Disney's Drop
In the 1970s and early
1980s, Marxist thinkers were fond of using the phrase "late capitalism" to
describe the American economy. With its intimations of the system's decadence
and inevitable disappearance, the label sounded both descriptive--these were
the days of stagflation, skyrocketing interest rates, and high
unemployment--and inspiring. At least if you were Marxist.
You don't
hear much about "late capitalism" these days, except insofar as it has morphed,
oddly, into the techno-utopianism of New Economy advocates. But what we should
start hearing about more and more is our own "late bull market," which seems
somehow simultaneously frothy and exhausted. There's no better sign of this
than the occasional fits of anxiety that have begun to grip investors who for
four years have dismissed talk of overvaluation as irrelevant. As a case in
point, consider the recent travails of Disney.
To all outward appearances, Disney remains among the
strongest companies on the planet. It reported earnings about a month ago that
were typically impressive, with earnings up sharply and news of a three-for-one
stock split. The company's new Animal Kingdom park at Disney World opened this
month to phenomenal business, and advance buzz on the latest animated Disney
film, Mulan , has been very good. Mystery writer Carl Hiaasen did come
out with a short book blasting Disney for, well, Disneyfying the world, but if
a month goes by without an article or book on that subject, Michael Eisner
knows he's doing something wrong. And the company has even got credit for an
Oscar-winning film since its subsidiary Miramax released Good Will
Hunting .
There were
a few question marks in the company's results in the last quarter, arising
mainly from the fact that Disney's sales grew hardly at all. But for the first
two weeks after the earnings report came out, all the good news drove the
company's stock to a new all-time high. Disney, after all, is everything a
modern company is supposed to be: media giant, high-tech pioneer, owner of an
immensely powerful brand, and a genius at outsourcing. What could go wrong?
Well, the interesting thing is that nothing has
gone wrong, and yet in the course of two weeks Disney's stock fell 13 percent,
a fairly hefty tumble for a company with a market cap of $79 billion. What
happened testifies partly to the continued power of analysts on Wall
Street but also to the fact that at these heights, it's very easy to become
suddenly--and often justifiably--afraid. Like Wile E. Coyote, investors are
able to skate across the air until they look down, at which point the fall is
often fast and hard.
That
analogy is inexact, since investors have been more than willing to give many
companies the benefit of the doubt, but those companies tend to be either
Internet stocks, cancer-drug companies, or merger candidates. The punishment
Disney's stock received, on the other hand, shows that when the Street changes
its mind, even blue chips are not immune.
In essence, what happened was that a few brokerage houses
downgraded Disney's stock from "buy" to "accumulate" or to "hold" or to "sell
immediately." (Actually, there is no "sell immediately" recommendation, though
common wisdom on the Street is that you should do so if bodies begin falling
past your windows.) Raising concerns about Disney's broadcasting units,
analysts reduced their earnings estimates while also suggesting that at these
prices, Disney's stock might be overvalued. Considering that we live in a time
when stock-market gurus produce brand new measures of valuation on the
spot--"See, you should buy this, because although the company has no earnings,
it's trading at just 80 times the cost of the phone calls its employees make in
any one month"--the suggestion that a company might actually be
overvalued was enough to send investors streaming to the doors.
Since the
concerns the analysts raised were not new, you might see this as evidence that
investors are now in the same fragile frame of mind as little kids who have
stayed up way past their bedtimes. But these concerns were also real. ABC and
ESPN--which Disney owns--together paid an incredible $9.2 billion to the NFL
for the exclusive rights to Monday and Sunday Night Football, and they may not
have the ratings to justify that. ABC is suffering from a declining revenue
base, mainly because its prime-time ratings are beyond dismal. True, ESPN is
one of the most profitable TV networks and in recent months has started
pressuring cable systems to increase the fees they pay for the right to carry
it. Still, recouping $600 million annually--the cost of the NFL contract--may
be more than even it can pull off.
ABC is certainly doing its best to put a
smiling face on its recent woes. It's been running full-page ads in the Wall
Street Journal saying that ABC offers "no pandering" and "upscale
momentum." While pandering is bad, I guess, it's hard to resist the thought
that describing yourself as "upscale" means that you're not. ABC's "What a
difference a day makes" ad, meanwhile, argues that ABC is the top network among
the coveted 18-49 crowd, if you leave out Thursday night. This is sort of like
saying the Indiana Pacers are the best team in basketball, if you leave out
Michael Jordan and Scottie Pippen.
Disney
CEO Eisner, who's actually underrated as a pop-culture maven (he was
responsible for Happy Days and Welcome Back, Kotter ), insists
that ABC's downturn is cyclical and that it will soon return to life. But it's
interesting to remember that Eisner was actually hesitant to buy a TV network
and that it was Jeffrey Katzenberg who pushed hard for such an acquisition,
though Disney only bought Cap Cities/ABC after Katzenberg had left. With
Disney's brand name perhaps stronger than ever--its theme parks, movie studios,
and merchandising machine booming--the fact that the part of the company
unconnected from that brand is struggling must make Eisner wonder whether this
was an investment that needed to be made.
Ultimately, what's most important about Disney's struggle
to turn ABC around is how impressive it makes the company's management of its
own franchise look. After 15 years of almost uninterrupted superlative
performance--which not even the Katzenberg and Ovitz contretemps could
seriously slow down--it's almost impossible to remember how close Disney was to
being dismantled in the early 1980s. The brand that we now think of as
irresistible seemed tired and used up, and this now seamlessly efficient
company lacked even a formal business model before 1983. A lot of what has
happened at Disney--better advertising, smarter merchandising, revitalizing the
animation department--looks obvious in retrospect. But it was only Eisner's
recognition that a brand has to be updated and nurtured if it's to flourish
that made those decisions so obvious.
ABC's problems, one suspects,
will be much harder to solve, if only because they have much to do with network
television as a whole and not just ABC in particular. But Disney's long-term
future seems about as guaranteed as that of Coke or General Electric.
Investors' recent flight from quality, as you might call it, was not completely
irrational. But it tells us more about this edgy and anxious market than it
does about Disney. In a market where tomorrow seems like the long term, the
fact that 10 years from now the mouse will still be roaring somehow just
doesn't really matter.
