Time Warner Cable Eyeing Network DVR Case

Time Warner Cable Inc. (NYSE: TWC) is keeping close tabs on the Cablevision Systems Corp. (NYSE: CVC) network digital video recorder (DVR) case, and could consider some changes to its own approach should the latest court ruling hold up as a long-term law.

On Monday, a court ruled that Cablevision's Remote-Storage DVR (RS-DVR) service does not directly infringe on copyright rules, and should be given the same protection afforded local, home-side DVRs. An appeal is expected, and there's speculation that it could eventually reach the U.S. Supreme Court. (See Court Resurrects Cablevision's Network DVR .)

Cablevision's approach assigns server space to each RS-DVR customer and requires customers to make their own recordings. Time Warner Cable's popular and more automated "Start Over" service allows subscribers to restart programs already in progress -- at least those shows that have been given copyright clearance. To prevent ad-skipping, any programs viewed in Start Over mode have the fast-forward function disabled.

"The engineering attraction of the network DVR is clear," Time Warner Cable president and CEO Glenn Britt said Wednesday morning, responding to an analyst's question during the MSO's second-quarter earnings conference call. "What isn't clear is the law. And we will do whatever the outcome is. If the outcome is that we have to get copyright permission, that's what we will do. If the outcome is [that] network DVRs don't require copyright permission, then we will do that," Britt added, noting that the case is "more complicated than the headlines" might make it appear.

Because Start Over uses much of the underlying technology used for a service more akin to Cablevision's RS-DVR, Britt estimated that Time Warner Cable could deploy such a service "fairly quickly."

Britt also pointed out that, regardless of the copyright model, the centralized DVR offers a "better engineering solution than having hard drives all over everybody's home." At the same time, Time Warner Cable has plenty of set-tops with baked-in DVRs. At the end of the second quarter, 45 percent of the MSO's digital subscribers had DVRs. But growth slowed a bit: Time Warner Cable signed up 160,000 DVR subs in the second quarter, down from 186,000 in the year-ago period.

Financial update
Time Warner Cable, like Cablevision and Comcast Corp. (Nasdaq: CMCSA, CMCSK), fared well in the second quarter, despite a challenging economy, typical "seasonality," and surging competition. (See Comcast Rings the Telcos' Bell .)

Time Warner Cable, which is set to split off from the Time Warner Inc. (NYSE: TWX) mothership before the end of the year, said revenues rose 7 percent ($284 million) to $4.3 billion. Analysts were expecting $4.33 billion. Net income was $277 million (28 cents per share), relatively flat from $272 million (28 cents per share) a year earlier.

Revenue generating units (RGUs) grew by 656,000, marking what the MSO deemed its "best second quarter ever." It ended the period with 33.6 million RGUs.

The MSO also lost 9,000 basic subscribers in the quarter but did better at retaining them than expected. Sanford C. Bernstein & Co. Inc. , for example, anticipated the MSO would lose 67,000 basics. Time Warner Cable lost 57,000 basic subs in the year-ago period.

The operator remained strong in other service categories in the period, adding 200,000 digital video subs, 201,000 high-speed Internet customers, and 251,000 residential voice subs.

"Time Warner Cable's results underscore the broad trend of cable dominance relative to the telcos," Bernstein analyst Craig Moffett noted this morning. (See DSL's Worst Quarter Ever .) Other analysts, however, aren't as bullish in light of coming competition from Verizon Communications Inc. (NYSE: VZ) in New York City. (See Time Warner Cable Faces FiOS Attack.)

Looking ahead, the MSO cut its 2008 full-year outlook to reflect financing and transaction costs associated with its planned separation from Time Warner Inc. It now expects full-year earnings per diluted share to be in the range of $1.10 to $1.15, down from earlier guidance of $1.25 to $1.30 per share. (See TWC Posts Q2, Updates Outlook.)

Shares in Time Warner Cable were down $1.56 (5.22%) to $28.34 in mid-day trading Wednesday.

— Jeff Baumgartner, Site Editor, Cable Digital News

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