Light Reading
Second-largest US MSO reports huge customer losses following nasty programming disputes with two broadcasters, fueling more M&A speculation.

TW Cable Hemorrhages Subs

Alan Breznick
11/1/2013
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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

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albreznick
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albreznick,
User Rank: Blogger
11/4/2013 | 8:57:57 PM
Re: Would love to see if the numbers say CBS feud was worth it
Good point. Yup, that number could have, and probably should have, been in my story. I'll do the math for you next time. Thanks for pointing that out.  
gconnery
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gconnery,
User Rank: Light Sabre
11/4/2013 | 12:22:59 AM
Re: Would love to see if the numbers say CBS feud was worth it
Yeah, those numbers probably aren't going to be placed in public view anytime soon.


Makes me want to mention that I shouldn't have to Google TW Cable's recent quarterly numbers to figure out if their 306,000 video sub loss is significant or not.  Okay, so they 11.7 Million subscribers before, so 306,000 is 2.6%.  Yup that's a big number for a single quarter.


But seriously, why isn't this number in the story?  Its like those headlines screaming about the DJIA falling hundreds of points without mentioning that's at 15,000...
albreznick
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albreznick,
User Rank: Blogger
11/3/2013 | 11:24:58 AM
Re: Capturing DSL subscribers.
Good points, David. I've wondered th same thing. Cable ops have generally not targeted DSL subs that aggressively. I think that's because they haven't wanted to compete on price too much. TW Cable now seems willing to do that. We'll see whether it proves worth their while.  
davidhoffman
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davidhoffman,
User Rank: Light Beer
11/2/2013 | 11:59:36 AM
Capturing DSL subscribers.
I was wondering when a cable system operator was going to really go after the DSL customers in their territory.  With the removal of the analog channel requirement and the implementation of DOCSIS 3.0, the cable companies have additional tools to lower the cost of each Mbps delivered.  Any decently run cable operator should be able to equal the 6.0 Mbps or slower AT&T DSL services for half the price that AT&T charges. I am not talking about promotional pricing. They should be able to do that as a regular price with no bundling.
MarkC73
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MarkC73,
User Rank: Light Sabre
11/2/2013 | 2:28:44 AM
Re: Would love to see if the numbers say CBS feud was worth it
Even if other providers might have benefited from TWC's battle with CBS, ask not whom the bell tolls for.  Negotiations can be rough, and content, I still believe will be king in the end, but even as competitor of TWC, I was hoping the precedence would end up in their favor.

I eventually lost track of the whole situation because it took so long, I guess I'll go google it now ...
albreznick
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albreznick,
User Rank: Blogger
11/1/2013 | 4:20:16 PM
Re: Would love to see if the numbers say CBS feud was worth it
True, HSI is usually a big profit center for cable cos. So it's not typically used as a loss leader.

Yeah, picking up 500,000 DSL subs shouldn't be all that tough for TWC. When i heard Marcus talk yesterday, I thought he was going to set the figure at 1 million or more. Maybe he just wanted to name a target that he knew TWC could and would reach.

It's funny. Marcus seemed almost personally offended that there are still so many DSL subs in TWC's footprint. In fact, he called it "unacceptable," as if they were doing something morally wrong. He's going to be an interesting change from Glenn Britt, assuming he gets to run an indepoendent compny for long. 
pilchard
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pilchard,
User Rank: Light Beer
11/1/2013 | 10:29:54 AM
Re: Would love to see if the numbers say CBS feud was worth it
HSI as a loss leader?  I thought this was where they were making the most money from residential subscribers these days....
Carol Wilson
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Carol Wilson,
User Rank: Blogger
11/1/2013 | 10:11:32 AM
Re: Would love to see if the numbers say CBS feud was worth it
I agree with Karl -- how hard can it be to scoop up DSL subscribers in areas where the copper plant hasn't been improved? Unless TW Cable is convinced these folks will go wireless only? I wonder how much money they make on a $15 a month customer, unless the thinking is this becomes the loss leader for VoIP and basic cable. 

 
KBode
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KBode,
User Rank: Light Sabre
11/1/2013 | 9:58:23 AM
Would love to see if the numbers say CBS feud was worth it
I remember you asking if it was all worth it, and I still would love to see the real numbers. I mean, they lost essentially 3% of their entire customer base and all the future revenues that entails. Was that worth it to essentially kick CBS in the shin? Seems like a more productive path would be something like covertly offering support to services and companies like Aereo if they really want things to change.

Also, when he says this:

"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."

I'm not sure that's a particularly amazing challenge, since Verizon is intentionally driving many of those customers into Time Warner Cable's arms through rate hikes, forced landline/DSL bundles. They no longer want them. Scooping them up as the remaining monopoly provider isn't exactly rocket science.
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