Video subscriber losses may worsen, but the broadband business is likely to continue to show strength for Time Warner Cable (NYSE:TWC) in its Q4 2012 results, set to release on January 31. The company has been slow in embracing the concept of “TV Everywhere,” which basically means making programming accessible to customers from any device and anywhere. Additionally, it hasn’t done too well with its bundling services and is focused on specific markets, and as a result, its pay-TV business has suffered. However, the broadband business has done well due to rising demand for faster Internet and decline of DSL Internet connections. The trend has been more or less the same for the past few quarters, and Time Warner Cable has grown its profits despite a dismal performance in its pay-TV business. Nevertheless, sooner or later, it will need to stem its pay-TV subscriber losses.
Here’s what we’re watching in this earnings release.
- Time Warner Cable Q1 Review: High-Speed Data Leads Revenue Growth, Company Gains Pay-TV Subscribers
- How Are Time Warner Cable’s Revenue & EBITDA Composition Expected To Change By 2020?
- What Has Led To A ~20% Increase In Time Warner Cable’s Revenues & EBITDA In The Last Five Years?
- How Has Time Warner Cable’s Revenue Composition Changed In The Last Five Years?
- How Much Can Time Warner Cable’s Revenues Grow Over the Next Five Years?
- What’s Time Warner Cable’s Fundamental Value Based On Expected 2016 Results?
Video Subscriber Losses Could Continue To Be Disappointing
Time Warner Cable lost 140,000 net video subscribers in Q3 2012, which was higher than its corresponding losses in 2011. This may continue in Q4 2012 as some analysts forecasts that Time Warner Cable’s video subscriber losses will worsen compared to Q4 of 2011.  The company’s continued disappointing pay-TV subscriber trends point to a weakness in its ability in bundling services.
While approximately 75% of Comcast’s subscribers are now using at least double-play bundles and approximately 40% are on triple-play, fewer 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.  This shows that Time Warner Cable is not monetizing its existing customers and selling other services as well as Comcast. Having customers on single-play is risky as it makes them less sticky and more likely to cancel their service.
If Time Warner Cable’s disappointing performance continues in the upcoming quarter, and the company does not get back on its growth track, there could be downside of more than 5% to our price estimate. Our present estimate for Time Warner Cable stands at $93, implying a discount of about 5% to the market price. The potential downside results from the assumption that the company’s subscriber base will decline to 11.6 million over the next six years, compared to the current base of close to 12.2 million.
Broadband Should Perform Well, Wi-fi Hotspots Expanding
Time Warner Cable’s profit margins have been growing for the past few years due to its success in the broadband business, which is likely to continue in the upcoming quarter as well. We estimate that the broadband business constitutes close to 30% of Time Warner Cable’s value. To enhance the appeal of its broadband service, the company has been building out nationwide network of Wi-Fi hotspots that can be accessed by its subscribers for free. Over the course of long term, this strategy should pay off and aid Time Warner Cable’s broadband expansion. There may also be a slight positive impact from the company’s new strategy of charging broadband modem fee.
The last few years have seen a significant rise in Internet-enabled mobile devices. With increased web activity on mobile devices, Wi-fi usage has also increased. Smartphone owners tend to use both cellular data services as well as Wi-fi for their Internet needs. According to a comScore report released in 2012, about 70% of iPhone users and more than 30% of Android-based smartphone users browse via both mobile and Wi-Fi networks. 
According to a study conducted by Nokia, stationary locations such as home, restaurants, coffee shops, etc., are commonly used spots for mobile web access.  Fortunately, for Time Warner Cable, such stationary locations are also ideally suited for Wif-Fi hotspots. This implies that consumers accessing the web on their mobile devices such as smartphones, tablets and laptops may find that most of their mobile web usage occurs at these stationary locations. Therefore, they could offload a significant amount of data usage to Wi-fi.Notes:
- Comcast, Cablevision, Charter to shore up video losses in Q4, says Jefferies, Fierce Telecom, Jan 18 2012 [↩]
- Comcast and Time Warner Cable’s Q3 2012 Earnings Transcript [↩]
- iPhones Have Significantly Higher Rates of Wi-Fi Utilization than Android Phones in the U.S. and U.K., comScore press release, April 2 2012 [↩]
- How People Use the Web on Mobile Devices, research.nokia.com [↩]