Zacks_Analysts' Blog : Time Warner Cable Saves TV Blackout - Analyst Blog

Time Warner Cable Inc. (TWC) recently entered into a tentative agreement with Sinclair Broadcast Group Inc. (SBGI) to ensure uninterrupted services of Sinclair local TV station affiliates such as FOX and ABC channels to about 4 million Time Warner Cable video customers. The dispute over the retransmission fees is temporarily solved; however, Time Warner Cable announced that it will enter into a final deal with Sinclair within a week.

Dispute over transmission fees between cable operators and broadcast TV channel owners has become a major problem in the U.S media and pay-TV industry. According to Bloomberg, during 2010, TV channel blackouts due to fee disputes took place seven times, the highest in the whole decade. Notable among them is the dispute between FOX networks and Cablevision Systems Corp. (CVC) when Cablevision subscribers were unable to see FOX channels for two weeks.

We believe TV blackouts could have been a major blow to Time Warner Cable. Time Warner Cable is a pure-play in TV and Internet distribution. The company is suffering significantly from the lack of any effective media asset. As a result, Time Warner Cable is highly dependent on the TV content providers, who are quickly increasing their programming fees.  

In the U.S., cable operators are facing fierce competition from satellite TV operators, telecom service providers and newly emerged Internet video streaming service providers. Telecom operators are quickly gaining market share from cable MSOs by offering mobile TV and other high-speed broadband services to subscribers.

Time Warner Cable lost 155,000 basic video customers and 46,000 digital video customers in the third quarter of 2010. The U.S. telecom giants are gradually expanding their fiber-optic networks. Verizon Wireless (VZ) with the FiOS network and AT&T (T) with the U-Verse network are likely to make the entertainment, information and communications market highly competitive.

Time Warner Cable has decided to launch lower-priced services in order to retain its core video subscribers. However, this policy may result in lower margin, thereby adversely affecting the company’s bottom-line in the future. A new deal with Sinclair will help Time Warner Cable retain its customers.

We maintain our long-term Neutral recommendation for Time Warner Cable. Currently it is a short-term Zacks #3 Rank (Hold) stock.