Time Warner Cable to Squeeze More Profit From Fewer Users

Photographer: Andrew Harrer/Bloomberg

The headquarters of Time Warner Inc. in New York. Their cable customers will likely be charged more for their services. Close

The headquarters of Time Warner Inc. in New York. Their cable customers will likely be... Read More

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Photographer: Andrew Harrer/Bloomberg

The headquarters of Time Warner Inc. in New York. Their cable customers will likely be charged more for their services.

Time Warner Cable Inc. (TWC) customers should prepare to pay more for the services they want.

The cable company is scaling back its discounts after years of offering low introductory rates on all-encompassing packages of Internet, television and phone service. The promotions were meant to hook customers by giving them as many amenities as possible, with a cheaper price for the first 12 months.

Those days are over, Chief Operating Officer Rob Marcus said in an interview. The cable provider’s new strategy: Figure out exactly what customers want and make them pay more for those pieces. That means landline phone service -- which many users no longer want -- doesn’t have to be in the bundle. Time Warner Cable (TWC) also is less worried about losing subscribers, so long as it squeezes more profit out of the ones that are left.

“It’s a shift,” Marcus said. “For so long, people that follow our business have been focused on subscriber gains. That’s not the right thing to focus on, at least not exclusively, and it actually causes behavior that’s not in the long-term health of the business.”

Time Warner Cable will continue to offer packages with low initial prices, but now they’ll come with slower Internet speeds and “fewer channels and features,” Marcus said. If customers want more bandwidth, a digital video recorder or more premium channels, they’ll have to spend more money.

Higher ARPU

The idea is to boost average revenue per user, rather than trying to attract more customers, he said. Time Warner Cable (TWC), based in New York, expects the new strategy to yield a higher ARPU in the second half of the year.

The trade-off is the continued loss of subscribers -- especially in the TV market, where the company faces stiff price competition from Verizon Communications Inc. (VZ)’s FiOS and AT&T Inc. (T)’s U-Verse. Time Warner Cable shed 119,000 video customers last quarter, more than the 92,000 loss projected by analysts.

It lost 35,000 residential phone customers, the first quarterly decline since 2011 and the largest loss since the product category was introduced. While the company gained 131,000 residential Internet users in period, the number missed the average analyst estimate of 160,000.

Shareholders may have to warm up to the new strategy, said Mike McCormack, an analyst at Nomura Holdings Inc. in New York.

“Investors are likely to take a wait-and-see approach,” McCormack, who advises buying the shares, said in a note to clients.

Profit Gains

Even with the disappointing subscriber numbers, Time Warner Cable boosted profit last quarter. Excluding one-time costs, earnings rose to $1.41 a share, beating the $1.37 average analyst estimate compiled by Bloomberg. Sales rose 6.6 percent to $5.48 billion, topping the $5.49 billion projection.

Time Warner Cable shares were up 1.1 percent to $93.23 at 9:34 a.m. New York time. They had fallen 0.6 percent yesterday after the results were released. Marcus viewed that relatively minor decline as a validation of his strategy.

“A muted reaction is a positive for us,” he said. “Clearly relative to what was expected from us, subscriber adds were light. It appears the reaction is a signal that investors are willing to believe in the strategy. Of course, the proof has to be in the pudding.”

To contact the reporter on this story: Alex Sherman in New York at asherman6@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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