While Time Warner Cable (NYSE:TWC) has been witnessing subscriber losses in its pay-TV business, broadband is fueling growth for the cable company. According to our estimates, broadband contributes more than 30% to TWC’s value. The company has been losing pay-TV subscribers consistently over the past few quarters. Adding to the woes, in a recent dispute with CBS (NYSE:CBS), TWC dropped CBS channels in three markets for around a month. (Read – CBS And Time Warner Cable End Dispute Over Retransmission Fees)
TWC may see continued pay-TV subscribers losses in the near term, however, broadband is a strong foothold for the company. TWC is benefiting from the continued demand for high-speed data services as people opt for expensive plans. At the same time, competition has been rising with companies such as AT&T (NYSE:T) and Comcast (NASDAQ:CMCSA) expanding their broadband businesses while Google (NASDAQ:GOOG) is offering 1 Gbps Internet service for $70 in a few cities. Nevertheless, TWC has been busy re-branding itself as a major broadband provider and is aggressively penetrating in the commercial business segment.
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- What Has Led To A ~20% Increase In Time Warner Cable’s Revenues & EBITDA In The Last Five Years?
- How Has Time Warner Cable’s Revenue Composition Changed In The Last Five Years?
- How Much Can Time Warner Cable’s Revenues Grow Over the Next Five Years?
- What’s Time Warner Cable’s Fundamental Value Based On Expected 2016 Results?
Broadband Growth In The U.S.
The U.S. broadband market is booming rapidly driven by a stronger economy and growing need for speed and connectivity. Internet traffic in the U.S. is expected to nearly triple from 2012 to 2017. According to a report from the White House, 94% of U.S. homes now have access to broadband and more than two-thirds of American households have Internet service compared to 4.4% in 2000.  However, given that only 72% of Americans use broadband at home, there is still much room left for broadband to penetrate, and this will benefit the cable industry in particular as it accounts for 58% of the U.S. broadband market. Following is the breakdown of the U.S. broadband market prepared by Leichtman Research Group.
Internet video, video on demand and online gaming account for a majority of the Internet traffic in the U.S. While cellular mobile data is the fastest growing portion of Internet traffic at 56% compounded annual growth rate over five years, it remains a very small portion of total Internet traffic. It accounted for less than 2% of the U.S. traffic and Cisco estimates it to grow to 5% by 2017.  Video streaming for instance requires high data volumes and thus the reliance on fixed networks is far more than the mobile carriers. It will be interesting to see if TWC can manage to increase its share in the market. Currently it accounts for 12% of the broadband market in the U.S.
How Is Time Warner Cable’s Broadband Subscriber Growth Trending?
In the latest quarterly earnings, TWC’s broadband revenue grew by 15% driven by 9% growth in ARPU (average revenue per subscriber) as a greater percentage of subscribers purchased higher-priced tiers. The company added 8,000 broadband subscribers as compared to 59,000 it added a year earlier.  We estimate an average subscriber growth of 5%, which translates into 16 million broadband customers by the end of our forecast period. However, there could be upside of around10% to our price estimate if the company manages to reach a customer base of 19 million.