Looney Times at Time Warner and DisneyPublished: May 24, 2000 in Knowledge@Wharton
A juvenile spat between mega-business leaders or the inevitable reality of clashing media powerhouses? It seems that the recent butting of heads between Time Warner's cable division and Disney's television networks is a bit of both.
On May 1, Time Warner dropped Disney's ABC network from 3.5 million of its cable systems, including those in New York, Los Angeles, Houston and Philadelphia. The dispute was about who would pay whom, and how much, for carrying ABC's myriad cable networks. The stand-off that ensued lasted for little more than a day, but it was an important day ABC had scheduled the first of the celebrity versions of the top-rated show of the season, "Who Wants to Be a Millionaire?"
Should people have seen something like this coming? "Of course. What is surprising is that anyone thought differently," said Wharton public policy and management professor Gerald Faulhaber. "If cable companies decide to be capricious, they can pull off any channel they want under most circumstances. Cable companies have been granted that power."
The bind came when Disney asked Time Warner to carry the Disney Channel as a basic cable service instead of a pay channel on its cable systems and, in addition, carry the new Disney channels, Soap Net and Toon Disney. In return, Disney offered to let Time Warner continue to carry the ABC-owned stations on the cable systems at no charge. But Time Warner said the deal was too expensive $300 million that in the end would have to be passed along to customers. In addition, they were angry that Disney was raising rates for its ESPN sports network.
Since Time Warner had already agreed to keep carrying ABC through May 24 the end of the important spring ratings sweeps period the cable service appeared to be in breach of contract (though the Federal Communications Commission did not intercede) by taking ABC off its air. "Both sides are petty, but clearly one side more than the other," said Wharton marketing professor Peter Fader. "In the consumer marketplace, the way it was going to play out, Time Warner just looks evil … I can't imagine they'll do it again unless they make very sure they have their backsides covered, at least legally."
In the ensuing days, ABC and Time Warner had a public relations battle. When customers turned to ABC on Time Warner cable systems, they saw a message that said, "Disney has taken ABC away from you." The next day, Disney placed an ad in newspapers reading in part, "Only an arrogant monopolist would drop its most popular channel to retaliate against ABC for raising questions about Time Warner's stranglehold over your television, cable and Internet access." (Disney has filed objections to the government over the AOL-Time Warner merger.) Then ABC offered a $198 rebate for some Time Warner cable subscribers in New York, Los Angeles and Houston who bought satellite dishes. In return, Time Warner said it would rebate two day's worth of billings to those who lost service and give them one month of a pay-cable network. "It clearly wasn't business. It was personal," said Fader. "It was so bad a business decision (by Time Warner), that it wasn't even a business decision. It was just stupid."
But the big question is: Will it happen again? There is precedent, although in reverse. Last year, News Corp. pulled its Fox stations off Cox cable systems for six days in a fee dispute, since resolved. What's a consumer to do? "The fact of the matter is that it is amazing it hasn't happened before," said Faulhaber, noting that about 95% of Americans have no choice in cable systems because their municipalities have awarded monopoly contracts in cable service. "The cable company does now and always has controlled its content. They get the choice of what they will show. Broadly speaking, that is okay, because they will normally give customers what they want to see. But if you are interested, for example, in the Sci-Fi Channel, and they say, no thanks, that's too bad for you," Faulhaber noted.
All of which makes the cable company more powerful than even the phone company. "If you look at that other big monopoly in your house, the phone company, they are not permitted to control any content," added Faulhaber. "If I want to make a call to a porn service and the phone company doesn't think it's moral, that's too bad, they have to carry the call."
Wharton management professor Harbir Singh is of two minds on the possibility of a spat between media giants blacking out customers again. "It may well have been a long-term strategy decision by Time Warner," said Singh. "In the next few years, access to broadband services will become more and more important. Terms may be redefined. So in some ways, the latest episode of this conflict between Disney and Time Warner is indicative of the battle for control of access to homes." On the other hand, Singh added, he isn't worried about the bigness of the companies involved; these types of clashes could happen in big or small corporations alike.
But the conflict does become almost comical when you consider the interrelations between Disney and Time Warner up until now:
* In 1993, Time Warner, which owns the Six Flags amusement parks, launched an ad campaign saying that Six Flags parks were cheaper and easier to get to than Disney amusement parks. In return, Disney pulled all advertising out of Time Warner magazines. In return for that, Time Warner canceled a corporate meeting at Disney World.
* Warner Brothers produces "The Drew Carey Show," "Norm" and "Whose Line Is It Anyway?" for ABC. Disney produces "Felicity" and "Popular" for the WB network.
* ABC-owned stations are the prime buyers of "The Rosie O'Donnell Show," which is produced by Warner for syndication.
* Phil Collins, a Warner Music artist, was on the soundtrack for the Disney movie "Tarzan."
Doesn't the right hand know what the left is doing? "Actually, they shouldn't see these other things going on. It would be a terrible waste of resources," said Fader. "In many cases, these companies are too large for their own good. They just aren't benefiting by being big. There is barely any evidence that these big media mergers work. It is okay to have a lot of tentacles out there if they are not bumping into each other. To avoid that happening, it takes so much central control, it doesn't allow them to do what they can do. "I don't see the logic, for instance, of AOL Time Warner, except there is no basic illogic in it," he said. "Oh, they say, these pieces don't crash into each other. But I don't think that means they should be crammed into one another."
Faulhaber agrees wholeheartedly. "I can see the guys at Warner Brothers tearing their hair out and saying, 'What the heck are the guys in the cable business doing?'" he said. "I'm sure, then, the cable guys are on the phone with the WB Network, saying, 'Don't worry about it. We'll keep it in our side of the business.'
"Cable has this tough-guy history," he said. "John Malone was doing this in the 1970s with TCI. If he didn't get the rates he wanted, he would put a streamer on the TV set denouncing the town council. Time Warner cable wants that same tough-guy image, but (Disney chairman) Michael Eisner is no wilting lily. Eisner was not going to screw around with Time Warner."
In an essay on National Public Radio, media critic Mark Crispin Miller noted that Disney is no saint when it comes to media censorship. "Last year, under pressure from the parent company, ABC News spiked a '20/20' story on some risks at Disney's theme parks," said Miller, a professor of media ecology at New York University. "And speaking of a corporate stranglehold over Internet access, try using Go, a Disney-owned search engine, to find the sites of DisneySucks.com or The Society of Disney Haters or The Disney Hate Page. You'll fail, and on your screen you won't see written: Disney took those sites away from you."
Meanwhile, the new Disney/Time Warner cable agreement is extended only until July 15. Will the same craziness happen again? "I certainly hope there will be no repercussions, and I don't think there will be," said Fader. "The marketplace really worked here. At 12:05 a.m., right after the blackout started, there was already a backlash. Those were markets operating."