Time Warner Cable puts pressure back on telcos

Time Warner Cable (NYSE:TWC) is holding its own against growing telco competition in the first quarter, adding 36,000 basic video customers and 121,000 digital video subscribers. Despite a 32% decline in profit, Bernstein Research senior analyst Craig Moffett called the first quarter "stellar" for the second largest cableco, due in large part to its success in video.

"Amidst the deepest recession in two generations, swirling anxieties about video 'cord-cutting,' and in the face of the telcos' best-ever video quarter, TWC added 36,000 basic video subscribers in its first quarter ever as a standalone cable company," Moffett wrote in a research note. "Consensus expectations had called for a loss of 77,000. That will be taken as an enormously encouraging, and reassuring, sign."

Telco competition has expanded to a significant part of TWC's footprint, but the growth slowed in the first quarter, according Chief Operating Officer Landel Hobbs. Verizon added 299,000 new FiOS TV subscribers in the first quarter, bringing its total to 2.2 million, while AT&T added 284,000 U-Verse subs.  Verizon may have squeezed by AT&T in video net adds, but – like last quarter – TWC still sees AT&T as the bigger threat. AT&T and Verizon are now in 22% of its footprint, 15% and 7%, respectively. AT&T has passed twice as many as TWC's homes as Verizon, Hobbs said.

The digital transition, although delayed until June, was also a boon to TWC's video growth. The DTV accounted for as many as 80,000 of TWC's net new subs in the first quarter. TWC offered free basic video service for those customers who also took on its DSL service, and Hobbs said that as many as a third of the subs agreed to either a double- or triple-play package. The company expects a similar impact in June when the final DTV transition occurs.

"We've become an independent company in challenging times, but times like this reinforce that cable is a great business," said Chief Executive Officer Glenn Britt on today's earnings call, adding that the company grew its revenues by 5% in the quarter even with local advertising revenues declining 26% year-over-year.

TWC was rumored to be mulling an acquisition of Internet video content site Joost.com to ward off competition from online video sources, but Britt would not comment on the speculation. He did, however, reiterate that the company's immediate focus is on remaining as an independent company and using its free cash flow to pay down its debt from its spin off.

"Clearly, if you go long enough in the future and all the same content sold for subscription were to become available free, consumers would migrate to the free," Britt said. "That is pretty straight forward as a concept. We are seeing a little of that, but emphasis on 'little.' The impact is not measurable. The conversations we are having are about what's going to happen down the road – way down the road."