Time Warner Cable: Time to Tune In?

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COMPANY OVERVIEW

Time Warner Cable is the second-largest cable operator in the U.S.—and a majority-owned subsidiary of Time Warner, one of the world's leading media conglomerates. After its July, 2006, acquisition of Adelphia Communications, TWC became a public company on Feb. 13, 2007—the effective date of Adelphia's reorganization plan. Its Class A shares began trading as of Mar. 1, 2007, while its parent company owns its nontrading supervoting Class B shares.

As of Mar. 31, 2008, TWC's cable systems passed about 26.6 million U.S. homes, nearly 85% of which were in New York, the Carolinas, Ohio, Southern California, and Texas. The company's subscriber count was more than 13.3 million for basic video (50.0% of homes passed); 8.3 million for digital video (62.2% of basic customers); 7.9 million for a residential high-speed data service such as Road Runner (29.8% of homes passed); and 3.2 million for digital phone (11.9% of homes passed). Nearly all of the homes passed in its legacy systems and about 94% in the acquired (Adelphia and Comcast) systems were served by a system with at least the industry's state-of-the-art 750 MHz of capacity. Also included are nearly 788,000 customers in Kansas City, Mo., upon a dissolution of a cable joint venture with Comcast in January, 2007.

BUSINESS STRATEGY

Over the years, TWC has achieved its current scale through a combination of organic growth and acquisitions. Most notably, in July, 2006, the company acquired Adelphia Communications for about $8.9 billion in cash, plus 16% of its common stock. After some concurrent system swaps with Comcast, TWC effectively added a net total of 3.2 million subscribers from those transactions, which consolidated its position as the second-largest U.S. pay-TV provider.

Driven by the launch of digital phone service since 2004, TWC's triple-play bundle (also including video and high-speed data) has become a central element of its competitive strategy, by our analysis. As part of its Adelphia integration, management has also made a point to deploy its bundled offering across its acquired systems. We believe the company's relatively contiguous cable systems allow it to attain an improved time to market, enabling it to deploy new services and features in a more responsive and economically feasible manner than might otherwise be the case.

TWC remains an industry leader in digital services, reflecting a continued penetration of high-definition and DVR services—nearly 45% of digital subscribers as of May, 2008. It is also aggressively ramping up its HD programming, now counting up to 50 channels in several markets, and growing. TWC is on track to launch Switched Digital Video in its major markets by the end of 2008, in our view, and in another move to reclaim bandwidth for further HD rollout, the company is currently in the early stages of a multiyear migration to an all-digital platform (starting with New York).

Evolving Wireless Strategy

In the past few years, TWC and its peer group of leading cable operators have mulled various strategies aimed at adding a wireless service to a potential quadruple-play bundled offering—albeit with mixed results, in our view. In April, 2008, among a cable consortium including Comcast, Time Warner Cable, and Cox Communications, TWC discontinued its mobile-phone service under a joint venture with Sprint Nextel (branded Pivot) that was formed in November, 2005. Earlier, in November, 2006, TWC was also part of SpectrumCo, a joint venture between the aforementioned cable consortium and Sprint Nextel (S), which won 137 Advanced Wireless Spectrum (AWS) licenses for $2.4 billion from an FCC auction. SpectrumCo has yet to announce a deployment strategy for the acquired spectrum.

Meanwhile, TWC and its peers are actively pursuing other wireless initiatives which we believe could ultimately lead to potentially viable convergent services. In May, 2008, as one of five strategic investors (Comcast, Bright House Networks, Intel (INTC), and Google (GOOG)) that would provide a combined $3.2 billion in a mobile broadband venture led by Sprint Nextel and Clearwire (CLWR), the company agreed to invest $550 million in a nationwide WiMAX network. Upon an expected fourth-quarter closing, the new Clearwire mobile WiMAX service would be offered as a 4G service by TWC (and peers), which would also offer Sprint's wireless voice and data services (in their bundled packages) under 3G wholesale agreements.