How to Figure Cable's New Math


There's a lot of talk about the promise of cable's new revenue streams — such as video-on-demand, high-definition television and digital video recorders — but precious little information about what any of those new products would mean to a cable operator's bottom line.

This edition of Multichannel News On Demand
examines that promise, whether it's ESPN's impending launch of HDTV, which officials with the total sports network believe could redefine the service, or Time Warner Cable's massive push across the VOD, HDTV and DVR fronts, as enunciated by executive vice president and chief marketing officer Chuck Ellis in a Q&A session.

But how much money can Time Warner generate from these new services? Since the MSO's impending initial public offering means that it can't project future revenue streams, we'll do some back-of-the-envelope forecasting for the company.

Time Warner now has about 11 million basic subscribers, 3.7 million digital homes and 2.6 million modem subscribers. According to the company's pro forma trending schedules, it added 984,000 digital subscribers in 2002.

Even if digital growth slows to 700,000 to 800,000 additions in the next two years, Time Warner could reach a 50 percent rate of digital penetration — or 5.5 million homes — by 2005 or thereabouts.

The video triple threat of VOD, HDTV and DVR will be targeted to that subset of subscribers. Let's assume that 2 million subscribers from the aforementioned base of 5.5 million homes regularly purchase hit VOD movies. And let's say they average 1.5 movie buys per month throughout the year.

That's about $6 in revenue per home per month, which translates to $12 million a month, or $144 million a year. TWC would keep roughly 40 percent of that, or $58 million.

Home Box Office counts more than 250,000 HBO subscription VOD subscribers, mostly paying $6.95 a month. If 1 million Time Warner premium subscribers — 25 percent to 35 percent of its estimated total premium-subscriber base — pay $6.95 a month for SVOD, and TWC keeps $4, that equates to $4 million a month — or $48 million per year.

Already, Time Warner has 76,000 HDTV subscribers, who pay no extra fee to see HBO or Showtime if they subscribe to those services. They also don't pay for any local broadcast stations Time Warner carries.

But let's suppose that HDTV follows a nice, stable course, rising from 5 million homes today to 10 million homes by 2005 — or 10 percent of the U.S. That would mean some 1.1 million Time Warner homes would have HDTV sets.

Let's estimate that 20 percent of those homes would buy an incremental $10 a month HD tier from Time Warner. That's 220,000 subscribers paying $26 million a year to the company. And let's say Time Warner keeps half of that, or $13 million.

DVRs are next on the list. Suppose the retail lease model becomes the easiest way for customers to get a DVR in their homes, and Time Warner achieves 25 percent penetration by 2005. With 275,000 subscribers paying $9.95 a month for DVR services, that's another $27 million a year.

Hence, Time Warner's annual total could look like this: VOD, $58 million; SVOD, $48 million; HDTV, $13 million; and DVR, $27 million.

That's a nifty $146 million in yearly revenue — or about 17 percent more than the estimated $853 million Time Warner took in 2002, considering its key metrics are $65 a month in revenue per basic subscriber across a universe of 10.9 million homes. Those numbers equate to an additional $13.39 per month in additional revenue.

It's not quite the cable-modem business, in which an MSO can clear $25 to $30 per month from every subscriber. But the VOD/HDTV/DVR play does provide some incremental revenue, while serving as the video lynchpin of cable's anti-satellite strategy.