable channel. This, he predicted, would open up a second stream of advertising revenue for the same program, on top of the money cable operators would pay Disney to carry the channel.

“There won’t be many opportunities like this one,” then-board member Andrea Van de Kamp quoted the chief executive and his management team as saying. The directors gave their unanimous consent.

Wall Street was not so trusting. Disney’s revenue projections were dismissed as unrealistic. The company’s credit rating was downgraded.

To some in the investment world, it appeared that Disney either bungled its forecasts or pumped up the numbers to make the channel’s price look better.

For example, two knowledgeable insiders said, Disney executives based their advertising projections in part on the rates USA Network was charging. The problem was that USA was always near or at the top of the cable ratings, whereas Disney’s new acquisition had been languishing at No. 17 in daily viewership.

Compounding the problem were the Sept. 11 terrorist attacks, which led to a general erosion of the advertising market.

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Beyond all this, the sources said, Disney executives believed they could muscle cable operators into paying huge increases of up to 35% to carry the channel. They were wrong.

Operators refused to shell out that kind of money for a flagging channel. In some cases, Disney ended up getting less than Murdoch and Saban did.

Still, according to regulatory filings, Tom Staggs, Disney’s chief financial officer, and Peter Murphy, its chief strategist, each were rewarded $1-million bonuses “for extraordinary services” that included bringing the cable channel into the Disney family.

In theory, Eisner’s strategy to recycle ABC programs was good. After all, NBC’s hit drama “Law & Order” had found a second life on cable after airing earlier in the week on the network. In execution, though, the idea was a no-go.

That harsh realization came during a meeting of high-level executives from throughout Disney’s television and studio empire, who weren’t consulted before Eisner’s $5-billion handshake deal.

When the group began talking about “repurposing” ABC’s shows, a hand went up, witnesses say. It belonged to Mark Pedowitz, the network’s business affairs chief.

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“We can’t do that,” he said of the plan, delivering a gut punch to the room’s upbeat mood.

Pedowitz explained that the company could not simply take a show and put it on another channel without renegotiating contracts with the actors and others involved in the productions. He said such renegotiations, although possible, would be time consuming and expensive.

Some of the network’s most watched shows -- those that might succeed on cable -- were untouchable because they were headed to syndication. Among them: “The Practice” and “Spin City.”

Although Pedowitz signed up some shows to repurpose, mostly those produced by Disney’s Touchstone Studios, none were close to the stature of a “Law & Order” to draw viewers.

Eisner’s public boast that ABC Family represented “the beginning of a new trend in the American broadcast and cable environment” now seemed premature, at best.

As the months advanced, viewers tired of B-list movies and reruns of “7th Heaven.” Ratings and revenue dived.

Deciding that dramatic changes were needed, Disney management pulled in television executive Angela Shapiro, who had spent seven years overseeing ABC’s daytime lineup. She was promised free rein to create a new strategy for ABC Family.

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Among other things, about $1 million was spent on consultants, who concluded that viewers 18 to 34 were ripe for the plucking. A marketing firm came up with a relatively hip name: XYZ, a bookend to ABC. Advertisers, hungry for shows with youth appeal, were impressed.

So were Disney executives, until they were blindsided by some fine print. The word “family,” they were told, must remain in the name -- a certain turnoff for the young crowd being targeted, the marketing experts said.

That mandate was contained in contracts Disney and previous owners signed with cable operators. The requirement dated back to the channel’s creation in 1977 by evangelist Pat Robertson, who wanted an identifiable family haven for his show “The 700 Club.”

Disney worried that changing the name would give cable operators ammunition to drop the floundering channel or provide them with leverage to negotiate better deals.

Said one former Disney executive: “Months of work, an entire summer, was just thrown away.”

Noticeable Climb in Ratings and Ad Revenue

Last year, an internal study disclosed that ABC Family was worth about $2 billion less than the company had paid. Some at the top of Disney debated whether federal rules required them to inform shareholders of the drop and adjust the company’s books. They decided neither was necessary.

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By the fall, ABC Family had hit a low-water mark. Instead of doubling cash flow to $300 million, as it had projected to investors, the channel had pulled in just a third of that, according to Merrill Lynch & Co.

Murphy, one of the deal’s architects, proposed a solution to the whole problem: “Blow up” the channel and start over.

“People were getting a bit frantic looking for a quick fix,” one executive said.

Instead, management tried with varying success to ignite ratings with reality-based series and movies created specifically for ABC Family -- the exact opposite of repurposing.

One of the most successful new shows, “Switched,” chronicles the exploits of teens who change places.

The channel’s experiment with original movies has been mixed, despite the involvement of some big names.

In spring, the channel heavily promoted “Brave New Girl,” based on a book by pop star Britney Spears and her mother. But the premiere generated the channel’s “lowest original-movie marks in quite some time,” a Disney memo said.

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Still, company executives say they are encouraged by a noticeable climb in recent ratings and advertising revenue.

“I have a strong belief in the value of our channel,” said Anne Sweeney, who co-chairs Disney Media Networks.

“You must go through the experimental phase, but we’ve worked extremely hard to clarify our vision and now we are going to carry it out.”

Former board member Van de Kamp, who was ousted last year amid clashes with Eisner, said everyone involved -- including the board -- must shoulder blame for the challenges facing ABC Family.

“None of us really understood to what extent we overpaid,” Van de Kamp said.

“We all got carried away with the enthusiasm and concept of the purchase. But at some point you have to rely on management’s projections.”

Times staff writer Richard Verrier contributed to this report.

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