Time Warner Cable (NYSE:TWC) recently dropped the Ovation channel from its programming packages, stating that the expenses did not justify its value to customers. That might be true, given that Time Warner Cable was paying close to 7 cents per subscriber per month to Ovation, implying close to $10 million in annual payments given its subscriber base of close to 12 million.  The company has stated that only 1% of its customers watch the channel at any given day.  This implies that close to 120,000 customers watch Ovation. This doesn’t make economic sense if we compare it to Time Warner Cable’s overall packages and costs.
Time Warner Cable paid close to $4.3 billion in total programming costs to media companies last year.  This implies annual payment of close to $360 per subscriber. However, given Ovation’s cost and viewership, it appears that Time Warner Cable is paying close to $80 per subscriber annually (counting only effective subscribers that watch the channel). That’s a lot of money to pay just for one channel! In comparison, its overall programming packages include hundreds of channels, including high priced ESPN, and yet make $360 per subscriber annually on a combined basis.
This move seems to be clearly justified and underlines Time Warner Cable’s strategy of cost control, rather than taking aggressive steps to control its subscriber losses.
We have previously stated that Time Warner Cable has been faring relatively poorly in terms of pay-TV subscriber trends compared to its peers. The company has been slow in terms of embracing the concept of “TV Everywhere”, which is basically making programming accessible to customers from any device and anywhere. In addition to this, the company hasn’t done as well as Comcast (NASDAQ:CMCSA) when it comes to bundling.
Despite this, the company has been growing its EBITDA (earnings before interest, taxes, depreciation and amortization) margins for the past few years on the back of its success in broadband. The strategy of trimming the programming packages is going to further support its margins. We note that Time Warner Cable’s programming expenses increased by 6.3% and 8.2% for the first nine months of 2012 and Q3 2012 respectively.  In comparison, its video revenues increased by just 3.4% and 3.7% for the respective time periods.  There is clear pressure on margins and while the company isn’t doing well with its pay-TV revenue growth, it can certainly add value by making sure that the pressure on profits is minimized.
We expect more such decisions in the future as the company tries to control its costs and keeps pricing competitive. Furthermore, one of its strategies of offering low priced programming packages for value conscious customers will benefit from such moves.
Our price estimate for Time Warner Cable stands at $93, implying a discount of less than 5% to the market price.Notes: