Time Warner Cable Inc. (TWC) posted weak financial results for the third quarter of 2011, missing the Zacks Consensus Estimates. We remain highly concerned regarding the continuation of the company’s video subscriber loss.
The U.S. pay-TV industry is at present facing significant challenges from several fronts. Economic volatility in the U.S., growing competitive threat from fiber-based TV services of telecom operators, and availability of cheaper substitutes, such as online video streaming services, have imposed mounting pressure on the traditional pay-TV operators, and Time Warner Cable is no exception.
In the U.S., cable operators are facing fierce competition from telecom service providers. Verizon Communications Inc. (VZ) and AT&T Inc. (T) are quickly gaining market share from cable MSOs by offering fiber-based TV and other high-speed broadband services to their subscribers. Online video streaming service providers, such as Netflix Inc. (NFLX), Hulu.com, uTube etc. have become a severe threat to cable TV operators.
These online videos provide an extremely cheaper source of TV programming unless the customer is very eager to see real time programs like sports events. This business model is gaining momentum especially when the economic headwind is still persisting.
However, one silver lining is that the loss of basic video subscribers declined 18.7% year over year in the last quarter. Besides, management is following a systematic share buy-back program, which may support the bottom line. We reiterate our Neutral recommendation as the stock price has dropped 25% in the last three months.
In a major strategic move, Time Warner Cable has decided to acquire privately held triple-play pay-TV operator Insight Communications Company Inc. for $3 billion in cash. Insight serves approximately 537,000 high-speed data subscribers, 679,000 video subscribers, and 297,000 telephony subscribers. This solid customer base will effectively complement Time Warner Cable dwindling video customer base. This deal is expected to be closed by the first half of 2012.
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