While broadband remained strong for Time Warner Cable (NYSE:TWC) in Q3 2012, the company disappointed with its pay-TV subscriber losses. Despite a smaller subscriber base, it lost 140,000 pay-TV subscribers during the quarter compared to Comcast‘s (NASDAQ:CMCSA) loss of 117,000.  The loss was even larger than what Time Warner Cable saw in the third quarter of 2011. 
Unlike Comcast, Time Warner Cable has not demonstrated any substantial improvement in its pay-TV business. Instead, the company seems to be completely relying on growth in broadband subscribers, ARPU (average revenue per user), and small incremental steps such as charging a rental fee for modem. So far this has done the trick as the company saw 9% y-o-y revenue growth in Q3 along with stable margins. 
However, the disappointing pay-TV subscriber trends point to a weakness in Time Warner Cable’s ability in bundling services. In contrast, Comcast’s efforts at promoting its Xfinity brand across pay-TV, digital voice and broadband customers seem to be paying off. As a result, approximately 75% of Comcast’s subscribers are now using at least double-play bundles and approximately 40% are on triple play.  In comparison, less than 28% of Time Warner Cable’s customers are on triple play and overall 61% of its customers are using at least two or more services.  Clearly, the company is lagging behind in terms of monetizing its existing customers and selling as many services as possible to them. Having customers on single play is risky as it makes them less stickier.
We previously noted that in terms of service enhancements, Time Warner Cable has generally lagged its competitors and that may partially be the reason for its disappointing pay-TV subscriber trends. The company needs to be more reactive to the changing trends and bring more innovation to its services. Additionally, the company needs to leverage its push in WiFi hotspots and joint marketing with Verizon (NYSE:VZ) to increase the stickiness of its customer base.
We are in the process of updating our pricing model for Time Warner Cable in light of the recent earnings and will have an update ready soon.
Our price estimate for Time Warner Cable stands at $88, implying a discount of more than 10% to the market price.Notes: