Should Time Warner Cable Worry About Cord Cutting?
Cable companies like Time Warner Cable (NYSE:TWC) and Comcast (NASDAQ:CMCSA) have seen pay-TV subscriber growth moderate over the past few years. One topic that often arises is the idea that consumers will “cut their cords” as consumers turn their backs on bundled services for internet, movies and cable in favor of unbundled alternatives delivered via the internet, satellite and or mobile operators.
The pay-TV industry has talked about cord cutting for quite sometime now, and although there is no conclusive proof yet available, many argue that emergence of internet video and satellite providers like DirecTV (NASDAQ:DTV) and Dish (NASDAQ:DISH) is likely to lead to consumers drop pay-TV services. Given the high levels of pay-TV service for Time Warner Cable, a large drop in penetration or pricing pressures could hurt the stock. We currently have a price estimate for Time Warner of $55.46.
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Incentives to Cut Cord – HD Antenna + Online Video
One of the obvious arguments in favor of cord cutting is emergence of online video platforms like Netflix, iTunes and Hulu. Though companies like Netflix and Hulu have a very minimal subscription fee, their TV content is limited for the time being but growing quickly. However if a user complements his or her Netflix or Hulu subscription with à la carte purchases from iTunes for shows, the overall combination does offer something to think about.
An interesting development in this respect is that the latest antennas are capable of displaying a picture as sharp as, and sometimes better, than cable or satellite. These cost somewhere between $25 to $150 and are capable of receiving HD transmission as well. [1]
With the above, an average viewer can watch free broadcast content with high quality picture and still potentially save money compared to average pay-TV subscription service.
Is it Really Happening?
Craig Moffett, an analyst with Sanford C. Bernstein, states that based on his talks with industry executives, most of the subscribers that are canceling their services are going for over-the-air TV [1]. Comcast also acknowledged in a recent call with investors that some customers had dropped subscription service for over-the-air TV [1]. Thus it looks like some of the customers are turning back to their antennas in order to save money.
How Can it Impact Time Warner Cable?
Time Warner Cable has two type of pay-TV subscribers: Digital Cable and Basic (Analog) Cable. As fee per basic cable subscriber is much less compared to fee per digital subscriber, these subscribers are budget conscious. If the cord cutting phenomenon indeed takes shape, we believe that it would first impact Time Warner Cable’s basic cable subscribers. However this business constitutes only 2% of the stock so we the pay-TV customers are the ones to watch.
In the above, you can see how change in pay-TV penetration can impact Time Warner Cable’s value. There is additional downside triggered by potential declines in Time Warner Cable’s pay-TV market share since cable companies like Time Warner Cable and Comcast seem to be the one most affected by cord cutting.
You can see the complete $55.46 Trefis price estimate for Time Warner Cable’s stock here.
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