Turner Takes Tough Stance on Possible CNN-ABC Deal

Is Ted Turner ready to let CNN go?

The creator of Cable News Network is asking the toughest questions on AOL Time Warner Inc.’s board about a possible merger between CNN and the ABC News division, according to people close to the company.

As a little-known cable renegade from Atlanta, Turner dreamed up the idea for CNN in 1978, when cable subscribers had just 12 channels on the TV dial and Home Box Office’s first original program was the Pennsylvania Polka Festival.

Few in the industry believed that a 24-hour TV news channel would work. But today, AOL Time Warner’s CNN is among the nation’s most profitable television news operations, earning more than $200 million annually before taxes on revenue of $1.6 billion, sources said.

So Turner, it seems, is not about to allow CNN to join forces with Walt Disney Co.’s ABC News without an exacting agreement. “This is his baby,” said one person close to Turner.

Turner, AOL Time Warner’s vice chairman and the company’s largest individual shareholder, took a lead role in grilling management about the possible news merger during a board meeting 10 days ago, executives close to the cable mogul said.

Turner, 63, could not be reached for comment. He is hiking in China and Tibet, associates said.

For 18 months, CNN and ABC News have been talking about joining their news operations. The discussions heated up recently, sources said, because both companies are grasping for ways to cut costs in the wake of severe stock slides.

Under the proposal being discussed, AOL Time Warner and Disney would combine CNN and ABC News into a new company that would be controlled by AOL, with a stake of about 65%. Disney would own the rest. Management of the news operations, however, would be more evenly shared, said sources close to the talks. Among the complicated issues to be worked out are which overlapping news bureaus would be cut, and how ABC’s celebrated news broadcasters, such as Peter Jennings, Ted Koppel and Barbara Walters, would fit into any CNN broadcasts.

Both companies confirmed last week that they were in discussions, but said no deal is imminent.

Turner sees the financial merits of a CNN-ABC News combination, sources say, because a joint venture could save an estimated $200 million a year as news programming costs are rising and TV audiences are sliced ever smaller by an explosion of channel choices. But Turner questions whether the price and timing of a CNN-ABC venture are right and whether a better deal could be had by waiting, sources said.

Disney is feeling pressure from Wall Street to stem losses at its ABC Network that could top $500 million this year.

“There’s no question that right now ABC is under more pressure to do a deal,” said Christopher Dixon, an analyst at UBS Warburg.

Turner also doesn’t want to rush into any partnership that unnecessarily restricts AOL Time Warner’s flexibility, as joint ventures notoriously do, sources said.

Disney and AOL Time Warner have a history of bad blood. Disney was one of the most vocal opponents of America Online’s $99-billion acquisition of Time Warner, first announced in January 2000.

Since then, several negotiations between the two rivals have languished. Cable operators, including Time Warner Cable, have threatened to drop Disney’s ABC Family Channel rather than pay higher subscriber fees it demanded. Another sore point is Time Warner Cable’s two-year effort to secure a video-on-demand deal with Disney’s movie studio.

“Before we do a deal benefiting Disney, Ted wants to make sure everything is buttoned up,” one AOL Time Warner executive said. “Nothing is going to slide through this company from now on without extreme scrutiny.”

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Feeling Burned

Veteran Time Warner executives, including Turner, feel burned by the sale of the company to Internet service provider America Online. Many privately blame former AOL Time Warner Chief Executive Gerald Levin in particular for a lack of “due diligence”--failing to examine AOL’s books for signs of weakness as well as aggressive AOL accounting practices that are the target of federal investigations.

The completion of the America Online-Time Warner merger in January 2001 was a bitter awakening for Turner. The company failed to deliver on the promised synergies between new and old media. A steep decline in revenue at America Online, which had been hyped as the growth engine of the new company, sent investors bailing. And as AOL Time Warner failed to meet revenue and earnings targets, the company’s stock tumbled 75%, leading to several management shake-ups.

On the AOL Time Warner board, Turner has become what one company executive describes as a “catalyst for change.”

“Ted is still angry at himself for not asking more questions about the AOL merger,” one source close to Turner said. “So now, he’s doing his own due diligence, as a board member.”

Turner, who owns a 3% stake in the new company, has watched his net worth dissolve. Forbes magazine pegs his wealth at $2.2 billion, a 65% drop in the last year, largely because of AOL Time Warner’s steady stock decline.

Turner is allied with other board members and large shareholders who would like to overthrow the company’s chairman, Steve Case, for his role in AOL Time Warner’s troubles.

He already is credited with triggering the early exit of Levin, who stepped down under pressure this spring and was replaced by Richard Parsons. A passionate speech by Turner at a board meeting last November urging a management change captured an undercurrent of discontent among directors about the direction of the company under Levin, sources said.

Turner’s associates say their boss was too trusting in going along with the merger plan and was distracted by a split with his wife, actress Jane Fonda. As part of a restructuring before the merger, Levin stripped Turner of his operating role at the cable group. Levin merged Turner’s group with Time Warner’s broadcast operations and put them under Jamie Kellner, founder of the company’s WB network.

After losing responsibility for CNN, HBO, TBS, TNT, the Cartoon Network and other cable channels, Turner made himself scarce in Atlanta’s CNN Center.

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Cable Competitors

Turner and Levin had been intense cable rivals dating back to the 1970s. At the time, Levin ran Time Inc.’s fledgling cable channel HBO, launched in 1971. Levin had urged Time Inc.’s board to launch a 24-hour news channel to capitalize on its journalistic roots, but was rebuffed because HBO was losing so much money, sources said.

Levin was one-upped by Turner, who launched CNN, but flimsy financing threatened such an ambitious undertaking. The Atlanta businessman, however, already had turned his Atlanta TV station, WTBS, into the first cable “superstation” by using new satellite technology to broadcast his Atlanta Braves baseball games nationwide.

Turner settled on the name Cable News Network, instead of Turner News Network, to appeal to the cable operators he needed to carry the channel. Turner’s proposed format was a mix of four half-hour segments--news, sports, women’s and business news. But his staff worried that the news channel might bankrupt his company.

CNN’s original offices didn’t have bathrooms, just portable toilets outside. Turner’s news director suggested hiring an anchor with star power and mentioned Dan Rather, who was waiting in the wings at CBS for Walter Cronkite to retire. Turner, who had never watched much news, asked, “Who’s Dan Rather?” according to the biography “Citizen Turner.”

The first CNN broadcast on June 1, 1980, was a bust. During the first hour, CNN lost its feed from New York, went black, went back on the air, cut out the middle of a presidential speech, tried-- and failed--to go live to Jerusalem and then cut to CNN’s reporter in Key West, Fla., while he was picking his nose. In the early days, a lightbulb exploded during a live shot from Washington, setting anchor Daniel Schorr’s clothes on fire, according to the Turner biography.

But Turner was wily, surviving near-bankruptcy several times and outmaneuvering the competition. In June 1982, ABC teamed up with all-news radio stations owned by Westinghouse Electric Corp. to start the Satellite News Channel as a CNN rival, prompting Turner to create another channel, CNN Headline News, as a 2-for-1 offer to cable operators to keep the rival off the dial.

ABC eventually lost a reported $100 million and agreed to sell the operation to Turner.

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Trumping the Networks

By the late 1980s, CNN routinely trumped the major networks with its live telecasts of space launches, wars and royal weddings. Then in 1991, CNN’s eerie gray images of the bombing of Baghdad and Peter Arnett’s live reports from Iraq during the Persian Gulf War prompted then-President George Bush to say, “I learn more from CNN than I do from the CIA.”

Turner was a major media force by the mid-1990s and attempted to buy both CBS and NBC. He was convinced that he could save millions of dollars by combining a broadcasters’ news division with CNN.

But he was blocked by his largest shareholders, Time Warner and Liberty Media Corp. Frustrated by the relatively small size of his business amid a frantic media consolidation, Turner in 1995 accepted Levin’s offer to buy Turner Broadcasting System Inc. for $6.7 billion. The next year, both NBC and Fox launched 24-hour news channels, challenging CNN’s dominance.

News Corp.’s Fox News Channel took off with its combative brand of news coverage, helped by its exhaustive treatment of the Monica Lewinsky scandal. This year, Fox News’ ratings have consistently bested CNN’s. Fox News’ Bill O’Reilly has the top-rated news show on cable, beating CNN’s longtime star Larry King, who comes in second. O’Reilly also whips CNN’s Connie Chung, lured away from ABC this year in an attempt beef up CNN’s ratings.

The prospect of CNN losing its independence one day makes Turner nostalgic, a friend said.

“I’d characterize his attitude toward the merger as wistful.”