When Jim Henson died, Kermit, Miss Piggy & Co were almost swallowed whole by Disney. Five years on, an extraordinary transformation has taken place. With the help of the Japanese, the Muppets are now preparing to take on Mickey Mouse
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PHILOSOPHER, singer, amphibian, Kermit the Frog admits he was nervous when he stood up to address the Oxford Union last October. "It was intimidating to think about it beforehand," he says. "They yelled and screamed and I thought maybe they wanted me to leave but it turned out they were happy I was there."

If Kermit was anxious, senior executives at the Los Angeles headquarters of Jim Henson Productions, the company which owns the Muppets, were also concerned. Were Henson's puppets, famous in the 1970s and 1980s for their own show, movies and Sesame Street, still a big draw? In the event, they had no need to worry. A worldwide TV audience of over one billion saw Kermit live in Oxford, tackling the slippery subject of what it is like to be a frog. CNN ran the story eight times; Reuters broadcast the speech around the world. If evidence was needed that the Muppets were as popular as ever, this was it.

Five years ago it was very different. Early in the morning of 16 May, 53-year-old Jim Henson, the man who created Kermit, Miss Piggy, Gonzo and all the other Muppets, died suddenly of pneumonia. Most people assumed that his cast of zany characters would die with him. They were his creation, the figment of his energetic imagination, the work of a one-off genius. Furthermore, Jim Henson Productions had shunned traditional corporate structures since it started in the early Sixties, and seemed to be built entirely around one laid-back, hippie visionary.

Wall Street analysts gave the company little chance, believing that the young family Henson left behind were too inexperienced to carry the flame of his unorthodox business. The 150 employees also had worries about the future. "To be honest, many years before he died I started wondering what was going to happen when Jim went," says Martin Baker, senior vice- president of the company. "I used to think, 'there is no company beyond Jim', because it was driven by this single vision."

In the traumatic hours immediately following Jim's death, however, his five children, aged 19 to 30, gathered in their father's Manhattan apartment and vowed to prove their doubters wrong. Amid much soul-searching, they agreed to keep the company going, even though it wasn't in the rudest of health. Labyrinth, a feature film directed by Jim, had bombed at the box office, and NBC had pulled a 13-part series, The Jim Henson Hour, after 10 shows. Worse, Jim had entered into complex merger negotiations with the Walt Disney Company and was due to sign a deal the day before he died.

"The family were all so grief-stricken," remembers David Goelz, a former industrial designer who has performed Gonzo since 1976. "Within hours of flying into New York they asked the main performers to come in, and were interested in knowing whether we as a group wanted to continue doing this work. It seemed so strange to do it on that day, but they did."

Brian, the eldest son, agreed to lead the company out of the tragic mess, helped by his eldest sister, Lisa, then a rising star at Warner Brothers, now head of Columbia Pictures. After much agonising, the family decided to abort the Disney deal; both parties issued writs before settling out of court. Meanwhile, Brian became the president of Jim Henson Productions, aged just 27. Up until that point, he had been building a reputation as an accomplished puppeteer, working both on films like Little Shop of Horrors (he co-ordinated the team of 40 people who operated Audrey II, the giant man-eating plant) and for his father's Creature Shop in London (a business which evolved out of the 1982 film The Dark Crystal, supplying puppets and spec-ial effects to the wider film industry). So he had scant management experience - but of all the children he was the one who had the closest working relationship with Jim. "He was both my father and my mentor," he recalls.

Five years on, the company has undergone an extraordinary corporate transformation. Rather than being a subsidiary of the Walt Disney Compnay, Jim Henson Productions is poised to become its major challenger. Brian is still president, and Hampstead's Creature Shop remains at the heart of the company's activities. But the headquarters have shifted to LA. In a move that has stunned Hollywood, the company has just signed an $80 million partnership with Sony Pictures Entertainment to develop, produce and distribute no fewer than 12 family feature films over the next five years. With the Japanese behind them, the Henson empire will become a very serious player in the family-entertainment market. Disney, who have distributed Muppet films in the past, are understood to be furious.

Hensons have equally ambitious plans for TV. The Muppets are set to run rampant across schedules in America, Britain and the rest of Europe. Here, for example, a new series of The Muppet Show has just been announced - the first since 1980 - and a fierce bidding war between British channels is underway. In July the BBC, in association with Survival Anglia, will start broadcasting a new 26-part series called The Animal Show with Stinky and Jake. Gulliver's Travels, a mini-series, is due to be shown on Channel 4 at the end of this year. And a feature film, Muppet Treasure Island, is being shot at Shepperton. Meanwhile, Big Bird and friends will continue to stalk the set of Sesame Street, now in its 26th year.

All of which is a remarkable testament to the skills of Brian Henson and his family. But how did he manage it, and at what price? There are dark rumours spreading through Muppetland that in its bid to become a leading corporate player in the family-entertainment market, the company is abandoning everything Jim Henson and his original "mom-and-pop" outfit represented. Can the company expand and still retain its famous informality and quirky creative spark? "I believe we are on the verge of something extraordinary," says Charlie Rivkin, the company's chief operating officer. "We are like Disney in 1984. We have extremely strong assets which are still relatively unexploited. We're ready to grow."

On the set of Muppet Treasure Island at Shepperton, a huge industrial fan is filling the sails of a mock Spanish galleon; but there is little evidence of the ill winds of corporatism. Brian is hard to pick out. Hidden in a crowd of young people, he is staring at a monitor, watching a playback of a pirate called Mad Monty burping. He wears a plum-coloured smock, jeans, trainers, and a headset microphone. Suddenly he throws back his shoulder-length hair and laughs a geekish laugh. The crew dissolve into hysterics and proceedings are held up while composures are regained. "Recharge your burper and let's do it again," Brian says, identifying himself as the director.

Tall and gawky, Brian has his father's big nose, thin lips and the same mischievous eyes, childish and alert. Like his father, he is an Anglophile; he lives by Hampstead Heath with his wife, a Scottish dress-designer. He is easy to talk to, a careful listener, opinionated, and unassuming. He is also clearly having a lot of fun. "Anybody who comes to us from another company always comments on how special the atmosphere is here," he says. "Luckily, we have this strong reputation for not being Hollywood, but for being much more personable and relaxed. We have very little time for politics, backstabbing and all of that. Once people realise that's the way we work here, they just relax ."

Just as he says this, a large canvas painted with blue sky and clouds knocks into the back of a monitor behind us. A technician leaps forward, catching it before it crashes to the floor. "Nice save," Brian grins.

After a while, however, the clowning begins to seem a little contrived, as if employees are trying to recreate the legendary on-set mayhem which made Jim Henson such an inspiring figure. "We wait until either an executive or journalist comes round and then we try to corpse each other," Dave Goelz says as Kermit pulls faces behind us. Perhaps there is a company line - nothing has changed since Jim died - or perhaps people still find it hard to cope with his loss.

"From my perspective it's absolutely the same company, and that's what's so wonderful about it," Goelz says loyally. "Jim was like a pied piper, setting a tone which drew people in. He was such a decent guy, a kind, warm, generous person. The nice thing about Brian is that he carries on that same way of working with people. He really enjoys it, just the way Jim did. They both have a very nice way with people, of appreciating whatever anyone has to offer."

There is no doubt, however, that Jim Henson Productions is a very different company now. Bigger and more professionally run, all staff have been given long corporate titles. "As sick as it is, it's very much the way of operating in LA," says Martin Baker. "Unless you are a vice-president you don't get your phone calls returned, so we instantly made all our assistants vice-presidents."

There is also a much greater interest in protecting the corporate media profile. People who speak out of turn about the company in print are in danger of being rung up and challenged afterwards. Charlie Rivkin recently telephoned a New York analyst after the man had given an unfavourable quote to the Wall Street Journal. Jim Henson Productions no longer speak to him, the analyst says. In a more curious incident last year, the publication of a biography of Jim Henson was put on hold by the publishers Random House amid rumours that the family was upset by parts of it. Ron Powers, the American author, has completed the book but, according to his agent, the manuscript is now "in dispute". Publishing sources say that it is unlikely that the book will ever see the light of day. The strange thing about all of this is that Powers' project seems to have been approved by the Henson family in the first place.

It is in the LA boardroom, however, that reform is most apparent. Four months ago, Charlie Rivkin was appointed co-president alongside Brian. A 33-year-old graduate of Harvard Business School, Rivkin has been the driving force behind many of the changes. Some observers have suggested a clash of personalities between the two young men now at the helm of the company: Rivkin, the business graduate who wears sharp brown suits and has a sensible, preppy haircut; Henson, the hippie with the long hair who says he doesn't even own a tie.

Certainly, Rivkin is an ambitious outsider, at ease discussing the company's grand corporate ambitions; Henson prefers to talk puppets. But they speak affectionately of each other and theirs could prove to be a historic partnership.

Rivkin's first task when Jim died was to sort out the company books. Then he set about exploiting the copyrights of famous characters in a series of short-term partnerships with record, video, TV and toy companies. Jim had never been particularly bothered about marketing his creations (there were over 30 years of unpublished Muppet songs, for example), and Rivkin was able to increase rapidly the company's earnings by leveraging existing assets. No one knows how successful he has been because the company is privately owned by the five children and never discloses its profits. But it is this systematic exploitation of the past that has worried some people.

"Jim Henson created more copyright characters than Disney," says Peter Orton, a senior executive who left the company in 1989. "How many new characters have been created since he died? A lot of the forthcoming TV programmes - like The Animal Show and Gulliver's Travels were around when I was there."

In a marketplace where companies live or die by the originality of their characters, Jim Henson Productions can't live on the strength of Kermit and Miss Piggy forever. Rivkin, however, says it was essential to maximise existing assets but that new Muppet characters are now being created.

He cites The Muppet Show series, now being fought over by television companies, which will be fronted by a Rasta Muppet called Clifford. "He is going to be a superstar," Rivkin proclaims. Clifford was, however, created when Jim was alive.

The new partnership with Sony, engineered by Rivkin, has also surprised many people, given the Henson family's poor track-record of dealing with large corporations. Opinions are divided on why, in the summer of 1989, Jim Henson ever started discussions with Michael Eisner, Disney's president. He admired the originality of Disney's characters, but the two firms couldn't have been more different. Some claim it was because Jim had lost his own creative nerve after a series of failures, others say he wanted to give Kermit and Miss Piggy the sort of immortality enjoyed by Mickey Mouse. Whatever his reasons, he began to regret making the approach when he discovered how Disney proposed to manage the Muppets. There was talk of using different people to do the puppets' voices - out of the question as far as Jim was concerned. The puppets' operators almost always did the voices.

"It was really a mismatch of cultures," Brian remembers. "There are too many reasons why the deal didn't work." One obvious reason is that Jim Henson Productions was non-hierarchical and sprawling, whereas Disney was an intricately tiered organisation, much like Sony is today. The deal with Sony, however, is a medium-term partnership rather than a merger. Perhaps the Henson family has learnt its lesson. They are older and wiser, no longer children of the Seventies, and they want to join the big time themselves.

"The Sony deal is an important step to becoming a big player," says Michael Garin, of Furman Selz Inc, a Wall Street investment firm. " Up until now they've been on a picture-by-picture basis. A multi-picture deal like this is a real coup. It strengthens their position as a major producer of a major product."

The next five years are going to be important for Brian. No one expects him to be exactly like his father, but he knows the company is looking to him to provide all-round inspiration and energy. According to some of his colleagues, Jim was a more canny businessman than is often realised and he only kept the company small because he preferred it that way. "Jim used to blow my socks off," remembers Martin Baker, Henson vice-president of production. "He would pull apart a contract having only glanced at it. He was always driven by the creative idea, but business considerations were never far behind. Brian has picked up many of the same genes."

Brian has already proved himself a capable businessman, guiding the firm through a difficult time. He has also directed a feature film, Muppet Christmas Carol (with Michael Caine as Scrooge), which was a commercial success, and is working on his second . But has he the raw talent to create that most elusive of commodities, a lasting slate of original characters?

Wisely, Brian has kept together the puppeteers who worked with his father. It may be that his strengths lie in bringing the best out of other people. His father loved to do the puppets' voices (he was the original voice of Kermit until his death). Brian prefers to stand back, direct and produce.

In the meantime, Brian's company is bringing over $50 million worth of film and television production into this country, so we must all hope that he and Charlie Rivkin succeed. The Muppets and Britain go back a long way, as the Oxford Union welcome to Kermit proved. "My popularity surprised me 30 years ago," Kermit says. "I don't understand why things are popular, really. I just try to keep a pretty level head about it. It gets me a good seat at restaurants." !