When Will Cable Admit Defeat?

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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Read/Post Comments (11) | Recommend This Article (1)

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  • Report this Comment On November 10, 2013, at 12:54 PM, NaterTheHater wrote:

    The fact that is lost, when examining the cable industry as a whole, that Time Warner Cable and their competitors are simply middlemen. TWC, satellite and AT&T, Verizon and etc. do not own the networks. They don't create or control what the networks show. They are just retransmitters of that signal. They pay the networks to retransmit their signal. A customer's cable bill is largely determined by what the networks are charging. If they admit defeat and give in to every network's demand to raise the price they charge the middlemen the price for the customer would sky rocket. There are people out there who think the middlemen should take less of a cut of the profits then and give in to defeat and not make as much money. Some customer think the companies would be fine because they are rich corporations anyway. Say they admit defeat and do just that absorbing every increase losing profit and viability. The company would not be able to sustain itself, would have to close and everyone would lose. It is the networks that need to control their costs so they don't feel they need to charge the middlemen so much which in turn charges the customer more. The supplier is on the front line and receives all the complaints and criticism from the customer and the media. The deals are undisclosed so we don't really know how much CBS agreed with TWC. One thing is for certain. Get used to black outs. The days of networks raising their prices is at an end and the middlemen are fighting back. TWC pushed back against CBS and showed the rest of the industry if you request outrageous increases you will lose profits. True TWC may have lost 300k subscribers but people ping pong in between companies all the freaking time. They will be back. It's the ebb and flow of the industry. TWC suffered a short term loss for a long term gain.

    Having said all that change is on the wind. Our society is turning to streaming as it way of getting their content. The old style of providing content in the form of middlemen with 100+ channels will soon diminish and be replaced with the networks streaming content to people directly. So that cable bill will soon be replaced with your Viacom bill, CBS bill, ABC bill, NBC bill, etc...Maybe all you want to watch is ESPN. So streaming ESPN will be the way to go. ESPN will be $20 a month just so you know. That's what cable pays.

    So the cable providers will still have the old school people who want the $100 a month package of 100+ channels but they will die off just like home phone land line users are dieing off. But what happens when all that streaming is wracking up huge bandwidth usage? Time to revamp the internet industry. The price will no longer be based off speed but gigabyte usage. In fact the speed will not matter and it would behoove the sellers of internet to up everyone's speed to use as much data as possible. So now you will pay for tiers of gigabytes: 10, 50, 100, 200, 500. You don't really think TWC would lose all the cable profits and have unlimited bandwidth did you?

  • Report this Comment On November 10, 2013, at 2:40 PM, Grathan wrote:

    Google Fiber charges $0/month for speeds that Time Warner milks customers dry with.

  • Report this Comment On November 10, 2013, at 4:55 PM, Burstedbladder wrote:

    They pretty much out priced themselves. People are sick and tired paying these high cable fees for channels they do not want.

    I ditched my cable once my 2 year contract was up. I can watch all the garbage I paid for on cable for free on the internet that's hooked up to my big screen tv, and I also subscribe to Netflix.

    I have no more use for Cable or Satellite companies.

  • Report this Comment On November 10, 2013, at 6:26 PM, sliderw wrote:

    NaterTheHater, good analysis.

    Customers are blaming the cable guys when it is the content owners who should take more of the heat. The cable guys should unbundle their offering in response. It will not be easy, but they should not underestimate their own leverage with the content guys.

  • Report this Comment On November 10, 2013, at 8:25 PM, Leecee wrote:

    The best thing I ever did is to ditch cable. There is so many ways to watch tv without the absurd prices being charged for pure garbage!

  • Report this Comment On November 10, 2013, at 9:31 PM, charlestonpaul wrote:

    We had Time Warner for 8 years in Charleston, S.C. before we moved to another state. They had the worst customer service. Our cable box kept crapping out. We had to exchange it at their center and 1/2 of the time, the refurbished one we got didn't work. Plus we lost all of our recorded shows each time. The employees at their center always seemed to have an attitude.

    We're happy to be a ex-customer now!!

  • Report this Comment On November 11, 2013, at 1:15 AM, leo561 wrote:

    Well this says it all why everyone is cutting the PIG loose- its revenue growth comes from increasing rates and switching customers to higher priced packages.Google fiber rates for a 12MB dl speeds are $0 as long as there is 1/2 of the people in your neighborhood that subs to a $70 tier package for a GigPersecond DL speeds for $70-$80 a month. i right now pay $40 for 6mbs DL(NO max Cap gigs)+$9 a month for netflix if i was to get Cable TV 130.00+40 for the internet way too much

  • Report this Comment On November 11, 2013, at 10:27 AM, adamlevy wrote:

    @NateTheHater and sliderw

    The content owners clearly have supplier power in this situation. Individual cable companies don't have that much buyer power, which is why John Malone is calling for consolidation in the industry -- to increase its leverage. But with so many ways for viewers to consume content now, content owners are gaining more power as cable companies' power diminishes. That means they can increase the price cable companies will pay. Maybe that means higher cable prices. But TWC and other multi-channel providers need to figure out a way to add value. Comcast is doing a pretty good job with its VOD and TV Everywhere offerings, but still hasn't completely stopped bleeding video subscribers (mainly due to Telecom companies encroaching on its territory). TWC needs to at least catch up to Comcast, which will take years and lots of money.

    You can't blame CBS or Viacom for taking advantage of their leverage. They have shareholders too.

  • Report this Comment On November 11, 2013, at 10:35 AM, johnfpetr9877 wrote:

    I worked for a huge call center here in south florida. I can almost tell you twc,cbs and all the other networks are in bed together. They want to make the public think their battling each other when its the opposite. The consumers are the ones that control what goes on. When CBS receives votes on a popular sitcom and that sitcom gets an emmy or an award voted by the consumer. Thats insentive to raise prices. I know this is true because I senior rep for Showtime told me this to my face.

  • Report this Comment On November 11, 2013, at 1:58 PM, eatmeoblamo wrote:

    Netflix doesn't have any good content, so no, they are not paying good money for good content. Since Time Warner and ATT have the majority of internet subscribers, they are getting the money there as well. Some subscribers like me have no choice, can't use satellite, no other cable operator, and internet through ATT suck so bad it can't stream content.

  • Report this Comment On February 12, 2014, at 9:46 AM, thunder18 wrote:

    @eatmeoblamo

    I think Emmy award winning House of Cards and People's Choice award winning Orange is the new Black would like a word with you.

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