Bob Iger: Disney’s fun king

Almost an hour later, after the main course, the lights dim and an animated movie plays on a screen in the restaurant wall. The diners begin to murmur as they recognize the drawings they have done, stitched together and brought to life in a cartoon. My own childish sketch links arms with other drawings and ice skates to a classical soundtrack. The kids around me are awestruck to see their own creations on the screen. So am I.

It’s the kind of casual virtuosity that marks the Walt Disney Company (No. 66 on the Fortune 500) at its best. There’s a lot of that on this $1 billion boat, which is a sort of Noah’s ark of Disney properties. I watch a live adaptation of the Disney film Aladdin in the ship’s Broadway-size theater and sip a Guinness in the sports bar while watching March Madness on ESPN. I try the tasting menu in the high-end French restaurant, Remy, designed to look exactly like the restaurant in the Disney/Pixar movie Ratatouille. On deck, I take in a Pirates of the Caribbean–themed fireworks show. And I float in the turquoise waters of Castaway Cay, a Disney-owned island that is technically governed by the Bahamas but is really part of the loose federation of complementary and sometimes competing brands and business models overseen by Robert Iger, Disney’s chairman and CEO.

It was at Iger’s regular Monday management lunch that many details of the Fantasy were worked out. The weekly roundtable, at which the heads of Disney’s (DIS) business units gather in Burbank, Calif., is at the core of how Iger runs this conglomerate. The company, which had $40.9 billion in revenue in fiscal 2011, has grown too complex to be run in the autocratic manner of some previous CEOs — it now comprises four divisions, multiple business models, and five key brands (Disney, ESPN, ABC, Marvel, and Pixar). So Iger, 61, does more listening than talking. “I’ve heard Bob say more than once, ‘If I can’t trust a person to do that, then I need a different person,'” says Disney EVP and CFO Jay Rasulo. “And so we all are empowered to basically run those business areas. I would say that Bob has a states vs. federal philosophy.”

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It doesn’t always work. Disney’s interactive division is losing money. The film division has had some bombs — after the latest, John Carter, studio head Richard Ross lost his job. But since Iger took over from Michael Eisner after a messy governance struggle in 2005, he has pulled Disney out of the rut it was stuck in. Iger greatly increased capital spending during the recession as rivals retrenched. Earnings, driven by acquisitions, have nearly doubled, to $4.85 billion in fiscal 2011. The stock price has risen 80% during his tenure. “Bob is just very effective,” says Warren Buffett, who has known Iger for decades. “He’s always calm and rational and makes sense, and therefore he gets things done through other people. He runs things without a heavy hand.”

“In a strange way,” Iger says, “I am the brand manager of Disney.” He sees his job as building, in the words of his friend the late Steve Jobs, more “brand deposits” than “brand withdrawals.” But it isn’t enough to find the right managers and leave them alone; you also have to know when to dive deep, in part because Disney’s business is such that a hit show or app or toy, if exploited correctly, can propagate throughout the company and become that sought-after thing, a “franchise.” Pirates of the Caribbean, the smash film series, began as a ride; High School Musical and Phineas and Ferb both started as cable TV shows on the Disney Channel; the “Fairies” idea came from Disney’s small publishing group, just to name four.

Walking the tightrope between extending Disney’s brands and knowing when to leave well enough alone is a tricky challenge — not that we feel so sorry for a guy whose actual day job involves screening movies, riding rides, and schmoozing with athletes. What follows is an exclusive look at how Iger runs one of the best-known businesses in the world.

Iger jokes that if he ever wrote a book about his career, he would title it I’ve Been Bought, referring to the two acquisitions he survived (Cap Cities buying ABC, and Disney buying Cap Cities). But if there is anything that defines his nearly seven years as Disney’s CEO, it is what he has bought — especially, iconic brands Pixar and Marvel.

When Iger took over the top job, expectations were tepid. Sure, he had been a star in his years at ABC, where he started in 1974 as an entry-level studio supervisor in New York and moved up through sports and entertainment. At Cap Cities, which bought ABC in 1985, Iger, known for his work ethic and candid style, became the clear successor to CEO Tom Murphy. Then, as Murphy puts it, “we sold the company out from under him” to Disney in 1996.

Iger stayed at Disney as Eisner’s long record of success ground to a halt. Iger ran ABC and then became president of Disney in 2000 — even though Eisner reportedly told directors that Iger wasn’t up to the top job. The board looked at outsiders before giving the CEO post to Iger.

Perceptions changed suddenly when Iger showed up at his first board meeting with a plan to buy Pixar, the company that had stolen the mantle of animation away from Disney. Created by former Disney animator John Lasseter, Ed Catmull, and Steve Jobs, Pixar had a successful partnership with Disney until the collaboration frayed in a personality conflict between Eisner and Jobs. Iger called Jobs the day he was named CEO, and the two became friends.

At the board meeting, Iger presented a 20-year look at Disney animation, which had stumbled after successes like The Lion King and The Little Mermaid. “I said, ‘I’ve got to fix this, and here are the three choices.'” One was to keep the status quo. The second was to find someone new to run the studio. The third was to buy Pixar. Says John Pepper Jr., then Disney’s chairman: “It’s a meeting I will never forget. He said, ‘Ladies and gentlemen, we must have this.'” The room went silent. The problem, Iger continued, was that it would be very expensive, and he didn’t know if it was for sale.

As it turned out, Pixar was for sale, and it was very expensive ($7.4 billion). But the discussion wasn’t simply about the price. Jobs and his co-founders had no interest in Disneyfication. They wanted guarantees that Pixar would remain in Northern California under its current leadership and would keep its culture. Iger eagerly agreed. The deal, announced in January 2006, changed Disney fundamentally: No longer was the Disney way the only way.

Six years later, it appears that Iger has kept his promise to let Pixar be. Pixar looks and feels like a Silicon Valley company. Not only can you bring your pet or kid to work, you can also drink at the funky bars that the creatives have set up in their offices. There is plenty of Pixar nostalgia — Lasseter’s office is filled with toys, and Buzz Lightyear greets you at the main entrance — but hardly anything to remind you that this is part of the Disney juggernaut. “Practicing a kind of cultural imperialism or autocracy on cultures that have thrived without you is just the wrong thing,” Iger says. When the deal closed, he appointed Lasseter and Catmull to run Disney’s animation studios as well as Pixar. “What’s interesting,” Lasseter says, “is that he actually said most of the time the big companies come in and influence little companies when they buy them. He, in fact, wanted the opposite to happen.”

Three and a half years later Iger made his second big acquisition, spending $4.3 billion to buy Marvel Entertainment. The home of characters like Iron Man and Captain America, Marvel helped Disney reach more boys and boost its flagging live-action-movie pipeline. It also provided a new stream of characters for Disney’s $3 billion consumer products machine.

Like Pixar, Marvel has been largely left to run its own affairs. Its boss, Ike Perlmutter, is a secretive man who has never given an interview — and who was the only top Disney executive not to be made available for this story. So far, based on the $178 million opening weekend for The Avengers, the first Marvel/Disney release, it looks as if the deal is paying off.

But Iger’s hands-off approach has its limits. The day I visit Walt Disney Studios, March 19, is not a great day for the live-action division, or for its chairman, Rich Ross. As I take a seat in Ross’s airy office, news has just crossed the wire that the company is going to take a $200 million write-down on the film John Carter, one of the most colossal bombs in movie history. Ross answers questions gamely, but he looks as if he would rather be having a root canal. “What Bob would like us to do,” he says, “is follow through and learn lessons to do a better job going forward.”

Iger’s December 2010 appointment of Ross was controversial from the get-go. Iger sacked longtime studio head Dick Cook to make way for Ross, the Disney Channel superstar responsible for Hannah Montana and other tween hits. Ross exemplified one of Iger’s core beliefs — that a really talented executive could work just as well in another job. But the studio business — while responsible for just 16% of Disney’s fiscal 2011 revenue and 7% of operating profits — has always been an insider’s gig, and Ross had a steep learning curve.

As the John Carter debacle unfolds in subsequent weeks, I ask Iger what it means for Ross and for the company. He makes a show of not pointing fingers, saying the failure belongs to everyone. “The leadership moment for me,” he says, echoing Ross, “was making sure that we … accepted it for what it was, which was clearly a big disappointment and failure, and that we moved on.”

But on April 20, Ross is out, a public humiliation in a town where schadenfreude is the favorite snack. Iger insists that Ross’s departure “had absolutely zero to do with John Carter” and that he was simply the wrong fit — something that had become increasingly clear as time went on. “Once you conclude that person is not right for the long term, you have to move,” says Iger. “I take full responsibility for it. I made the decision to put him in.”

Jeffrey Katzenberg, CEO of rival DreamWorks Animation (DWA) and a friend of Iger, says, “Bob is someone who is genuinely admired, respected, and incredibly charming. But underneath that is a really very determined executive, and when the killer instinct is required he has got it in a big way.”

For all the commotion that attends a flop like John Carter, in today’s Disney it’s not that big a deal for the business: The write-down will hurt second-quarter earnings, but the effect on the full year’s profit will be minor. What is a big deal for Disney is ESPN, the sports network it acquired in the Cap Cities deal. ESPN is now the single largest profit driver, bringing in an estimated 45% of Disney’s operating income, according to Drew Borst, an analyst at Goldman Sachs.

If you were playing that children’s game “Which of these things doesn’t belong?” ESPN would be the outlier. Most of Disney’s other brands are about scripted entertainment; ESPN is only sports, and it is mostly live. It is male, while much of Disney skews female; it is located far, far away from California, in Bristol, Conn.; and its strongest element is football, the sport known more these days for knocking people out cold than for making dreams come true. In a tour of ESPN’s headquarters, it is clear to me that the fanatical loyalty employees have is 99% to ESPN. I see no chairs with mouse ear cutouts; no one is wearing Disney gear.

ESPN is so strong that in 2006, Iger phased out ABC Sports altogether. WatchESPN — a technology that lets people watch live sports on any mobile device — is now being adopted by the rest of the company.

But Iger, a huge sports fan (Packers, Knicks, and Los Angeles Clippers) has been deeply involved in the contract negotiations that are most responsible for ESPN’s continued success — the deals with the National Football League and the main college conferences. Last September, ESPN paid some $15 billion to air Monday Night Football through 2021 — 73% more than it had in its last contract. Iger agreed to the huge increase partly because football continues to grow in popularity but also because he didn’t have much choice. ESPN is the single most valuable cable channel, collecting some $4.70 of every cable bill, and much of its viewership goes to football. Some people thought Iger overpaid, especially should viewers start to go wireless and give up cable — the nightmare scenario known in the business as “cord-cutting.” But the only thing worse than overpaying would be to risk losing the access. Says Jeff Bewkes, CEO of rival Time Warner (TWX) (which publishes Fortune): “They were right to do it. Disney has a locked-in advantage. It’s a virtuous circle.” Now Iger is moving to keep that advantage by signing new, very long-term deals with cable companies. Their impact — and their cost — will resonate far beyond Iger’s tenure.

Deep inside an unmarked building in Glendale, Calif., I am scooting myself along on a wheeled stool, following Iger as he gets a top-secret look at one of the most important attractions planned for Shanghai Disney Resort, the $4.5 billion theme park that may end up being the capstone of Iger’s career. As Luc Mayrand, Disney’s “Imagineer” in charge of the project, narrates, we propel ourselves on our stools through a model built of wood and carved foam that lays out every twist and turn. Iger appears pleased and makes a few suggestions.

Iger is not quite so sanguine about another presentation, about a story line to introduce one of the park’s rides. The Imagineers borrowed a character from a Pixar movie and created a story around him set in the 1930s. Iger leans way back in his chair, crinkles his forehead, and says that he likes the concept but doesn’t see how a historical character makes sense introducing a ride set in the present. (“I try to be respectful about it,” he says later, “but that was just off.”) As the review moves to a room-size mockup of the park, Iger zeroes in on such details as sightlines for photographs.

The fact that Iger is spending 2 1⁄2 hours reviewing everything from landscaping to lighting tells you just how important Shanghai Disney is for him and for the company. “This is a big deal,” he says. “The park is not a movie that comes and goes if you miss or fail. This is going to stand there forever.” Shanghai Disney, a joint venture between Disney and Shanghai Shendi Group, with Disney owning 43%, will open at the end of 2015 and serve as a doorway to more than 1 billion consumers.

Making it in China is tough. Disney’s Hong Kong resort lost money for years after it opened in 2005; it’s now close to breaking even. But Disney has an advantage over other Western companies. On a 2010 trip to China, I visited two homes — one a high-rise apartment in Shanghai, the other a peasant’s home near Mongolia. The two living areas had just one thing in common: a stencil of Mickey Mouse on the wall.

A huge part of Iger’s global expansion strategy has been its use of the Disney Channel to pry open previously closed markets. In 17 years it has expanded into 167 countries, including, most recently, Russia. But because of foreign ownership restrictions, Disney has to use other means in China, such as a new partnership with Tencent, the Chinese Internet company, to train local animators. Another creative idea was the 2008 rollout of Disney English, an English language school for kids that now has 33 locations in China. These high-tech centers have animated whiteboards and lots of friendly Disney songs and music. It’s brilliant, if insidious: Get kids to use the Disney characters to study English.

But China remains challenging — and possibly risky. In April, Iger traveled to China to meet the mayor of Shanghai and Shanghai Communist Party Secretary Yu Zhengsheng, to whom Iger presented a gold-painted model of Cinderella’s castle. While he was there, Reuters published a story saying that Disney and other movie studios had received letters from the SEC inquiring about “potential inappropriate payments” in China. Disney has no comment.

Last October, Iger announced that he would step down as CEO in March 2015 and stay on as chairman until June 2016. The announcement surprised many Disney watchers. Why make that decision so far in advance? Would it set off a horserace within the company à la GE (GE), and would that be a good thing or a bad thing? Says Warren Buffett: “I would say the only mistake Bob Iger has made is setting his resignation date. If I owned the place, Bob would not be retiring.”

Iger admits that the timing is strange, but says he didn’t want to commit to the longer contract the board presented to him. “To have the opportunity of a lifetime to run this company is extraordinary,” he tells me, “and I will forever appreciate it. But it is also all-consuming.”

At a company as complicated at Disney, there is never any downtime — and Iger is always onstage. I watch as a communications executive fixes his collar before he goes on air; his aide de camp, Nichole Smith, handles his phone, jacket, and much of his business; car doors open magically, banquets are waiting, jets appear; around every corner lurks a Disney fan, junior executive, or budding TV star hoping for an audience. When I ask him what it feels like to be observed nearly constantly, he smiles ruefully. “I never got used to that part,” he admits.

Iger takes things up a notch by his commitment to be available whenever he is needed. “Accessible is an understatement,” says George Bodenheimer, executive chairman at ESPN. “He is available 24/7, seven days a week.” The one time when he is able to be alone, Iger says, is during his 4:30 a.m. workout. Sometimes he exercises in the dark, with just his music to keep him company (he’s a big Beatles fan).

The stresses of the job aside, it’s understandable that Iger would want to arrange a smooth succession, considering the chaos of the one he endured in replacing Eisner. He says no decisions have been made yet. But in November 2009 Iger asked Rasulo, then head of parks and resorts, and Staggs, the CFO, to switch jobs. It was the kind of high-profile shakeup that could have proved disastrous (see Rich Ross) but so far it appears to have worked out well — some say more so for Staggs, a smooth-talking, slightly sardonic Minnesotan who has become more visible as the result of all that spending. The less polished Rasulo has worked to charm the Street, but it’s not as glamorous to announce a dividend increase as it is to christen a cruise ship with Mariah Carey. Says Goldman’s Borst: “If you were going to ask 10 analysts, eight or nine would say it is Tom Staggs’ to lose.”

There’s another question: What will Iger do with his free time? He’s not the type to kick back on the beach — and, he tells me pointedly, he doesn’t play golf. Which is why, when an ABC News video produced to honor Iger at a 9/11 memorial benefit dinner circulated, with Iger, in a hardhat, shaking hands with workers as Diane Sawyer called him “a true New Yorker,” the political tongues began to wag. Could Iger be considering some kind of run for office?

Iger, who was named to Apple’s (AAPL) board last year, says, “I have made no decisions about life after Disney.” But a few people close to him say he is mulling the idea of some political move. Some have speculated that he could run in his native New York City to succeed Mike Bloomberg as mayor in 2013, or that he might be a candidate for governor in California in 2014. A big question mark is what his wife, TV correspondent Willow Bay, thinks. (She declined to comment.)

In the meantime Iger shows no signs of slowing down. As the sun rises one April morning, he deftly manages a cross-branding quadrifecta — an on-camera interview with ABC’s Good Morning America, at the Animal Kingdom theme park, about the Disney nature film Chimpanzee, as well as a Disney corporate citizenship event. Somehow he makes it all look easy. Maybe that’s just another example of the Disney magic.

Reporter Associate: Marilyn Adamo

This story is from the May 21, 2012 issue of Fortune.