Time Warner’s Stock Depends on Modest Subscriber Fee Growth for TNT Channel

TNT, a cable channel owned by Time Warner (NYSE:TWX), primarily focuses on drama but also covers a small portion of sports programming. Some of its shows include The Closer, Saving Grace, Leverage, NBA games and NASCAR races. The channel competes with Disney’s (NYSE:DIS) A&E and ABC Family, and News Corp’s (NASDAQ:NWS) FX.  We estimate that TNT accounts for about 13% of the $27 Trefis price estimate for Time Warner’s stock.

TNT has a dual revenue stream and makes money via sales of advertising slots as well as by collecting subscription fees from cable and satellite operators (Comcast, Dish). With more than 80% penetration amongst US pay TV households, TNT generates about $1.1 billion in revenue through subscription fees, which account for 60% of its total revenues.

We estimate that the average fee per subscriber for TNT has increased from about 86 cents in 2005 to about 94 cents in 2009.

We expect TNT to maintain average subscription fee growth at a moderate rate of about 2 cents per year, in line with the historical rate increase, driven by the following factors:

1) Fee per subscriber is generally negotiated as multi-year contracts with annual dollar increases pre-specified

Historical dollar increases in fees per subscriber are considered strong predictors of future growth for TV channels. Historically, TNT has been able to increase its fee per subscriber between 1 and 2 cents, which is about the average for other channels.

2) Mix of drama and sports programming extends appeal to broader audience

TNT was one of the early channels to narrow its focus to drama. With popular shows like The Closer, it has successfully branded itself as a “We know drama” channel.  However, with a healthy mix of sports programming, it has diversified its audience to sports enthusiasts, and has created a broader appeal which should help TNT maintain subscriber fee growth.

3) Pricing lacks competitiveness; significant hike is very unlikely

TNT’s fee per subscriber of 94 cents in 2009 is much higher than that of ABC family’s 22 cents and A&E’s 27 cents.  Also, FX Networks’ fee per subscriber of about 40 cents stands at less than half of TNT’s.  This suggests that TNT already commands a significant premium over its competitors which may act as a limit to its future pricing growth.

You can modify our forecast above to see how Time Warner’s stock may be impacted if TNT’s fee per subscriber were to stabilize rather than grow as we forecast.  Stabilization around current levels could lead to a loss of value of as much as 20 cents per share for Time Warner.

For additional analysis and forecasts, here is our complete model for Time Warner’s stock.