For Time Warner Cable, How Significant Can Business Services Be?

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Time Warner Cable

Time Warner Cable (NYSE:TWC) offers broadband, video, voice, hosting and cloud computing services to business customers. This segment has seen significant growth over the past few years, both in customer relationships and revenues. The revenues have more than doubled from $1.11 billion in 2010 to $2.31 billion in 2013 and business services now account for more than 10% to the company’s overall revenues. It also offers higher margins of close to 60% to the company. [1] This growth has been primarily led by broadband and voice services. While broadband revenues have grown from $614 million in 2010 to $1.10 billion in 2013, voice revenues have grown over 3 times from $127 million to $421 million during the same period. Time Warner Cable is not alone in seeing such growth in this segment. Other cable operators such as Comcast (NASDAQ:CMCSA) have been growing business services at similar pace. Broadband plays an important role for businesses as it connects them to the global marketplace. More information can be transferred at faster speeds using a broadband connection and it can be less expensive due to unlimited usage and competitive pricing depending upon the location. We believe the uptrend in business services will continue in the coming years and the segment will generate more than 15% of the company’s overall EBITDA by 2018.

See our complete analysis for Time Warner Cable

Broadband Growth Primarily Driven By Small And Medium-sized Enterprises

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Time Warner Cable currently has 674,000 business customer relationships, representing customers who are subscribed to at least one of the services — video, broadband, voice or other services — offered by the company. The subscriber mix is comprised of small businesses, medium-sized enterprises and government, education and non-profit institutions. The company continues to target the small and medium-sized enterprises as majority of businesses in the U.S. fall under this category. While businesses with less than 20 workers accounted for 89.8% of the total employer firms in the U.S. in 2011, businesses with a workforce of less than 500 made up 99.7%, according to a data released by U.S. Census Bureau last year. [2] Businesses need  the Internet to transfer of information and to reach out the customers and other businesses and cable companies have been targeting this segment for broadband growth, accordingly. Time Warner Cable presently provides services in locations that cover around 47% of the small and medium-sized employer firms in the U.S. Assuming broadband penetration rate of 70%, this translated into a potential market size of a little under 2 million as of 2011 (latest data available). Time Warner Cable had a broadband subscriber base of 390,000 for business customers in 2011, reflecting around 20% of the estimated serviceable market size.

Our Estimates And Forecasts

Currently, the company’s broadband subscriber base is around 566,000 for business services, reflecting close to 25% share of the estimated serviceable market. The continued growth of broadband penetration and need for high speed connectivity will drive the business services growth in the coming years. If the company can grow its market share to around 40% in the serviceable market over the span of next five years, it will translate into a subscriber base of close to a million. It must be noted that Comcast and Time Warner Cable are two largest cable operators in the U.S. but they operate in different areas thereby limiting the competition.

The company charges monthly subscription fees to its customers, which has grown to an estimated $175 from $155 between 2011 and 2013. This growth has been primarily driven by businesses opting for higher priced, faster broadband tiers. For instance, Time Warner Cable offers a 100 MBPS wideband Internet plan for $300 per month, which is far more expensive than $80 per month base package of 7 MBPS. We believe that the need for higher speed will continue to drive monthly subscription fees and estimate it to be around $235 in the next five years. A subscriber base of around 1 million and monthly subscription fees of $235 will translate into broadband revenues of close to $2.80 billion by 2018, more than double the 2013 figure of $1.10 billion. An estimated EBITDA margin of around 60% will translate into EBITDA of $1.68 billion, reflecting 15% of the company’s overall estimated EBITDA for 2018. It must be noted that currently we do not provide a breakup for business and residential broadband in the Trefis model.

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Notes:
  1. Time Warner Cable’s SEC Filings []
  2. Statistics of U.S. Businesses (SUSB) Main, United States Census Bureau []