Of all the major pay-TV providers, Time Warner Cable (UNKNOWN:TWC.DL) has experienced the most cord cutting of all. Over the last three years, the cable company has lost 1.4 million video subscribers. But Time Warner has a plan to appeal to cord cutters.
Starting with a test in New York and New Jersey, Time Warner Cable Internet subscribers will have the option to add access to the TWC TV app, which streams live television on any Internet-enabled device connected to the home Wi-Fi network. This live streaming service will put it in competition with similar services like Dish Network's (NASDAQ:DISH) Sling TV, but isn't a true over-the-top solution as it doesn't allow for streaming outside of the home.
Giving consumers a choice
One of the biggest complaints about cable companies is the number of hidden fees included in their pricing. Those fees include things like charging for installation and a monthly fee to rent a set-top box. Consumers don't even get a choice if they want to use the cable operator's box or not.
Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is petitioning the FCC to allow third-party set-top boxes. Meanwhile, pay-TV providers argue that the proprietary set-top box is essential to their business, allowing them to present television content as intended and often required by contracts with media companies. Opening up to third-party hardware like Google's Chromecast makes the cable company nothing more than a content wholesaler for those hardware makers. Naturally, there's self-interest involved for both cable companies and Alphabet, which sells its own set-top box devices.
But Time Warner Cable seems to have found a middle ground. It will even pay for a new Roku 3 device for subscribers of its new plan. Those subscribers are technically TV subscribers, but there's no hidden fees for the set-top box or DVR. Of course, that comes with the drawback of not being able to record content easily.
Because those subscribers are technically video subscribers, they can access Time Warner Cable's TV Everywhere apps without violating the cable company's contracts with the networks. Meanwhile, Time Warner Cable gets to control the interface because the content is only accessible through its app. It's a solution that works for both consumers and the cable company.
Time Warner Cable also benefits from saving money on truck roll, installation, and other subscriber acquisition costs when it opts to let users stream their television content over the Internet instead of via cable. This could allow it to draw in a lot more subscribers if it takes its offer nationwide.
Dish Network CEO Charlie Ergen told analysts that the company spends about $800 per subscriber to get them set up and ready to receive their satellite feed. Costs for Time Warner cable may be a bit less, but are still likely very similar. However, Ergen noted that a lot of those costs disappear with Sling TV. As a result, Dish doesn't bring on customers with an average revenue per month below $50 to its satellite TV business, but Sling TV starts at just $20 per month.
Time Warner, likewise, is capable of reducing its upfront costs to serve subscribers that only want to access video through Internet-enabled devices. As a result, it can use tactics like a free trial or offering a bundle for less than stand-alone Internet service (as it's currently doing) to attract new subscribers to the service on a trial basis. Since it only has to pay for the cost of a Roku and the operating costs, it gets more value out of each subscriber.
Investors should watch for Time Warner to expand the test nationally, or at least get results from its early test during the next earnings call. The service has potential to win over some cord cutters with relatively inexpensive access to premium programming. It has some tough competition for the same audience, however, including Sling TV and more mainstream over-the-top services.
Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.