Time Warner Cable Faces FiOS Attack
Pali Research analyst Richard Greenfield also reduced his firm's EBITDA growth estimate for the operator to 7.9 percent, versus 9.6 percent, with earnings per share reduced to $1.11 from $1.21.
Time Warner Cable shares were down $1.06 (3.80%) at $26.85 in midday trading.
Greenfield based the downgrade in part to "ramping" competition for Time Warner Cable, particularly in New York City, where Verizon recently received final approval to begin delivering video services. (See Verizon Readies FiOS TV for NYC.)
"Based on our discussion with Verizon FiOS customer service reps, we believe Verizon is already taking video service orders, with plans to begin installing on August 1st," Greenfield wrote.
Verizon has not disclosed when it will activate its first FiOS TV subscriber in the city, but a Verizon spokesman said it's expected to happen "in the coming weeks."
The telco has until 2014 to complete its NYC buildout. Twenty to 25 percent of the city is passed by Verizon's fiber-fed FiOS network so far, with Staten Island being the area that's furthest along, the spokesman adds.
Staten Island and Manhattan are both Time Warner Cable territories. Verizon will also take on Time Warner Cable and Cablevision Systems Corp. (NYSE: CVC) as it heads into Brooklyn, Queens, and the Bronx; it also competes with RCN Corp. in the region.
Time Warner Cable did not have an immediate response Monday to Greenfield's downgrade
Greenfield acknowledges that NYC represents just 10 percent of TWC's sub base, but it's a valuable slice, given that the average revenue per user is well above the average. In comparison, Cablevision gets about half its cable services business from the city.
So far, Cablevision has managed to hold its own against FiOS. (See Cablevision High on WiFi.) But TWC?
"Based on our checks, TWC does not appear to be well prepared for Verizon," Greenfield writes. He adds that the MSO's service reps don't have a "specific offer" for the customers who are considering Verizon, though they have offered deep discounts – as much as $30 per month – when customers threatened to switch.
However, the operator is preparing a Wideband platform that promises shared speeds in excess of 100 Mbit/s. In May, MSO president and CEO Glenn Britt said Time Warner Cable would begin testing Docsis 3.0 technology in New York "later this year." (See Britt: Docsis 3.0 Coming to NYC.)
Verizon offers its "triple-play" of video, voice, and Internet services at $69.99 per month to "win back" customers, a company spokesman confirmed. After six months, that rises to $99.99 per month. Greenfield says Time Warner Cable's closest competing triple-play offer costs $119.95 per month.
Although Greenfield has cut his rating on Time Warner Cable, analyst Craig Moffett of Sanford C. Bernstein & Co. Inc. downplayed the Verizon factor in a note issued today. Although he believes Verizon and its FiOS strategy will find success in New York City, Moffett says the impact of the franchise approval "is wildly overstated."
He points out that Verizon's fiber will pass about 30 percent of the city by the end of this year and that not all those homes will be "marketable" at first. "Verizon must first negotiate building access rights... then design what amounts to customer engineering solutions for each building," he writes.
Moffett gives a "reasonable guess" that Verizon might gain access to 25 percent of homes passed in any given year, and perhaps grab 20 percent of market share "right out of the gate."
In an interesting side note, Moffett points out that although service providers are forbidden under state law to strike exclusive deals with multiple dwelling unit (MDU) owners, "preferred marketing agreements... between buildings and [the cable MSOs] are not only commonplace, they are indeed the norm." (See FiOS in NYC: Verizon's Daunting Task.)
Moffett's been bullish on Time Warner Cable before, noting that the separation from Time Warner Inc. (NYSE: TWX), coming as early as the fourth quarter, includes a healthy dividend that makes the stock attractive. (See Getting Bullish on Time Warner Cable .)
— Jeff Baumgartner, Site Editor, Cable Digital News