How Will Time Warner Cable Combat Cord Cutting?

Over the past several years, digital cable subscription growth in the U.S. has been anemic. In 2011, subscription growth is expected to be less than one percent while it has been negative in previous years. ^[1]  Time Warner Cable (NYSE:TWC), the second-largest U.S. cable operator behind Comcast (NASDAQ:CMCSA), is greatly affected by this slowing trend. Analysts and industry executives blame the slow growth over the last few years on the recession and high unemployment.

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Cord Cutting is a Real Threat

However, digital cable subscription growth has also been slowed by a secular change in the marketplace. Over the last few years, services such as Hulu, Netflix (NASDAQ:NFLX) and Google’s Youtube (NASDAQ: GOOG) have provided an explosion of video content to the web. Conscientious consumers now have a real choice as to whether they need cable anymore. For the vast majority the choice will still be cable subscriptions; we expect that U.S. TV households will increase from 117 million today to 126 million by the end of the Trefis forecast period, but some people will undoubtedly choose to go with only internet.

Increased Broadband Internet Prices Could Replace Lost Cable Revenue

Time Warner is well-positioned to make up for lost cable subscriber growth through its position in the broadband internet business. The company can raise prices for its internet service to make up for lost cable users. According to Trefis estimates the digital cable business contributes 36% to the stock price while broadband internet contributes 42%. This means that customers switching from a cable subscription to a high data-tier, higher-margin, broadband plan may not have a significant negative impact on the company. Time Warner has generally been able to implement increases in price without significant churn as it is a hassle to change internet service providers. Additionally, the company usually dominates a service area, leaving local consumers with few alternatives. These considerations put the company in a strong position to capture further broadband internet revenue.

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1. U.S. Pay TV: Don’t Touch That Dial, Financial Times, Nov 2011 [↩]