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Drums on the Potomac

From Washington, it's hard to see how Time Warner comes out a winner after last week's very public, very noisy spat with Disney.

In the short term, Time Warner's decision to throw ABC off its cable systems in seven cities-albeit only briefly-makes it look like an old-time cable bully that doesn't give a whit about its customers. Time Warner counters that it was trying to help subscribers by resisting Disney's billion-dollar-plus demand for compensation, which it says it would have to pass on to consumers in the form of higher fees.

That argument notwithstanding, Time Warner's tactics have forced its merger with AOL into the glare of the government spotlight.

"I think the issues of monopoly control and discrimination are now on the table for everyone to see. It's impossible to sweep them under the rug," said Preston Padden, executive vice president of The Walt Disney Co.

"This reflects a mindset of incredible arrogance that is only associated with monopoly power," says Larry Sidman, who is representing Disney and is a senior partner at the Washington law firm of Verner, Liipfert, Bernhard, McPherson and Hand.

"The dynamics have changed on Capitol Hill as a result of this feud," says Ken Johnson, spokesman for House Telecommunications Subcommittee Chairman Billy Tauzin (R-La.). "It's brought unwanted publicity to the merger and has focused everyone's attention on the problems we face as we make the conversion to digital. Americans love their TV, and when the screen suddenly goes dark and people start pointing fingers, frankly they don't care who is to blame-Time Warner, ABC or Congress-they just want it fixed." Johnson also says that as the November elections draw nearer, Congress will be less tolerant of high-profile battles that could alienate voters.

Even now, the fight stirred sleepy, election-year Washington into action. Early last week, Tauzin said he would move a planned hearing on the merger to just after Memorial Day instead of waiting until later this summer. And Disney now plans to testify, while before the company didn't want to air its concerns publicly. "There will be no more tiptoeing around on eggshells pretending there's not a problem," Padden says.

Senate Commerce Committee Chairman John McCain (R-Ariz.) also plans a hearing to examine retransmission consent in general, and how the practice of negotiating for cable carriage may be hurting consumers.

The FCC will hold a hearing on the merger in late May or early June. The commission was quick to rule in Disney's favor last week. "No company should use consumers as pawns in a private contract dispute," FCC Chairman William Kennard said.

Consumer groups say the fight proves their point: A merged AOL Time Warner will control too much of the country's two-way broadband networks and needs some government rules to follow.

"If Time Warner has the power right now to block the top-rated TV network in the country, one can only imagine what the new AOL-Time Warner will be able to do in the broadband Internet arena," says Jeff Chester, executive director of the Center for Media Education."

And sources say the Federal Trade Commission, which is reviewing the merger for antitrust problems, has pricked up its ears and started asking questions.

That said, merger watchers always expected the scope of the proposed AOL-Time Warner to prompt some conditions from regulators.

What Padden wants and has been quietly pushing for in Washington is "non-discriminatory access to the platform," he says. "We need government rules as opposed to that toothless, worthless PR document that AOL and Time Warner put out to skate through [last February's Senate] Judiciary committee hearing."

Last winter, AOL Chairman Steve Case and Time Warner CEO Jerry Levin told Senate committees that they would open their broadband networks to competitive Internet service providers, and that they had signed a non-binding legal document to prove it. Many senators and consumer advocates were skeptical of that promise then and are even more so now.