Weekly Pay-TV Notes: Netflix Splits Stock, Charter Tries To Impress FCC And TWC Subject Of First Net Neutrality Complaint

The pay-TV industry saw significant activity this week, with Netflix announcing a seven-for-one stock split. On a separate note, Charter Communications recently made certain promises to the FCC in lieu of its deal with Time Warner Cable (TWC) being approved. In yet another, TWC became the first company to be accused of unfair practices under the new net neutrality laws. On that note, we discuss below these developments related to the pay-TV companies over the past few days.

Netflix Announces 7-for-1 Stock Split

Streaming giant Netflix (NASDAQ:NFLX) announced Tuesday that the company’s Board of Directors have approved a seven-for-one stock split. ^[1] As per the announcement, the stock split will be effected in the form of a stock dividend of six additional shares of common stock for each outstanding share of common stock. Stockholders of record at the close of business on July 2, 2015 will be eligible for the stock dividend, which will become payable on July 14, 2015. The company’s shares will start trading at the post-split price from July 15, 2015 onwards. Additionally, Netflix’s transfer agent Computershare Trust Company has been entrusted with the responsibility of delivering the new shares.

Netflix was widely expected to go for a stock split once its shareholders approved a motion to increase the company’s share authorization limit. ^[2] The limit was increased nearly 30 times from 170 million to 5 billion. The company is the top performer on the NASDAQ 100 this year, with its stock up 90% year-to-date.

Netflix’s stock declined around 1% over the week through Thursday. We currently have a price estimate of $549 for Netflix. For the year 2015, we estimate revenues of $6.77 billion, compared to consensus estimate of $6.78 billion, and EPS of $1.52, compared to a consensus estimate of $1.55.

With TWC Merger On Its Mind, Charter Tries To Impress FCC

With the proposed Time Warner Cable (NYSE:TWC) – Charter Communications (NASDAQ:CHTR) merger currently under regulatory review, Charter is doing its best to sway the FCC’s decision in its favor. In a recent filing with the FCC, the company said that it will provide faster Internet service with no data caps to TWC and Bright House customers. ^[3] Charter also expects that the service will cost less than other comparable services. Additionally, Charter pledged to comply with the FCC’s new net neutrality rules, including the one against “paid prioritization”, which disallows different treatment for different websites and content. The company also promised to abide by the FCC’s ban on blocking or throttling websites.

Charter also stressed on the fact that TWC-Charter combine will wield comparatively less influence than what the now-defunct Comcast-TWC combine would have wielded. The proposed Comcast-TWC merger faced stringent opposition from the general public, industry players and consumer-advocacy groups ever since it was announced. With regulatory approval seeming a longshot, Comcast decided that best step would be to drop the merger plans altogether. Charter doesn’t want its plans to end up the same way and is trying to distance itself as much as it can from the doomed Comcast-TWC merger.

FCC Receives First Net Neutrality Complaint

Time Warner Cable (NYSE:TWC) was also in the news for a more dubious reason. The Internet service provider became the first company to be accused of unfair practices under the new net neutrality laws. The web hosting company Commercial Network Services (CNS) filed an informal complaint with the FCC claiming that TWC was in violation of the FCC’s rules on “paid prioritization” and throttling. ^[4] The complaint highlighted the interconnection issues between the two companies, with CNS stating that TWC is “failing to fulfill obligations to its subscribers” by “opting to use more congested traffic routes rather than pay for interconnections.” CNS further elaborated that “by refusing to accept the freely available direct route to the edge-provider of the consumers’ choosing, TWC is unnecessarily increasing latency and congestion between the consumer and the edge provider by instead sending traffic through higher latency and routinely congested transit routes.” CNS also argued that TWC disobeyed “paid prioritization” rules when it created a paid fast lane through its peering policy. ^[4]

When the FCC first made the new net neutrality rule public, the commission avoided setting definite limits for issues such as interconnection deals and positioned itself as a punisher of bad behavior in such matters. ^[5] Given this framework, it is unclear how the FCC will look upon the TWC-CNS dispute. The FCC decision on the matter will give us a better idea on how the FCC plans to approach such issues in the future.

Time Warner Cable’s stock gained around 1% over the week through Thursday. We currently have a price estimate of $183 for Time Warner Cable. For the year 2015, we estimate revenues of $23.8 billion, in line with the consensus estimate, and EPS of $7.38, compared to a consensus estimate of $7.33.

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1. Netflix Announces Seven-For-One Stock Split, June 23, 2015, Netflix Investor News [↩]
2. Netflix investors approve share increase, company to pursue stock split, Jun 9, 2015, Reuters [↩]
3. To sway regulators, Charter pledges to play nice on Internet, June 25, 2015, Statesman [↩]
4. Time Warner Cable Hit With Net-Neutrality Complaint, June 22, 2015, Multichannel News [↩] [↩]
5. FCC Leaves Itself Wiggle Room on Net-Neutrality Rules, March 12, 2015, Wall Street Journal [↩]