Time Warner Cable’s Pay-TV Subscriber Base Will Continue To Decline, But Growth In ARPU Will Lead To Pay-TV Revenue Growth

Time Warner Cable (NYSE:TWC) and other cable operators have been losing pay-TV subscribers for many years due to a combination of market saturation, fierce competition from satellite-TV companies & telcos, and consumers shifting to cheaper alternatives. However, Time Warner Cable managed a better subscriber retention rate in 2015 as compared to earlier years. This can be attributed in large part to the company’s triple play bundling packages. We continue to believe that the rise of alternative video platforms will negatively affect Time Warner Cable in the long run. We estimate that the company’s subscriber base will experience a sustained decline throughout our forecast period. However, continued growth in the pay-TV segment’s average revenue per subscriber will compensate for subscriber losses, and pay-TV revenue will grow from an estimated $8.9 billion in 2015 to $10 billion by 2022.

Our price target for Time Warner Cable stands at $199, implying a premium of more than 5% to the market.

See our complete analysis for Time Warner Cable

Pace Of Decline Will Slow Down In Time Warner Cable’s Subscriber Base

Pay-TV operations contribute 31% to Time Warner Cable’s stock value, according to our estimates. The cable-TV provider has been losing pay-TV subscribers for years now. Time Warner Cable’s overall subscriber base has come down from 13.3 million in 2007 to just under 11 million, as of September 30, 2015. ^[1] Time Warner Cable is not the only cable-TV company which is losing subscribers. Top cable-TV providers lost around 1.7 million ^[2] and 1.2 million ^[3] subscribers in 2013 and 2014, respectively. The subscriber loss in the cable-TV industry can be largely attributed to a combination of market saturation, fierce competition from satellite-TV companies and telcos, such as AT&T (NYSE:T) & Verizon (NYSE:VZ), and more consumers opting for a lower-cost mixture of over-the-air TV and other over-the-top viewing options such as Netflix (NASDAQ:NFLX), Hulu, etc.

Even though Time Warner Cable is losing subscribers, the company has been able to slow down the pace of decline in its subscriber base in recent quarters. The company’s pay-TV subscriber base shrank by 15,000 subscribers during the first half of 2015. ^[4] By comparison, Time Warner Cable had lost 186,000 and 310,000 subscribers during the first six months of 2014 and 2013, respectively. The company continued this momentum in Q3 2015 and had its best third quarter performance since 2006, losing only 7,000 video subscribers. Much of the reduction in the pace of subscriber decline can be attributed to TWC’s strategy of triple play bundling. The company management has stated previously that 80% of the video subscriber base opt for the full bundle. ^[5] Triple play bundling is the combining of the three services offered by Time Warner Cable — pay-TV, high speed internet, and voice — into one package. This bundling helps reduce the subscription fees for subscribers as it saves on infrastructure costs and leads to operational efficiency and economies of scale.

Looking ahead, we believe that Time Warner Cable will continue to lose pay-TV subscribers in the coming years, albeit at a slower pace. We estimate Time Warner Cable’s subscriber base to be around 10 million by the end of 2022, reflecting a sustained decline throughout our forecast period. The primary reason for the sustained decline is the continued growth of alternative video platforms including free programming and online video services such as Hulu, Netflix, and Amazon Prime. Netflix, in particular, has been adding more and more subscribers every quarter due to its attractive pricing. Additionally, content providers such as Dish Network, Sony, Apple, HBO, CBS, etc., are also entering the lucrative streaming market. These services are priced somewhere in between the subscription fees charged by traditional pay-TV providers, and Netflix. As more and more consumers embrace these lower cost options, the pay-TV penetration will reduce in the coming years.

Increasing ARPU Will Lead To Growth In Segment Revenues

Time Warner cable’s pay-TV revenues have taken a hit in the past two  years due to the decline in the company’s subscriber base. However, the revenues could have decreased at a greater rate if not for the growth in the segment’s average monthly subscription fee. Time Warner cable’s pay-TV segment average monthly subscription fee has increased from $57.70 in 2008, to an estimated $68 in 2015. The company will need to continuously increase prices in the future for its existing customers in order to maintain profitability amidst the sustained loss of subscribers. Consequently, we believe that the uptrend in average monthly fees will continue in the coming years, and the metric will touch $82 by the end of the forecast period. Furthermore, we believe that the continued growth in average monthly subscription fees will be able to compensate for the negative effect of the decline in subscriber base in the later years of our forecast period. Resultantly, we believe that pay-TV segment revenues will grow from an estimated $8.9 billion currently, to $10 billion by 2022.

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1. Time Warner Cable’s SEC Filings [↩]
2. Major Multi-Channel Video Providers Lost About 105,000 Subscribers in 2013, March 14, 2014, Leichtman Research Group [↩]
3. MAJOR PAY-TV PROVIDERS LOST ABOUT 125,000 SUBSCRIBERS IN 2014, March 3, 2015, Leichtman Research Group [↩]
4. Time Warner Cable’s SEC Filings [↩]
5. Time Warner Cable (TWC) Robert D. Marcus on Q2 2015 Results – Earnings Call Transcript, July 30, 2015, Seeking Alpha [↩]