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WIKI ANALYSIS
Time Warner Cable (NYSE: TWC) is the nation's second largest cable provider, serving 14.6 million customers. Like many other cable companies, Time Warner Cable has bundled different services (the so-called "triple play") to take advantage of the access it has to millions of households. In particular, it offers broadband Internet access along with digital phone services.
The company's cable video segment is its largest, thus making trends in subscriber growth and advertising important for the company's bottom line:
- Satellite television providers EchoStar Communications (DISH) and The DirecTV Group (DTV) have poached subscribers from TWC, and satellite penetration has grown at the expense of cable television
- Slowing growth in the U.S. housing market leaves TWC with fewer new homes in which to install cable (an important source of new subscribers)
As a result, TWC has increasingly relied on its rapidly growing VoIP phone services segment for revenue growth. This segment contributed about 6% to revenue in 2006.
Business Financials
TWC generates the vast majority of its revenue from subscription for services such as cable television, broadband Internet access, and VoIP. The company offers "bundled" packages through which it sells customers all three services at once.
Its revenues have increased steadily over the past five years, growing at rates of 10-12% during 2002-2005 and 34% in 2006. The company's fastest growing segment is digital phone, its newest service; 2006 growth reflects a 163% increase in digital phone revenues. The 2006 acquisition of certain assets from Adelphia, a bankrupt cable operator, also contributed to revenue growth. The transaction also included swapping assets with competitor Comcast (CMCSA); overall, the deal resulted in a clearer geographic focus for TWC and increased the number of homes its networks pass by approximately 40%, to reach almost a fourth of all U.S. households.[1]
Subscriptions to cable video services account for the majority of TWC's revenues (65% in 2006); high speed data is the second largest segment, accounting for 23% of revenues. National and local advertising continues to be a relatively small segment of the business; given slow growth in advertising spending and a shift away from traditional media (see next section), this will likely continue to be the case. The digital voice segment, on the other hand, is growing rapidly, increasing its subscriber base by 88% in 2006 alone. [3]
Key Trends, Risks, and Forces
- Consumer Adoption of VoIP: Since TWC's penetration rates in television and internet services are so high, VoIP, or Voice over Internet Protocol, offers the most growth potential for the company. Subscribers to VoIP can use their broadband Internet connection to make phone calls, substantially lowering costs without sacrificing call quality. VoIP is a rapidly growing market, expected to reach $10 billion by 2010 as businesses, only about a quarter of which currently use VoIP, join consumers in adopting the technology.[5]
- Popularity of Satellite TV: Satellite television services provided by companies such as The DirecTV Group (DTV) and EchoStar Communications (DISH) has gained market share rapidly over the past few years and was used by 27.6% of U.S. households in 2007, compared to 24% the year before. Cable television, despite enjoying much higher penetration rates, has been losing popularity; it currently reaches 61.3% of households, the lowest percentage since 1990.[6] If this trend continues, TimeWarner will face heated competition for a shrinking market, and its margins would likely suffer.
- New Housing in Time Warner's Coverage Areas: Because 85% of US households are already signed up for cable service, the company's ability to grow its customer base depends on the number of new homes in the geographic areas it serves. The recent weakness in the U.S. housing market has affected TWC's ability to gain new subscribers--in 2006, video was the segment with the slowest growth rate. Continued weakness in the U.S. economy will keep new construction at a minimum, negatively affecting growth in Time Warner Cable's largest segment.
Competition
Companies in the cable industry face fierce competition on several fronts; in addition to other cable companies, Time Warner Cable competes with providers of digital satellite television and phone companies attempting to replicate its product offering.
- Comcast (CMCSA) The largest cable company in America, Comcast faces saturation in the video market, and is now focusing on marketing its triple play package to existing customers. The company introduced VoIP later than competitors; its penetration rates in that area are about 5%.
- Cablevision Systems (CVC) Cablevision's revenues are about half of TWC's, but the company's revenue per basic video customer is the highest in the industry. High penetration in densely populated markets and successful use of bundling (for instance, two thirds of cable customers also subscribe to Internet services) are responsible for CVC's high margins.[7]
- AT&T (T) & Verizon Communications (VZ) Their primary business threatened by cable companies' VoIP offerings, AT&T and Verizon are actively investing in fiber networks in order to provide a triple-play bundle of services. The companies already offer VoIP and internet service, and face a favorable regulatory environment as they launch their video services. [8] AT&T’s networks reach about 40% of TWC’s potential customers; the company has attempted to match TWC’s service offerings, but the development of these is taking more time than expected. Verizon, whose networks reach approximately 30% of TWC’s territory, has seen more success in its upgrade to the technologically superior FiOS network, but still faces high costs and delays.[9]
- The DirecTV Group (DTV) and EchoStar Communications (DISH) DirecTV and EchoStar are the two primary digital satellite television providers in the US; they account for 27% of the total market for multichannel television programming services. Due to a wider content offering (over 300 channels and exclusive arrangements such as DirecTV’s partnership with the NFL) and less strict regulation, these companies are formidable competitors to Time Warner. [10]
Time Warner differentiates itself through scale (among cable companies, it is second only to Comcast in size and number of customers) and a large presence in the New York and Los Angeles markets; these factors give the company leverage when negotiating for content from suppliers such as Disney and Viacom.[11] This is a key advantage considering that programming fees can comprise as much as one fourth of total operating costs for cable companies. Other competitive advantages include Time Warner's comprehensive service offerings and a focus on innovation; for instance, the company is the first in the industry to offer the Start Over service, which allows video customers to restart live programs on select channels at any point during the program. The triple play package of video, Internet and voice services is the company’s primary competitive advantage against non-cable rivals (i.e. satellite providers and telephone companies.)
Footnotes
- ↑ Time Warner Cable 2006 10-K Section 7 Management's Discussion and Analysis p.61
- ↑ Time Warner Cable 2006 10-K Section 7 Management's Discussion and Analysis p.101
- ↑ Time Warner Cable 2006 10-K Section 7 Management's Discussion and Analysis p.71
- ↑ Time Warner Cable 2006 10-K Section 7 Management's Discussion and Analysis p. 101
- ↑ "Us National Telecom - VoIP Market Continues Explosive Growth." Market News Publishing. 7 December 2007
- ↑ Satellite Takes Market Share from Cable in U.S. Pay-TV Market
- ↑ Cablevision Wikinvest Article http://www.wikinvest.com/stock/Cablevision_Systems_(CVC)
- ↑ CVC 2006 10-K Item 1 Business p. 13
- ↑ Time Warner Cable 2006 10-K Section 1 Business pg. 34
- ↑ Time Warner Cable 2006 10-K Item 1 Business p. 17
- ↑ Time Warner Cable 2006 10-K Section 1 Business pg. 2
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