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GROUND ZERO: HOUSTON Time Warner, Disney Square Off

Long-simmering tensions between programmers and cableoperators boiled over last week, as Houston became the battle ground for two media giants-- The Walt Disney Co. and Time Warner Inc. -- to wage an extraordinarily nasty war overretransmission consent and program costs.

Flatly stating that it was making a test case out of themarket, Disney threatened to pull the signal for its owned-and-operated ABC Inc. station,KTRK-TV, from Time Warner Cable's system in Houston effective 12:01 a.m. last Friday.That move would have affected 660,000 cable homes. But the showdown was delayed untillater this week.

A last-minute, temporary truce was declared last Thursday,when both sides agreed to a seven-day cooling-off period after Houston Mayor Lee Brownstepped in. He convinced both sides to resume negotiations, and KTRK agreed to extendretransmission consent to Time Warner for that weeklong period, extending the deadline tothe end of the day Thursday (March 9).

Both Disney and Time Warner were ready for battle lastweek. To help maintain its viewership, KTRK in an unusual move offered 1,500 Time Warnersubscribers rebates of $99 to buy DirecTV Inc. satellite dishes and receivers.

In Houston, both DirecTV and EchoStar CommunicationsCorp.'s Dish Network carry KTRK, which Disney believes gives it unique leverage andbargaining power against Time Warner.

Dish planned to beef up its advertising in the Houstonmarket to tout its national free-satellite-system and free-install offer.

Time Warner, in turn, gave out more than 8,000 "Tuneto 13" kits, which included antennas and A/B switches, free to its subscribers.

This round of retransmission-consent talks betweenbroadcasters and cable operators has become far more complex and problematic than inprevious years. This is partly due to ongoing media consolidation and the proliferation ofnew cable networks, according to cable-industry sources.

Mega-media companies from the beginning have usedretransmission consent for their TV stations as currency to launch new cable networks.

But this go-around, broadcasters are often seeking dealstied to more than one new cable network, since a flood of digi-nets has spawned. And inmany cases, they are trying to jack up license fees for their existing networks.

Earlier this year, for example, Fox Broadcasting Co. gotinto a public retransmission-consent battle with Cox Communications Inc. and wound uppulling its TV stations off some Cox cable systems for six days. Fox was demanding digitalcarriage for FXM: Movies from Fox and Fox Sports World, which Cox balked at.

NBC came to cable operators with a complex package thatincluded not only retransmission consent for NBC TV stations, but also a 10-year OlympicGames package, as well as contract extensions and double-digit price increases for CNBCand MSNBC.

And as part of its retransmission-consent deal, broadcasterHearst-Argyle Television Inc. is seeking contract extensions and rate increases forLifetime Television and carriage for Lifetime Movie Network. Lifetime is a 50-50 venturebetween Hearst and, ironically, Disney.

Hearst-Argyle last week granted furtherretransmission-consent extensions for its TV stations, including giving one until April 1to Time Warner, which has complained about the Lifetime price hikes being sought.

One MSO official noted that media consolidation has createdlarger TV-station groups. That factor, and the fact that direct-broadcast satellite is nowcarrying local signals, have made broadcasters believe they have much more clout andleverage in retransmission-consent talks this year, several sources said.

"It's a major bone of contention with cableoperators that the broadcasters are trying to extract as much as they can," saidMichael Goodman, a senior analyst with The Yankee Group. "There's less analogspace now, so it's harder to get deals done for new channels."

At the same time, cable operators are under tremendouspressure and scrutiny from Washington not to increase cable rates to consumers.

Last week, Disney and Time Warner basically charged thatthe other was lying about the events leading up to the Houston dispute and whether or notthe two companies had ever closed a deal.

That deal purportedly called for Time Warner to launchDisney's cable networks SoapNet and Toon Disney and mandated the conversion of DisneyChannel to basic from a premium service.

Time Warner contended that it had a finished agreement withDisney that just needed signatures, until Disney reneged in January and essentially raisedthe price tag on the 10-year pact by $100 million by boosting the monthly subscriberlicense fee for Disney Channel to 71 cents from 30 cents. That's an "exorbitantdemand," according to Time Warner Cable spokesman Mike Luftman.

"We had a deal with them that was virtuallycomplete," he said. "That [ABC and Disney are] telling 660,000 subscribers todrop dead is remarkable. We're only asking them to come back with a more reasonabledeal."

For its part, Disney denies ever having a nearly finisheddeal, saying the terms that had initially been discussed "were below industrystandards."

ABC spokeswoman Patti Matson said the company particularlywanted to rethink the deal after Time Warner's acquisition by America Online Inc. wasannounced in January. "That made it more important than before to be sure we werecomfortable with the terms of the deal," she added.

The fracas erupted because Disney is in the midst ofnegotiating new retransmission-consent deals with Time Warner in DMAs such as New York;Los Angeles; Raleigh, N.C.; and Milwaukee -- systems reaching 3.5 million homes.

In a worst-case scenario, ABC stations in those marketscould wind up being yanked off cable by Disney, as well. But for now, all of those marketshave been granted retransmission-consent extensions from Disney until end-of-day March 30.

Disney had declined to grant Time Warner a similarextension for KTRK, which meant that the channel's signal was supposed to go offcable at the end of March 2. The system planned to replace KTRK with Home BoxOffice's HBO Family, which is owned by Time Warner.

Disney said it wanted to force the issue in Houston inorder to bring Time Warner back to the negotiating table.

"Disney is looking anywhere they can to boost theirbottom line," said Derek Baine, a senior analyst for Paul Kagan Associates Inc."But cable operators can't tolerate double-digit license-fee increases.They'll fight tooth-and-nail to keep license-fee increases modest."

Time Warner and Comcast Corp. have been the two major MSOholdouts to Disney's conversion of Disney Channel to a basic service, which nowreaches more than 60 million homes.

Any cable operator that makes the conversion winds uptaking a financial hit. That's because as a premium service, operators would chargesubscribers a fee -- typically $9 per month -- for Disney Channel, then split that feewith the network.

But when a cable system carries Disney Channel as a basic,it must instead shell out a per-subscriber monthly license fee, which sources said is inthe expensive 58- to 75-cent range.

It appeared that Disney was going to give Time Warner adiscount on that fee -- large MSOs typically get volume discounts from programmers -- bycutting it in half to 30 cents. But then, Time Warner claimed, Disney withdrew that offer.

Disney officials said they have been forced to take a standto get fair value for their programming after reaching a stalemate with the MSO.

"We can't agree to a proposal in which TimeWarner is dictating a price that's not fair for our content," Disney generalcounsel Alan Braverman said. "We had to take a stand. Since 1992, we'venegotiated hundreds of retransmission-consent deals. We've never gotten to an impassewith anybody or been close to pulling our signal."

Last week, Disney announced carriage deals for SoapNet withCablevision Systems Corp., Charter Communications Inc. and Cox. It wasn't clear ifthose deals involved retransmission consent for ABC stations.

Braverman said Houston was chosen as the test marketbecause pulling an ABC station there would be less disruptive to viewers than in otherDMAs. Both DBS companies carry KTRK and, because the terrain is flat, viewers can stillpick up the station's signal with antennas.

In a published report, Disney president Robert Iger alsocharged that Time Warner was giving preferential treatment on its cable systems -- intimes of carriage and channel position -- to networks it owns, such as Cartoon Network.Time Warner denied the charge.

"They are throwing up a smoke screen," Luftmansaid, "for a company like Disney to betray their public interest to serve theircustomers for channel placement, let alone carriage."

In the long run, analysts believe the cable operator winswhen a broadcaster pulls its TV stations off cable.

"MSOs are willing to dig in their heels and take ashort hit," Goodman said. "They will get some bad PR [public relations]. Butonce they weather that initial storm, in the long term, it's the broadcasters thatare in the more difficult position. They can't afford not to be on cable for anextended period of time."

In a letter to Iger last week, Time Warner senior vicepresident of programming Fred Dressler wrote, "We do not want to lose ABC for oneminute in Houston However, we cannot capitulate to this heavy-handed approach tonegotiating."