The Keys to the Kingdom (41 page)

The value of the Euro Disney stock, which had peaked at 165.2 francs in March, had tumbled to a low of 61.2 francs even as Eisner's interview was published. The following month, an unusually negative report from the influential Banque Paribas said the shares were still overvalued and should be sold at once by all but the most risk-tolerant investors. The report questioned every aspect of Euro Disney's operations and structure. Disney declined to comment.

“We have been [here] before,” Eisner assured shareholders in his letter accompanying the 1992 annual report. “Disneyland was too expensive. Walt Disney World's Magic Kingdom opened and the company's stock fell by half (it recovered quickly, I might add). Tokyo Disneyland threatened the very existence of the Oriental Land Company. And Epcot Center was the mother of all expensive parks. But, like all good fairy tales, the company not only survived, but it is living happily ever after.”

But Europe, as Disney continued to learn every day, presented daunting problems. The issue wasn't attendance. The visitors came but they didn't behave as Disney had hoped they would. Many of the hotel rooms were empty. Guests who checked in stayed for one night but moved on instead
of staying a few days and returning to the park. There was so much turnover at the hotels that they had to install additional computer stations to handle the traffic. “Would you rather stay in a hotel that stops getting train service at midnight or go to the heart of Paris, which is open all night?” asks a former Imagineer. “There was an arrogance about the whole thing.”

In the days before the park opened, French intellectuals became increasingly grumpy about it, and Euro Disney was variously described as a “cultural Vietnam” or a “cultural Chernobyl.” The press piled on, happily chronicling every setback.

Disney was indeed showing a tone deafness to European culture. For example, the company refused to serve wine or beer, prompting press attacks over this assault on one of France's great traditions. “That was [more] arrogance on Eisner's part,” this former employee says. “Thinking we were going to change European culture. I watched Eisner make decisions all the time and I'm a pretty ballsy guy. It took all my restraint not to walk up to him and say, ‘You know, this is wrong.'”

But too many of Eisner's executives exercised that restraint, and mistakes were made. Disney believed that many European visitors wouldn't expect breakfast and were caught off guard when they showed up hungry in the morning. And Europeans weren't spending with the same abandon as visitors to the American parks, who shelled out almost as much on souvenirs and food as they did to enter in the first place. Disney also made a short-lived attempt to forbid employees to wear beards or mustaches.

“We had a cultural problem,” Eisner acknowledged later. “We had a financial problem. We had a recession problem. We had the French problem. We had the facial hair problem. We had the deodorant problem. We had the beer and wine problem. We had all these problems. They all went away.”

Euro Disney head Robert Fitzpatrick warned that the park would lose a billion dollars in its first year. But he had lost the company's confidence. Inside Disney, he was referred to as “le concierge”—a gibe suggesting that his primary skill was getting Eisner reservations at the finest French restaurants. In 1993, he was replaced with Philippe Bourguignon, a French executive who stood a better chance of gaining acceptance in his native land.

In the third quarter of fiscal 1993, the park lost $83 million. Disney confirmed that it was undertaking a “strategic reexamination” of the project. But Eisner said rumors that Euro Disney might close were “insane.”

By this point Eisner was waging a public relations war. “We have planted
a flag in the middle of Europe, which is among the most spectacular things any company has ever done,” he told the
Los Angeles Times
in August 1993. “Do I wish it was profitable in the first week? Absolutely. But it will not bring down Walt Disney Co. or even dent it substantially.” He blamed others for overreacting to the park's problems. “It's unbelievable,” he said. “People approach me as if someone died when they talk about Euro Disney…. We have a creative smash. It's as good a piece of entertainment as we've ever delivered anywhere in the world. So I know this is like a movie that starts off slow. You just have to be a believer in better times.”

But even as he spoke, Eisner was digesting a lengthy presentation at a company retreat in Aspen. Sid Bass had flown in for the occasion, and to Eisner's chagrin, the news was awful. “I think he was genuinely surprised about the depth of the problems…hearing it in an organized fashion for the first time,” says a former top Euro Disney executive involved in the meeting. “It's one thing to hear the numbers are bad. It's another to go through two days of what the problem is—everything from A to Z.” Eisner reportedly acknowledged that Euro Disney was a drag on earnings and a public relations nightmare.

Euro Disney was running out of money. The company swung into action to cut the losses. That fall, a thousand Euro Disney employees were laid off. Eisner and Wells also concluded that the planned second attraction, modeled on the Disney-MGM studio tour in Florida, would have to be put on hold. But they knew that these measures, without a major restructuring of the company's debt, would not prevent losses of several hundred million dollars in 1994 and 1995. It would fall to Wells to figure out how to get Disney's creditors to swallow a very bitter pill.

Eisner would later say that even at the Aspen meeting, he remained steadfastly optimistic about Euro Disney, which would be renamed Disneyland Paris. But the unfolding debacle seems to have marked a major turning point for him. This was the first real morass of his career, and it was a deep one. Eisner's anxiety was growing. Just as Katzenberg was coming into his own with animation, it seemed, Eisner became more distrustful than usual. And at least with respect to his studio chairman, Eisner did indeed feel exactly that way—more so than Katzenberg could have imagined at the time.

L
ATE IN AUGUST
1993, Jeffrey Katzenberg was taking what was, of course, a working vacation. As he hiked down the Grand Canyon with an all-male posse of Hollywood executives and agents that he had invited on one of his annual camping trips, he turned to Tom Pollock, then head of Universal Studios. “Last week, I blew Michael's mind,” he boasted. In fact, he had; he had sent Eisner a letter exercising an option to terminate his contract in a year, at the end of September 1994.

At the time Katzenberg was finishing the third year of a six-year contract. But at the end of 1993, he had the right to give notice that he wanted to leave in 1994. He would forfeit a great deal of money in stock and other remuneration for 1995 and 1996—an amount that could easily have reached $100 million. Eisner “could not believe I would do it,” Katzenberg told his hiking partner.

In fact, Eisner was incredulous. “You really want to give that up?” he had asked Katzenberg. To Frank Wells, Eisner predicted, “There is no chance he will do this.” His skepticism was well placed. It just seemed impossible that Katzenberg, such a die-hard Disney man, would take the game of chicken to a conclusion. But if he did, Eisner knew what he intended the outcome to be—and he wasn't inclined to give Katzenberg a golden handshake.

 

AS IT HAPPENED
, Katzenberg's deal with Disney—created by Wells in 1984—had given him a certain leverage that he now intended to use to his advantage. When Wells and Eisner had taken the helm in 1984, they had sat down with Katzenberg and his attorney, Arthur Emil, at the Beverly Hills Hotel—the pink palace on Sunset Boulevard. Katzenberg had written out his wish list on a studio “buck slip”—an oblong piece of memo
paper. Among the perks he considered requesting were “2 secy's, beach house…corporate jet, travel-family-etc., screening room, house maintenance? butler?”

He started by asking for a big stock-option package like the ones Eisner and Wells had designed for themselves. Wells replied that the Disney board would never go for that and instead promised Katzenberg 2 percent of the profit from “all forms of exploitation” of the projects he would put into production as Disney's studio chief. At the time the studio had no shows on television and hadn't ever released a picture on video, so it's doubtful that Wells or Eisner or Katzenberg could have begun to grasp the potential magnitude of such an arrangement.

Every year, Katzenberg was to receive a payment based on 2 percent of the company's profit based on anything he had put into production—including everything from live-action and animated films to television shows. And he was to get a piece of the income from video, merchandise, and theme-park attractions based on his movies and programs. When he left the studio, he would get a lump sum that would cover 2 percent of the future value of every project he'd put into development at Disney. It was shockingly open-ended. Wells described it as “an annuity” for Katzenberg's twins, who were eighteen months old at the time.

Four years later, Wells had approached Katzenberg about renewing his deal even though it didn't expire until 1990. He wanted to keep Katzenberg at the company through 1996. At the time Disney was flourishing. The company's operating income had shot from $242 million to more than $884 million.

But Disney's accounting was conservative. The company counted all its expenses but didn't count income from theaters, video, network deals, and other revenue streams until the money was in the bank. (If the studio had an obvious hit, Disney's books would still show it losing money until the cash was in its coffers.) Katzenberg had discovered at the end of each year that the envelope was consistently empty when he looked for his annual 2 percent bonus. In fact, he had been told that his division was still in the red—despite hits like
Ruthless People, Down and Out in Beverly Hills,
and
Three Men and a Baby,
and despite the fact that the Disney studio had gone from dormant to dominant.

Disney was obviously minting money. In 1988, Wells wrote to Katzenberg's lawyer addressing the studio chief's disappointment and assuring him that Katzenberg had been “perfectly reasonable” to have expected a bonus
given “the enormous success” of the studio. Wells urged patience. “Many of these pictures still have substantial revenues forthcoming…and of course, will continue ‘forever,'” he wrote. The company expected to reap at least $100 million from the television series
The Golden Girls
alone.

And Katzenberg could still look forward to the final 2 percent lump-sum payment that had been promised when he left the company. But as Wells set about renewing Katzenberg's contract, he tried to persuade Katzenberg to give that up. Katzenberg agreed, as long as he could get 75 percent of whatever Eisner would earn. Eisner's stock-option packages were paying off more handsomely than Katzenberg's 2 percent had thus far. Wells said the board would never tie one executive's compensation to another's.

Katzenberg tried to sweeten his deal, asking if Disney would include the library product—the animated classics like
Snow White
and
Sleeping Beauty
—in his annual 2 percent payment. After all, Disney was making a lot of money from rereleases and Katzenberg figured he had worked on those campaigns. Wells agreed—but only on condition that Katzenberg give up the final 2 percent lump-sum payment for profit in perpetuity that would be due when he left his job. Katzenberg said he'd rather keep the bonus—the so-called annuity for his twins.

The 1988 contract discussions dragged on for months. Katzenberg balked at committing to a six-year term. He insisted on being granted an option to leave in 1994. Wells ultimately agreed. Already, perhaps, Katzenberg had concluded that he either had to move up or out, and he had started counting his cards. During the negotiations, Katzenberg's lawyer had scrawled a note on a draft proposal from Wells: “If Frank leaves you replace him.” Disney never made such a promise a part of the contract, but Katzenberg later said Wells assured him that if he or Eisner left Disney—“if the plane goes down,” as Wells put it—Katzenberg would become the number-two man in the company. Katzenberg said Wells told his lawyer that the matter had been discussed with major shareholder Sid Bass, Roy Disney, and with Roy's point man, Stanley Gold.

As further incentive to sign the contract, the company agreed to pay $4 million toward Katzenberg's beach house and gave him a bundle of stock options. And Wells also promised Katzenberg the final 2 percent lump sum when he left. It was “a tremendous concept,” Wells scrawled in his notes. The payout “should increase by a big amount” in the years ahead. Katzenberg was about to release
The Little Mermaid;
he had
Beauty and the
Beast
and
Aladdin
in the works. Still, Wells probably didn't begin to suspect how enormous the payout could become.

After the 1988 contract negotiation was behind him, Katzenberg was relieved and grateful—though not, perhaps, entirely satisfied. Nevertheless, he wrote a thank-you note to Eisner. His letter may have been a routine exercise in diplomacy but it also expressed his yearning for a bond with Eisner that he had doggedly sought for more than a decade. “Most importantly to me…way beyond the dollar and cents of it all, is the fact that in the end you came thru and delivered for me,” Katzenberg wrote. “We've been together a very long time—in fact in terms of Hollywood timekeeping about 3 lifetimes so far. I not only hope but I'm counting on us staying together
forever
. You've been great. You've handled my crap with extraordinary patience and care and understanding. I'm deeply appreciative and do love you for it.”

 

BY THE TIME
1993 had rolled around, Wells was still in place and Katzenberg was still ablaze with the ambition that had prompted his ill-fated 1991 memo. In April, he asked to see how much his 2 percent lump sum would be if he elected to leave the company in 1994. It was a request calculated to scare Eisner. But a month later, Disney's lawyers sent Katzenberg a letter expressing the company's position that he could forget about a final 2 percent payout if he left in 1994. Katzenberg said later that he assumed this was an error. He went to Wells, who said he would look into the matter. Katzenberg recalls that the discussion was “calm.” He says he was confident that Wells would put things right. At this point Katzenberg had no idea how much money was at stake. But Eisner and Wells, as would later be revealed, had secretly been monitoring the potential payout for some time.

In August 1993, a Disney lawyer wrote a letter asking Katzenberg to state his intentions. Katzenberg, who had never heard back from Wells, asked his lawyer, Arthur Emil, to get Disney to clarify its position on the 2 percent payment. No doubt Katzenberg expected Wells to reassure him that he would get his bonus if he left in 1994. But he was in for a big disappointment. Instead, Wells told Emil to “read the contract.”

“I don't have to read the contract, Frank,” Emil angrily replied.

“Listen, it's not going to be an issue. Jeffrey's going to stay these next two years,” Wells said.

Katzenberg began calling Wells himself. According to him, he told Wells he didn't understand why Disney was playing games with him. At one point he said, Wells told him that Eisner had “a misunderstanding” about Katzenberg's deal and believed that Katzenberg would forfeit the money if he left early. Katzenberg offered to have his lawyer send Eisner a letter. But Wells urged him to hold off. “I will handle it with Michael,” he told Katzenberg—or so Katzenberg says. And Katzenberg assumed that he did exactly that.

 

AS HE PLOTTED
his course, Katzenberg relied primarily on the advice and comfort provided by a strong-willed older male figure—another in a series that had peopled his life. Having sold his music company to MCA, David Geffen was beginning to measure his wealth in the billions. Katzenberg talked on the phone with him at the break of dawn every day, gossiping and strategizing. Like Katzenberg, Geffen had a long-standing antagonism to Michael Ovitz, dating back to a bitter fight that had occurred during the making of the 1982 film
Personal Best
with Mariel Hemingway. (Geffen, who produced the film, believed that Ovitz put the entire project at risk when he tried to get Paramount Pictures to give director Robert Towne a richer deal. In fact, Paramount dropped the picture, which could have cost Geffen millions of dollars. He got off the hook when Warner agreed to make the movie.)

Geffen's influence on Katzenberg had long been an irritant to Eisner, who had complained about it in a 1988 conversation with Katzenberg's lawyer. Geffen and Katzenberg had been on vacation together in Acapulco during Katzenberg's contract-renewal discussions and Eisner was convinced that Geffen had gotten Katzenberg riled up. Geffen, for his part, felt that he was looking out for his protégé's interests and he had no intention of being stared down by Eisner.

Both Geffen and Katzenberg figured that Katzenberg's value to Disney was high, notwithstanding the studio's continued failure in live action. Hollywood Pictures had recently released bombs like
Swing Kids,
the story of rebellious youths trying to dance the Third Reich to death (by defiantly listening to American music) and
Born Yesterday,
the pointless remake of a Judy Holliday classic, with Melanie Griffith as the lead. Things were barely better on the Touchstone side. The spring had seen the release of
The Cemetery Club,
which brought together Ellen Burstyn, Olympia Du
kakis, and Diane Ladd in an attempt to mimic the 1991 success of Universal's female-audience-pleasing
Fried Green Tomatoes.
And summer hadn't improved with the dead-on-arrival
Life with Mikey,
a James Lapine–directed film with Michael J. Fox as a former child star turned talent agent. It had been a bleak season; the rerelease of
Snow White and the Seven Dwarfs
turned in the studio's best performance with a $37.6 million gross. “It was really depressing,” says a studio executive. “A couple of years were very bleak and very humiliating.”

“We could hardly get a movie to open to more than $6 million,” says David Vogel, who headed Walt Disney Pictures (the Disney live-action family film label). “Jeffrey was always saying, ‘Next. It'll turn around. It'll be fine. Hang in there.' Jeffrey's the greatest cheerleader in the world.”

Katzenberg acknowledges that in live action the record was grim. “I never made a movie or caused a movie to be made in which I wasn't certain that people involved in the making were going to do something creative and successful,” he says. “We can rattle off a list of stupendous stinkers. It's easy to say, ‘What could you have been thinking?'
My Boyfriend's Back
—what could you have been thinking?
Cabin Boy
is the whipping boy of every Jeffrey joke—not even a movie I wanted to make. But somebody was passionate and believed in it and thought it was a great shot to take. And at that time I shared that belief, or believed in that belief. Who sets out to make a stinker? But we all get there.”

There were a few glimmers. Hollywood Pictures had its best showings with the modestly successful
Joy Luck Club,
based on the Amy Tan novel, and
Tombstone,
a sleeper with Kurt Russell and Val Kilmer reprising the shootout at the O.K. Corral.

And Hoberman's Touchstone label had a well-reviewed summer performer with
What's Love Got to Do with It?,
with Angela Bassett doing an impressive star turn as singer Tina Turner. Later that year, Touchstone had
The Nightmare Before Christmas,
a unique animated creation from director Tim Burton. Burton had done a treatment for the film years earlier as an animator at the studio, and his agent, Mike Simpson, had called asking if he could buy it. Instead, Hoberman offered to finance it. It was a critical success and did well at the box office, grossing $50 million. While the film was in production, Hoberman told Katzenberg that he was depressed because Katzenberg would receive all the plaudits if it turned out to be a hit. It did, and Katzenberg stepped aside so that Hoberman could enjoy the limelight.