How Is Time Warner Cable’s Broadband Business Trending?

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Time Warner Cable (NYSE:TWC) has seen rapid growth in its broadband business in recent years. The increasing need for speed and connectivity is driving broadband growth in the U.S. The higher penetration of smartphones and use of multiple devices are aiding overall growth. Smartphone penetration has seen rapid growth from 54% in December 2012 to 72% in June 2014. Internet video, video-on-demand and online gaming account for the majority of Internet traffic in the U.S. Video streaming, for instance, requires high data volumes which explains why the reliance on fixed networks is far greater than that on mobile carriers. We believe these factors will continue to drive broadband growth for cable operators such as Time Warner Cable. We also note that there is enough room left for broadband to penetrate in the U.S. Currently, broadband coverage is around 70% and it is estimated to reach more than 90% in the long run. [1]

See our complete analysis for Time Warner Cable

How Is The Broadband Business Trending For Time Warner Cable?

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During the past few years, Time Warner Cable has been losing pay-TV subscribers due to rising competition from telcos, satellite operators and alternative video platforms. However, during the same period, broadband was fueling growth for the company. From less than 8 million subscribers in 2007, Time Warner Cable’s broadband base increased to around 12 million as of June 2014. [2] During the second quarter of this year alone, the company added 67,000 broadband subscribers (Read More – Time Warner Cable Earnings Grow 12% On Continued Broadband Growth). Subscriber growth is driven by the increasing need for high speed connectivity given the growth in video streaming. These factors will continue to drive broadband growth in the coming years and take the subscriber base north of 17 million by 2021, according to our estimates.

Looking back to 2013, the overall industry (17 largest players representing 93% of the industry) acquired 2.6 million new broadband subscribers, taking the total subscriber base to 84.3 million. It must be noted that 59% of these were cable subscribers. This indicates a good growth opportunity for cable operators. Time Warner Cable added 211,000 broadband subscribers in 2013. The following chart from Leichtman Research Group shows broadband subscribers and net adds among telcos and cable companies in 2013.

We estimate that broadband accounts for 40% of Time Warner Cable’s stock value. While the broadband penetration continues to grow, its pace has slowed from 7 percentage points a year between 2000 and 2009 to 7 percentage points in total from 2009 to 2013. The pace of broadband adoption may continue to be slow in the coming years due to certain barriers such as availability of broadband in some locations. [3] However, there is an increase in demand for high priced tiers that offers higher speeds to the user. The growth in demand for high speed will translate into higher revenues for the cable companies. Time Warner Cable’s broadband revenues have increased from $3.7 billion in 2007 to close to $7 billion in 2013. [2] This can be attributed to the growth in subscribers as well as the average monthly subscription fees (ARPU), which grew from $42 in 2007 to an estimated $50 in 2013. We expect the ARPU to continue to grow and be north of $75 towards the end of our forecast period, driven by the growing demand for high priced tiers and the company’s rapid growth in business services, which typically have faster broadband requirements, resulting in higher ARPU. This will take broadband revenues north of $15 billion and an estimated EBITDA margin of 37.5% will translate into EBITDA of close to $6 billion by 2021. However, there could be an upside of more than 20% to our price estimate if the ARPU grows at a faster pace and be close to $100 by 2021. On the other hand, there could be a possible downside of 20% to our price estimate, if the ARPU remains range bound around $60 levels.

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Notes:
  1. Broadband Internet Penetration Deepens in US; Cable is King, IHS Technology, Dec 9, 2013 []
  2. Time Warner Cable’s SEC Filings [] []
  3. Statement of Aaron Smith – Broadband Adoption: The Next Mile, Pew Research, Oct 29, 2013 []