UPDATE, 7:35 PM: Time Warner Cable says that it will give a credit to Showtime and TMC subscribers “based on the number of days those channels are not available to them.” It won’t extend the policy to broadcast and basic cable services, though, “because the whole package continues to provide value.”

PREVIOUS, 2:07 PM: CBS and Time Warner Cable negotiators failed to reach an agreement in their retransmission deal negotiations. Shortly after 5:00 PM ET some 3.5M TWC customers in New York, Los Angeles, and Dallas lost programming from their CBS-owned local stations, and all 11.7M TWC subscribers lost Showtime, TMC, FLIX, and Smithsonian. Los Angeles customers also lost CBS-owned independent station KCAL, which broadcasts some Los Angeles Dodgers baseball games. TWC customers who turn to CBS will see a graphic saying that “CBS has demanded an outrageous increase for programming that CBS delivers free over the air and online.” It tells viewers that they can use an antenna to see CBS, and “as a courtesy, we will provide replacement programming from Starz Kids and Family on a temporary basis beginning shortly.” (See the screen shot at left.) In New York, the graphic tells viewers that they can watch CBS on streaming service Aereo.

Separately, TWC says that “CBS has refused to have a productive discussion. It’s become clear that no matter how much time we give them, they’re not willing to come to reasonable terms.”

CBS counters that it didn’t require TWC to take the channels down, and the blackout of Showtime is “a wholly punitive measure.” It urges TWC customers to consider switching to a competitor such as DirecTV, Verizon FiOS or AT&T U-verse. The cable company “has conducted negotiations in a combative and non-productive spirit, indulging in pointless brinksmanship and distorted public positioning — such as the fictional and ridiculous 600% increase CBS supposedly demanded — while maintaining antiquated positions no longer held by any other programming distributor in the business.” The broadcaster adds it wants “fair compensation for the most-watched television network with the most popular content in the world. We will not accept less.”

The smart money on Wall Street is betting that CBS will prevail, ultimately walking away with a big price increase. The companies haven’t discussed proposals in detail, but RBC Capital Markets’ David Bank says the broadcaster was lobbying for as much as $2 per subscriber each month, more than twice the current rate the cable company pays. But today BTIG’s Richard Greenfield urged TWC to dig in its heels which “most likely means an extended multi-week blackout.” If it doesn’t, then “Time Warner Cable will have virtually no leverage in battles with other broadcasters that occur at the end of 2013/early 2014….Simply put, this is a ‘Once-in-a-Cable Lifetime Opportunity’ to battle retrans.”

CBS will feel its pain from the black out right away as it sees ratings and ad dollars fall. TWC accounts for about 19% of WCBS’ New York area viewers, 37% of KCBS’ audience around Los Angeles, and 25% of KTVT’s market in Dallas, according to data from SNL Kagan. But time doesn’t appear to be on TWC’s side. Football fans will clamber to see NFL games on the network when the season begins in September. Viewer anger will intensify once the fall primetime schedule kicks in. Meanwhile Charter Communications and its leading shareholder, Liberty Media’s John Malone, are circling for an opportunity to make a bid for TWC. The operator’s CEO Glenn Britt is cool to the idea. But he recently announced that he will step aside when his contract expires at the end of 2013.

The main focus of the black out is on CBS-owned stations that carry the network’s programming in large TWC markets: New York’s WCBS, Los Angeles’ KCBS, and Dallas’ KTVT. But it also affects CBS-owned independent stations WLNY in New York, KCAL in Los Angeles, and KTXA in Dallas. In addition, some TWC customers will lose CBS’ Boston stations WBZ and independent WSBK, Pittsburgh’s KDKA and WPCW (The CW), Chicago’s WBBM, Detroit’s WKBD (The CW), and Denver’s KCNC.

Here’s CBS’ complete statement: