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The Murdoch-Levin spat over Fox News turns into a blood feud
On Sept. 17, Time Warner Inc.'s Gerald M. Levin made the short trip from his Manhattan office to see News Corp.'s Rupert Murdoch. Throughout the summer, the two chief executives and their aides had held cordial, constructive meetings aimed at inking a deal for Time Warner's cable system to carry Murdoch's Fox News Channel. But this session was anything but friendly.
Abruptly, Levin said the deal was off, even though Murdoch had received repeated assurances from him that the pact would be signed right after the Federal Trade Commission approved Time Warner's acquisition of Turner Broadcasting System Inc., says an executive familiar with what happened. Levin's turnabout meant Fox News was launched on Oct. 7 without being available in the crucial Manhattan market controlled by Time Warner. To make matters worse, to meet an FTC requirement that it provide a competitor to CNN on half its cable systems, Time Warner opted to carry Fox archrival MSNBC instead.
Since then, relations between Time Warner and News Corp. have gone from bad to worse--much worse. After warning Time Warner privately in early October that Murdoch was prepared to engage in a nasty public battle over the issue, top News Corp. executives have been waging an all-out war to win access to Time Warner's huge cable audience. In the process, everyone from Ted Turner to the mayor of New York to the state attorney general has weighed in. As the spat continues to escalate, one Murdoch executive warns, it is jeopardizing a wide range of deals between the two companies.
Among Murdoch's allies: Rudolph Giuliani. The mayor's wife, Donna Hanover, works for Fox as a local TV reporter. And when Giuliani first ran for mayor (and lost), he was advised by then political consultant Roger Ailes, who is now Fox News chief. Giuliani has intimated that the city agency in charge of granting cable franchises may decide in coming weeks that the Time Warner-Turner deal constitutes a change of control. If that happens, Giuliani would have a pretext to revoke Time Warner's cable franchise.
The stakes heightened on Oct. 8, when New York Attorney General Dennis Vacco launched a wide antitrust probe into Time Warner. Then, on Oct. 9, News Corp. sued in federal court, accusing Time Warner of antitrust conspiracy, breach of contract, and fraud. "When you're screwed over, you fight," says Ailes. "We're not going to quit until we're all dead. This'll be a blood war until we get clearance in New York City." Time Warner declined requests for interviews with its top executives.
HEAD-SCRATCHER. The feud may strain scores of business arrangements between the two companies. The Fox TV network buys Warner-produced programs such as The Rosie O'Donnell Show. Time Warner's HBO buys movies, such as Independence Day, made by News Corp.'s 20th Century Fox studio. And Time Warner wants its programming shown on Murdoch's distribution systems worldwide, such as British Sky Broadcasting and a Latin American satellite system. "These are important relationships that no one wants upset too much," says Cowen & Co. media analyst Harold L. Vogel.
The fight has other media executives scratching their heads. A deal isn't a deal until it's signed, say several, and News Corp.'s tactics seem excessive to some. "They totally overreacted and acted like babies with their strong-arm tactics," says a senior executive at another media company. "Murdoch says, `Do it on my terms right now, or I'll get the government involved to screw you.' It's a crazy way to deal with people."
Still, News Corp. desperately needs access to Time Warner's cable subscribers for Fox News. Murdoch has already spent $80 million and plans to go through an additional $165 million in the first year of operation. His lucrative offer to pay $10 or more per subscriber to any system willing to carry Fox News Channel hasn't been accepted by many, though Tele-Communications Inc. did offer access to 10 million subscribers in exchange for an option on a 20% equity stake in the channel. An industry insider says the deal Murdoch offered Time Warner was especially lucrative--nearly $20 a subscriber, or as much as $236 million. A Fox source denies that, saying the offer was about $13 per subscriber.
Without Time Warner, Fox's distribution is pitifully small. It claims 17 million subscribers right now, vs. MSNBC's 25 million and CNN's 70 million. Though Fox insists its numbers are correct, industry sources say Fox's real count is more like 10 million homes.
Some outsiders see Machiavellian scheming behind Time Warner's dissing of Murdoch. With few other cable operators making major commitments to Fox, they speculate, Time Warner saw a chance to deal a potentially fatal blow to a CNN competitor. "Time Warner looked at this and said: By backing out, we are going to make this service maybe not viable," says one executive. Hardball? Certainly. But it's a tactic a brawler like Murdoch surely can understand.By Elizabeth Lesly in New York