Time Warner Set to Shed Cable Unit

Time Warner Cable could add debt, and many analysts speculate that in the spin off a significant dividend could be paid to shareholders -- including parent Time Warner, Miller Tabak analyst David Joyce wrote. “Any transaction will factor in availability and cost of additional borrowing,” TWC Chief Financial Officer Rob Marcus told investors Wednesday, saying only that the company is committed to maintaining investment-grade credit ratings.

Time Warner bought back no stock during the quarter, Bewkes told investors. “Given everything we have going on in terms of structural change, [we thought] that was advisable for us to keep our resources or powder dry,” he said. “We keep in mind very much maintaining the right level of leverage to support returns” of cash to investors by stock buybacks or other moves.

The separation announcement overshadowed TWC financial and operational results that beat analyst forecasts. During Q1 TWC netted 55,000 new basic video subscribers, rebutting analysts’ predictions of a 30,000-plus basic subscriber loss for the period. “This strong basic video comes despite the fact that telco video is growing apace and that housing remains stuck in reverse,” Sanford Bernstein analyst Craig Moffett wrote: “The result is a clear indication that, at the broadest level, the company is competitively holding its own.”

The subscriber gains reflect the success of TWC’s stepped up marketing efforts, CEO Glenn Britt said. The company’s 2008 marketing budget will outpace last year’s, ratcheting even higher in the second half, Marcus said. That responds partly to new competition from Verizon, which got preliminary franchise approval to sell its FiOS TV service in New York City starting this year. (See separate report in this issue.)

Broadcasters’ February 2009 switch to DTV won’t lead to many new TWC subscribers, Britt said. “We will modestly pick up some customers from it, but we don’t think it’s a huge thing,” he said. “Quite frankly, multichannel video is a very mature, longstanding product at this point. There’s probably nobody in America that hasn’t been offered it multiple times.” Over-the-air viewers who historically have shunned pay-TV are unlikely undergo a sudden conversion next year, he said.

TWC’s wireless plans haven’t changed despite the demise of its Pivot joint-venture with Sprint and other cable operators, Britt said. Consumer demand for a “quadruple- play” bundle of mobile phone, video, wireline phone and broadband services hasn’t materialized, he said. “In the future there may be robust broadband wireless offering, but it will be in the form of hybrid networks that are wireless and wireline, not two separate things per se,” he said. “We continue to talk to all sorts of potential people about whether there is a good opportunity to participate in that.” -- Josh Wein

Time Warner Notebook…

About 20 percent of Time Warner Cable’s subscribers live in multiple dwelling units, Chief Operating Officer Landel Hobbs told investors. Signing up MDU customers is costly, particularly in Manhattan where Verizon will soon offer its FiOS TV service, because installation is much more challenging, CEO Glenn Britt said. “It’s really time consuming and expensive to get into all these high-rise buildings and wire them in a way that doesn’t mire the hallways,” he said. But in New York City, the MDUs that characterize Manhattan are the exception, not the rule, in the city’s four other boroughs, he said.

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Q1 sales at Time Warner’s AOL unit fell 23 percent from a year earlier to $1.1 billion, as subscription revenue dropped sharply and ad sales rose only slightly. A drop in online display ad sales offset gains in AOL’s paid search and third-party ad business. The company’s acquisition of social-networking site Bebo will help drive users from AOL’s instant-messaging service to the social network features, CEO Jeff Bewkes said. “The unique advantage of the AIM and ICQ messaging base” means “we can bring a lot of people through those to Bebo’s social networking,” he said. AOL claimed 110 million average monthly unique U.S. visitors during the quarter, according to comScore data. As of March 31, AOL had 8.7 million access subscribers, a 3.3 million drop from a year earlier.

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Q1 sales at Turner Broadcasting and HBO increased 10 percent from a year earlier to $2.7 billion, as affiliate fees and ad sales rose. Turner’s news and entertainment networks sold more ad spots for higher prices than they had in the past, Time Warner said. Total Time Warner sales gained 2 percent from last year to $11.4 billion. Profit fell 36 percent from a year earlier to $771 million on higher merger and restructuring costs. Total sales at Time Warner Cable gained 8 percent from a year earlier to $4.1 billion. Profit fell 12 percent on higher subscriber acquisition costs.