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Why Is Time Warner Saying “Costs Increasing” to Consumers, But “Decreasing” to Stockholders?

Phillip Dampier April 10, 2009 Issues 32 Comments

Another night spent tossing and turning….  It’s amazing how irritated one can get when they just feel deep down inside they are being played as a sucker.

So I fire up the laptop looking for something that will bore me to sleep in short order.  Since I already had waded through the Bank of America “change in terms” legalese mailing they sent me explaining why they needed to raise everyone’s credit card interest rates, the only other surefire snoozefest was reading Securities & Exchange Commission 10-Q filings.

I consider the fact Time Warner has been on my mind as of late for some reason, so why not start there?

As I scroll through a whole lot of excuses about why AOL has fallen from grace, I finally find my way down to a peculiar passage.

High-speed data costs decreased for the three and nine months ended September 30, 2008 primarily due to a decrease in per-subscriber connectivity costs, partially offset by subscriber growth.

Wait.

High-speed data costs decreased for the three and nine months ended September 30, 2008 primarily due to a decrease in per-subscriber connectivity costs, partially offset by subscriber growth.

Oh no.  I am fully awake now!

I fire up Google.  How can this be?  Did we not read less than 24 hours ago the sob story from company officials complaining their costs were spiraling and they needed more revenue from customers in order to pay for required upgrades?

Thank goodness someone else had braved the even more ponderous 10-K filing and mined these goodies (quoting their findings):

“In 2007, TW made $3,730 Million, on high speed data alone, and then had to turn around and spend $164 Million to support the cost of the network. 2007 total profit on high speed data: $3.566 Billion”

“In 2008, TW made $4,159 Million, on high speed data alone, and then had to turn around and spend $146 Million to support the cost of the network. 2008 total profit on high speed data: $4.013 Billion”

“It cost TW 11% less money in 2008, to keep their network running, than in 2007.”

If you actually spent less on your infrastructure in 2008 (during the incoming tidal wave of those pesky “heavy users” sucking down all those files and videos) than 2007, earned even more last year than you did the year before on broadband, then why are you coming to the consumer in 2009 begging for a bailout?

So is this entire tier “experiment” nothing more than a PR snowjob for a money party, exposed by filings made with the SEC, an agency that presumably would take a dim view of snowflakes falling in their offices. Maybe I’m all wrong.  Or maybe they’ve been wrong all along with this crazy cap scheme.

While Mr. Hobbs was telling consumers about the trials and tribulations of delivering broadband to consumers, he was responding to Saul Hansell in the New York Times (and to investors): ‘He said it was “absolutely not” true that Time Warner’s profits were being squeezed by the cost of heavy broadband users.’

So just how much money does Time Warner need to upgrade their cable systems to DOCSIS 3.0 to fix all this?  The New York Times reports:

Pretty much the fastest consumer broadband in the world is the 160-megabit-per-second service offered by J:Com, the largest cable company in Japan. Here’s how much the company had to invest to upgrade its network to provide that speed: $20 per home passed.

The cable modem needed for that speed costs about $60, compared with about $30 for the current generation.

The experience in Japan suggests that the major cable systems in the United States might be able to increase the speed of their broadband service by five to 10 times right away. They might not need to charge much more for it than they do now and they’d still make as much money.

The cable industry here uses the same technology as J:Com. And several vendors said that while the prices Mr. Fries quoted were on the low side, most systems can be upgraded for no more than about $100 per home, including a new modem. Moreover, the monthly cost of bandwidth to connect a home to the Internet is minimal, executives say.

$100!  Yet Time Warner was asking for up to $110 more per month from the “heaviest users” they blame this problem on. And for everyone else, capped access and higher prices for paltry tiers. Math has never been my strongest subject, but even I know this only adds up to one thing: MoNeY PaRtY!

Currently there are 32 comments on this Article:

  1. Diane says:

    IN RELATION
    Time Warner Prepping for Possible AOL Spin-Off

    By Reuters – eWEEK – Mon Apr 6, 2009 1:17PM EDT
    NEW YORK – Time Warner Inc said on Monday it is asking some bondholders to change credit terms, a move expected to pave the way for a spin-off of its beleaguered Internet unit AOL.

    The media conglomerate, whose shares fell 4 percent in early trading, said the change in credit terms will allow for a possible change in ownership at AOL.

    The unit was once how most people found their way onto the Internet. It has since been left behind as a relic as cable and phone companies picked off subscribers and Google and others swooped in to dominate online advertising.

    Last month Time Warner Chief Executive Jeff Bewkes lured former Google Inc executive Tim Armstrong to head AOL with the possibility of leading a spin-off.

    “We view this announcement as significant as it clears a major hurdle to spin AOL to Time Warner shareholders,” Sanford Bernstein analyst Michael Nathanson said in a note to clients.

    AOL has long been one of the weakest units at Time Warner, thanks to a series of writedowns reflecting the declining value of the assets and a slowing online advertising market. Time Warner’s portfolio includes HBO, film studios and the Time publishing unit.

    Nathanson said by separating AOL, Time Warner would double its estimated earnings growth between 2009 to 2012. He estimates that AOL would be valued at $2.4 billion on a stand-alone basis, a far cry from some estimates of up to $10 billion last year.

    In a sign that Time Warner management wants to expediently decide AOL’s fate, the company is offering each bondholder that agrees a payment of $5 for each $1,000 principal amount of debt. As part of the offer, Time Warner said the new agreement will be guaranteed by using HBO Inc as collateral.

    Analysts at Bernstein and Citi now believe a spin-out is more likely. Nathanson said it could likely be announced in “the next few months”.

    The so-called consent solicitation is to amend the indentures covering around $12.3 billion of outstanding debt. It means that Time Warner will have to pay around $61.5 million to the bondholders if they all agree to the offer. The solicitation will expire at 5 p.m. New York time on April 15 unless extended.

    Time Warner shares dropped 95 cents in early trading to $21.27 in line with a wider market downturn.

    • Diane, Time Warner, Inc., no longer owns any part of Time Warner Cable.

      • T.M. says:

        This is an important distinction that i figured out last night myself. We should be sure we reference Time Warner Cable as “TWC” and not as “TW” as they are in fact two separate companies.

        • Yes, but this spin off has happened only recently. I think the TW reference, at least with respect to this site, is a common abbreviation for Time Warner the cable company, not the corporation. TWC will mean “The Weather Channel” for a lot of people.

  2. FedUpInSA says:

    Okay now didn’t Mr. Hobbs just say that each year bandwidth demands keep increasing (first it was 50% a year, and then it was 40%…guess those pesky percentage things are just so darn difficult to figure out). Then they have change the tiers…and then the overage pricing.

    Maybe they are just horrible at math. Or could it be something more sinister. Oh wait…no one would ever deliberately fudge numbers to use it against their customers…hmmm….shades of Enron again perhaps.

    I think it is great that you are finding these numbers, and I love that they are coming from their public filings to the SEC. I am still waiting to see some numbers come from their Network Engineers finally showing what they keep saying about the impacts on the network. Of course, I think we are going to have to take those numbers with a big grain of salt.

    Keep tossing and turning…it makes the rest of us insomniacs feel good to have company.

  3. Andrew_J says:

    Big grain of salt and some heavy alcohol probably. What we really need are hard numbers. Statistics can be skewed 100 different ways by changing a few variables. Hard numbers will really paint a clearer picture, and kudos to Phil for finding some in the SEC filings. Thankfully I am not a TWC customer yet, but getting my own place this summer means i get to make the hard choice, hopefully this is over before then

    • Brion says:

      Don’t count on it. This will only start at the end of summer. I expect they will drag it out fighting tooth and nail until mid- to late November or December when they’ve finally hemorrhaged enough customers to call the test a failure.

  4. DOWN_with_TWC! says:

    Thanks for the late night discovery Phil. I’ll tell you one thing, reading all this BS from TWC really makes me mad!! Even if they decide to do away with the cap just the way they are treating us makes me want to leave. Does anyone know if Frontier has trial period before your locked into there 2 year contract?

  5. Jake says:

    The same SEC filing repeatedly identifies threats to their revenue from free online video content, which threatens their video business —

    All taken from: http://ir.timewarnercable.com/sechome.cfm – 2008 Annual Report on Form 10-K

    Page 33:
    “In addition, TWC faces competition from a range of other competitors, including, increasingly, companies that
    deliver content to consumers over the Internet, often without charging a fee for access to the content. This trend
    could negatively impact customer demand for TWC’s video services, especially premium and On-Demand services”

    Page 34:
    “Increasingly, content owners are
    delivering their content directly to consumers over the Internet, often without charging any fee for access to the
    content. Furthermore, due to consumer electronics innovations, consumers are more readily able to watch such
    Internet-delivered content on television sets. The increasing number of choices available to audiences could
    negatively impact not only consumer demand for TWC’s products and services, but also advertisers’ willingness to
    purchase advertising from TWC. If TWC does not respond appropriately to further increases in the leisure and
    entertainment choices available to consumers, TWC’s competitive position could deteriorate, and TWC’s financial
    results could suffer.”

    Seems pretty clear that they’d love to find a way to stop people from using streaming video, if only there were a way to do so without running into possible net neutrality issues….

    • I would be surprised if the first paragraph hasn’t been a part of the risks section for the last several years.

      As for the second, I find in interesting that they don’t ever talk about the bandwidth matter, just the competition from video that they suggest might threaten them.

      That also confirms one of the other arguments this, among other sites, have offered as to why TW might have a vested interest in the online video issue.

      Thanks for joining me in the wading.

      • Jake says:

        They cover their bases – the bandwidth issues are mentioned, but always in the context of unexpected or unanticipated bandwidth increases – Page 35 of the 10-K has a mention of this. I don’t think the current trends are unanticipated, given that TW also noted the growing bandwidth usage of it’s consumers in it’s 2007 SEC 10-K – Page 42: “The average bandwidth usage of TWC’s high-speed data customers has been increasing significantly in recent years as the amount of high bandwidth content and the number of applications available on the Internet continues to grow.”

        While they make no mention of bandwidth in 2006, they do list “net neutrality” as a risk in 2006 (p51), as well as mentioning “The internet” as competition to their video services in several places (p52 being the one that’s nearest where I’m reading).

    • T.M. says:

      Those are pretty damning statements and luckily they come right from the horses mouth in legal filings to the Gov’t. To refute them is to refute your own legally binding statements. Did they lie to the Gov’t or are they lying to the customer? Hmmmm……I wonder.

    • Brion says:

      This entire debacle is and has always been about the threat of online video content (and third-party VoIP phone) to their bottom line and in particular the video and phone services they sell. If you believe anything otherwise you’re fooling yourself.

      The SEC filings prove it out that it’s not infrastructure cost, it’s competition that has them running to grab more cash and stifle competition.

    • Keith says:

      This is not a practice that is limited to TWC. Look at AT&T’s open access DSL. They basically price it out of demand with the tiers and prices they offer. They have gotten better since when I got my dsl service a year ago since they now offer the 6MB down service on open access. However the pricing is as follows:
      Open Access:
      6MB down $45 a month
      3MB down $40
      1.5MB down $35

      With phone service which is roughly $15 a month plus tax, fees, BS
      6MB down $35
      3MB down $30
      1.5MB down $25

      It use to be that you could only get up to 3MB down and it was somewhere between $30 and $40 a month with open access.

      So its a similar situation, AT&T is trying to protect its landline business by charging more the same services because you are not using another one of their services. Some would call it a bundle savings, I call it punishment for not needing a landline.

      • Chris says:

        You are talking about pipe usage, not bucket usage, right now all those prices have an unlimited sized bucket.

        Imagine if on top of the $35 6 meg plan, which is about half as much as the comparable cable plan, they also limited your bucket to 30G a month, and increased your price to $50. That would be comparable.

  6. Ken says:

    All of this certainly does infuriate me. In the past, I’ve always had an impartial feeling towards this company, but the more I learn, the angrier I get. I hope they are aware of how much damage they are doing to their reputation and the public’s perception of them. This is fast becoming a debacle for them. If they had any sense at all, they should abandon this crazy idea as soon as possible and issue a public apology.

    • Patrick says:

      I sincerely hope that these latest “findings” in the SEC filings are exposed to the proper channels. Can the phrase ‘double-speak’ or ‘double-think’ be any more appropriate here? I may have an already negative view of certain C-level titles in major businesses due to first-hand experience, but this public display of arrogance, disrespect, and flat-out ignorance of true corporate ethics is disgusting.

      It’s alarming that these “respected” businessmen with multi-million dollar salaries can inhabit such positions of power and wake up every morning feeling good about themselves. To just flat-out lie, use accounting books to spin arbitrary numbers, and justify anti-consumer practices must be the reason we all earned our business degrees. I understand the the money-culture drives this behavior, but where are all the good executives during these actions? Why is it that the unethical individuals are the “leaders”, the “moveres and shakers” or the “innovaters”? Maybe it’s decades of the media and society bowing down to this behavior in the name of “success” is finally catching up to us all – Enron, Wall Street, Housing, Banks, Auto…. what’s next?

      While this post probably comes across as a somewhat off-topic rant, I think it’s important to not only explore what is happening, but why it’s happening. I don’t ever remember sitting in my MBA courses and learning that deception, greed, incompetence, and anti-consumer are the foundations of a solid, capitalist society.

      • luke says:

        wow!! you hit the nail on the head!! exactly what i was thinking. how do we change the mindset of a nation to understand that its always been “for us, by us”? Not “for us, by us, profit them” arrrrgggghhhhhh!!!

  7. Bradley K. says:

    Time Warner Cable is to 2009 what AIG was to 2008.

  8. John says:

    The scary thing is that TWC has to know how bad the PR from this is. Yet they will still proceed according to plan. Their minds are made up. Our best hope is that the competition will not follow suit. TWC has shown they are scared of real competition. The current outrage must be maintained and followed with a hit to their bottom line (i.e. dropping all TWC services). That is the only number they will understand.

  9. T.M. says:

    To me these findings warrant a substantial investigation by the State and Federal AG’s office. This is tantamount to fraudulent, illegal activity in my opinion. To change billing because you must due to cost is one thing. To try to do so for the purpose of squeezing out competition or pure profit is another. I wonder about the legality of all this more and more in light of the apparent motives.

  10. Phil, it was very nice to meet you last night at the Town Hall. This is fantastic reporting; thank you again for taking the time to be a leader here!

  11. Christine says:

    Hey Phil… I wrote to Verizon regarding FiOS, and got an interesting response. 🙂

    Dear C,

    Thank you for contacting the Verizon eCenter. I have received your email dated 4/6/09 regarding Verizon providing FiOS in your area. I greatly appreciate your interest in Verizon. My name is John, and I will be happy to assist you. I apologize for the delay in my response, and I regret any inconvenience to you.

    You may want to write to the following address:

    Verizon
    PO Box 9002
    Annapolis, MD
    21401-9002

    Just let them know you are interested in getting Verizon in your area and what would it take to make this happen. They may be able to assist you with this matter. The department to which we have referred you will be able to assist you.
    If you have any additional questions, please let us know. We look forward to serving you. Thank you for using Verizon. We appreciate your business.

    Sincerely,
    John
    Verizon eCenter

    *********** MY VERIZON: FAST, SECURE, AND FREE! *********
    Online account access with loads of possibilities! Pay your bill, set upautomatic payments, view your account history, and add or change services 24/7! Register now at: http://www.verizon.com/enrollmyhome

    • We have heard back from Verizon definitively that they will not intrude on another wireline carrier’s territory (Frontier). FIOS will simply not be an option for Rochester unless:

      1) Verizon buys a portion of Frontier.
      2) Frontier tries a cooperative marketing agreement with Verizon.
      3) Verizon changes their mind on the corporate level.

      I would not hold my breath for any of these things to happen.

  12. DOWN_with_TWC! says:

    As long as Frontier is in Rochester Verizon FiOS won’t be.

  13. Joly MacFie says:

    The solution is for the people to take over the pipes – for example http://nyc-community-fiber.blogspot.com

    or even more so, http://frankston.com/public/?name=SimplyConnected

  14. Pete says:

    Phillip, thanks for doing this research. This 10-k filing is quite damming. I was angry about this cap when I first learned of it, but now after seeing how TWC tells shareholders that costs are going down and then tells customers the exact opposite I’m really disgusted. TWC has some serious ethical problems. I don’t see how they can refute their SEC 10k filing. I’m interested to see how they attempt to dig out of this hole.

    I dropped my TWC cable TV service last September in response to their ever increasing rates. Apparently that wasn’t enough, now they are out to bleed their internet access customers as well.

  15. ScottyDog says:

    TWC is an Illegal Monopoly and should be broken up like the phone companies. They not only are allowed to have monopoly Status by the Government, now they want to abuse the privilege by gouging its Cable and Internet customers. It is time for a DOJ Investigation into anti trust violations that have gone on for too long at Time Warner.
    They are in violation of Sherman anti trust laws as well as the Clayton Act.
    MCA was forced into breaking up in 1962 for doing the same things that TWC is doing to its customers.
    The legal term is that they are “vertically integrated” and control the business with no effective competition.

  16. Mike says:

    These people should all be fired for the piss-poor job they’ve done in lying, deceiving, and trying to cheat us. Damn it TWC… get some people who actually make me wonder if they’re lying or telling the truth to me. Especially Melissa Buscher and Landel Hobbs: they are the most incompetent wannabe spinmeisters I’ve seen in a long while. More like the last spokesperson for the Iraqi army (“the American soldiers are committing suicide en masse at the city gates!!!!!!!”). Go die you stupid imbeciles. Burn in hell.

  17. TravisO says:

    >> 160-megabit-per-second service offered by J:Com… how much .. to upgrade its network … $20 per home passed.

    Lets be fair now, in Time Warner’s defense, the US is nowhere near as populated as Japan is, we’re talking on an order of 10x less populated per square mile. In fact I looked up the info so in my city (Syracuse, NY)

    People per sq mile: 5,871 (Syracuse NY)

    New York state as a whole: 401
    Japan as a whole: 875

    I couldn’t get reliable figures on a specific city in Japan but atleast as a whole, upgrading New York would give 1/2 the profit per square mile and that’s still ignoring the size of NY, so the problem is two fold, half the profit per mile and more miles.

    It’s very possible a DOCSIS 3.0 upgrade in the US costs on the magnitude of 10x what it did it Japan. I don’t support the rate increase, I’m a techie and work from home so using the Internet is a requirement of my job, otherwise I’d have to commute 2 hours total per day. Because I use video streaming, which is becomming highly popular, TW’s excessive low caps are simply not acceptable. 5yrs ago 40GB might have seemed possible, but today I could chew that up quickly just between my daily work usage, email, basic surfing, video game playing and LEGAL video streaming.

    PS: I don’t drink the Koolaid, I’m a happy customer that’s NOT using Time Warner as Verizon’s FiOS offers much better speed, price and latency.

    • Earl Cooley III says:

      It’s very possible a DOCSIS 3.0 upgrade in the US costs on the magnitude of 10x what it really should cost so that TWC can conceal ludicrous profits that rationalize grotesque payouts to executives, resulting in economic sabotage at the local level that should instead result in criminal prosecutions.

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