Market Insight

Time Warner Cable: video revenue flat, broadband up

January 27, 2012

Harold Vargas Harold Vargas Senior Analyst, Television Media
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Time Warner Cable (TWC), the second largest cable operator in the US, ended 2011 with 11.9m basic video subscribers, a yearly loss of 453,000, matching the losses that occurred in 2010. This was despite the addition of 79,000 basic subscribers from acquisitions over the year.  For the fourth quarter, TWC posted a residential video decline of 129,000 subscribers, or 1.1 per cent of its basic subscriber base. This was an improvement on the same period of 2010, when the MSO lost 141,000 subscribers. DVR subscriber trends turned around with 53,000 net adds for the quarter, but it was not enough to offset the 84,000 DVR subscribers lost in the past two quarters. 

While basic video losses continued, residential broadband has continued to be the catalyst of growth for TWC, gaining a strong 117,000 subscribers in the fourth quarter. This quarterly sub-growth is up 31.4 per cent from the previous quarter and up 40 per cent from Q4 2010. For the year, TWC gained 437,000 HSD subscribers, ending the year with 9.9m. Digital voice posted a gain of 37,000 residential subs after losing 8,000 subs in the previous quarter. TWC gained 133,000 residential digital voice subscribers for the year, ending at 4.4m.

Residential video revenue for the year remained unchanged from the previous year at $10.5bn even after losing 453,000 residential basic subscribers. This can be attributed to higher subscription prices, as well as increased revenues from equipment rentals, resulting in higher video ARPU which helped offset declines in premium and transactional video-on-demand revenue.

Broadband once again fueled revenue-growth for TWC's residential services, amassing $4.4bn for the year, a 8.6 per cent increase over last year. This influx helped buoy revenue from all residential services to a gain of 3.7 per cent for the year to $17bn.TWC's commercial services saw a healthy yearly 32.7 per cent increase in revenue to reach $1.4bn at year end, propelled by HSD, voice and the acquisition of cloud servicing NaviSite.

All things considered, TWC saw 2011 net income rise to $1.6bn, an impressive 27 per cent jump over 2010. Additionally, TWC announced a 17 per cent increase in quarterly dividends, as well as a $4bn share buyback, driving the TWC stock price up 7.8 per cent the same day.

Time Warner Cable seems to have found the formula for continued prosperity, despite the continued shrinkage of its core video-subscriber base: keeping video revenue flat through price hikes and rental fees, while continuing to add high-margin broadband subscribers. As has become the norm, TWC continued its struggle to curb basic subscriber loss while its IPTV competitors, U-verse and FiOS, consistently post quarterly gains, most recently increasing by 208,000 and 194,000 video subscribers, respectively, in the fourth quarter. TWC is losing some of its video customers to these aggressive IPTV operators, where FiOS is available in 12 per cent of Time Warner's footprint and U-Verse is available in 25 per cent.

Yet, TWC has shown it is able to adapt and grow revenue and income despite its video subscriber loses. The major contributing factor is the relentless additions of broadband subscribers, some of which come from winning over DSL customers in markets where FiOS and U-verse have yet to expand their fiber-optic reach. Verizon and AT&T bled 103,000 and 636,000 DSL customers, respectively, during the fourth quarter. While some of these former DSL subscribers may have migrated to FiOS and U-Verse where available, the rest moved to cable broadband especially with DOCSIS 3.0 becoming widely available. TWC reported DOCSIS 3.0 now covers 76 per cent of its footprint.

IHS Screen Digest forecasts that broadband growth will continue to be a thriving business not just for TWC, but for the majority of cable operators. Video still makes up the core of TWC's services, with residential video revenue accounting for 62 per cent of all residential revenue. To continue to increase revenue from its declining video subscribers, like most cable operators, TWC persists on increasing prices and rental fees. In the process, it will continue to squeeze out consumers, some of which can no longer afford the entry price to cable TV. One thing TWC has done to address the issue is expand its economic TV package 'TV Essentials' from Ohio and New York City to more East Coast markets. With the broader rollout, TWC may put a dent in subscriber losses in the following quarters. In fact, Cox, the nation's fifth largest pay TV operator has followed suit and recently announced plans for a wide rollout of a similar 'Lite' TV package.

IHS Screen Digest expects video subscriber losses to continue to mount for TWC, but it will get a respite in 2012 when it will assimilate 750,000 recently acquired Insight Communications customers, which will also drive revenue growth on all fronts in 2012.

Geography
USA
Organization
Time Warner Cable
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