Time Warner Cable’s MSG Deal Keeps Customers Happy, Adds Little to Bottom Line

Following a dispute that lasted for almost two months, Time Warner Cable (NYSE:TWC) and MSG networks have finally reached a multi-year deal under which Time Warner Cable will carry MSG’s networks including MSG, MSG+ and Fuse. ^[1] This brings an end to the blackout and the company’s subscribers in New York will be able to see Knicks games. The dispute was one of the many disputes that have occurred in recent past between media companies and pay-TV service providers such as Dish Network (NASDAQ:DISH) and DirecTV (NASDAQ:DTV). In this context, let’s try to understand how much financial value MSG brings to Time Warner Cable and why is it critical to resolve such disputes.

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Direct Financial Value Is Little

MSG & MSG+ charge about $4.65 per subscriber. ^[2] Furthermore, Time Warner Cable has about 2.8 million subscribers in New York & New Jersey area that were affected due to stand off. ^[2] This implies that Time Warner Cable earns roughly $156 million in annual revenues through this channel. This amounts to roughly just 2% of Time Warner Cable’s digital cable revenues. We estimate that digital cable constitutes about 40% to Time Warner Cable’s overall value. This implies that the financial value contribution of MSG Networks to Time Warner Cable is less than 1%.

So what is the hoopla about?

It Is Critical To Resolve These Disputes, No Matter How Small

Lately, the pay-TV market has become very competitive. With a wider range of options available and companies offering discounts for first-time subscribers, it has become easier for subscribers to switch. Furthermore, the sluggish economy has encouraged a few of them to simply disconnect and use over-the-air programming, and later re-connect when conditions get better.

The point is that customer satisfaction is of utmost importance and a little discomfort can encourage subscribers to switch service providers. Cable companies have especially felt this subscriber migration over the past few years. Time Warner Cable alone lost more than 120,000 subscribers in Q4 of 2011.

The increasing competition and expansion of options and alternative services makes it critical for the cable companies to keep their service top notch and satisfy all the subscribers. Even though MSG’s financial value in the context of Time Warner Cable’s overall business is quite low, the impact of possible subscriber disconnects due to black-out could be quite high since these subscribers will not just drop MSG, but the whole TV package.

Our price estimate for Time Warner Cable stands at $65.67, implying close to 15% discount to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Madison Square Garden, Time Warner Cable finalize deal to bring Knicks games to 2M subscribers, Washington Post, Feb 20 2012 [↩]
2. MSG-Time Warner breakdown sign of times, espn.go.com, Jan 2 2012 [↩] [↩]