Analyst: Retrans to Crimp Time Warner Cable

Pali Research: Univision Communications’ switch from must-carry to retransmission consent will hurt cable operator.
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A TV broadcaster aggressively seeking retransmission-consent fees from cable operators is weighing down on the profit outlook for Time Warner Cable, according to a Friday report from investment outfit Pali Research.

Pali issued a sell rating on Time Warner Cable because its footprint is heavy with a Hispanic population and Spanish-language broadcaster Univision Communications is changing from free must-carry status to retransmission consent -- or fee-based carriage -- starting next year. Univision also operates the TeleFutura channel.

“We believe TWC will be forced to absorb significant incremental costs in 2009 and/or lose a significant number of subscribers -- particularly with competition increasing,” said the short report from Pali’s Richard Greenfield and Ari Danes. TWC is the stock ticker symbol for the nation’s second-largest cable operator, with 13.3 million basic subscribers. Other competition is telco video, such as Verizon Communications’ FiOS TV.

Pali estimated that Hispanic programming is important to 15% of TWC’s existing subscriber base, especially in Los Angeles, New York and Dallas. Hispanic households account for 25% of households passed in TWC’s footprint, but Pali noted that the cable giant has been weak in converting them into subscribers. It is estimated that 46% of all U.S. Hispanic homes are in TWC franchise areas.

The report noted that Univision -- which is owned by private-equity investors and has some publicly traded debt -- floated a $1-per-subscriber, per-month objective for retrans fees.

“If Univision is able to achieve even half their stated goal of $1/sub/month -- an average with higher rate in key markets, including key TWC markets -- meaning they attain just $0.50, the impact on TWC’s 2009 EBITDA (cash flow profit) would be $80 million,” Pali said. That equates to 1.2% of TWC growth in 2009.

“We suspect Univision’s leverage will generate monthly fees well in excess of $0.50/sub/month,” Pali added.

Pali expects Univision to reach carriage agreements with DirecTV and Dish Network “over the next few months, as both DBS [direct-broadcast satellite] providers have substantial Spanish-language packages -- around 1 million on DirecTV and 1.5 million on Dish.”

TWC has dug in its heels before on channel carriage fees, rebuffing both Big Ten Network and NFL Network, which wanted to be on big basic. TWC reportedly offered placement on digital sports tiers, which keeps a lid on basic subscriber fees.

In recent years, TV broadcasters have become increasingly aggressive in seeking payment from multichannel-TV platforms. A wave of carriage contracts begin across the industry in January that are both renewals and also stations shifting to retrans.

TV broadcasters collected $340 million in retransmissions fees in 2007 from multichannel-TV platforms, and the forecast is for $1 billion by 2010.

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