A Looney Tunes Cable Clash

By Daniel Okrent

What was that all about? Last week's blundering effort by Time Warner Cable to use its local monopoly power to bring the Walt Disney Co. to heel was almost a perfect illustration of how not to run a business. By depriving 3.5 million households in seven markets, including New York City and Los Angeles, of their God-given right to watch Regis Philbin, some very highly paid people at the world's largest communications company leaped into an early lead for a coveted trophy--the one inscribed "Worst P.R. Move of the Year."

Not that Disney wins prizes for anything other than superior corporate mud wrestling. By provoking Time Warner into a foolhardy act that outraged both companies' customers, Disney invited onlookers--from channel surfers to Washington watchdogs--to turn away in disgust. Jeffrey Chester, executive director of the Center for Media Education, a Washington advocacy group, says, "Disney and Time Warner deserve a consumer award. They have taken an issue that was the preserve of techies and lobbyists and thrown it onto the front page."

One would have thought that Time Warner (parent company of Time Inc., which publishes TIME) would be on its best behavior while awaiting regulatory approval for its mammoth merger with America Online. But in its effort to win an arm-wrestling match with Disney, TW displayed the attributes of some of its prize properties: the discretion of Jenny Jones, the gentleness of Tony Soprano.

The issues of the fight were, in the end, less important than the tactics. In December, according to Time Warner, after months of negotiation, the two companies had come to a deal regarding the fees TW would pay to carry various Disney-owned channels on its cable systems and--most notably--to convert the Disney Channel from a premium service to basic cable. Disney negotiators deny they had got that far. And certainly after Time Warner announced its merger with America Online on Jan. 10, Disney didn't feel it had a deal. What it had then was leverage. Figuring that TW would tread lightly lest it disturb Washington's slumbering regulators at the Federal Communications Commission and the Federal Trade Commission, Disney asked for that one thing all negotiators hold out for when they've got the upper hand: more.

According to Time Warner, Disney tacked $300 million onto the price that TW would have to pay to carry the channels, an increase that would have raised the cable company's costs to $1.3 billion over 10 years. Disney naturally disputes that amount.

In any case, Time Warner Cable chairman Joe Collins held an apparent ace. He could shut down access to Disney's ABC network on TW systems at the beginning of May, the "sweeps month," which determines ad rates for the coming broadcast season. But if Collins did play that card, Disney executives surely realized, the public relations victory would be theirs. If you begin with the premise that people don't like their cable company, it would have been hard for TW to win a hearts-and-minds-of-the-public battle with Attila the Hun.

But Time Warner Cable didn't see that because the culture of Time Warner Inc., unlike that of Disney, is highly decentralized, giving the cable unit independence to focus almost solely on its bottom line. The cable guys are equal opportunity offenders, even inside Time Warner. No less a figure than vice chairman Ted Turner, the company's largest individual stockholder, has repeatedly complained about the cable division's unwillingness to carry Time Warner's own programming. Financial news network CNNfn is available in barely 60% of Time Warner homes. Sports network CNNSI is in far fewer, even while Disney-owned rival ESPN is ubiquitous.

Hence, when the first night of the ABC blackout separated viewers from Regis, TW was cooked. Worse still, the words that the company emblazoned on the blank screen that normally would have been carrying ABC programming was a piece of Orwellian newspeak that suggested precisely the opposite of what it said: "Disney Has Taken ABC Away from You."

Another literary source could have been the Warner Bros. film library. Time Warner officials were outraged that Disney had tried to wring commercial advantage out of the big merger, using the FTC and FCC examination of the deal as air cover for an opportunity to enhance Disney's bottom line. They sounded like Claude Rains in Casablanca, who would have been "Shocked! Shocked!" that one communications conglomerate would dare to profit at the expense of another.

When Time Warner capitulated last Tuesday, offering an olive branch that brought an extension of the current Disney contract through July 15, a grateful viewership could finally reconnect with Regis. But there had taken place a not so subtle shifting in the ground beneath the cable business and in attitudes toward the Time Warner-AOL merger.

Back in January, the New York Times had editorialized that "there is little economic reason to fear the merger" as long as the parties kept their systems open. Last Friday, the paper saw fresh reason for concern: by "overriding the information and entertainment needs of millions of customers," the Times said, "Time Warner virtually compelled federal regulators to take a more searching look" at the merger.

The ABC misadventure isn't likely to derail the AOL deal. As former FCC chairman Reed Hundt puts it, "Those people who might [have been led to] think AOL-Time Warner is a big, scary company already know how big and scary it is." But there was a big rush on satellite dishes in Houston last week, and a heightened sensitivity to the power of the cable companies. Officials in many cities have been looking toward Portland, Ore., which drew upon its power to approve a change in ownership of the city's cable systems to win concessions from AT&T when it acquired the previous Portland cable operator in 1998. While the FCC has since taken Portland to court, and no one expects that an individual city council could really stop the AOL-Time Warner deal, local opposition might prove to be vexing.

Meanwhile, Time Warner and Disney will soon be back at the table. In New York City, TW has offered to make nice by giving all its cable customers a refund on two full days of basic service, plus a free month of a premium channel they weren't already receiving (the latter is a tactic that used to be called sales promotion). In Washington chief Disney lobbyist Preston Padden was serving up unctuousness by the ladle. After the FCC officially scolded Time Warner in midweek, Padden intoned, "We are incredibly grateful to the people at the FCC, who were placed under a completely unfair burden by this whole contrived crisis."

A more honest posture from Disney would have them saying, simply, "Gotcha!" Or, at worst, "We won." But even if they did, the award for most honorable statement would still go to Fred Dressler, the Time Warner Cable programming chief, who played a pivotal role in the botched negotiations. Asked what he thought his company had gained from the entire adventure, Dressler said, "One of the things we've learned is that whatever we do that affects the viewing habits of the American public is of greater importance than anyone had imagined."

--Reported by Sally B. Donnelly/Washington, Mike Eskenazi/New York and Jeanne McDowell/Los Angeles

With reporting by Sally B. Donnelly/Washington, Mike Eskenazi/New York and Jeanne McDowell/Los Angeles