TWC's Cheap Package Essentially No Big Deal
Letting people pay less for cable TV sounds like it would be bad for business, right? Not so fast say a bundle of Wall Street analysts who have taken a closer look at Time Warner Cable’s TV Essentials package, which the company revealed Thursday during an SNL Kagan conference.
TV Essentials is aimed at households hit hard by the economy who can’t afford traditional expanded basic programming packages. By excluding some expensive channels, notably ESPN and the regional sports networks, TWC can offer a package of about 39channels to subscribers at a more reasonable price.
The plan has led investors to worry that TV essentials is the first step towards an a la carte model, or ”cord shaving,” which encourages subscribers to get low-end service to get their premium content, which could ruin the multichannel ecosystem that is generating so much of the entertainment industry’s profits right now.
Those worries are unfounded, the analysts say. The main reason to relax is that the number of consumers likely to subscribe to TV Essentials is limited.
Craig Moffett of Bernstein Research says that Time Warner Cable is able to offer this tier under its current programming agreements so long as TV Essentials is not among its two most popular tiers. He says that Time Warner Cable’s second most popular tier now accounts for 18% of subscribers, and TV Essentials won’t get there because “the company has put in place ‘limiters,’ including a prohibition on bundled discounts, which will naturally reduce its appeal.” Those limiters mean that subscribers lose the discount to high-speed Internet and phone service they had if they trade down to TV Essentials.
All of which leads Moffett to state flatly: “There is no chance the tier would approach this level of popularity.”
Similarly, Richard Greenfield of BTIG Research writes that the package is “designed to underperform/fail.” He says the $49.99 a month price point “is not terribly compelling,” particularly compared to Dish Network’s $40 package. “Offering a programming package that does not allow bundles (of higher margin products such as data) or high-margin add-ons such as DVR service would be idiotic unless a cable operator believed there was little chance of most consumers having interest,” Greenfield says. “If TV Essentials caused mass service downgrades and reduced bundling at Time Warner Cable, not only would TWC’s financials suffer, but it would be forced to add back all of the programming that it is excluding from the package in the first place.”
David Bank, managing director of RBC, figures that 5% of TWC subs switching to TV Essentials would be a pretty “extreme” scenario. But even then, the impact on the major programmers would be only a 0.15% to 4.07% dilution of earnings per share per year. With their sports properties News Corp. and Disney would be most vulnerable, while Discovery and Viacom would be least vulnerable.
Bernstein’s Moffett figures that not only will the TV Essentials package not hurt TWC’s profit margins, it might even help slightly. “To be sure, gross profit dollars per subscriber will be lower than today’s average subscriber, but not by much, and not at all if the product achieves its $50 price point (unlikely, in our view). And the product will be easily EBITDA accretive if it helps retain even a modest number of subscribers who would otherwise have left,” he said.