Pay-TV subscriber losses remained high even though the broadband business did well for Time Warner Cable (NYSE:TWC) in Q4 2012. With investors not too happy with the results, the stock has declined by roughly 10% since the earnings announcement. The company doesn’t seem to have a handle on its pay-TV business. Its cable competitor Comcast (NASDAQ:CMCSA) has done much better in the same business. Time Warner Cable has been slow in embracing the concept of “TV Everywhere,” which means making programming accessible to customers from any device and anywhere. It has slightly lagged behind in being efficient with bundling and hasn’t been able to manage post-promotion pricing very well. Going forward, the company intends to focus on better pricing and packaging of its programming, improving customer retention through enhanced products and better customer service, and expanding business services.
Disappointing Pay-TV Results
Compared to a loss of 140,000 net pay-TV subscribers in Q3 2012, Time Warner Cable lost 129,000 subscribers in Q4.  While this may seem to be an improvement over Q3, the losses did not improve when compared to Q4 of 2011. While approximately 75% of Comcast’s subscribers use 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.
Excluding the impact of Insight Communications’ acquisition, Time Warner Cable’s fourth quarter’s pay-TV revenues declined by 3%.  Even broadband’s double-digit growth is not helping much anymore as overall revenues grew by just 1% (excluding the acquisition impact). Pay-TV is still the largest business for the company and it needs to ensure that 2013 is the year of revival. Time Warner Cable cannot charge too much in order to ensure revenue growth and make up for subscriber losses. Time Warner Cable has been able to increase its pricing by 16% during the same period to partially tackle this issue.  However, any attempt to increase price significantly will adversely impact the subscriber additions. The company’s programming cost per subscriber has risen by 32% over the last 4 years while the consumer price index has increased by only 9%. 
The company must place its hope in adding unique programming, improving its live programming streaming app and launching a streaming service similar to Comcast’s Xfinity Streampix. In addition to this, it needs to experiment with different programming tiers and pricing bundles and find the right fit that can attract and retain customers.
If Time Warner Cable’s disappointing performance continues in 2013, there could be downside of more than 5% to our price estimate. Our present estimate for Time Warner Cable stands at $93, implying a premium 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.
We are in the process of updating our price estimate in the light of recent earnings.Notes: