Time Warner Erred in ABC Action, FCC Says

Federal and local regulators said Wednesday that Time Warner Inc. was in the wrong when it dropped the ABC television network from its cable systems in seven cities, depriving 3.5 million homes of the top-rated network’s programming for all of Monday and part of Tuesday.

Both the city of Los Angeles and the Federal Communications Commission said they would consider fining Time Warner for the violations or taking other remedies against the world’s largest entertainment company, which is also the nation’s leading cable operator.

After an outcry by ABC fans, Time Warner said Wednesday that it will make up for the inconvenience by giving customers “refunds and something more,” according to Michael Luftman, a spokesman for Time Warner Cable.

Even though Time Warner restored ABC service by midday Tuesday, customers seemed to relish punishing the cable operator for the lapse. A $198 satellite rebate Wednesday in Los Angeles, New York and Houston sponsored by ABC and DirecTV was fully subscribed--and extended to today by the companies because of its success.

“We couldn’t buy this kind of awareness for our product,” said Bob Marsocci, a spokesman for DirecTV. He said the 1,000 vouchers it promised to dispense in Los Angeles were given away in the first 25 minutes after the kickoff at 6 a.m. He said DirecTV would double the number today.

In addition to losing subscribers to satellite, Time Warner’s missteps could mean trouble in upcoming regulatory reviews of its planned merger with Internet giant America Online Inc. The company plans to complete the merger by fall.

“This kind of treatment of their subscribers is not a good sign,” said Los Angeles Councilman Alex Padilla. “This certainly doesn’t bode well for Time Warner in the transfer process. We hope this is not a sign of things to come.”

A City Council vote is imminent on the transfer to AOL of Time Warner’s local cable franchise. Padilla said the council will hold hearings on the transfer and the blackout May 17.

Time Warner has maintained that the blackout occurred because it was not authorized to carry the signals of ABC’s seven television stations, including KABC-TV Channel 7 in Los Angeles. Its agreement with Walt Disney Co., ABC’s parent, to carry the signal expired at midnight Sunday, prompting Time Warner to pull the signal and Disney to file with the FCC on Monday for injunctive relief.

The FCC ruled Wednesday that a cable company cannot remove a broadcast channel from its systems during a key rating period like May, when audience viewership is used to set advertising rates.

Time Warner claims that the rule only applies to stations being carried on a “must-carry” basis. Under federal rules, cable operators are required to carry broadcast stations, which elect either “must-carry” status or “retransmission consent.” Most large station groups, such as the ones the networks own, elect retransmission consent because, unlike “must carry,” it requires that cable operators compensate them for their signal rights.

The FCC, which said Disney is the first company to ever invoke the “sweeps rule,” said that these regulations are “clear and absolute” and that Time Warner’s cable unit acted inappropriately.

The May sweeps began last Thursday. Disney risked losing millions of dollars in advertising revenue if the blackout had continued.

Meanwhile, the cities of Los Angeles and New York are considering ordering the company to give customers refunds. In Los Angeles, the city attorney’s office sent a letter to Time Warner on Tuesday informing the company that it was in violation of its franchise contract because it failed to notify customers of the interruption in writing 30 days in advance. The city’s franchise rules require local cable operators to provide customers with advance notice of changes in service, including any changes in the channel lineup.

Luftman of Time Warner Cable said that since Dec. 1, Time Warner has been running message banners across its screen warning customers that contract negotiations with ABC might result in termination of the signal. He couldn’t say how recently those messages, which he said constituted notification, ran in Los Angeles.

Time Warner serves 180,000 cable customers in the western San Fernando Valley.

Disney, which owns ABC as well as cable channels ESPN, Disney Channel and the Soap Net, is expected to lead a campaign asking local authorities nationwide to require Time Warner and AOL to provide certain guarantees as a condition of the ownership transfer.

Disney is waging a campaign to prevent the combined companies from giving preferential treatment to services they own, such as AOL, CNN, Cartoon Network and the Roadrunner Internet provider. The company says it fears Time Warner-AOL will discriminate against outsiders by using their monopoly over high-speed cable pipelines into the home.

The company also is lobbying federal antitrust regulators. “No one else has the size to take on this negotiation,” said Disney Chairman Michael Eisner in an earnings conference call with analysts Wednesday. “We have always had to contend with gatekeepers and have proven in the last two days that if you make good product, even gatekeepers can’t block access.”

Time Warner, which already controls cable and programming distribution, says it has not discriminated against outside suppliers in the past and will not do so in the future.

Time Warner said it would appeal the decision by the cable bureau of the FCC. “While we agree this ambiguous rule needs clarification, it is unfortunate that on an important issue affecting the entire cable industry, and where there was no emergency, that this was done without the full commission being involved,” Time Warner said in a statement. “We don’t think that was the intent of Congress, and we will pursue further review of this order.”

It is unclear whether regulators in the other cities in the region are considering taking actions against Time Warner, which serves more than 250,000 cable customers in Orange County and Palm Springs.

Padilla said the issue of Time Warner’s breach would be taken up again in a City Council meeting next week. Among the issues that will be discussed is why the blackout occurred.

Without notifying the city or Disney, Time Warner pulled the signal at midnight Sunday and put up notices on its channel that “Disney has taken ABC away from you,” posting a number to call at Disney to complain.