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AOL Time Warner is just another battle to Disney's Padden

Preston Padden again takes aim at AOL Time Warner, saying the merger will create a monopoly that will ultimately deprive consumers of programming choices.

A football stands on Preston Padden's bookshelf, encased in glass, memorializing one of sports' most famous fumbles: the day Fox Network in 1993 out-dueled Viacom's CBS for TV broadcast rights to the National Football League.

Padden, who played a key role in that fight as a top executive for Fox parent News Corp., is used to taking and giving hard knocks. Now he's tackling the proposed $148 billion merger between America Online and Time Warner as head of government affairs at Walt Disney.

Padden has been aggressively pushing Capitol Hill and other federal organizations to place conditions on the merger, which would create the world's largest media company.

While many lobbyists successfully fly below the radar of public attention, Padden has not shied from the spotlight, skewering the deal in all forums with a characteristic grin.

"There's a down-home nature to him," said one Wall Street analyst, who The AOL walled garden, for example, is all about restricting consumer choice. requested anonymity. "But on the other side, he can be inflammatory."

Padden has room to push hard, thanks to a potentially enormous blunder by his adversaries. In May, Time Warner Cable pulled Disney-owned ABC off its network after the companies could not agree on terms to carry Disney's cable properties. The decision promptly exploded in Time Warner's face, setting off alarms among federal regulators that the merger could put too much power over media distribution into the hands of a single company.

Before taking over as Disney's executive vice president of government relations, Padden spent 14 months as president of the ABC Television Network. A lawyer by education, the 51-year-old also spent seven years at News Corp., where he served as president of telecommunications and television, and then became chief executive of American Sky Broadcasting, News Corp.'s satellite TV joint venture with MCI.

In an interview with CNET, Padden again took aim at AOL Time Warner, saying the merger will create a monopoly that will ultimately deprive consumers of programming choices.

CNET Disney and also your former employer Fox have been extremely vocal in opposing any government intervention into their business practices. Why are you now embracing regulation?
Padden: Let's take our broadcast network, ABC. We own shows, and we own the network. That's integration of content and conduit. But ABC operates in a competitive environment. Nielsen measures 56 different national television networks--cable and broadcast.

If you're a consumer sitting in New York--a Time Warner Cable customer--and you want interactive television, and they won't enable interactivity with ABC, you've got very few, if any, alternatives. That's why we think the government needs to step in here.

Time Warner Cable is only the second-largest cable provider in the country. There's always AT&T, which just acquired MediaOne.
We had concerns over the AT&T transaction. We skated up to the line of getting involved, and we stepped back. What pushed us over the line here is the unique marriage of this AOL closed, proprietary, walled-garden marketing environment married up to the bottleneck cable pipeline to the home. We think that is a deadly combination for consumer choice.

What is Disney trying to do with its lobbying efforts right now in relation to the merger?
We went through a very noisy and public commercial negotiation with Time Warner. That's over. We completed that deal. We've entered into a seven-year commercial transaction that provides for carriage of our broadcast and cable networks by Time Warner. The number of subscribers is set; the pricing is set. All those commercial terms are done.

What we and Time Warner were unable to agree on was what I'd call the public policy issues...Just tell us that you're not going to discriminate against our content as compared to your content in (certain key categories).

These are the very same issues that are in statute for any interactive There's nothing in the history of either company that would justify
reliance on the 'trust me' promise. television system built by a telephone company. They are in section 653 in the (Communications Act of 1934).

If it was Bell Atlantic building this system, they'd be bound to nondiscrimination. Congress established the policy?five years ago when everybody thought the phone companies were going to build the information superhighway. Now it looks like the cable companies are going to build it. The same policy ought to apply.

We could not agree on these nondiscrimination terms. The reason is Time Warner said to us, "If we agree to nondiscrimination terms with you guys, we'll have to agree with that with all the guys."

They ultimately said to us, "We're not comfortable dealing with these issues that are really Washington issues in our private negotiation, so why don't we conclude our negotiation without these provisions, and we'll both go to Washington and fight our case." And we said, "OK."

You've also proposed separating the company as a condition to the merger.
The objective is nondiscrimination, and basically there are two ways to get there. One is to separate the ownership of the content from the conduit, in which case you remove the incentive to discriminate in favor of your own content because the owner of the pipe wouldn't own any content.

The other way to do it is a set of behavioral safeguards, and they're all outlined in (our July 25) pleading (to the FCC). In addition to suggesting that, to keep the government from having a heavy burden of overseeing the business on a day-to-day basis, (we are suggesting) they set up an arbitration procedure.

Are you seriously advocating government regulation?
Yes. Absolutely. Either separate the content from the conduit, or let them keep the content and the conduit together but have strong and effective regulations prohibiting discrimination that reduces consumer choice.

You know, both of these companies have a history of abusing their distribution platform to limit consumer choice in favor of their own content. The AOL walled garden, for example, is all about restricting consumer choice. When we put our Disney Store Online inside the walled garden last Christmas selling season, they made us eliminate the links from Disney Store Online to other sites that were not inside the walled garden. They made us cut off consumer navigation links.

Many people have observed that a lot of Disney's tactics right now are simply based on leveraging this (controversy) to strike sweeter deals.
The only problem with that theory is that we did our deal--for seven years. So it would be kind of dumb to make some kind of argument today in hopes of cutting a sweeter deal seven years from now.

During Thursday's FCC hearing, AOL chief executive Steve Case, Time Warner president Richard Parsons, Time Warner CEO Gerald Levin and AOL president of interactive services Barry Schuler all said they will not limit content. Why shouldn't consumers be satisfied with that?
I think it's great. A year ago, Time Warner said open access was not technically possible. Today, it's not only technically possible, they're going to do it, and they said it was in their business interest to do it. Well, if they're going to (support open access), and if it's in their business interest to do so, then how is it going to be a problem to just have the government write a few little words to make sure it's going to happen?

You compare AOL Time Warner to the creation of the next Microsoft. Where do the comparisons lie here?
Think of the Windows platform as the distribution conduit. And then all the applications as the content. And what Judge (Thomas Penfield) Jackson has said is we need to separate the conduit from the content. Because in this case the conduit is a monopoly--the Windows operating system.

The analogy is the Time Warner-AOL cable pipe to the home: Because you can't do interactive television over DSL, the cable pipeline is the monopoly. And it should be separated from ownership of the content trying to pass through it.

Do you believe AOL Time Warner will treat other service providers on a level playing field?
No. There's nothing in the history of either company that would justify reliance on the "trust me" promise.