Despite telco competition, video services remain strong

Time Warner Cable, which today announced will be fully separated from parent company Time Warner Inc., has beat out its main competitors, including AT&T and Verizon, in both video and broadband earnings. As both of the leading telcos state plans to increase the price tag on their video services, some analysts are predicting the run of success will continue.

Craig Moffett, analyst and senior vice president at Sanford C. Bernstein & Co., said that despite a predicted loss of 32,000 subscribers, TWC is continuing to hold its own in the competitive landscape. “With Verizon indicating a plan to raise FiOS prices even further, and with AT&T now talking about raising prices and fees for U-verse as well – having already raised prices for DSL – the overall state of competition might reasonably be judged to be far more hospitable than broadly perceived,” Moffett wrote with regards to the earnings.

Like its telco competitors, TWC reported not feeling the affects of a sluggish economy. Telecom service providers including AT&T and Verizon have been quickly ramping up their video presence in many TWC markets, but the cableco reported strong earnings in both video and broadband services. While Time Warner posted a 36% decline in first-quarter earnings from a year ago, growth in the cable division remained strong. TWC added 55,000 new subscribers in Q1, its highest total since adding 66,000 in the first quarter of 2006 and the second highest total in more than five years.

Time Warner CFO John Martin also reported significant broadband net additions with 304,000 added in Q1 – TWC’s second highest total ever. Whereas last year, Verizon topped TWC’s broadband net additions by 17%, this year the cableco beat out Verizon by 15.5% and AT&T by 62%.

Tom Robey, senior vice president of investor relations, said that TWC is investing in three areas to continue its growth in video. First, in enhancing the video capacity of its hybrid fiber coax network by implementing switch digital video or, in certain areas, going all digital. To enhance high-speed data capacity, the company will make network investments, splitting service groups and adding equipment. TWC is also looking toward growing its commercial business, which had revenue growth twice as fast as residential, as well as investing in high definition.

“We are investing in consumer premises equipment, especially high-definition set-top boxes,” Robey said. “This is an important component of our strategy to attract and retain high-end customers.” TWC’s HD capable subscribers increased by 41% this quarter, and DVR subscribers also increased to 44%.

Verizon has been quickly going through the process of gaining approval to compete on video in the New York market, a move that TWC has contested. The telco is even said to have wired entire markets, like Staten Island, just waiting for a video franchise. When asked how TWC would respond to this competition, CEO Glenn Britt responded that he is not expecting anything different from the give and take in other markets where Verizon is a competitor.

“New York gets a lot of headlines, but we’ve been competing with Verizon elsewhere with FiOS, both broadband and video, and other operators in the business have too, so I think we can pretty much see what is going to happen -- namely that when they enter a market with video, they will certainly get some video customers from both us and satellite, so that shouldn’t surprise anyone,” Britt said. “But we also see that broadly we continue to take a very large number of voice customers from both them and AT&T, so I think we will see patterns similar to elsewhere. It will probably get more headlines because it is New York City, but I don’t expect it to be different.”

Chief Operating Officer Landel Hobbes added that, coupled with more aggressive marketing campaigns, they are currently taking all the HD channels in the city digital, as well as launching a price lock guarantee in advance of Verizon’ launch.

Surprisingly, TWC is also giving the telcos a run for their money in their traditional domain, telephony. The cableco’s phone business showed positive growth in wired voice as well, up 21% from last year. The company is bringing its version of a caller ID on TV feature to most of its service areas. In terms of a wireless offering, following its failed venture with Sprint, Britt only said that the company’s wireless strategy has not changed. He views it as the business of today, but is more interested in the broadband wireless networks of the future that could potentially tie wireless and wireline together in a hybrid network. He said TWC is looking into the possibilities, but has yet to make any commitments.

“We have not seen big demand for the quadruple play to date,” Britt said. “We continue to study that, and if that changes, we’ll figure out what to do about it. So I view that as maybe largely defensive.”

Analyst Moffett said the only weak spot of the quarter was in margins. At $1.4 billion, TWC’s earnings were 4% light of Bernstein expectations. He attributed the shortfall to the timing of option grants in this year, as well as more aggressive advertising and marketing than years past. The company was successful in raising cash flow guidance, however, and anticipates year-on-year growth of 40%, due in part to tax benefits from the Economic Stimulus plan. Moffett expects the positive growth to continue into the second half of the year.

“While second-quarter seasonality makes sustaining this strong Q1 pace a challenge in the near term, we believe there are more powerful catalysts even than this awaiting in the second half,” he wrote. “A rebound in advertising as the November elections approach, and – more importantly – a tailwind in basic subscribers ahead of the upcoming 2009 Digital TV transition, auger well for even faster growth in the latter part of the year.”

The decision to make TWC its own independent entity came after months of pressure from Time Warner investors. TWC became a separately publicly traded company in 2007, but to date parent company Time Warner has maintained an 84% stake in its cable division, the second-largest cable TV operator in the United States, trailing only Comcast. When the spin off is completed, TWC will act as a pure media content company. The structure and timing of the split was not disclosed.