For Time Warner Cable 2013 Was Yet Another Year Of Loss In Video And Gain In Broadband Subscribers

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Time Warner Cable

Time Warner Cable (NYSE:TWC) has agreed to merge with cable mammoth Comcast (NASDAQ:CMCSA) in an all-stock friendly deal valued at $45.2 billion. [1] The cable industry seems to be heading for a consolidation, after seeing several quarters of pay-TV subscriber losses. Post merger, Time Warner Cable shareholders will own approximately 23% of Comcast’s common stock, with a value of $160 a share to its shareholders. [1] The company had earlier rejected Charter Communication’s bid of  around $130 a share (See – Time Warner Cable Rejects Charter’s $61 Billion Bid).

Time Warner Cable late last month reported its Q4 2013 earnings. While the revenues and operating income remained around similar levels as the prior year period, the company’s EPS (earnings per share) grew by 16% to $1.82. [2] The company continued to lose pay-TV subscribers and add broadband customers. It lost whopping 825,000 pay-TV subscribers in 2013. [2] The business services segment has been the company’s strength for past some time and it continued to outperform with 20% revenue gains, driven by the growth in broadband and voice subscribers. The company said that it is on track to reach at least $5 billion of annual business services revenue by 2018. [3]

Going forward, the company should continue to see robust growth in its broadband business due to the increasing demand for higher speed and connectivity. However, taming the pay-TV subscriber losses remains a key challenge. The stock has already climbed more than 65% in past twelve months primarily over the cable consolidation. It will be interesting to see how events unfold from here. The merger with Comcast will go through a tight scrutiny with the regulators as it involves the top two players in the industry and Comcast, assuming the deal is approved, will eventually command around 30% market share (Read More – What Does Time Warner Cable’s Merger With Comcast Mean For The Industry?).

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One can argue that there is no competition in the industry, as the two cable companies have no overlap in any ZIP code in the US, and nowhere will a consumer lose a competitive choice. Comcast has also agreed to divest 3 million subscribers so that the combined company’s pay-TV market share remains under a 30% cap the FCC once set as the threshold for one company to control. [1] The chart below (sourced from CNET) shows the markets in which Comcast and Time Warner Cable operate.

 

See our complete analysis for Time Warner Cable

Loss In Pay-TV and Gain In Broadband Subscribers

Time Warner Cable’s overall revenues increased by less than 2% to $5.58 billion during the fourth quarter. While the broadband continued its growth and revenues jumped 14% to $1.53 billion in the residential segment, pay-TV revenues plunged 6% to $2.54 billion as compared to the prior year quarter. [2] The estimated fee per video subscriber in 2013 declined slightly to $66.27 as compared to $67.07 in 2012. On the other hand, the broadband fee per subscriber stood at an estimated $50.15 as compared to $46.02 in 2012. We expect the broadband subscriber fee to continue to grow and reach levels of over $65 by the end of our forecast period. The demand for broadband has been growing rapidly as people use multiple devices to stay connected. The growth in subscription fees will be primarily driven by the increasing demand for high-priced tiers with higher speeds for seamless video streaming.

As far as pay-TV is concerned, the subscriber loss is an industry wide trend and it has been there since 2007. This can be primarily attributed to fierce competition from satellite and telcos, cord-cutting, and rise of alternative video platforms such as Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN). However, Time Warner Cable’s video subs declined at a much higher pace than others. Comcast, for instance was able to reduce its subscribers losses in past few quarters and rather added few subscribers for the fourth quarter in 2013 over its advanced services such as X1 platform and triple play bundling, which Time Warner Cable no longer markets (Also Read – NBCUniversal Drives Comcast’s Q4 Earnings). Time Warner Cable has frequently blacked out many networks in the past including the top rated CBS (NYSE: CBS) in the third quarter of 2013. Many customers who were unable to watch their favorite shows vented their frustration over the cable operator by cord-cutting/cord-switching. We thus don’t see any significant upside for Time Warner Cable’s pay-TV market share in the U.S. and expect it to be under 11% by the end of our forecast period.

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Notes:
  1. Time Warner Cable to Merge with Comcast Corporation to Create a World-Class Technology and Media Company, Time Warner Cable’s Press Release, Feb 13, 2014 [] [] []
  2. Time Warner Cable’s SEC Filings [] [] []
  3. Time Warner Cable Management Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, Jan 30, 2014 []