Time Warner Cable (NYSE:TWC) is the second largest cable operator in the US and competes with AT&T (NYSE:T), Verizon (NYSE:VZ), DirecTV (NASDAQ:DTV) and Dish Network (NASDAQ:DISH) in the pay TV and broadband internet businesses. We estimate digital cable and broadband businesses each contribute about 35% to the $37 Trefis price estimate for Time Warner Cable’s stock. Below we discuss each of these businesses and their contribution to the TWC stock.
Digital Cable Constitutes 36% of TWC’s Stock
Digital cable refers to the reception of Time Warner Cable’s digital pay TV programming. We estimate that digital cable contributes about 36% of Time Warner Cable’s estimated $12.9 billion of value, making it a $4.6 billion business for the company.
The high contribution can be attributed to Time Warner Cable’s large pay TV subscriber base and increasing digital penetration. Although Time Warner cable’s pay TV market share has declined in recent years, we expect it to stabilize as the company attempts to hold on to its subscribers with advanced video-on-demand (VoD) offerings and bundled packages at competitive prices. You can modify the forecast below to see see how TWC’s stock is impacted by its pay TV market share.
Despite a decline in pay TV market share, TWC’s rapidly increasing digital penetration within its own subscriber base is one of the prime reasons for the high contribution of digital cable to TWC’s stock. We estimate that digital penetration will increase to more than 90% by the end of the Trefis forecast period.
Broadband Internet Constitutes 35% of TWC’s Stock
We estimate that broadband internet contributes around 35% of Time Warner Cable’s estimated $12.9 billion value, making it a $4.5 billion business for the company. Time Warner Cable has witnessed a consistent increase in broadband market share except for a slowdown in the past two years due to rising competition and saturation in the broadband market. We expect the company’s broadband market share to reach 13% by the end of the Trefis forecast period.
TWC’s broadband internet business has around the same number of subscribers as its digital cable business, though at a lower fee. However, its comparable valuation to digital cable can be attributed to higher gross margins. We estimate that broadband gross margins for 2009 were 74% compared to 44% for digital cable.
You can modify the forecast below to see how TWC’s stock can be impacted by changes in its broadband internet gross margins.
You can see our complete model for Time Warner Cable’s stock here.
