Disney V. Time Warner Essay, Research Paper

A little over one week ago, on May 1, 2000, millions of Time Warner Cable customers ? 3.5 million to be exact ? woke up without the American Broadcast Company (ABC) on their TV dial. While these 3.5 million, which pondering the coming of the Apocalypse without Regis, Kathy Lee or Susan Lucci for a day, news spread across the country about the reality of the situation.

After the two companies failed to reach an agreement on a transmission deal, after five months of negotiating, ABC service was cut off for Time Warner customers in seven cities ? including households in New York; portions of the Los Angeles area; Houston; Flint, Michigan; Philadelphia; Raleigh-Durham, North Carolina; Fresno, California; and Toledo, Ohio. The dispute arose as the two media giants were sparring over how much money Time Warner most compensate The Walt Disney Company, ABC?s corporate parent, for the right to carry some of its cable channels ? those of Disney-ABC?s other television properties (i.e., ESPN, Lifetime, The Disney Channel). While Disney says that the price it is asking for its cable channels is fair since Time Warner gets ABC for free, Time Warner disagrees and wants a lower price.

A May 5, 2000 editorial in the New York Times suggests that the Time Warner dispute with Disney ?could enter the annals of business history as a famous strategic blunder.? In fact, the display of corporate chess played between Disney and Time Warner could foretell much about the future of the corporate media. While financial issues cannot be tossed aside in this debate, other issues and future technological, business and political consequences are also at stake here. In essence, the blackout of ABC by Time Warner could indeed be the first in a line of future negotiation tactics between corporations that also have their hand in the media, and a sign of the times in media conglomeration.

Approximately 36 hours into the ABC blackout, Time Warner, under pressure from irate subscribers who wanted their ?Regis? and ?General Hospital,? politicians and federal regulators, put ABC shows back on its cable TV systems after an agreement with Disney to continue negotiations on a new contract through July 15. Soon after the blackout, the Federal Communications Commission ruled that Time Warner violated an FCC rule in its actions, that there is to be ?No deletion of a local commercial television station . . .during sweeps period? ? a ratings month in which ad rates are set. The FCC are to decide this week what enforcement action it may take, and if any punishments will be levied.

Borrowing a line from the Time Warner figurehead Bugs Bunny, ?But that?s not all, folks.? Apart from the fees spat at the heart of their current dispute, both parties are fighting the times and each other in the constantly changing world of the cable TV market. The nation?s cable operations ? essentially government-sanctioned monopolies ? are facing both negative and positive forces brought on by changes in technology.

First, cable operators are increasingly likely to lose their ?only game in town? status to satellite services. When the blackout of ABC occurred last week, viewers in those markets had two options: Buy old-fashioned antennae for their sets, or watch friends? satellite TV systems. ABC knew this of their viewers, and two days after the blackout, on May 3, stepped up its battle with Time Warner by offering a $198 rebate to certain cable customers who want to switch to satellite television. The offer was made through full-page newspaper ads to Time Warner cable subscribers in New York City, Houston, and Los Angeles that said, ?If Time Warner can dish it out, so can we ? at no cost to you.? Rebates were made available to the first 1,000 people to respond by telephone in each city, and within 2.5 hours, were gone. ABC believed that a satellite dish ?was something that some viewers would find important to enhance their sense of security.?

On the other technological hand, cable companies like Disney and Time Warner stand to benefit from increasingly use by Internet customers drawn to their high-speed connections. This point is especially not lost on Disney, which apart from its TV and movie holdings has considerable aspirations to be an Internet player in a joint venture with Go.com. During the dispute, Disney was quick to point it its concern that Time Warner?s pending merger with Internet leader AOL has the potential to create a barrier to non-AOL Time Warner companies interested in participating in burgeoning Internet and interactive TV technology. So Disney, with its eye on the future, is said to want assurance from Time Warner that no such favoritism is on the horizon. Time Warner deems such a demand unacceptable, especially because it is unclear what direction the still-emerging interactive television technology will take. As Matthew Diebel wrote, ?We have a suggestion: Regis could be asking if we want to e-mail a friend.?

When discussing the business issues at the heart of this conflict, the word ?monopoly? quickly comes to the forefront. It is no surprise that there is a possibility that Time Warner?s widely unpopular, short-lived decision to remove ABC from its cable network may not sit well with regulators reviewing Time Warner?s proposed merger with America Online. Consumer groups and Disney have already played the monopoly card, calling for the combined AOL-Time Warner to open its cable lines to all Internet service providers and allow rival entertainment companies access to its Internet customers.

This argument also stems from the recent instant messaging debate, where the Internet engineering community is pressuring the federal government to break AOL?s stranglehold on the ?IM? market. The spurned companies blocked out of the path of conversation with AOL?s services see AOL?s planned merger with Time-Warner as an opportunity to get the government to intervene on their behalf. ?What the FCC filing is meant to do is raise awareness for agencies reviewing the AOL/Time Warner merger that AOL . . . is demonstrating anticompetitive, monopolistic behavior,? said one Internet executive.

At a cable television company convention this past Monday, May 8, in New Orleans, it was predicted that competition, international activity and investor demand would drive the industry in the coming months ? only further reinforcing the business facts at hand. Many of these expectations are based on the coming revolution of the digital age on the cable industry, where companies will provide both high-speed Internet access as well as cable services. Consolidation between old and new media companies, such as AOL-Time Warner, can be expected as well as disputes between media giants such as Disney and Time Warner as the cable industry develops, for if the means for such a negotiation tactic are there, it will be used.

Political discussion was also a part of the New Orleans annual cable executive convention this past Monday, with discussion mainly surrounding the call for re-examination of laws governing their transmission deals with broadcasters. Broadcasters are guaranteed the right to have their signals carried on local cable systems for free. However, the 1992 Cable Act also gave broadcasters the option instead to hammer out private retransmission agreements with cable companies. In the latter case, the two sides must strike a deal before cable operators can carry local channels. Broadcasting companies have used this arrangement to seek compensation like having new basic cable networks also carried on cable systems. Yet cable operators say this provision of the law has given broadcasters too much leverage in negotiations and puts them in an untenable position as they try to hold down cable rates for their customers. The ideal situation would be for the marketplace to work these issues out and for the companies to ?negotiate their deals seamlessly,? said Deborah Lathen, chief of the cable services bureau at the Federal Communications Commission.

Senator John McCain, Chairman of the Senate Commerce Committee which has jurisdiction over a wide range of communications concerns, echoed the thoughts of many on May 2, saying that Time Warner Cable?s retransmission dispute with ABC is a prime example of the negative effect the concentrated power of media conglomerates can have on the average American. While Disney and Time Warner blame each other, McCain said that ?They?re (both) to blame, and I think its up to us in Congress, but particularly to start with, the FCC, to find out whose responsibility it is.?

Finally, with these realities in mind, David Paletz raises four issues in the ?domination of the few.? The first is entry, for ?the cost of capital and the amount required for operations are formidable obstacles to entry into the media industries by new competitors, although it is no problem for the conglomerates that have access to vast funds.? The truth is that there are very few companies that could stand up against ABC, if high prices for broadcasting are part of the cause for the blackout. Any other ?little guy? has no chance of succeeded or fighting back in the market, and thus eliminates competition ? Paletz?s second point.

The third case raised is availability. If Time Warner were to again shut out ABC to the viewing public, those with the benefit would have few options if they needed their Millionaire fix. Finally, the final point highlighted by Paletz coincides with Ben Bagdikian ? that of content. Throughout this debate, two sides of the story have been presented depending on whom you are listening to. If you watch ABC, you received a story compassionate to the Disney cause. If you watched CNN, you received a Time Warner influenced report. The questions you have to ask is who do you believe, and who is actually to blame?

So to summarize, one must look at the facts. Whether the cause is business oriented, financially motivated, or technologically correlated, the power of corporations with media concentration will have their way unless they are stopped by a higher power ? and the average American will sit back and watch ? or not watch, for that matter ? the consequences. With the authority that a conglomerate like Time Warner has, negotiation tactics can go very far to get a giant like Time Warner what they want, and one must consider exactly how much more power Time Warner will be allowed before they are stopped in the name of anti-trust laws. Until then, the war will continue, and future battles like the one with Disney are inevitable.

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Associated Press, ?Cable Execs Want Law Governing Deals With Broadcasters Changed,? CNN.com, May 8, 2000, pg. 2.

2 Ibid, pg. 2.

3 Reuters, ?Eisner Hopeful After Time Warner Flap,? New York Times, May 8, 2000, pg. 1.

4 Alexander, Keith L., ?Disney Wins Earnings, Time Warner Battles,? USA Today, May 4, 2000, pg. 1.

5 Diebel, Matthew, ?ABC Wins Cable Battle; Will it Win the War?? CNN.com, May 3, 2000, pg. 1.

6 Ibid.

7 Bash, Dana, ?McCain Speaks Out on Time Warner-ABC Flap,? CNN?s allpolitics.com, May 2, 2000, pg. 2.

8 Associated Press, ?ABC Lures Time Warner Viewers to Satellite,? USA Today, May 3, 2000, pg. 1.

9 Ibid, pg. 2.

10 Diebel, Matthew, ?ABC Wins Cable Battle; Will it Win the War?? CNN.com, May 3, 2000, pg. 1.

11 Ibid.

12 ?The Week in Review: Not So Funny,? CNETnews.com, May 6, 2000, pg. 2.

13 Marsan, Carolyn Duffy, ?Pressure Mounts for Instant Messaging Standard,? May 2, 2000, pg. 1-2

14 Reuters, ?Competition, Revenue Demand to Drive Cable Industry,? New York Time (web), May 8, 2000, pg. 1

15 Ibid, pg. 2.

16 Associated Press, ?Cable Execs Want Law Governing Deals With Broadcasters Changed,? CNN.com, May 8, 2000, pg. 1.

17 Ibid, pg. 2.

18 Paletz, David L., The Media in American Politics: Contents and Consequences (New York: Longman Press, 1999), pgs. 43-44.