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Investment Overview for Time Warner Cable (NYSE:TWC)
Time Warner Cable is the second largest U.S. cable operator, providing consumers and businesses with pay-TV, broadband and digital voice (VoIP) services. The company primarily makes money through monthly subscription fees for its services, advertising carried on some its channels and on-demand and pay-per-view programming.
Time Warner Cable has agreed to merge itself with Comcast, the largest pay-TV operator in the U.S. Both the companies are currently awaiting regulatory approval for the proposed merger. If the merger goes through, it would take combined entity's pay-TV market share to 30% and also generate more than $1.5 billion annually in operational efficiencies.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Time Warner Cable's value that present opportunities for upside or downside to the current Trefis price estimate for Time Warner Cable:
Time Warner Cable Broadband Subscriber Fees: We estimate this figure to grow in the coming years and be north of $75 by the end of our forecast period as compared to $50 in 2013. However, there could be an upside of more than 20% to our price estimate if this figure were to be north of $100 in the coming years driven by the rapid growth in broadband market. On the other hand, there could be downside of around 20% to our price estimate, if the company is unable to raise the prices amid an increased competition in the broadband market.
Time Warner Cable Pay-TV Subscriber Fees: We estimate this figure to grow from $66 levels currently to $84 by the end of our forecast period. However there could be more than 15% upside to our price estimate if Time Warner Cable can raise its subscription prices and the average fees stands around $105 by the end of our forecast period. On the other hand, there could be downside of a similar order, if the company fails to pass the rising costs to its customers and the subscriber fees stays rangebound around $65 levels
For additional details, select a driver above or select a division from the interactive Trefis split for Time Warner Cable at the top of the page.
We believe cable TV (pay-TV) is the most valuable segment, followed by broadband. This is primarily due to following reasons:
High number of subscribers
Time Warner Cable has more than 11 million pay-TV subscribers and more than 12 million broadband subscribers currently. Going forward we expect that broadband subscribers will continue to grow while the pay-TV subscribers will remain more or less stagnant in long-term.
High monthly subscription fees
There is quite a difference between fee per subscriber for Time Warner Cable's pay-TV and broadband subscribers. Time Warner Cable is making on average $66 per month from its pay-TV subscribers compared to $46 per month for broadband subscribers. This $66 figure excludes on-demand and DVR services and the fees would be much higher if they were included.
Migration to digital platform
Time Warner Cable has shifted to a digital platform from analog platform used earlier. It has benefited by migrating customers to digital services, since it frees up significant delivery bandwidth by eliminating the analog service. Moreover digital services offer higher profits for Time Warner Cable, compared with analog TV services.
Increasing Competition with Telecoms, such as AT&T and Verizon
AT&T's U-Verse and Verizon's FiOS are fiber optic TV services that have gained traction in some geographic areas. We expect competition in this space to result in declining subscription prices for both telecom and cable operators.
Online video services such as Netflix emerging as a potential threat
Time Warner Cable's on-demand services are increasingly facing competition from online streaming companies such as Netflix and Hulu. Netflix has been able to grow its subscribers at a rapid pace. The company has been consistently adding to its movie and TV show catalog. Although there is no evidence currently that services such as Netflix are encouraging people to cut their cable cords, over time this may emerge as a more serious threat.
Trefis Forecast Rationale for Time Warner Cable's Pay-TV Market Share
This represents Time Warner Cable's share of the U.S. pay-TV market. The pay-TV market refers to cable TV and satellite TV.
Pay-TV viewers have to subscribe to a connection from one of the operators and pay for the service on a monthly basis. The contracts are usually time-bound.
Time Warner Cable is the second largest cable provider in the U.S. (behind Comcast), with nearly 11.1% of the U.S. pay-TV market share as of 2013. The company's market share has declined over the past few years and the slight increase in 2012 can be attributed to acquisition of Insight Communication. Going forward, we expect market share to continue to decline albeit at a slower pace.
Trefis considered the following factors for its forecast:
- Intense competition in the pay-TV market
- Time Warner Cable faces intense competition from other pay-TV companies such as Comcast, DirecTV, Dish Network, AT&T, Verizon etc. As a result it has consistently lost pay-TV subscribers over the past few years.
- The U.S. cable market is more or less saturated, with limited scope for expanding subscriber base.
- Acquisition is the easiest way to gain market share but FCC is unlikely to view any significant acquisition favorably
- In an intensely competitive operating environment, the easiest way to gain market share is by acquisition.
- Nevertheless it is going to difficult to make a major successful bid in pay-TV service business.
- Time Warner Cable's proposed merger with Comcast is pending with regulatory bodies for approval. If approved, the combined entity will then control 30% share in the U.S. pay-TV market.
- Loss of analog subscribers
- Most of the company's subscriber losses are concentrated in its analog base. As these subscribers migrate to digital platform, they are exploring multiple options.
- This trend is likely to continue for several quarters as Time Warner Cable has a higher proportion of its subscribers on analog platform, compared to its rivals such as Comcast.
Back to Company Overview
- Time Warner Cable's efforts & other developments
- Over the course of past few quarters, Time Warner Cable has made some efforts towards improving its service. The company launched streaming apps on iPad & android devices to enable live streaming of its programming, and offered cheaper programming packages to target value conscious customers.
- Furthermore, the telcos have reduced their pace of expansion of fiber optic services and that should help Time Warner in future. In fact, Time Warner is going to co-market its products with Verizon while the latter will focus more on wireless service.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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