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If John Malone Doesn’t Buy Time Warner Cable, Someone Else Will

If TWC wants to survive, it needs to get bigger

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For one thing, the company’s latest earnings weren’t great. Net income at the New York-based c0mpany sank 34% year-over-year to $532 million, or $1.84 per share. Excluding one-time items, profits were $1.69 per share, beating the $1.64 analysts had expected. Revenue rose 3% to $5.52 billion, lagging the $5.54 billion analysts had expected.

Meanwhile, Time Warner Cable stock’s run of 26% is beating the broader markets by a few percentage points, though it’s slightly behind CMCSA shares, and Charter is blowing the field away with 80% year-to-date returns.

The dust-up with CBS, which lasted two weeks, was far more damaging to Time Warner Cable than analysts had feared. The company lost an astounding 304,000 video customers, which was almost double what analysts expected. That far exceeded the 129,000 video customers Comcast lost in the same time period. Comcast, though, managed to gain 287,000 high-speed Internet customers and 123,000 voice customers.

Time Warner Cable wasn’t so lucky. The firm lost 24,000 residential Internet subscribers, indicating that many of these angry clients “cut the cord” with Time Warner Cable entirely. Analysts were expecting Time Warner Cable to add 46,100 customers.

Those figures are shocking. Consumers didn’t pay any attention to Time Warner Cable’s arguments that CBS’s fee increases were unreasonable. Consumers seem to be undeterred by the fact that they would eventually see these fee hikes in their cable bills. And this is a bad sign for the pay TV industry.

Cable and satellite providers are getting pounded by retransmission fees. Market researcher SNL Kagan estimates that they may reach $6.05 billion by 2018, more than double their $2.36 billion in 2012. Of course, these increases are not sustainable. Let’s not forget that the content companies bundle their popular channels with their less popular ones. Earlier this year, Cablevision filed suit an antitrust suit against Viacom (VIAB) over this issue. CVC has claimed that Viacom wanted a penalty of more than $1 billion in exchange for allowing it to choose what networks it wanted to show. Viacom, of course, rejects this notion.

Cracks are starting to appear in the decade-old framework of the television industry. DirecTV (DTV), Verizon (VZ), AT&T (T) and Dish Network (DISH) have all refused to carry Comcast’s regional sports network in Houston, arguing steep fees Comcast was charging couldn’t be justified by the viewership. Having the Houston Astros, one of the worst teams in baseball, as part of the channel’s programming lineup doesn’t help matters either. These spats will become more commonplace.

Bottom Line

Battle lines are being drawn between content makers and distributors. For Time Warner Cable to stand a chance in these battles, it needs to get bigger, or become part of something bigger.

Investors should buy shares now. If Malone doesn’t buy TWC, someone else will.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. Follow him at Berr’s World.

Article printed from InvestorPlace Media,

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