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Time Warner's hardball tactics could hurt merger plans

The media giant's handling of a contract dispute with Walt Disney could influence regulators who are reviewing its pending megamerger with America Online.

With its megamerger with America Online hanging in the balance, Time Warner chose a path this week that could influence regulators who are reviewing the deal.

Time Warner on Monday yanked ABC TV programming from its cable network following a contract dispute with ABC's parent company, Walt Disney.

Although the parties reached a temporary agreement yesterday to reinstate ABC programming to the 11 markets that were affected, the action may not sit well with regulators who are reviewing Time Warner's megamerger with AOL.

Time Warner and AOL already face some heat over the pending merger from consumer advocacy groups such as Consumers Union and from competitors in the media and Internet industries, such as Disney. They want the combined AOL Time Warner to open its cable lines to all Internet service providers and to allow rival entertainment companies access to Internet customers.

Against this backdrop, Time Warner's handling of the Disney dispute may provide ammunition for detractors of the merger.

"I would think they would want to stay out of the headlines while their merger is going on," said William Kovacic, an antitrust professor at George Washington University and a former Federal Trade Commission regulator.

He added that although the dispute with Disney and Time Warner's action might seem irrelevant to the pending AOL merger on a "technical" basis, it can still create problems.

"There is always some danger that this will be seen as a way for regulators to justify reviewing this case for exclusivity issues," Kovacic said. "It can make it somewhat more difficult to gain acceptance for the transaction."

One attorney who is familiar with such issues but wanted to remain unnamed was more blunt.

"Government officials read headlines," he said. "What does it say about the power of cable systems or networks to get their programs carried?"

Michael Luftman, a Time Warner spokesman, said his company did not have the luxury of lying low.

"Disney was counting on that," Luftman said. "They were basically blackmailing us...Our chief negotiator said they said they could make (their complaints to Washington) go away if (Time Warner would) agree to the rest of the deal."

Among the issues in dispute, Disney wanted Time Warner to carry some of its programs as part of the cable company's basic service, rather than as a premium service. The contract between the companies had initially expired Dec. 31, and several temporary extensions had been granted to continue Disney's programming.

"We had been operating on short-term agreements with Disney, some of them lasting 30 days or less," Luftman said. "We decided enough was enough."

He added that Time Warner could not lie low because it did not expect to wrap up its pending merger before having to resolve the Disney dispute. AOL is expected to complete its acquisition of Time Warner by the end of the year.

Luftman also noted that Time Warner does not expect its actions against Disney to have any effect on receiving regulatory approval for its pending merger with AOL.

Under the agreement yesterday, ABC said its programming can remain on the Time Warner network until July 15, or until a new long-term agreement is reached.

Preston Padden, executive vice president of governmental affairs for Disney, said public policy issues are deemed as important as financial issues among top executives at the company.

"Our negotiators in the Time Warner deal wouldn't have the authority to say they would drop (complaints) to Capitol Hill," Padden said.

You've got Time Warner Christine Castro, a Disney spokeswoman, said Time Warner's actions were in part retaliation for Disney's complaints to Capitol Hill about the pending AOL merger.

Disney lobbied Washington politicians about concerns that it would not get fair access to Internet users via the merged company.

The Federal Communications Commission has two Time Warner issues before it and the Federal Trade Commission is expected to review the pending merger for antitrust violations.

In this recent spat with Time Warner, Disney petitioned the FCC after its ABC programming was dropped, calling the action illegal, as it occurred during the "sweeps" rating season. The FCC today said Time Warner violated FCC rules by dropping the programming and will now consider what enforcement action to take.

The FCC also is looking at the proposed merger's effect on consumers. Several groups, individuals and companies have submitted comments to the FCC, and the deadline for replies to those comments is May 11. The agency expects to wrap up its review by fall.