Fading To Black - Time Warner dropped the signal of Walt Disney-owned stations - Statistical Data Included

The Time Warner-Disney battle only scratched the surface of a deeper question: who really controls our TV sets?

In an extreme move last week that blew the lid off long-festering retransmission consent tensions and could threaten the biggest media merger ever, Time Warner Cable dropped the signal of 11 Walt Disney Co.-owned ABC TV stations that serve 3.5 million households in markets including New York, Houston, Philadelphia and Raleigh, N.C.

And while the network was back up in a day, the dropping of stations in major markets was unprecedented and may be part of a much bigger struggle between two massive media companies.

"The more I talk about this, the more I realize this goes beyond retransmission consent," said Bruce Leichtman, director of media and entertainment strategy at the Yankee Group. "I think they're [Disney] trying to set up some scrutinizing of AOL/Time Warner."

The negative reaction against the drop was pervasive and at times harsh against both companies, which were accused of putting their business concerns ahead of public interests. However, at press time, Time Warner Cable received a rebuke from the Federal Communications Commission, which ruled that the media giant had violated an FCC rule in dropping ABC during the may Sweeps period.

The entire fracas is said to have angered FCC chairman Bill Kennard, who said in a statement that "the television sets of average consumers should never be held hostage." The FCC ruling served to clarify the point that dropping networks will not be well received in the future and that appropriate enforcement action will be considered.

"The game of brinkmanship played this week deprived viewers of ABC network programming. This should never happen again. I urge these companies to resolve their differences and put this entire matter behind them," Kennard said.

The agreement between the two companies came just hours before the FCC was to rule on the legality of dropping a network during a sweeps period. Under an agreement reached Tuesday, Disney agreed to allow Time Warner to carry ABC stations free until July 15. In a letter to Disney, Time Warner said it wants ABC to return to its systems for six months under terms of the expired agreement. Disney recently signed a similar extension with Comcast.

Time Warner's actions could also have repercussions on Capitol Hill, where Disney has been lobbying frantically against Time Warner's merger with AOL. Staffers for the Senate Commerce Committee said that Time Warner's ability to "act on a whim and cut off consumers' TV" is making legislators wonder about the appropriateness of mergers that give one company so much control.

Both sides commented sharply last Monday. ABC, using the M-word--monopoly--pointed out competitive concerns about the AOL/Time Warner merger. "This blackout is a frightening foreshadowing of the implications of the Time Warner/AOL merger," said Tom Kane, president and gm, WABO-TY, adding that Time Warner "wants to duck the issue of monopoly control and consumer access while their merger is pending."

Time Warner said it is Disney that has not negotiated in good faith. "Disney is trying to inappropriately use its ownership of ABC television stations to extract excessive and unreasonable terms for its cable TV channels--terms that would add hundreds of millions of dollars in costs for Time Warner Cable and its customers," said Fred Dressler, senior vp, programming for Time Warner Cable. Dressier said Time Warner last week made a series of reasonable offers to Disney that would have kept ABC on Time Warner cable systems through the end of the year. Dressler said Disney rejected those offers even though Time Warner repeatedly pointed out that, if no new agreement was signed by Disney's midnight deadline, Time Warner would lose the legal right to carry the ABC signal and have to stop carrying them.

With ABC locked out of Time Warner cable systems, subscribers had to scramble to see ABC'S hit game show Who Wants to be a Millionaire and the conclusion of ABC'S miniseries Arabian Nights. The ABC signals went off the air at 12:01 a.m. Monday, May 1. Viewers were treated to a blue screen and a icy text crawl that said, "Disney has taken ABC away from you."

The dispute centers on Disney's request for higher fees for the cable rights to ABC and broader distribution by Time Warner for Disney's the Disney Channel, Toon Disney and the SoapNet spinoff. Time Warner said Disney's fee increase is too much, at $300 million over the course of a multi-year deal. "Despite claims that it granted unconditional consent, in fact, Disney always imposed conditions that could only lead to higher prices for our customers," wrote Time Warner senior vp and general counsel Marc Apfelbaum, in a letter to Alan N. Braverman, ABC's senior vp and general counsel.

Time Warner is also in the midst of a retransmission battle with Hearst Argyle for its stations as well as the carriage of Lifetime Movie Network and the license fee it pays for Lifetime. Those retrans negotiations were recently extended to the end of June.

The Time Warner/ABC retransmission fracas began with the expiration of their previous contract at the end of December last year. Since then, several deadlines have been pushed back by negotiation extensions.

Making matters worse for Disney, the ABC drop comes at the beginning of the May sweeps when advertising rates are set by network's most high-profile programming. Disney stood to lose millions in advertising dollars if it had stayed off Time Warner systems even for a few days. "Every day it lasts is a bad day for Disney," said Leichtman, adding Disney either has a larger agenda or had a misguided plan that DBS possibly nabbing subscribers angered by the drop would scare Time Warner.

Drops have occurred in the past but have always been short-lived. After a week-long blackout of Fox TV station signals in 440,000 Cox cable homes last year, Fox parent News Corp. and Cox Communications agreed to restore owned-and-operated stations to Cox systems in Texas and Northern Virginia. The terms of the agreement were undisclosed, but Fox had been holding out for Cox to give digital tier carriage commitments to News Corp. cable channels Fox Sports World and FXM as a condition of securing Fox's retransmission consent in those markets.

Meanwhile, DirecTV and EchoStar have to be pleased. During the retransmission consent tussle in the Houston, both launched efforts to snag cable subscribers. While rival Echostar advertised its system in local newspapers, DirecTV in concert with the ABC's KTRK-TV began a free installation promotion, in which the station started handing out $99 discount vouchers for $100 DirecTV systems. About 18,000 vouchers have been distributed.

What impact such a high-profile drop will have on both the cable and broadcast industry in unclear, but for the most part, retransmission consent negotiations go on all over the nation without more than a hiccup. "There are 1,600 television stations and 11,000 cable systems. So there are literally thousands of negotiations that involve retransmission consent and in a vast majority of cases those negotiations do not ever surface publicly because the two parties have come to accord," said National Cable Television Association chairman Robert Saclis, in an interview a week prior to the Time Warner/ABC battle. "We have a few highly publicized circumstances, hut in the larger context most MSOs and most broadcasters have successfully completed negotiations in a process that has gone on since the 1992 Cable Act."

However, as the media world consolidates, the Time Warners and the Disneys of the world will increasingly find themselves allied and embattled over marketplace leverage over content and its distribution. Their success or failure could hinge on how the customer fares.

Jim Cooper is Mediaweek's news editor. He's based in New York.

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