No Happy Ever After for ABC in Disney Saga

It was a marriage roundly toasted in Hollywood and on Wall Street, the jaw-dropping union of a major studio and a top-rated television network.

Walt Disney Co.’s acquisition of the ABC network seemed like a perfect match. But six years later, the storybook romance that paired Disney’s production factory with ABC’s pipeline into American homes has yet to blossom.

Disney’s recent failure to lure David Letterman to replace Ted Koppel’s “Nightline” is just the latest setback for ABC, which has fallen to fourth place in the prime-time ratings among the key demographics sought by advertisers. ABC was ranked No. 1 in 1995, when Disney Chairman Michael Eisner announced the $19.5-billion acquisition of the network’s parent company, Capital Cities/ABC Inc.

“Michael and I don’t sleep at night, knowing where the network is,” said Disney President Robert Iger. “It’s a priority for the company and the No. 1 issue right now.”

ABC’s prime-time audience has declined 24% this season--one of the steepest year-to-year plunges in network history. Ratings have dropped so sharply that ABC is compensating advertisers with additional spots. In some cases, ABC is giving advertisers cash payments, a highly unusual move that networks use only when they have depleted their commercial inventories.

As viewers taper off, so do the rates advertisers are willing to pay. As a result, the ABC network made less money last year than in 1996. Merrill Lynch analysts project a record loss of $500 million for ABC this year.

In the past, Disney and ABC executives said the problems stemmed mostly from the cyclical nature of the hit-driven network TV business, in which one or two blockbuster shows can bring ratings riches. Now, however, senior managers acknowledge that strategic mistakes also were made.

During the last six years, ABC has hatched only a few prime-time hits, foremost among them the quiz show “Who Wants to Be a Millionaire.” But instead of using the show as a springboard, Disney cut back production, a strategy critics said mortgaged the network’s future for short-term profit.

The network is just a fragment of Disney’s vast empire, accounting for about 5% of the operating income generated last year by the company’s theme parks, sports teams, cable channels, TV and radio stations and movie studios, according to Merrill Lynch.

But the network is among the company’s most visible properties, and its performance has given investors another reason to gripe about Disney’s idle stock price. Iger, 51, said a rejuvenated ABC could add $5 to $10 to the price of Disney’s shares.

The stock rose 19 cents on the New York Stock Exchange on Thursday, to $23.08, the most recent day of trading because of Good Friday.

Iger, who ran ABC Inc. for six years before becoming Disney president in 2000, acknowledged that he took his eye off the network after the acquisition. He said he was distracted by new responsibilities and the task of orchestrating what was then the second-largest merger in history.

“There was a clash of cultures,” Iger said. “I spent two full years managing the merger process. . . . I got less and less involved instead of wanting to become more involved. . . . I didn’t have the time or the ability to focus during those years because I was given so much more to do.”

Now, as he did when ratings sank in 1997, Iger is pledging to roll up his sleeves to fix ABC in prime time, which generates about 60% of a network’s advertising revenue.

Iger and other studio executives said the solution can be found by looking back to the early and mid-1990s, when ABC dominated prime time with the family comedies “Roseanne” and “Home Improvement” and dramas including “NYPD Blue.”

Recently appointed ABC Entertainment President Susan Lyne, 51, said the network’s programming had “gotten too narrow” by focusing on edgier, adult fare.

“We really needed to embrace what had made ABC a strong network in the past,” she said.

The rebuilding process partly began last weekend, when ABC used the Academy Awards as a showcase to promote four new prime-time series that premiered this week--including a comedy about a struggling TV network.

In the months ahead, the network will unveil its all-important fall lineup. To improve its chances of a hit, Lyne said, ABC is spending more money developing pilots and is opening its arms to outside suppliers rather than relying so heavily on its own TV studio.

So far, analysts support Disney’s steps to fix the network, especially the hiring of Lyne, a respected ABC executive. But it is too early to evaluate the strategy, they cautioned, and a quick turnaround at the network appears unlikely.

“It’s a beginning step,” said Jeffrey Logsdon, an analyst with Gerard Klauer Mattison in Los Angeles. “Needless to say, what they have been doing hasn’t been working. . . . They are trying something new to break out of the rut, and that’s good. . . . It may succeed, and it may not.”

Still, former ABC and Disney executives said the network’s problems run much deeper than its programming. They said the last six years have revealed as much about Disney’s management performance as about viewer preferences.

Almost uniformly, the executives blame the network’s troubles on a clash of the merged companies’ cultures and high-level power struggles that resulted in an exodus of senior executives.

ABC Entertainment, the division responsible for the network’s prime-time schedule, has had six management teams in as many years.

Disney’s top-down management style was jarring to many at Capital Cities, which was known for a decentralized approach and for pushing authority down the line, sources said.

Unlike other media moguls, industry sources said, Eisner has involved himself in programming at ABC, including setting the prime-time schedule, pursuing Letterman and signing off on the airing of “Millionaire” four nights a week.

Iger said Eisner’s involvement is exaggerated. Others at Disney said it’s natural for Eisner, an ABC executive during the 1970s, to lend his expertise. Former Disney TV chief Richard Frank said his old boss’ advice often was on point.

“He helped me many, many times by sticking his nose in on a project creatively or forcing me to think about a project in a different way,” Frank said.

Eisner’s move to buy Capital Cities was aimed largely at making sure there would be a continuing market for programs made by Disney’s studios. A relaxation of federal rules in the early 1990s made it possible for TV networks to produce shows in-house instead of relying on outside studios.

This set off a chain reaction among nervous entertainment giants, which scrambled to buy networks or start their own as venues for their production divisions. Viacom Inc. and Time Warner Inc. started broadcast networks UPN and the WB, respectively. Disney, though, outdid them both.

The multibillion-dollar acquisition of Capital Cities catapulted Disney over Time Warner to become the world’s entertainment leader, at least for a while.

Eisner promised remarkable synergy from the teaming of the two companies--”a 1-plus-1-equals-4” equation, he called it. Wall Street embraced the deal, calling it a model for the future.

ABC was considered the Cadillac of networks, with a prized TV station group and a tradition of strong prime-time network ratings.

But within weeks of the announcement, Iger said it was clear that ABC would soon be in a dogfight with NBC, which had assembled a ratings powerhouse on Thursday nights with a hip, urban-oriented mix of comedies such as “Seinfeld” and “Friends.”

Eisner, under pressure to name a president to manage the expanding company, turned to one of Hollywood’s most powerful players, agent Michael Ovitz, who represented an array of the industry’s top stars and had hooks into the leading studios.

One of Ovitz’s first acts was to recruit a hotshot executive from NBC to head ABC Entertainment. Jamie Tarses, who at 32 became one of the youngest presidents in network history, had overseen the creation of “Friends” and “Frasier” at NBC. To free Tarses from her contract, Ovitz went to war, threatening to raise allegations of sexual harassment against an NBC executive.

Once Tarses arrived, ABC quickly changed. Her hiring ushered in an era of management instability and programming decisions that led the network away from its loyal family audience.

“We entered into a pretty dark period where we had management upheaval, a merger we were focusing on, a whole new set of rules and a business that was changing dramatically, so the results, I think, speak for themselves,” Iger said.

Tarses tried to duplicate NBC’s success with similarly provocative dramas, including “Nothing Sacred,” a series about a young priest.

Iger then was president of ABC Inc., overseeing the network as well as the company’s cable unit and its television and radio stations. He said neither he nor Eisner opposed the programming initiative, because family comedies were then considered out of step.

“Instead of trying to be different, we tried to be the same,” Iger said, adding: “We got off our game.”

One of the earliest conflicts to engulf Tarses’ tumultuous tenure was her reluctance to use programs generated by Disney’s TV studio, undercutting the company’s reason for acquiring ABC. She wanted to buy elsewhere because she did not like what Disney was pushing.

Other tensions between Tarses and her colleagues became so bad that a peacemaker was flown in from the company’s New York office. The executive, longtime Iger lieutenant Stu Bloomberg, was made Tarses’ boss. This left people in Hollywood’s creative community confused about whom to call with their ideas.

Soon, Disney folded its studio into the network, saving money while making it abundantly clear where ABC would get its new shows. Within a month, in August 1999, Tarses resigned.

Under the new structure, Bloomberg shared the title of co-chairman of ABC Entertainment with the previous head of Disney’s TV studio, Lloyd Braun. The cumbersome structure slowed the production process.

“You can’t have two [people] picking shows and choosing scripts,” Frank said. “In a creative process, one person has to be boss.”

The merger of the studio and network brought its own unanticipated pitfalls.

By tying its fortunes to ABC, Disney’s production studio limited its ability to create shows for sale to other networks.

Most notable, Disney’s Touchstone Television gave ABC first crack at a show it was producing called “CSI: Crime Scene Investigation.” After ABC passed, CBS picked up the one-hour drama for the 2000 season, and Touchstone gave up its ownership position, unwilling to finance an expensive show for a competitor. The show became a big hit for CBS.

The year Disney’s TV studio was merged with the network, ABC hit bottom, losing $60 million. But luck struck with “Millionaire,” reversing ABC’s fortunes the following season.

Although “Millionaire” provided a huge windfall for the network, critics said Disney prematurely exhausted the show’s earning power by running it four nights a week. The show raked in a record profit for ABC of $518 million in 2000, the height of a raging bull advertising market.

“Millionaire” producer Michael Davies said: “I sort of understand why ABC ran it the way they did, because they made great revenue during an incredible ad market on a show that was very cheap to make.”

But the show flamed out a year later, in 2001, driving down profit at the network to $218 million. Television executives said the mistake Disney made was not investing the largess of “Millionaire” in the development of new shows.

Unlike Fox, which spent $100 million in 1996 to lock up marquee talent, Disney was reluctant to spend on top writers and producers, industry observers said.

“They put too much faith in ‘Millionaire’ and didn’t put enough shows around it,” said Peggy Green, president of national broadcasting for Zenith Media, a major advertising buyer.

ABC today is taking a new tack.

In January, Disney ousted Bloomberg and promoted Lyne, a former journalist and relative newcomer to TV, to president of ABC Entertainment. Lyne caught the attention of Eisner and Iger as head of ABC’s movies and miniseries.

Disney said the structure has been streamlined and Lyne is spending more freely on fall pilots, ordering twice as many as the network did two years ago.

In retrospect, Lyne acknowledged, ABC may have limited its success by depending too heavily on Disney productions. Still, only four or five of the 30 new pilots come from outside studios.

“Was I doing this again, I would probably be more aware of the message that sends to the community,” Lyne said of the limited relations with other studios. “It’s obviously in my interest to be able to work with everybody in town.”

ABC also has hired Fred Silverman--who was president of CBS, ABC and NBC in the 1970s and early 1980s--as a consultant. Eisner once worked for Silverman, who brings a historical perspective that Lyne lacks.

Disney says ABC, to some degree, can lean on its other strengths to boost prime time. The network has been No. 1 in daytime programming for 25 years, its news programs are second to NBC News in most time slots, and it has one of the strongest network sports lineups.

Sports programming is unprofitable, but it is an unmatched vehicle for promoting programs. ABC owns broadcast rights to the National Football League, the National Basketball Assn. starting next year, the National Hockey League and college football and basketball. The network recently signed Fox commentator John Madden in an attempt to improve ratings for “Monday Night Football.”

Although the network’s prime-time programming and profit have been erratic since the merger, Disney has enjoyed substantial benefits from its acquisition of Capital Cities/ABC. ABC’s stations, for example, continue to rank No. 1 or No. 2 in the local ratings--a testament, analysts said, to the legacy of Capital Cities, which had maintained strong leads in local news since the ‘70s.

Merrill Lynch forecasts that the ABC stations will make $310 million this year, even as the network loses money.

The biggest bonus for Disney was landing ESPN, the sports cable channel today worth an estimated $25 billion--about four times its value when Disney acquired it as part of the Capital Cities/ABC deal in 1996. ESPN is the world’s most profitable network and by far Disney’s best performer.

ESPN also will pick up the estimated cost of $400 million a year for the NBA contract even though ABC will get 15 of the best games, including the finals.

“ABC has certainly experienced disappointment,” said Steven Bornstein, 49, president of the ABC Television Group, which oversees the network, ABC’s 10 TV stations and its 53 radio stations. “But I have to say, there’s so much right about ABC.”