QUOTE AND NEWS
SeekingAlpha  Apr 10  Comment 
By Markus Aarnio: Time Warner Cable (TWC) offers video, high-speed data, and voice services in the United States. (click to enlarge) Insider selling during the last 30 days Here is a table of Time Warner Cable's insider activity during...
Wall Street Journal  Apr 10  Comment 
Comcast and Time Warner Cable executives faced questions from lawmakers on how the proposed merger of the nation's two largest cable companies would help consumers.
New York Times  Apr 10  Comment 
The judiciary panel expressed concern over higher costs for consumers if a merger with Time Warner Cable were approved, but a Comcast executive downplayed the likelihood.
Wall Street Journal  Apr 9  Comment 
In trying to clear any antitrust hurdles to its proposed deal with Time Warner Cable, Comcast wants regulators to think both locally and globally.
TheStreet.com  Apr 9  Comment 
NEW YORK (TheStreet) -- Time Warner Cable shares are up 1.8% to $138.36 in trading Wednesday. Time Warner Cable has been in the spotlight all day as its CFO Arthur Minson appeared before the Senate Judiciary subcommittee which is looking into...
TheStreet.com  Apr 9  Comment 
NEW YORK (TheStreet) -- Enough hysteria. Big company mergers have become one of those topics where all common sense and reality goes out the window. Outrage is the default and only acceptable emotion.  Comcast's buyout of Time Warner Cable ...
New York Times  Apr 9  Comment 
The judiciary panel expressed concern over higher costs for consumers if a merger with Time Warner Cable were approved, but a Comcast executive downplayed the likelihood.




 

Time Warner Cable (NYSE: TWC) is the nation's second largest cable provider, serving 14.6 million customers.[1] 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.

Time Warner Cable has systems located mainly in five geographic areas: New York State (including New York City), the Carolinas, Ohio, southern California (including Los Angeles) and Texas. TWC offers video, high-speed data and voice services over its broadband cable systems to residential and commercial customers. In addition, TWC sells advertising to a variety of national, regional and local advertising customers. On March 12, 2009, TWC completed its separation from Time Warner (TWX).

The adoption of satellite television has harmed TWC's ability to acquire and retain customers. 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.

Company Overview

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.

First Quarter 2010 Results[1]

Revenues for the first quarter of 2010 increased 5.4% from the first quarter of 2009 to $4.6 billion. Net Income attributable to TWC shareholders was $214 million, or $0.60 per basic and diluted common share, compared to $164 in the first quarter of 2010.

Subscription revenues grew 4.9% year-over-year to $4.4 billion, driven by a 4.1% increase in residential subscription revenues and a 19.2% increase in commercial subscription revenues. Advertising revenues increased 19.3% to $173 million. Residential subscription revenue growth was driven by increases in video, high-speed data and voice revenues. The growth in residential video revenues was the result of video price increases, the continued growth of digital video subscribers, and an increase in DVR service revenues, partially offset by a year-over-year decline in video subscribers. Residential high-speed data revenues increased as a result of growth in high-speed data subscribers and, to a lesser extent, price increases. The growth in residential voice revenues was driven by an increase in Digital Phone subscribers, partially offset by a decrease in average monthly revenues per Digital Phone subscriber. Commercial subscription revenue growth was due primarily to increases in Business Class Phone and commercial high-speed data subscribers and an increase in cell tower backhaul and Metro Ethernet revenues. Advertising revenue growth was driven by year-over-year increases in a wide range of categories, most significantly automotive.

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Business Segments

Residential Services

Video Services

TWC offers a broad range of residential video services, including advanced services such as On-Demand, high-definition and digital video recorder (“DVR”) services. As of December 31, 2009, TWC had approximately 12.7 million residential video subscribers.

Programming tiers

TWC currently offers three main levels or “tiers” of video programming—Basic Service Tier (“BST”), Expanded Basic Service Tier (or Cable Programming Service Tier) (“CPST”) and Digital Basic Service Tier (“DBT”). TWC’s video subscribers pay a fixed monthly fee based on the video programming tier they receive. Subscribers to specialized tiers and premium services are charged an additional monthly fee, with discounts generally available for the purchase of packages of more than one such service.

On-Demand services

On-Demand services are generally available to digital video subscribers. Available On-Demand services include a wide selection of featured movies and special events, for which separate per-use fees are generally charged, and free access to selected movies, programming from broadcast stations and cable networks, music videos, local programming and other content.

DVR service

Set-top boxes equipped with DVRs enable customers to pause and/or rewind “live” television programs and record programs on the hard drive built into the set-top box. Subscribers pay an additional monthly fee for TWC’s DVR service. As of December 31, 2009, 50%, or approximately 4.4 million, of TWC’s digital video subscribers also subscribed to its DVR service.

High-speed Data Services

TWC’s high-speed data services provide customers with a fast, always-on connection to the Internet. Subscribers pay a fixed monthly fee based on the level of service received. As of December 31, 2009, TWC served approximately 9.0 million residential high-speed data subscribers.

Road Runner High-Speed Online

TWC offers four tiers of Road Runner High-Speed Online service in all of its systems: Turbo, Standard, Basic and Lite. Each tier offers a different speed at a different monthly fee.

Road Runner Mobile

During the fourth quarter of 2009, TWC launched Road Runner Mobile, a wireless mobile broadband service, in several cities. Road Runner Mobile provides customers with wireless broadband Internet access on their computers via a TWC-provided data card. TWC offers service delivered over Clearwire Corporation’s 4G WiMax network and Sprint Corporation’s 3G CDMA network.

Voice Services

Most Digital Phone customers receive unlimited local, in-state and U.S., Canada and Puerto Rico calling and a number of calling features, including call waiting, caller ID and Enhanced 911 services, for a fixed monthly fee. TWC also offers additional calling plans with a variety of options that are designed to meet customers’ particular needs, including a local-only calling plan, an unlimited in-state calling plan and an international calling plan. As of December 31, 2009, TWC served approximately 4.2 million residential Digital Phone subscribers. In 2010, TWC expects to launch a residential web portal, which will allow Digital Phone subscribers to use the Internet to customize their Digital Phone features and listen to their voicemail.

Commercial Services

TWC offers video, high-speed data, voice, networking and transport services to commercial customers marketed under the Time Warner Cable Business Class brand.

Video Services

TWC offers small- and medium-sized businesses a full range of video programming tiers and music services. Commercial subscribers are charged a fixed rate based on their tier of service. As of December 31, 2009, TWC served 160,000 commercial video subscribers.

High-speed Data, Networking and Transport Services

TWC provides high-speed data service to small businesses with speeds of up to 15 Mbps downstream and up to 2 Mbps upstream and, in New York City, up to 50 Mbps downstream and up to 5 Mbps upstream with Wideband. TWC also provides dedicated access to small- and medium-sized businesses through a fiber connection to the Internet. Commercial subscribers pay a fixed monthly fee based on the services received. As of December 31, 2009, TWC had 295,000 commercial high-speed data subscribers.

Commercial networking and transport services

TWC offers Metro Ethernet service that provides high capacity connections to the Internet for commercial customers with geographically dispersed locations with speeds ranging from up to sub-T1 to up to 10 Gbps.

Voice Services

TWC offers its commercial voice service, Business Class Phone, to a broad range of businesses. Business Class Phone is a multi-line voice service developed for small businesses, which provides unlimited local, intrastate and long distance calling, along with other key business features, such as call restrictions, non-verified account codes and three-way call transfer. During 2009, TWC also began offering Business Class PRI, which is designed for medium-sized businesses and supports up to twenty-three simultaneous voice calls on each two-way trunk line. At December 31, 2009, TWC had 67,000 commercial voice subscribers.

Advertising

TWC earns revenues by selling advertising to national, regional and local customers. As part of the agreements under which it acquires video programming, TWC typically receives an allocation of scheduled advertising time in such programming, generally two or three minutes per hour, into which its systems can insert commercials.

The clustering of TWC’s systems expands the share of viewers that TWC reaches within a local designated market area, which helps its local advertising sales business to compete more effectively with broadcast and other media. In addition, TWC has a strong presence in the country’s two largest advertising market areas, New York, NY, and Los Angeles, CA.

Trends 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.[2]

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. Cable television, despite enjoying much higher penetration rates, has been losing popularity; it currently reaches 61.3% of households, the lowest percentage since 1990.[3] If this trend continues, Time Warner Cable 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. 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.[4]
  • 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. [5] 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.[6]
  • 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. [7]

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.[8] 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

  1. 1.0 1.1 "Time Warner Cable Inc. Reports 2010 First-Quarter Results" April 29, 2010
  2. "Us National Telecom - VoIP Market Continues Explosive Growth." Market News Publishing. 7 December 2007
  3. Satellite Takes Market Share from Cable in U.S. Pay-TV Market
  4. Cablevision Wikinvest Article http://www.wikinvest.com/stock/Cablevision_Systems_(CVC)
  5. CVC 2006 10-K Item 1 Business p. 13
  6. Time Warner Cable 2006 10-K Section 1 Business pg. 34
  7. Time Warner Cable 2006 10-K Item 1 Business p. 17
  8. Time Warner Cable 2006 10-K Section 1 Business pg. 2
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