Disney’s War With Cable, Satellite Firms Heats Up

Walt Disney Co.’s battle with cable and satellite operators over its new ABC Family channel escalated this week when it sued EchoStar Communications Corp. to prevent the satellite TV company from dropping the network Jan. 1.

The lawsuit, filed in U.S. District Court late Monday, provides a rare glimpse into the hard-nosed tactics between programmers and their distributors that rarely come into public view.

The situation also underscores the challenge Disney faces in fulfilling financial projections promised to Wall Street when it paid News Corp. a record price of $2.9 billion last fall for Fox Family Worldwide. Disney plans to bring a host of new shows in January to the channel, which it renamed ABC Family.

The lawsuit could have ramifications for EchoStar’s pending merger with satellite rival DirecTV to become the nation’s largest pay television provider.

“It’s certainly in Disney’s favor to do this when EchoStar has a regulatory review pending,” said Blair Levin, an analyst at Legg Mason and former chief of staff at the Federal Communications Commission, which along with the Justice Department must approve the merger of the nation’s only two satellite TV providers. “In a chess game with 100 moves, this is a move by Disney that changes the board.”

Some industry executives were surprised by EchoStar Chairman Charles Ergen’s public threats in mid-November to drop ABC Family because of the sensitive regulatory review he faces in Washington. Disney has shown a willingness to use its clout to block the expansion of rivals.

Disney won a huge victory when a fight with Time Warner over Disney’s cable channels and ABC signal spilled into public view. Time Warner dropped ABC when a new contract could not be reached, upsetting regulators when thousands of customers were affected and it delayed review of Time Warner’s merger with AOL.

Disney Chairman Michael Eisner has said publicly that his company would not block EchoStar’s acquisition of DirecTV. But Eisner’s comments came before Vivendi Universal, one of Disney’s biggest rivals, pledged $1.5 billion to EchoStar for an 11% stake and agreed to provide five new channels and interactive services.

Ergen has said he needs to free up space on EchoStar’s satellite system for new channels. He also cited the expense of the ABC Family channel and its lackluster ratings.

Disney has plans to spruce up the channel with original programming from sister network ABC.

In its lawsuit, Disney says EchoStar notified the company Oct. 26--two days after Disney purchased the cable channel--that the satellite company was dropping the channel based on a so-called change-of-control provision. But Disney contends in its lawsuit that EchoStar is using the provision as an excuse to negotiate better rates.

Although Disney has customarily used the leverage of its powerhouse ESPN and ABC brands to demand stiff rate increases from distributors, cable operators say the company has little clout now because those other contracts are locked in. Disney has been counting on rate increases from cable operators to pay for the ABC Family purchase. Wall Street analysts say Disney must double the cash flow of the channel to justify the high price paid.

With advertising rates depressed and cable operators threatening to drop the channel, Disney faces a big challenge meeting its goals.

The ABC Family channel has new contracts with only two of the seven largest cable operators. The contract with DirecTV, the leading satellite provider, has been expired for a year.

ABC Family contracts with cable operators AT&T; Broadband and Comcast Corp., which means the channel has locked in only about 21 million households. The remaining 60 million ABC Family subscribers are not under long-term contract, according to industry estimates. Time Warner already has bounced the ABC Family channel from wide distribution in Florida, eliminating 800,000 subscribers. ABC would lose an additional 6.4 million homes if EchoStar drops the channel.

DirecTV, which serves 10.3 million customers, also has told Disney that it plans to drop the channel by year-end, according to sources at the satellite company.