Time Warner Cable's Pay-TV Subs Will Continue To Decline But Broadband Will Stay Firm In The Third Quarter
Time Warner Cable ( TWC ) will report its Q3 2013 earnings on October 31. We expect continued growth in broadband business as the residential and business demand for high-speed data services continues to grow on the back of increased use of multiple devices and higher penetration of smartphones. On the other hand, there will be a decline in pay-TV subscribers as on-demand video services such as Netflix ( NFLX ) and Amazon ( AMZN ) continue to grow. Moreover, the company blacked out CBS ( CBS ) networks in three key areas for almost a month that may have let some customers vent their frustration on the cable-TV provider by either cord switching or cord-cutting.
Additional Services Can Help Counter The Subscriber Losses
For cable companies in the U.S., the past several quarters have been tough as they have been experiencing significant challenges in retaining pay-TV subscribers. During the last quarter, Time Warner Cable lost 191,000 pay-TV subscribers. The company stated that it will now pursue subscribers with higher ARPU, higher profit and lower churn even if that means fewer connects.
The cable giant Comcast ( CMCSA ) has been aggressively addressing the issue of customer churn by developing additional features such as X1 and Xfinity bundled with pay-TV services. Time Warner Cable also offers TV everywhere service to stream live channels and access on-demand content but needs to develop it further and bring more content for viewers. We continue to believe that such offerings with pay-TV subscription can help the company counter subscriber losses attributable to rising competition, especially from on-demand video services.
Broadband Will Stay Firm
The broadband business has done well for Time Warner Cable due to the rising demand for faster Internet and the decline of DSL Internet connections. For the last quarter, the company reported 11.6 million broadband subscribers. We estimate that the broadband business constitutes roughly 32% of the company's value. The boom in demand for broadband in the U.S. can be primarily attributed to a resurgent housing market and stronger economy, along with the growing need for speed and connectivity. Given that only 72% of the population uses broadband at home, there is still much room left for broadband to penetrate, and this will benefit the cable industry in particular as it accounts for 58% of the U.S. broadband market. In an attempt to expand its fiber base, the company recently agreed to buy DukeNet Communications, which will strengthen its business services in the Southeast (Read More - DukeNet Acquisition Will Bolster Time Warner Cable's Business Services In The Southeast )
Why Is Stock Moving Up?
Time Warner Cable's stock has been moving upwards and gained more than 20% since June this year even after losing many pay-TV subscribers in the second quarter. This can be attributed to the speculation of a possible bid from Charter Communications. Liberty Media owns 27% of Charter and Liberty Chairman John Malone has been vocal about his goal of leading the consolidation in the cable industry. Liberty has made it clear it can wait for Time Warner Cable results to deteriorate further. This would be interesting to watch as even if the results turn out to be negative, the stock might move upwards sensing a deal.