TW Cable Hemorrhages Subs
Time Warner Cable is not exactly giving Glenn Britt, its retiring chairman and CEO, a great send-off.
Time Warner Cable Inc. (NYSE: TWC) reported huge customer losses for the third quarter, shedding residential video, high-speed data, and voice subscribers across the board. Specifically, the second-largest US MSO lost a whopping 306,000 basic video, 24,000 broadband, and 128,000 phone customers, racking up probably its worst quarterly performance ever.
TW Cable also shed double-play and triple-play subscribers, making the earnings report an overall rout for the company. Total customer relationships fell by either 117,000 or 131,000, depending on the two different types of metric the company uses.
In their earnings call with analysts Thursday morning, TW Cable executives blamed the unprecedented subscriber losses mainly on their twin programming disputes with CBS Corp. (NYSE: CBS) and Journal Broadcast Group over retransmission-consent fees. Both heated summer battles resulted in lengthy programming blackouts for cable customers in August and early September.
"All the action occurred in August and September, when the disputes were going on," said TW Cable COO Rob Marcus, who will take place Britt's place on Jan. 1. He noted that the programming disputes also had a lingering "hangover effect" on the rest of the MSO's operations, leading it to lose the broadband and voice users and reach out to fewer prospective subscribers as its customer call centers were jammed with complaints from angry customers.
Despite the unexpectedly high customer losses in Q3, TW Cable executives insisted that they made the right call in battling CBS for a month. They argued that they ended up paying notably less than they would have paid for the rights to CBS's local stations in New York, Los Angeles, and Dallas and Showtime Networks Inc. , the CBS cable property.
"In the end, the deal we reached was far better than when we started," Marcus said. Britt agreed, brushing aside the suggestion that he waged the war with CBS largely to push retransmission-consent reform in Washington, D.C. "We do think we are better off with CBS than we would have been if we didn't have this fight," he said.
Yet the breadth and depth of the quarterly customer losses stunned many financial analysts. Although they had been bracing for some negative impact on TW Cable's earnings from the bitter summer brawls with CBS and Journal Broadcast, they didn't expect the losses to be nearly this heavy.
In notes issued to investors, several analysts contended that the results would weaken TW Cable management’s ability to stave off an acquisition by Charter Communications and Liberty Global, which have been circling TWC for months. Not surprisingly, TW Cable stock shares climbed in early trading Thursday as speculation rose again about a deal.
"If Time Warner Cable wants to remain independent, this probably isn’t the best way to go about it," quipped Craig Moffett, principal and senior analyst of MoffettNathanson Research, in his note to clients. "The shareholder base at TWC is now more levered than ever to a takeover."
TW Cable officials, however, maintained their combative stance about any deals with Charter and Liberty Global. While pledging their dedication to creating and protecting shareholder value, they cautioned against merger fever.
"Consolidation can be a good thing," Britt said. "But the terms really matter." A long-time Time Warner official, he cited two large mergers in the company's history -- Time Inc.'s 1989 union with Warner Communications and Time Warner Inc. (NYSE: TWX)'s 2001 union with AOL Inc. (NYSE: AOL) -- as classic examples of "mergers of equals" that turned out to be heavily "lopsided" in favor of one party.
Even as the merger speculation inevitably heats up again, Marcus declared that he's determined to win back the residential customers that TW Cable lost over the summer and then some. On the earnings call with analysts, he outlined several steps that the MSO will take, starting as soon as early next month.
In one move, the MSO will shortly launch a holiday promotion where it will hand out Samsung tablets loaded with features to new customers. In another, the company plans to blitz the 4.5 million remaining telco DSL subscribers in its footprint with a new broadband-lite cable modem offering that will cost only about $15 a month.
"We’re going after DSL," Marcus said. "I'm challenging our team to convert at least half a million DSL subscribers over the next 18 months."
Further, Marcus said he has spent the last 90 days working with TWC senior management to develop a comprehensive program to "improve the customer experience" in select markets with the most customer service problems. Designating them "TWC Max Markets," he plans to focus the company's resources on cable customers in these regions, upgrading them to all-digital, putting in new HD and DVR set-tops, installing wireless DICSIS 3.0 gateways, boosting broadband speeds to new heights, and increasing network performance and reliability.
"The goal here is to fundamentally change the customer experience in a given market," he said. "So we're going to concentrate market-by-market."
— Alan Breznick, Cable/Video Practice Leader, Light Reading