ABC Back on Cable TV as Dispute Is Set Aside

Time Warner Inc. and Walt Disney Co. agreed Tuesday to temporarily set aside a contract dispute that prevented millions of Time Warner cable customers from watching the ABC television network Monday.

Around midday Tuesday, Time Warner’s cable systems resumed airing the signals from ABC stations in seven cities, including Los Angeles and New York, restoring service to the 3.5 million customers who were disconnected from the top-rated network shortly after midnight Sunday.

Yet the power struggle between two of the world’s largest media titans may just be beginning. The contest underscores the rising tensions as consolidation has concentrated power in the hands of just a few giants, whose agendas are increasingly at cross-purposes.

Disney appeared to win Tuesday’s round with Time Warner, yet refused to drop the issue and even seemed to press harder.

Time Warner initiated the settlement, then capitulated to certain Disney demands Tuesday. And still, in meetings with reporters Disney tried to politicize the debate by calling for greater regulatory scrutiny of Time Warner and other cable giants, and, for the first time publicly, for Washington to block its adversary’s proposed sale to America Online Inc.

“This is broader than television,” said Preston Padden, Disney’s executive vice president for government relations. “This is about whether there should be a policy prohibiting AOL/Time Warner and cable companies in general from owning the content seeking to travel over its monopoly pipeline.”

Disney said it plans to plead its case with the Federal Trade Commission, which is in the midst of an extensive review of the merger.

At the same time, Padden said the company would proceed today with a giveaway of DirecTV satellite dishes to affected Time Warner cable customers in Los Angeles, Houston and New York.

“We are trying to introduce competition to cable into the marketplace,” he said.

Disney’s saber-rattling will make further negotiations with Time Warner difficult.

To end the blackout, both firms agreed Tuesday to extend for the sixth time the terms of a rights contract that expired at the end of 1999. The firms agreed to a new extension of that contract until July 15--two months later than Disney originally wanted and three months before the date Time Warner offered Tuesday in its settlement.

Time Warner dismissed Disney’s bid to broaden the scope of the debate as a negotiating ploy. “There’s still no agreement so they are trying to extract money from Time Warner Cable that we would have to pass on to our customers,” said Time Warner spokesman Ed Adler. “We think their argument that AOL-Time Warner would favor their own programming is a smoke screen.”

Time Warner executives say that Disney is using a form of blackmail, trying to force the cable operator’s hand by threatening to make the company look bad in the eyes of regulators during the sensitive approval process. They say Padden has been buttonholing members of Congress for months, trying to gain support in Washington.

Adler said Time Warner still expects the merger with AOL to be completed by fall.

But before that occurs, Time Warner and Disney will be returning to the bargaining table, raising the prospects of another blackout. Disney and Time Warner are still far apart on the terms of the new agreement, which will cover the carriage of ABC and three Disney channels by the nation’s largest cable giant, as well as a host of other issues.

Government regulators jabbed the companies for letting the negotiations reach the break point, while applauding the cease-fire, which forestalled further confusion among viewers, whose complaints clogged telephone lines of both companies and government offices Monday. “We are pleased that the parties have reached an agreement,” said William Kennard, chairman of the Federal Communications Commission. “The television sets of average consumers should never be held hostage in these disputes.”

He said the agency would still render an opinion on whether Disney would qualify for an injunction under the law. Disney filed for an injunction to get Time Warner to restore its signals, claiming that federal rules prevent cable operators from knocking off broadcast stations during key ratings periods.

The loss of Time Warner cable viewers could have cost Disney a fortune during the May “sweeps” period, when ratings are used to set advertising prices. During Day One of the blackout, however, ABC didn’t experience any obvious ill effects. Its first celebrity edition of “Who Wants to Be a Millionaire” attracted a record audience for that program.

The ratings performance only fueled Disney’s bravado.

Padden said he didn’t expect a breakdown in the negotiations, because “Time Warner will have a hard time being as cavalier” after experiencing consumer outrage at losing ABC.

Wall Street’s reaction Tuesday could also discourage Time Warners. While Disney closed up 56 cents, to $42.56, Time Warner shares dropped $2.75, to $86.12. Both trade on the New York Stock Exchange.

Padden equated Time Warner’s powers as a gatekeeper to the Internet and television to the antitrust case against Microsoft Corp., which regulators are trying to break into two companies after finding that the software giant used its control over the computer operating system to unfairly dominate other markets.

The Disney executive is worried that through the combined strength of AOL’s Internet service and Time Warner’s high-speed cable pathway into the home, customers would be steered to Time Warner-owned CNN’s news programming rather than to ABC News. “They could make it unwieldy for consumers to access, and it would be out of our power to correct,” Padden said.

He suggested several remedies. Regulators could block the merger of AOL and Time Warner, or it could force the company to sell its cable distribution systems to concentrate solely on content.

Paradoxically, Disney is taking up the “open-access” crusade that America Online spearheaded two years ago, but abandoned after it struck a deal in January to buy dominant cable supplier Time Warner. Through a well-organized grass-roots campaign, AOL urged municipalities across the country to force cable operators to lease access on their high-speed systems to Internet service providers other than their own.

Though the cable industry fought the attack at first, AT&T;, Time Warner and others have recently compromised, agreeing to open their systems to some Internet service providers other than their own.

Disney says it wants the same nondiscriminatory treatment for other services carried down the cable pipe, such as interactive programming. ABC is among the most aggressive of the networks in making programming interactive. For instance, it has given viewers of “Monday Night Football” the ability to access scores and see replays during the game with the flick of a remote.

But critics accused Disney of having the same self-interested agenda in this debate as AOL had in the open-access controversy. AOL, reliant on the conventional and slow phone connections, was at risk of losing millions of customers to speedy cable-owned Internet services before it agreed to buy Time Warner. It has abandoned its visible role leading the charge for open access.

Critics say Disney is being equally disingenuous. Cable companies say they have spent billions of their own funds building the cable highway and Disney is free to make its own investment in distribution.

Others say Disney uses its own broadcast network outlet to favor programs produced internally. Typically outside suppliers are forced to give up huge equity stakes in programs to buy real estate on the network’s schedule, if they are allowed to play at all.

Padden said the situation is different because of the myriad outlets consumers have for entertainment programming other than ABC. He said cable owns one of three pipelines to the home, along with telephone wires and utility lines.

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Times staff writers Jube Shiver Jr. and Brian Lowry contributed to this report.