Time Warner Cable: Broadband And Pay-TV Trends In Focus

by Trefis Team
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Time Warner Cable
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Time Warner Cable (NYSE:TWC) will report its Q1 2013 earnings on April 25, and the focus will remain on the company’s efforts to revive its pay-TV business and its continued success in the broadband segment. During the last quarter, the company added 75,000 residential broadband subscribers. We expect the company to continue adding more broadband subscribers as the residential and business demand for high-speed data services continues to grow. We also expect the pay-TV subscriber losses to continue, albeit at a slower rate. The company lost 129,000 pay-TV subscribers in the last quarter, as many of its customers shifted to telcos and satellite companies. We believe that a similar trend will be visible when the company releases its Q1 2013 earnings.


See our complete analysis for Time Warner Cable

Continued Improvement In Broadband

The broadband business has done well for Time Warner Cable due to the demand for faster Internet and the decline of DSL Internet connections. The trend has been more or less the same for the past few quarters. We estimate that the broadband business constitutes roughly 30% of the company’s value.

Earlier this month, the company submitted a bid to build 1GB broadband service in North Carolina. Google (NASDAQ: GOOG) was the first one to introduce 1GB fiber optic Internet service in the U.S. In Kansas City, Google directly competes with Time Warner Cable for broadband services. The company has not provided any details of its investment in this project, but it is clear that it will continue to focus on expanding its broadband business aggressively. [1]

Revenues from the residential broadband services increased by 17.6% last quarter. This rise was led by the growth in subscribers and an improvement in average revenue per subscriber (ARPU). [2] The company reported that the increase in its broadband ARPU was primarily due to the price increases (including equipment rental charges) and a greater percentage of subscribers opting for higher-priced tiers. The demand for higher-priced tiers is increasing due to a general consumer shift towards the Internet, growing demand for streaming and the proliferation of connected devices. We estimate Time Warner Cable’s broadband ARPU to be close to $48 in 2013.

Pay-TV Subscriber Losses

The gloomy economic situation in the U.S., increased competition and the availability of online video streaming have put immense pressure on the traditional pay-TV operators such as Time Warner Cable. Pay-TV is the biggest business for the company, constituting roughly 50% of its value, according to our estimates.

The company has been struggling in this business and losing its subscribers while its peers such as Dish Network (NASDAQ: DISH), DirecTV (NASDAQ:DTV) and AT&T (NYSE: T) have been doing better. Another reason why Time Warner Cable has been losing its subscribers is the delay in its transition to the digital platform. This encouraged many of its customers to shift to telcos and satellite companies. The growth of fiber optic services, technological advantage of satellite companies (in form of HD/DVR services) and customer service complaints have fueled this shift. The company lost 109,000 pay-TV subscribes in the last quarter. [1] However, as the company completes its transition to the digital platform, the subscriber trends should improve. Most of the subscriber losses were concentrated in its analog base.

Time Warner Cable was also lacking a compelling streaming service. Streaming on Apple (NASDAQ: AAPL) devices was earlier available only in the locations serviced by the company. However, following the moves of Comcast and DirecTV, Time Warner Cable started providing streaming facility (currently for 11 channels) on its iOS app everywhere. [3] The company can benefit from this facility of live streaming, as the penetration of Apple devices in the U.S. is very high.

The demand for video streaming has been growing on the back of the consumer shift to Internet as well as the growth in mobile devices. This trend is likely to continue, and the company could benefit from this shift by providing competitive higher-priced broadband tiers to its customers and also by adding more channels to its mobile apps. Going forward, we therefore expect Time Warner Cable to lose its pay-TV subscribers at a slower rate. However increased demand for high speed Internet should continue to drive growth in the company’s broadband business.

Our price estimate for Time Warner Cable stands at $91.50 is roughly in line with the market price.

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Notes:
  1. Time Warner Cable bids to build 1-gig broadband service in North Carolina, FierceCable, 3rd Apr, 2013 [] []
  2. Annual Report Time Warner Cable, SEC, 15th Feb, 2013 []
  3. Time Warner App Brings Apple Users ‘TV Everywhere, Adweek, April 17, 2013 []
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