Time Warner Cable (NYSE:TWC) has stated that it will start charging a fee of $3.95 per month for the modem it provides to its broadband subscribers.  For those who wish to buy their own modem, this fee will not be applied.
So far, the company has borne the modem costs in order to promote its broadband services. It appears that the move is motivated by the fact that Comcast (NASDAQ:CMCSA) already charges such a fee and that the broadband demand is strong enough to guarantee that an additional fee will not be a hindrance. Further, this is a smart way for the cable companies to mitigate the margin pressure from increasing pay-TV programming costs.
We estimate the broadband business constitutes roughly 30% to Time Warner Cable’s value. We further estimate that the average monthly broadband subscription fee per Time Warner Cable subscriber stood at $43 in 2011. This figure was roughly $3 less than the corresponding figure for Comcast. With Time Warner Cable charging a monthly fee for the modem, there is an opportunity to close this gap.
If every broadband subscriber of Time Warner Cable starts paying the monthly modem fee, there could be more than 5% upside to our price estimate based on higher fee per subscriber and slightly higher margins. This implementation will be directly additive to profits since the company has been bearing modem-related costs thus far.
Our price estimate for Time Warner Cable stands at $88, implying a discount of about 10% to the market price.Notes: