Like other cable companies, Time Warner Cable (TWC) has suffered consistent subscriber losses for the past few years. Satellite companies such as DirecTV (DTV) and Dish Network (NASDAQ:DISH) as well as telcos such as AT&T (NYSE:T) and Verizon (NYSE:VZ) have performed much better.
As a result, Time Warner Cable’s subscriber base decreased from 13.3 million in 2007 to 12.2 million in 2012. During the same period, its share in the U.S. pay-TV market declined from 13.4% to 11.7%. The slight increment in 2012 compared to 2011 can be attributed to the acquisition of Insight Communications. Its market share in the pay-TV business is paramount as we estimate that the cable business drives nearly half of Time Warner Cable’s total value.
The decline in market share was due to better performance from its competitors. Time Warner Cable was late in its transition to the digital platform and many of its customers shifted to telcos and satellite companies. The growth of fiber optic services, technological advantage of satellite companies (in form of HD/DVR services) and sub-par customer service fueled this shift.
Going forward, we expect Time Warner Cable’s pay-TV market share to continue to decline, albeit at a lower rate, and more or less stabilize in the long term at around 11%. We believe the company has been a little late in adapting to changing trends in the pay-TV industry and competitive advantages of its peers could deny it any market share growth. However, subscriber losses should slow in the next 2-3 years, and the company should be able to increase its subscriber base and grow with the overall market.
We Expect Subscriber Trends To Improve
In the past six years, Time Warner Cable’s subscriber base has declined at an average annual rate of 1.5%. The number of subscribers decreased from 13.4 million in 2006 to 12.2 million in 2012. The company lost on average close to 200,000 net subscribers each year with 2010 and 2011 seeing the highest losses. However, as the company completes its transition to the digital platform, the subscriber trends should improve. Most of the subscriber losses were concentrated in its analog base.
We expect the subscriber losses will continue in 2013 as Time Warner Cable clearly seems to be lagging behind its competitors in terms of bringing the latest technology and service enhancements and embracing the concept of TV everywhere. Besides, its focus on limited markets doesn’t give it much room to expand geographically.
However, we expect the company to do better in subsequent years and over the long term will be able to maintain market share of around 11%. This implies that it may be able to gain 50K-75K net subscribers annually overall the long term, assuming that it closes the technology and service gap that exists between itself and competitors. Some efforts in this direction include the introduction of streaming apps on iOs and Android devices that gives subscribers access to live programming over the Internet. In addition, Time Warner Cable is focusing on creating more relevant programming tiers that will appeal to a wider range of customers. This could be an important move especially in the face of rising programming costs that may encourage cord cutting. Finally, the slowdown in the telcos’ pace of expansion can give Time Warner Cable an opportunity to strengthen its position in the markets that Verizon and AT&T are not looking at currently. However, this might mean broadening its market focus and laying down new infrastructure.
Market Share Growth Unlikely Due To Intense Competition
Even though Time Warner Cable will be employing multiple strategies to improve its subscriber trends, there is fierce competition from DirecTV, Dish Network, Comcast (NASDAQ:CMCSA), AT&T and Verizon. DirecTV has done extremely well and has grown its pay-TV market share from 17.4% in 2008 to 19.2% in 2012, as per our estimates. The company was able to do so on its brand strength and customer service, unique programing such as NFL Sunday Ticket, and maintenance of better customer credit standards. In addition, DirecTV has benefited from gaining certain key distributors such as AT&T.
Dish Network has acquired spectrum assets from TerreStar and DBSD North America and a successful construction of a nationwide wireless network will allow it to bundle broadband and voice services with its current pay-TV offerings. This can give the company a competitive edge. Dish also offers sling DVR technology allowing its subscribers to remotely access pay-TV programming. Adding Blockbuster streaming is an excellent complement which gives subscribers true flexibility in what, when and where they want to watch. In addition, the company has started to focus on higher credit quality subscribers.
While cable companies in general continue to battle subscriber losses, Comcast has improved a lot as it lost only 12,000 net subscribers in Q4 2012. The company has been investing in improving its customer service & installation and promoting the Xfinity brand. It also introduced a subscription streaming service called Xfinity Streampix to create an incentive for its subscribers to stay. Telcos, with their fiber optic services including FiOs and U-Verse, are still gaining subscribers and consolidating their positions in their existing markets. The overall market is saturated and quite competitive and we believe it will be extremely difficult for Time Warner Cable to gain share. However, with a slow and steady subscriber growth, it will be able to maintain its share.
Significance For Time Warner Cable
Given the past trends and that the U.S. pay-TV market is becoming saturated and highly competitive, we believe there isn’t a lot of room for upside/downside to our price estimate based on market share changes. However, it is still important to understand the sensitivity of Time Warner Cable’s stock to this driver.
If the company is able to increase its market share to 2008 levels of 13% by the end of our forecast period, there could be upside of about 10% to our price estimate. However, this means that the company would gain close to 2.2 million subscribers over the next 7 years, implying an average annual gain of close to 300,000 net subscribers. We believe this is highly unlikely in the current environment. On the other hand, if Time Warner Cable’s pay-TV market share falls to 10% by the end of our forecast period, there could be downside of around 5-10% to our price estimate.
Our price estimate for Time Warner Cable stands at $91.50, implying a discount of less than 5% to the market price.
Disclosure: No positions