Time Warner Cable (NYSE: TWC) lost 306,000 video subscribers last quarter, mostly as a result of a dispute with CBS (NYSE: CBS). COO Robert Marcus iterated on the third-quarter conference call that "the deals we reached were far better than where we started." They must not have started off that great.

The details of the agreement are unclear, but CBS came out a clear winner in this 32-day battle despite any pennies Time Warner Cable might have saved on fees. Now, when coming to the table to negotiate retransmission and carriage fees, cable operators know that one month without CBS and Showtime, or any major network, can cost them dearly.

What's the damage?
The loss in video subscribers isn't the most alarming thing about Time Warner Cable's third-quarter results. It's the fact that the company also lost 24,000 Internet subscribers where analysts expected it to add 46,100.

Overall, 131,000 residential customers cut ties with the company. That's on the back of 93,000 customers leaving the quarter before. With so many alternatives for consumers to watch their favorite programming, they're leaving, and finding better options for both video and high-speed Internet.

Can it come back?
Time Warner Cable is currently relying on an unsustainable business model. As it loses subscribers, its revenue growth comes from increasing rates and switching customers to higher priced packages. As a result average revenue per user climbed about 2% to $105 in the residential segment.

But with options from phone companies, satellite providers, and other cable companies, not to mention the bevy of cord-cutting options, customers won't put up with indefinite price increases.

Meanwhile, the cost of content is increasing, and its evident from the dispute with CBS that networks can withstand much more pain than pay-TV providers. Indeed, CBS still ranked as the top-rated network during the dispute.

Time Warner Cable, in the face of its struggles, is considering John Malone's proposal of a buyout from Charter Communications (NASDAQ: CHTR). Malone, Chairman of Liberty Media and 25% stakeholder in Charter, believes that consolidation in the pay-TV industry is necessary for it to survive.

If Time Warner Cable brought another 4 million-plus households (Charter's video subscriber count) to the table in its negotiations with CBS, it might have done better, the theory goes. It could have negotiated better fees and resolved the dispute sooner. This kind of leverage is necessary to combat subscribers leaving for another option -- give them fewer options.

Still missing something
A merger with Charter would only do so much though. Time Warner Cable really needs to change its residential strategy. We're living in an age where a cable monopoly would still have to surrender to the networks because there are outlets outside of traditional TV that will happily pay for content.

Netflix doesn't seem to mind paying huge amounts for good content. Amazon.com will pay up too. The result is a market that the cable industry can no longer control. It doesn't pull as much weight as it used to.

Instead, Time Warner Cable needs to work with content providers to give customers what they want. That means cutting into its returns.

Content is king
It's cliche, but it's never been more true -- content is king. Time Warner Cable's third-quarter results indicate that pay-TV operators need to be willing to pay up for content, or risk losing customers across the board.

When will cable companies admit it? They can't win. DIRECTV lost subscribers when it blacked out Viacom channels. DISH Network lost when it blacked out AMC Networks. Neither nearly as badly as TWC dropping CBS, but enough to materially impact their quarterly results.

With cable operators being encroached upon from all sides from phone companies to video streamers, they need to make a change to stand a chance. A merger with Charter could be a win-win, but it doesn't mean either company could really win against the networks.

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