Cable Operators

Losses Hit TW Cable

2/08/2009 4:45 AM Eastern

In reporting third-quarter results last November, Time Warner Cable CEO Glenn Britt warned that his company, the second-largest U.S. cable operator, was starting to see a “significant slowdown” in subscriber additions.

How significant? Time Warner Cable reported last Wednesday (Feb. 4) that it lost a net 119,000 basic-video customers in the fourth quarter, more than double the 50,000 shed in the same period in 2007. Even with Britt's warning, analysts had been expecting something in the range of 50,000 basic losses. TWC ended the year with about 14.6 million customers taking at least one service.

Britt's company also joined the roster of firms cutting back jobs amid the worst economic environment in decades. TWC said it planned to cut 1,250 employees in coming weeks to pare costs, a reduction of about 2.7% of the 46,000 employees it has overall, according to its corporate Web site.

Britt told analysts during a conference call that the company hopes any further cuts beyond those would come via normal job attrition, adding the company would monitor the situation closely.

Analysts had expected declines in subscriber growth as the recession gathers steam, and the fourth quarter was the first period to include the full impact of the stock market slide and resulting economic turmoil since September.

TWC's overall financial results were in line with most analysts' expectations, but in growth areas like digital telephone and high-speed Internet service, the company fell short of even the most conservative estimates. That could be read as a signal that cable might not weather the economic downturn as well as some had hoped — an outcome that will be watched as other big cable operators report results. Comcast, for example, is scheduled to report earnings on Feb. 18.

Time Warner added 175,000 revenue-generating units — combined voice, video and data subscribers — in the fourth quarter, one of its lowest tallies in years.

Citigroup cable analyst Jason Bazinet said in a note last week TWC's RGU growth missed his estimates by 64% and “raised questions.”

Bazinet said that despite Britt's earlier warning, “the sheer magnitude of the net add miss caught us by surprise. The actual net adds missed our estimates by a wide margin in every category: analog, digital, data and voice.”

Despite the fourth-quarter falloff, chief financial officer Rob Marcus said TWC actually lost fewer basic customers in 2008 (104,000) than in 2007 (144,000) and that there were indications of improvement. December, for example, was better than November, he said.

“As we have ramped [up] our marketing efforts, we are seeing continued improvement in the New Year and that is particularly true over the last several weeks,” Marcus said on the call. “To be sure, net adds are still dramatically below last year's levels but we are somewhat encouraged by the recent trends.”

Britt blamed the decline in subscribers partly on people who sever their cable connections and watch programming online for free.

Britt has been a vocal opponent of programmers that make their shows available online at no cost, yet charge cable operators a fee for running the same content on a cable system. That's a self-defeating system, he said.

“In other words, free wins,” Britt said. “If we don't have a customer, then the programmers don't get paid for the customer that we don't have anymore.”

Pali Research media analyst Richard Greenfield wasn't buying Britt's argument.

“Time Warner Cable's fundamental mistake has been milking ARPU for all it is worth, rather than capturing as many triple-play subscribers as they could have,” Greenfield wrote, referring to average revenue per unit. “Time Warner Cable never took the offensive, they waited for competition to arrive, then altered their marketing (greater discounts) and programming tactics (HD channel increases) to fend off the competition.”

Verizon Communications' major push into the New York City market — TWC's second-largest — could have been a contributing factor to the subscriber declines. The telco said last month it added 303,000 FiOS TV customers in the fourth quarter.

Actually, though, TWC has more exposure to AT&T and its U-verse video offering, which also is growing. TWC did not break out specific markets, but said telco video is now available in about 21% of its footprint, up from 18% at the end of the third quarter and 6% at the end of 2007. Chief operating officer Landel Hobbs said AT&T U-verse is “available to more than twice as many customers as Verizon,” adding “they have had a more significant impact.”

Hobbs said TWC has been responding aggressively where it needs to. He said TWC on average has about 57 HD channels available in its systems across the country. In New York City, where it faces a FiOS TV HD onslaught, it has about 100 HD channels available.

In 2009, TWC will add more HD, as well as focus on expanding Hispanic channel offerings, Hobbs said. He said TWC has made a best-of English and Spanish language digital package (Paquetazo) available in New York, Los Angeles and Texas, helping TWC grow its Hispanic subscribers in those areas by one-third.

It's also begun marketing campaigns in those key Hispanic markets and significantly increased TWC's brand awareness among Latinos in those areas.

Greenfield, though, said that reliance on Hispanic growth could cost TWC in retransmission-consent talks with Univision, particularly over local-news content from stations in key Hispanic markets. He downgraded TWC to “sell” from “neutral” on Feb. 5.

Subscriber growth slowdown
Time Warner Cable reported fourth-quarter subscriber figures that fell below some analysts' estimates. Following are the cable company's actual results and how they stacked up to consensus estimates for subscriber additions in four segments for the period:
TWC Actual Analyst Consensus
SOURCE: Company estimates and analyst reports
Basic video(119,000)(46,000)
Digital cable44,000108,000
High-speed data124,000170,000
Digital phone130,000165,000
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