TW, Disney shake on it

But tentative retransmission consent deal doesn't deter NAB challenge of AOL merger

With their retrans fight drawing the media attention of a heavyweight-title bout, Time Warner and ABC put down the gloves rather than take their battle to the closing bell.

Gerald Levin, chairman of the country's second largest cable operator, surprised Time Warner shareholders attending the company's annual meeting last week by announcing a "handshake" deal to settle a retransmission dispute with Walt Disney Co., ABC's parent. The announcement came on the heels of a retrans deal Time Warner cut with NBC earlier in the week.

The Disney agreement closes well before their truce would have expired-July 15-in the bitter and public battle over compensation due Disney for Time Warner's carriage of the ABC broadcast network and affiliated cable channels.

Levin and ABC officials wouldn't reveal specific terms of their deal until the formal agreement has been signed, which is expected today (May 22).

But industry executives provided some details of the compensation package. Although ABC would not receive any direct payment for Time Warner's carriage, the MSO agreed to pay increased license fees for its cable networks, averaging about $105 million annually over 10 years, or around $1.05 billion. That includes migrating The Disney Channel from pay to basic, distribution of start-ups Soapnet and Toon Disney, plus a higher license fee for Lifetime. Disney powerhouse ESPN is not included in this deal.

The license fees and rollouts are slightly more aggressive than Time Warner had tentatively agreed to in December, before Disney seized on the company's plan to sell out to America Online and tried to up the stakes. But the tentative deal is less ambitious than Disney had sought in recent weeks.

Importantly, Disney relented on its broad demands concerning distribution and promotion of its products on AOL-Time Warner's broadband networks. Disney had sought such things as strong promotion of its products on Internet screens and electronic cable-program guides. The tentative deal offers no such hard guarantees.

The settlement does not necessarily halt Disney's campaign to gum up the takeover by AOL. Included in the backlash against Time Warner's action are heightened concerns that the merged AOL-Time Warner will renege on promises to make its Internet broadband network open and free of discrimination against unaffiliated content providers.

Prompted by Disney, the National Association of Broadcasters today is expected to ask the FCC to condition the AOL merger on its cable systems carrying all free over-the-air signals of local stations-both analog and digital. Disney also has urged Capitol Hill and local governments to closely scrutinize the merger.

Disney's campaign has paid dividends. The FCC plans to hold a hearing on the deal, as does the House Telecommunications Subcommittee. In addition, Disney has prompted local governments in four Orange County, Calif., cities to consider open-access rules for AOL-Time Warner. Disney's lobbying also is said to be an influence on local officials in Houston, Connecticut and North Carolina, who have raised concerns about the merger to the FCC.

The NAB's conditions, approved by the group's TV board of directors last week, also include barring AOL-Time Warner from discriminating against unaffiliated content providers and prohibiting it from blocking electronic program guides and other supplemental services that broadcasters offer for free. Disney sits on the NAB TV board.

"Given Time Warner's brazen treatment of viewers a few weeks ago, we think it's critically important the FCC take pro-consumer steps to ensure the viability of local broadcasting," said an NAB spokesman.

All 24 companies sitting on the NAB TV board voted for the conditions, except Viacom, which abstained. Viacom, which just completed its own mega-merger with CBS, is worried that the NAB's decision would set a bad precedent and could lead to other trade groups becoming involved in future corporate mergers.

"As a matter of principle, we don't believe a trade association should insert itself into a merger application proceeding," said a Viacom spokesperson.

Other TV board members say the NAB's action is prompted not by Disney's agenda, but rather by longstanding dislike for Time Warner, a company with which broadcasters have frequently clashed over issues such as their own retransmission consent negotiations and carriage of broadcaster signals for electronic program guides.

Still, the other non-NAB networks, NBC and FOX, have declined to comment on the merger.

The dispute catapulted both companies into the nightly newscasts and drew the ire of politicians, when Time Warner pulled the top-rated ABC signal from cable systems serving seven markets and 3.4 million homes three weeks ago. Although Time Warner maintained the blackout for only a day and a half before agreeing to a temporary deal, the cutoff was a public-relations disaster for the company and cast unwanted political attention on its pending merger with America Online.

"This was a regrettable event," Levin told shareholders from the stage of Harlem's Apollo Theater. "I think what you had was an unfortunate failure of communication."

Industry players said Disney needed to reach a deal soon, because nobody saw Disney as a victim in the dispute, and NBC reached a compensation deal with Time Warner earlier in the week. "By getting a deal with NBC, Time Warner was able to isolate Disney," said Scott Cleland of the Legg Mason Precursor Group.