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Disney dogged by talent-loss issues
Dismal box-office sales, Miramax pact spur concern
By Russ Britt & Jon Friedman, CBS.MarketWatch.com
LOS ANGELES (CBS.MW) -- At his darkest hour when he was under the shareholders' microscope in March, one thing Disney Chief Executive Michael Eisner could point to was that his movie division had done well in 2003.
Wall Street frets over Disney's feuds, slumping sales.
The company's Miramax division had dominated the Oscars with best-picture winner "Chicago" and a slew of other entries. Plus, Disney's own motion-picture division was the industry's domestic box-office king, buoyed by two $300 million pictures, "Finding Nemo" and "Pirates of the Caribbean."
A month after that shareholders meeting, though, streak turned into slump for Disney (DIS: news, chart). Since April, the company has released four big-budget, high-profile flops.
Further, its relationship with Miramax, the veteran Oscar-winning film unit, appears in jeopardy. The contracts of principals Harvey and Bob Weinstein are up for renewal, with talk the duo may split from Disney. Each side, however, is unwilling to say that will happen.
And despite optimism for Disney's short-term prospects, some on Wall Street are concerned the recent slump is a sign long-term problems remain in the Magic Kingdom.
"It goes to the greater issue of whether Disney has lost its creative edge," said Todd Mitchell, an analyst for Blaylock & Partners. "I think Eisner's in a position where he needs to deliver."
The string of struggling Disney films began with "Home on the Range," an animated feature released April 2.
Though Burbank, Calif.-based Disney is trying to get animation costs under control, "Home on the Range" cost an estimated $110 million to make and returned $52 million worldwide.
Next was "The Alamo." Released on April 9, it cost an estimated $107 million to make, plus $30 million to market. Total worldwide receipts were $24 million.
Last month, Disney's remake of "Around the World in 80 Days" cost $140 million to produce and market, but has made only $25 million worldwide thus far. Disney's only solace is that it didn't shell out production costs for the film; that was handled by a separate group of partners.
The curse has may even hit Jerry Bruckheimer -- a veritable hit machine -- whose "King Arthur" came out July 7. That film cost an estimated $160 million to make and market, and brought back $31 million in its first eight days, considered too slow a pace to recoup its costs.
Chuck Viane, Disney's head of distribution, acknowledges the company's performance looks lackluster when compared to last year's record U.S. box office take of $1.5 billion.
Moreover, Viane asserted, "King Arthur" is no flop. He believes it will ultimately bring in returns that amount to a mid-range success.
"I think it's a double. It's certainly not a single, or a strikeout," he said. Viane adds that "Home on the Range" was moderately successful in his view, but he acknowledges that "Alamo" and "Around the World" were disappointing.
The film business is cyclical by nature. Studios often find themselves in streaks and slumps, thanks to fickle public tastes. Some investors sympathize, such as Mark Greenberg, manager of the $1.1 billion Invesco Leisure Fund in Denver, who says entertainment executives work in a fishbowl.
"Every business has issues like Eisner has with (Pixar chief) Steve Jobs and the Weinstein brothers," Greenberg said. "This is the only thing that gets written about in the press. Nobody really cares where the steel comes from for appliances."
Questions about Disney's creative direction have only worsened with the chilly relations with Miramax, coming not long after its divorce from Pixar (PIXR: news, chart), the creator of "Finding Nemo."
"I think Eisner is on an unfortunate trajectory," said Michael Holland, president of money managers Holland & Co. in New York. "Everything appears to be spinning out of control. For someone who is a control freak, this must be a nightmare. It's yet one more negative."
In New York, Matthew Hiltzik, a spokesman for Miramax, said the company declined to comment on its relationship with Disney.
To be sure, the movie division's slump comes at a time when Wall Street's cool sentiment toward Disney is thawing a bit. Disney's stock, a component of the Dow Jones Industrial Average, has languished well below its 52-week high $28.41, set in the wake of Comcast's failed takeover attempt.
Earlier this month at an investment conference, Eisner said that he was considering an increase in the company's dividend payments. Standard & Poor's subsequently softened its stance on Disney's credit outlook, replacing a "negative" moniker with "stable" but keeping its ratings.
And some analysts are encouraged by the recent performance of Disney's theme parks, which have been in a slump of their own since the Sept. 11, 2001, terrorist attacks. There's also been improvement at the company's oft-troubled consumer products division, and its ESPN division continues to thrive.
"Those businesses are doing so well, that theatrical performance at the box office is not a significant concern at this point," said Tim Wallace, analyst for UBS Securities.
Another big performer that's helping offset recent theatrical troubles is the studio division's own home video sales, helped by "Nemo," "Pirates" and other successful titles from last year's film slate.
But therein lies the rub for the division, analysts say. Sure, the titles from 2003 helped this year -- but what about 2005? This year's duds are unlikely to do the heavy lifting for Disney's studio operations next year, so the company will have to bank on producing a hit.
Paul Kim, analyst at Tradition Asiel Securities, is concerned the company won't be able to live up to double-digit earnings growth projections beyond 2004 if that's the case. The company already expects to live up to 30 percent earnings growth for this fiscal year, which ends Sept. 30.
"The perennial question at Disney is, 'What is the earnings power of this company'," Kim said. "Disney was never about fiscal year '04. It's all about next year."
Bob Chapek, Disney's home-video president, says each of the box-office disappointments could turn around when it they arrive in video stores.
"While it's nice to have that wind at your back -- I don't want to say it's irrelevant -- but it's not as important as people in this business think it is," Chapek said.
Last year's "Brother Bear," a modest performer in U.S. theaters, had a better run when it hit video stores. As Chapek puts it, "It performed like a title that had twice the box office that it did."
"I think each one (of this year's films) holds potential for us," Chapek added. "I think we're going to dramatically overperform on each one of those."
There remains the possibility that Disney can pull out of the slump as early as the end of this month. That's when it releases "The Village," the latest offering from M. Night Shyamalan, creator of "Sixth Sense" and "Signs."
Also on the horizon is the November release of "The Incredibles," the sixth computer-generated animated film by Pixar. Other titles Disney hopes will pan out are "National Treasure," starring Nicolas Cage, "Mr. 3,000" with Bernie Mac and "Ladder 49" with John Travolta.
If none of these rises to the occasion, Disney could face its first sub-$1 billion year at the domestic box office since 2001.
And if Eisner is unable to keep Miramax and the Weinsteins in the fold, Disney's standing as a creative entity may be threatened, investors say.
"I think that it is not a big deal financially in the near term," said Ken Marlin, an investment banker with Marlin & Co. "But it is a big deal psychologically in terms of Eisner's ability to survive as CEO. It is one more example of Eisner's difficulty in dealing with strong, powerful people."
Russ Britt is the Los Angeles Bureau Chief for CBS.MarketWatch.com.
Jon Friedman is Media Editor for CBS.MarketWatch.com in New York.
Dismal box-office sales, Miramax pact spur concern
By Russ Britt & Jon Friedman, CBS.MarketWatch.com
LOS ANGELES (CBS.MW) -- At his darkest hour when he was under the shareholders' microscope in March, one thing Disney Chief Executive Michael Eisner could point to was that his movie division had done well in 2003.
Wall Street frets over Disney's feuds, slumping sales.
The company's Miramax division had dominated the Oscars with best-picture winner "Chicago" and a slew of other entries. Plus, Disney's own motion-picture division was the industry's domestic box-office king, buoyed by two $300 million pictures, "Finding Nemo" and "Pirates of the Caribbean."
A month after that shareholders meeting, though, streak turned into slump for Disney (DIS: news, chart). Since April, the company has released four big-budget, high-profile flops.
Further, its relationship with Miramax, the veteran Oscar-winning film unit, appears in jeopardy. The contracts of principals Harvey and Bob Weinstein are up for renewal, with talk the duo may split from Disney. Each side, however, is unwilling to say that will happen.
And despite optimism for Disney's short-term prospects, some on Wall Street are concerned the recent slump is a sign long-term problems remain in the Magic Kingdom.
"It goes to the greater issue of whether Disney has lost its creative edge," said Todd Mitchell, an analyst for Blaylock & Partners. "I think Eisner's in a position where he needs to deliver."
The string of struggling Disney films began with "Home on the Range," an animated feature released April 2.
Though Burbank, Calif.-based Disney is trying to get animation costs under control, "Home on the Range" cost an estimated $110 million to make and returned $52 million worldwide.
Next was "The Alamo." Released on April 9, it cost an estimated $107 million to make, plus $30 million to market. Total worldwide receipts were $24 million.
Last month, Disney's remake of "Around the World in 80 Days" cost $140 million to produce and market, but has made only $25 million worldwide thus far. Disney's only solace is that it didn't shell out production costs for the film; that was handled by a separate group of partners.
The curse has may even hit Jerry Bruckheimer -- a veritable hit machine -- whose "King Arthur" came out July 7. That film cost an estimated $160 million to make and market, and brought back $31 million in its first eight days, considered too slow a pace to recoup its costs.
Chuck Viane, Disney's head of distribution, acknowledges the company's performance looks lackluster when compared to last year's record U.S. box office take of $1.5 billion.
Moreover, Viane asserted, "King Arthur" is no flop. He believes it will ultimately bring in returns that amount to a mid-range success.
"I think it's a double. It's certainly not a single, or a strikeout," he said. Viane adds that "Home on the Range" was moderately successful in his view, but he acknowledges that "Alamo" and "Around the World" were disappointing.
The film business is cyclical by nature. Studios often find themselves in streaks and slumps, thanks to fickle public tastes. Some investors sympathize, such as Mark Greenberg, manager of the $1.1 billion Invesco Leisure Fund in Denver, who says entertainment executives work in a fishbowl.
"Every business has issues like Eisner has with (Pixar chief) Steve Jobs and the Weinstein brothers," Greenberg said. "This is the only thing that gets written about in the press. Nobody really cares where the steel comes from for appliances."
Questions about Disney's creative direction have only worsened with the chilly relations with Miramax, coming not long after its divorce from Pixar (PIXR: news, chart), the creator of "Finding Nemo."
"I think Eisner is on an unfortunate trajectory," said Michael Holland, president of money managers Holland & Co. in New York. "Everything appears to be spinning out of control. For someone who is a control freak, this must be a nightmare. It's yet one more negative."
In New York, Matthew Hiltzik, a spokesman for Miramax, said the company declined to comment on its relationship with Disney.
To be sure, the movie division's slump comes at a time when Wall Street's cool sentiment toward Disney is thawing a bit. Disney's stock, a component of the Dow Jones Industrial Average, has languished well below its 52-week high $28.41, set in the wake of Comcast's failed takeover attempt.
Earlier this month at an investment conference, Eisner said that he was considering an increase in the company's dividend payments. Standard & Poor's subsequently softened its stance on Disney's credit outlook, replacing a "negative" moniker with "stable" but keeping its ratings.
And some analysts are encouraged by the recent performance of Disney's theme parks, which have been in a slump of their own since the Sept. 11, 2001, terrorist attacks. There's also been improvement at the company's oft-troubled consumer products division, and its ESPN division continues to thrive.
"Those businesses are doing so well, that theatrical performance at the box office is not a significant concern at this point," said Tim Wallace, analyst for UBS Securities.
Another big performer that's helping offset recent theatrical troubles is the studio division's own home video sales, helped by "Nemo," "Pirates" and other successful titles from last year's film slate.
But therein lies the rub for the division, analysts say. Sure, the titles from 2003 helped this year -- but what about 2005? This year's duds are unlikely to do the heavy lifting for Disney's studio operations next year, so the company will have to bank on producing a hit.
Paul Kim, analyst at Tradition Asiel Securities, is concerned the company won't be able to live up to double-digit earnings growth projections beyond 2004 if that's the case. The company already expects to live up to 30 percent earnings growth for this fiscal year, which ends Sept. 30.
"The perennial question at Disney is, 'What is the earnings power of this company'," Kim said. "Disney was never about fiscal year '04. It's all about next year."
Bob Chapek, Disney's home-video president, says each of the box-office disappointments could turn around when it they arrive in video stores.
"While it's nice to have that wind at your back -- I don't want to say it's irrelevant -- but it's not as important as people in this business think it is," Chapek said.
Last year's "Brother Bear," a modest performer in U.S. theaters, had a better run when it hit video stores. As Chapek puts it, "It performed like a title that had twice the box office that it did."
"I think each one (of this year's films) holds potential for us," Chapek added. "I think we're going to dramatically overperform on each one of those."
There remains the possibility that Disney can pull out of the slump as early as the end of this month. That's when it releases "The Village," the latest offering from M. Night Shyamalan, creator of "Sixth Sense" and "Signs."
Also on the horizon is the November release of "The Incredibles," the sixth computer-generated animated film by Pixar. Other titles Disney hopes will pan out are "National Treasure," starring Nicolas Cage, "Mr. 3,000" with Bernie Mac and "Ladder 49" with John Travolta.
If none of these rises to the occasion, Disney could face its first sub-$1 billion year at the domestic box office since 2001.
And if Eisner is unable to keep Miramax and the Weinsteins in the fold, Disney's standing as a creative entity may be threatened, investors say.
"I think that it is not a big deal financially in the near term," said Ken Marlin, an investment banker with Marlin & Co. "But it is a big deal psychologically in terms of Eisner's ability to survive as CEO. It is one more example of Eisner's difficulty in dealing with strong, powerful people."
Russ Britt is the Los Angeles Bureau Chief for CBS.MarketWatch.com.
Jon Friedman is Media Editor for CBS.MarketWatch.com in New York.
Gee I wonder what will happen? 
