DISNEY SERVES NOTICE

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Disney Channel has notified cable operators that still
offer the network as a premium service that once their carriage deals expire, they must
relaunch it as a basic channel or stop carrying it.

Disney Channel, owned by The Walt Disney Co., sent out the
notifications during the past several weeks to its remaining premium affiliates, according
to senior vice president of sales and affiliate marketing Charlie Nooney.

Essentially, the letters said Disney Channel will not renew
contracts with affiliates that carry the high-profile children's network as a pay service.

Time Warner Cable and Comcast Corp. are the two major MSO
holdouts that generally have yet to convert Disney Channel to a basic service.

Disney Channel is trying to complete its conversion from a
pay service to basic. The network's distribution has been increasing, and it now reaches
52 million subscribers. Roughly just under 2 million of those subscribers are still
getting Disney Channel as a premium service, Nooney said.

"We're sitting down with all of the remaining
operators [who carry Disney Channel as a premium] to transition it from a pay to a
basic," he said. "It's a very small part of our base."

Some cable operators have been reluctant to move Disney
Channel to basic because doing so means that they must take a big cash-flow hits, shelling
out hefty license fees for the channel, instead of charging subscribers $9 per month and
then splitting that revenue with Disney.

Also, some MSO officials, still reeling from ESPN's
rate-card hike this year, said they are loath to give any other Disney-owned cable network
additional revenue.

"There's a high concern about having any more
programming costs jammed down by a company that just brought us a 20 percent ESPN
increase," one operator source said.

When asked if Disney Channel will be dropped by some cable
systems that don't want to carry it on basic, Nooney said, "We will work with
operators so that is not the result of this. We're doing everything possible so that won't
be a scenario."

Disney Channel started its conversion to a basic service
nine years ago, according to Nooney, so the recent notices "should not be taking
anyone by surprise. No one can accuse us of doing it overnight."

He added: "The reason for doing this, from our
standpoint and the operators' standpoint, is that we need to complete the conversion and
move on. Now we're at a point in time when we truly are managing our business as a basic
business. It's in our interest to be fully distributed as soon as possible."

Time Warner declined to comment on Disney Channel's status
or on whether the MSO will convert the service to basic or drop it once the affiliation
deal expires. One source said Time Warner's contract expires at the end of this year, but
Nooney wouldn't comment other than to say that he is in talks with the MSO.

Comcast's contract with Disney Channel expires in a
year-and-a-half, MSO spokesman Joe Waz said, adding, "We are in discussions with them
about the future."

Time Warner has only converted Disney Channel to a basic
channel in a few scattered markets where it faces competition. It did so, for example,

in some Ohio systems that

face direct competition from Ameritech New Media, which
carries Disney on its expanded-basic tiers. Comcast has Disney Channel on basic on some
systems it acquired.

Several operators said Disney Channel's monthly license fee
is roughly 75 cents per subscriber, which is relatively expensive as networks go.

Nooney justified that price by saying Disney Channel is
"a high-quality service" with a reputation and consumer respect. And he pointed
out that the network needs to charge a higher rate because it doesn't carry any
advertising.

Since direct-broadcast satellite operators carry Disney
Channel as a basic service, cable operators have felt competitive pressure to put the
network on their expanded-basic tiers.

But converting Disney Channel to basic is an expensive
proposition.

An operator of a 100,000-subscriber system would have to
pay Disney $75,000 per month to carry it on expanded basic. In contrast, as a premium
service, an operator would charge subscribers $9 per month for the service and split that
with Disney Channel. At 10 percent penetration, that cable operator would collect $90,000
for Disney as a premium, keeping $45,000 and paying $45,000 to the programmer.

So in that conversion-to-

basic scenario, the bottom line is that the operator would
have to ante up $75,000 per month to Disney Channel, rather than pocketing $45,000 in
additional revenue, assuming that it wouldn't charge more for an expanded-basic tier
because it included Disney Channel.

Operators also complained that Disney Channel can't give
systems local ad avails because it runs no commercials.

In addition to Comcast and Time Warner, a number of small
and midsized cable operators still carry Disney Channel as a premium, including Prestige
Cable of Cartersville, Ga.

Prestige hasn't gotten its notice from Disney Channel yet,
but chief financial officer Rob Buckfelder is bracing for it. "We realize it may be
coming," he said. "We're going to try to continue to work with them."

Buckfelder hopes his MSO won't have to drop Disney Channel,
but noted that it's expensive to make the conversion to basic. "We look at it
long-term," he said. "How much will it cost us? It's a struggle. It's a tough
issue."

Other operators pointed out that Disney Channel now has a
rising number of strong rivals in the kids' arena, such as newcomers Noggin, Boomerang and
Fox Family Channel's boyzChannel and girlzChannel.

"Disney Channel is no longer invaluable," one
operator said.

At least one former cable operator, Mike Egan, said
converting Disney Channel to basic wasn't quite as painful as he had anticipated.

Egan is the former principle of Renaissance Media Group
LLC, which had acquired a number of cable systems that offered Disney Channel as a
premium. When he had to redo those deals, Disney Channel told him it wasn't renewing any
contracts for the network as a premium, so he was forced to convert it.

"It was really a take-it-

or-leave-it proposition from them," Egan said.

The conversion eventually did work out, however. "It
was a big cash-flow hit," Egan said, "but we used it as a lead for a
basic-subscriber-acquisition effort. It became our hook."

Renaissance was not only able to use Disney Channel as a
hedge against DBS, but it was able to tout the network becoming a basic channel to the
local town fathers, according to Egan.

"We got over the hump, and we felt that it was a
win-win situation," he added.

But Buckfelder pointed out that Renaissance has since sold
its systems, while Prestige is in the business for the long haul, and it will feel the
impact of a Disney Channel conversion for years.

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