Shows like Game of Thrones may be more important than owning distribution channels going forward. Image Source: HBO
Aside from their interlocked history and names that cause confusion, Time Warner (TWX +0.00%) and Time Warner Cable (NYSE: TWC) largely operate on opposite sides of the same business.
TWC, which is in the process of attempting to be acquired by Charter Communications, is largely a cable and Internet provider, while TWX owns cable channels and a movie studio. Since the two companies split in 2009, one, Time Warner Cable, delivers content and services, while the other, Time Warner, creates and houses it.
These are two very different businesses that are intertwined. You wouldn't need cable if there were no channels, and there would be no need to create those stations without a means to deliver them through traditional pay-TV or over the Internet. Still, while TWC and TWX need each other to thrive, and cases can be made for both, one company represents a safer choice for your portfolio.
A look at Time Warner and Time Warner Cable stocks over the last 12 months. Source: YCharts.com.
The status quo is starting to unravel
The difference in deciding which stock is a better buy comes down to how cord-cutting -- consumers dropping cable in favor of streaming options -- affects both. So far, this phenomenon has been more a trickle than a steady flow of customers, but it's fair to say it's putting pressure on cable companies.
Up until very recently, pay-TV worked in a fairly symbiotic way with channel owners. Cable subscribers were, and are, forced to buy big packages of channels whether they want them all or not. This makes for a bigger bill, which is good for the pay-TV company. It's also great for the channel owners, because they receive a carriage fee -- as much as over $6 per month for ESPN, and down to a few cents for less-watched channels.
Consumers pay for content they never intend to watch, and the stations housing that content make money even when nobody watches their channel. It's a good system for both Time Warner Cable and Time Warner.
Unfortunately for one more than the other, the status quo is starting to change. Because cord-cutting has such a huge advantage in price over traditional cable, pay-TV companies are very slowly giving up the current bloated channel packages in favor of what's known as skinny bundles. These packages cost less because they offer only a smattering of channels -- generally the most popular ones.
It's a way for cable to hold onto some pay-TV relationship with customers, but in a much less lucrative way. Of course, the channel owners suffer, too, because they lose carriage fees as fewer people get forced to buy channels they don't want.
Cord-cutting hits both companies
Cord-cutting and cord-shaving (switching to a more limited, skinny bundle) will hurt Time Warner Cable and Time Warner, but it's going to a bigger problem for the cable company. The reason is that cable is merely a delivery method for content. People have no emotional ties to it in the way they do to their favorite shows. Pay-TV doesn't even have the nostalgia draw of a movie theater. It's simply a way TV shows are delivered, and it's just not that different from streaming boxes or watching via computer, tablet, or phone.
Time Warner Cable will gain some broadband subscribers as people cut the cord, but its ability to eke out extra money from them won't make up for the revenue it loses as people drop or downsize their cable packages. It's hard to know if pay-TV will become like the newspaper or music business -- a gutted shell of its former self -- but it's fair to say that it's a question of how fast and how much the industry will shrink, not if it will.
Of course, having fewer cable subscribers hurts Time Warner when it comes to carriage fees, but the company's cable portfolio is full of premium brands people will probably seek out. In addition to owning HBO, a brand that already has a stand-alone streaming service, the company owns TBS, TNT, Cartoon Network, Adult Swim, Warner Bros. movie studios, New Line Cinemas, and Warner Bros. animation, as well as the Hanna-Barbera brand and library of cartoons.
Even the company's lesser successes, such as the CW network, have shows such as Arrow and The Flash with devoted fans who would follow them to the Internet or a streaming service.
Time Warner is a better buy
The phrase "content is king" has become even more true in a world where people have a legitimate alternative to paying for bloated cable packages. Both Time Warner and Time Warner Cable have good businesses that should thrive for years to come, but as an investor, I feel safer backing the company that owns programming people want to see.
TWC, which will probably be under a new name assuming its acquisition gets approved, is going to lose cable customers or see some downgrade to cheaper packages. How deep that will go is not yet known, but it's fair to say that pay-television as it exists now has already had its heyday. It may not become a gutted shell of its former glory, but the arrow on the chart points down.
This will hurt TWX -- it's going to be a drag on every company involved in creating or delivering television -- but ultimately content will rule the day. People will seek out Adult Swim's cartoons, TNT's dramas and sports, and TBS's original shows. They will find The Flash and the rest of the CW DC Comics lineup, and most certainly they will find HBO.
Both Time Warner and Time Warner Cable have bright futures (or at least their pieces do, in the case of TWC), but if I could only buy one, I'd consider Time Warner, with its original content, as the better buy.
