Time Warner Dispute With Sinclair - 2 Potential Downsides to Stock

Includes: CHTR, SBGI
by: Trefis

Time Warner Cable (TWC) and Sinclair Broadcasting Corporation (NASDAQ:SBGI) are at it again. The two companies are engaged in heated programming negotiations for 2011 bringing to light the often-tense relationship between broadcaster owners wanting higher programming fees and cable and satellite companies attempting to mitigate rising costs. Time Warner Cable primarily competes with Comcast (NASDAQ:CMCSA), AT&T (NYSE:T) and Verizon (NYSE:VZ) in both the pay-TV and broadband businesses. The company also competes with satellite pay-TV providers like Dish Network (NASDAQ:DISH) and DirecTV (DTV).

Given the threat of rising costs, potential blackouts and as new pay TV operators enter the fray, TWC’s market share and profit margins could ultimately suffer in the medium-term adding downside pressure to the Trefis price estimate of $55.46 for Time Warner Cable.

Sinclair Broadcasting Corporation owns 58 TV stations in 35 markets in the U.S. and reaches an estimated 22% of U.S. TV households. [1] Time Warner Cable has refused to agree over the retransmission fee demanded by Sinclair for its broadcasting content and as a result about 5 million of Time Warner cable’s subscribers face possibility of content blackout as the new year approaches. [1]

As broadcasters are increasingly pushing for retransmission fees for their content, disputes with pay-TV service providers seem to be arising more frequently. Recently, Cablevision’s (NYSE:CVC) subscribers in the New York tri-state area faced blackouts to the World Series and NFL games in a dispute with News Corp’s (NASDAQ:NWS) Fox TV stations.

We see two downside scenarios for TWC’s stock:

1) If Arbitration Stalls

If this arbitration process drags on or hits a snag, a potential blackout could affect 5 million Time Warner Cable subscribers, which constitutes almost 40% of the company’s base. While a one-time event is not significant, increased network interruptions could lead some subscribers to explore other pay-TV services like DirecTV and Dish. Time Warner Cable could lose disgruntled customers and see a drop in its pay-TV market share.

The company has lost market share gradually since 2006 and from just about 14% to decline to around 12% by the end of 2010 by our estimates. Since we forecast stabilization going forward, disputes and related blackouts could lead to further loss of subscribers and consequently risk Time Warner Cable’s market share. If so this would weigh on our estimates.

2) If Time Warner Cable Pays Retransmission Fees

Sinclair Broadcasting Corporation states that it is looking for additional fee of less than 30 cents per subscriber per month. [1] Now considering that the blackout could affect 5 million subscribers, this amounts to additional annual costs of close to $18 million for Time Warner Cable. If we assume that the company will absorb these costs and the impact is attributed to digital cable, it can reduce its digital cable margins by over 2% and lead to about 5% downside to Time Warner Cable’s stock.

Below you can see how change in digital cable margins can impact Time Warner Cable’s price estimate.


  1. "2nd UPDATE: Sinclair, Time Warner Cable Trade Barbs In Fee Dispute," Wall Street Journal Online, 16th Dec 2010

Disclosure: No position