Esteves

Time Warner Cable is spending less to maintain and improve services for residential customers even as broadband usage grew 40-50 percent, redirecting spending on its business services division instead.

Irene Esteves, chief financial officer of Time Warner Cable, told attendees at Morgan Stanley’s Technology, Media & Telecom Conference that the growth in the company’s capital spending is associated with serving business, not residential customers.

Esteves reported that spending on residential services was actually down slightly in the last year. The business services division used its increased capital to wire 100,000 office buildings and provisioned 1,900 cell towers with backhaul service last year.

But despite decreasing costs, Time Warner Cable expects to continue increasing broadband prices, primarily because it can.

“What we have found is […] as customers use it more, value it more, we can then price it more,” said Esteves. “And we think that’s a terrific dynamic for the market for quite a bit of time.”

Powering usage growth more than anything else is online video.

“If we look at peak volume, which is really what drives our capacity planning, 66% of that increase comes from streaming video,” notes Esteves. “Again, the more they use it, the more they love it, the more important we become to them as a service provider. So we’re continuing to watch that usage pattern and cheering them on.”

For traditional television viewing, Time Warner’s march to digital will also carry on, but it will happen slowly.

Time Warner Cable has chosen a gradual transition to IP video for cable television service. Subscribers can expect about a dozen channels per year to be removed from analog service until the cable system offers a completely digital television package. In Maine and New York City, that digital transition is already complete.

“We’re taking a more measured approach over a 5-year time period,” said Esteves. “We’re taking [away] analog channels in the 10 to 12 per year kind of measure, which is less disruptive to our customers and less capital-intensive.”

That kind of transition, coupled with annual rate increases, could potentially alienate customers, but Time Warner has retrained its retention specialists to assuage customers headed for the door.

“With the increasing promotional activity in the marketplace, we have more and more of our customers on promotion and it’s imperative that when the [promotion expires], we’re being very thoughtful about who rolls off to what, when,” said Esteves. “We’re training specialists to talk to customers, listen to them, find out the reasons for potentially leaving and recapturing those.”

But the industry is also under pressure from Wall Street to cut promotional activity and stop discounting service excessively, because it gets customers used to a lower price.

“If you think about the promotional prices in the marketplace, that really drives people to price shop and that just increases the transactions and the turmoil in the industry, which increases everyone’s cost and reduces everyone’s profitability,” Esteves said. “So the real conundrum for the entire industry is how do we each build on our retention rather than build on the promotional side in order to keep our customers and become more profitable.”

Data caps protect incumbent big studio and network content creators at the expense of independent producers and others challenging conventional entertainment business models.

That was the conclusion of several writers and producers at a communications policy forum hosted by Public Knowledge, a consumer group fighting for an open Internet.

A representative from the Writers Guild of America West noted that cord-cutting paid cable TV service has become real and measurable because consumers have a robust online viewing alternative for the first time. John Vezina, the Guild’s political director, noted how Americans watch television is transitioning towards on-demand viewing.

New types of short-form programming and commissioned series for online content providers like Netflix are also changing the video entertainment model.

Welch: It is about the money.

But a digital roadblock erected by some of the nation’s largest broadband providers is interfering with that viewing shift: the data cap.

Data caps place artificial limits on how much a customer can use their Internet connection without either being shut off or finding overlimit fees attached to their monthly bill. Critics contend usage caps and consumption billing discourage online viewing — one of the most bandwidth intensive applications on the Internet. With broadband providers like Time Warner Cable, AT&T, Verizon, and Comcast also in the business of selling television packages, cord-cutting can directly impact providers’ bottom lines.

Providers have traditionally claimed that usage limits are about preserving network resources and fairness to other customers. But Time Warner Cable admits they exist as a money-making scheme.

Rachel Welch, vice president of federal legislative affairs at Time Warner Cable, says the cable company is not worried about limiting data consumption. It considers monetizing that consumption more important.

“We want our customers to buy as much of the product as possible,” Welch told PC World. “The goal of companies is to make money.”

Time Warner now offers customers a choice of unlimited service or a $5 discount if customers keep their monthly usage under 5GB, but some worry that is only a prelude to introducing expanded usage limits on a larger number of customers in the future.

For many consumers already hard-pressed by high broadband bills, worrying about exceeding a data allowance and paying even more may keep viewers from watching too much content online.

For that reason, Vezina called data caps “anti-innovation.”

“It hurts consumers [and] it hurts creators who want to get as much out to the public in as many ways” as possible, he said.

Public Knowledge has become increasingly critical of data caps in the last two years. The organization has questioned how ISP’s decide what constitutes a ‘fair’ usage limit and criticized inaccurate usage meters that could potentially trigger penalties and overlimit fees.

Windstream has announced the increased broadband investments that expanded DSL service to about 75,000 more homes and businesses and brought fiber connections to cell towers are nearly complete and the company intends to dramatically cut spending on further enhancements by the end of 2013.

Jeff Gardner, Windstream’s CEO, told investors on a conference call last week the company’s highest priority in 2013 is preserving its current dividend to create value for shareholders. Not on the priority list: improving broadband infrastructure to support video streaming services, further expanding broadband in areas it now bypasses, and boosting the quality of service it delivers to current customers.

Gardner called the company’s increased investment in 2011 and 2012 a result of “finite opportunities that provide[d] attractive investment returns.”

But most of that spending will come to an end next year.

“We expect to substantially complete our capital investments related to fiber to the tower projects, reaching 4,500 towers by the end of 2013,” said Gardner. “In addition, we will finish most of our broadband stimulus initiatives […] to roughly 75,000 new households. As we exit 2013, we will see capital spending related to these projects decrease substantially.”

That could be bad news for communities in places like Wayne County, Mo., which suffers with inadequate broadband from the company. In some areas when local broadband traffic reduces DSL speeds to a crawl, area businesses are occasionally forced to shut down for the day.

Broadband and business services now account for 70% of Windstream’s revenue, but it has come with a price: increased investment, that Wall Street considers negative to the company’s value. To satisfy analysts and shareholders, Gardner made it clear improving the balance sheet is a major priority. He said he will continue to direct excess free cash flow first to preserve the company’s shareholder dividend, and then direct much of the rest to debt repayment.

That does not mean Windstream will end all investments in its business. The company now spends 12.4% on ongoing capital investments and will continue to do so, but much of the spending will cover network upkeep and supporting more profitable business services.

“Over the last four years, our acquisitions have been very targeted on businesses that are growing in the strategic growth areas that we’re focused on, and we’ve really changed the mix very significantly here, away from the consumer business toward the enterprise space, and I think that puts us in a very different position with respect to the stability of our revenue and OIBDA over time,” Gardner added.

Windstream plans to bring back its “price for life” promotion this year.

Gardner noted Windstream is well-positioned to take advantage of the fact it has few competitors, which reduces pressure to invest and improve its networks to stay competitive.

“Our residential customers remain concentrated in very rural areas where there is less competition, which has contributed to a more stable consumer business,” Gardner admitted.

He added that those rural customers will have to rely on the company’s satellite partner Dish Networks for video services. Windstream will not build a “capital-intensive facilities based technology” to support online video. In contrast, CenturyLink has invested in Prism, a fiber-to-the-neighborhood service in several of its larger markets, to offer triple play packages of broadband, phone, and cable TV. Windstream has no plans to follow.

Despite investments in 2011 and 2012 to improve broadband service and speeds, Windstream’s DSL services have not kept up with its cable competitors.

During the last quarter, Windstream lost 2,000 broadband customers and 23,000 consumer voice lines (a 4.5% decline year over year).

To stem the tide of customers moving away from the phone company, Windstream is trying to sell value-added Internet support services, online backup, and faster speeds to maximize profitability. It will also add new customers made possible from federally funded broadband stimulus projects.

Windstream customers can expect to see increased promotional activity this year to win or keep their business:

• Covering the costs of switching from another provider to Windstream;
• A return to the “price for life” promotion, which promises stable rates as long as a customer stays with the company;
• A substantial introductory discount on satellite TV when bundled with Windstream’s own services.

More than 20 cable systems across Kansas will be terminating television and broadband service after a private equity firm, working with former Bresnan Cable executives, deemed them unprofitable and not worth upgrading.

Residents of Conway Springs (pop. 1,250), Chetopa (1,125), Sharon (158), and Harper (1,473) are among those who will find their cable and broadband service discontinued in the coming weeks. Abandoned cable subscribers are being told to buy satellite dishes to continue watching television. No immediate broadband solution was available.

Allegiance Communications, which provides cable TV, broadband Internet, and VOIP telephony services to rural and mid-size markets in Arkansas, Kansas, Missouri, Oklahoma, and Texas was acquired last month by former executives at Bresnan Communications, itself bought out by Cablevision Industries. The deal was largely financed by BBH Capital Partners, a New York City-based private equity firm.

The purchase by BCI Broadband orphaned nearly two dozen cable systems that Allegiance owned and operated, but were excluded from the sale. Subscribers are being notified they are about to be switched off permanently in letters signed by Allegiance executives.

Several former Bresnan Cable executives are behind BCI Broadband.

The service will leave rural Kansans without broadband service, cable television, or an alternative to AT&T and other independent phone companies operating in the state.

“This was not an easy decision for us, nor is it one that we came to hastily. The costs of doing business in Conway Springs can no longer be profitable,” Allegiance wrote in its letter, according to KSNW-TV.

Local officials in affected communities are rushing to find an alternative, appealing to providers like Southern Kansas Telephone to see if they can pick up where Allegiance left off, but the phone company has yet to respond.

Allegiance claims the outdated cable systems served few subscribers and the new owners were not interested in investing funds to upgrade them.

BCI Broadband is a new company run by former executives forced out of Bresnan Communications when the company was sold to Cablevision. BCI Broadband claims it wants to invest in system upgrades to improve service to remaining subscribers.

“Historically when we have purchased cable systems and invested in upgrading to the latest technology in markets like Shawnee, that has inevitably led to more customers and the need for more staff,” said Shawn Beqaj, vice president of public and government affairs for BCI Broadband. Beqaj was the former vice president of public affairs at Bresnan.

There has been an accelerating trend of industry consolidation among rural cable operators, particularly by private equity firms that are interested in the stable earnings cable operators usually generate.

GTCR, through its portfolio company Rural Broadband Investments LLC , separately announced its plans to acquire NewWave Communications Co., in what it hopes is just the first of a series of acquisitions. NewWave’s purchase was financed by debt capital from SunTrust Robinson Humphrey, Inc., and Goldman Sachs Bank USA.

[flv width=”480″ height=”290″]http://www.phillipdampier.com/video/KSNW Wichita Small towns losing cable service 2-7-13.mp4[/flv]

KSNW-TV reports more than 20 Kansas communities will lose television and broadband service when Allegiance Communications switches off the cable systems. (2 minutes)

Time Warner Cable customers in the Carolinas will soon pay $90.49 a month for digital cable television, including one set-top cable box. Customers who buy broadband, television, and phone service will see their monthly bill rise to $167.89.

The rate increases will not initially apply to customers on term contracts or promotional pricing until those terms expire. Others will begin to pay higher rates in March.

Almost 70 percent of Time Warner Cable’s eastern North Carolina subscribers have digital cable TV. The rate increase for television-only service amounts to an extra $5 a month or $60 a year. Triple play customers will also pay an extra $5 a month.

Time Warner’s last rate hike, not including the introduction of a $3.95/month cable modem rental fee last fall, was in late 2011.

Although Time Warner claimed increased programming costs were responsible for the bulk of the rate increases, the cable company keeps adding more channels. In 2012, Time Warner added NFL Network and NFL RedZone, both costly sports networks. In the last few months, Time Warner added an additional 30 channels to the cable lineup in the Carolinas, including a number of new HD channels and barely watched networks including Retirement Living Television and Magic Johnson’s Aspire TV.

A rate change notice mailed to customers in the Carolinas will include exact pricing changes applicable in different communities, but customers in Fayetteville and surrounding parts of the eastern Carolinas will see these changes starting in March:

• Broadcast cable: From $16.19 to $17.99
• Cable programming tier: From $53.30 to $54.50
• Basic cable: From $69.49 to $72.49
• Digital tier: From $10.68 to $9.01
• Basic cable, when bundled with standard Internet and/or home phone unlimited nationwide: From $68.99 to $71.99
• Digital cable includes basic cable, digital tier, digital equipment and Navigator interactive guide: From $85.49 to $90.49
• Digital cable when bundled with standard Internet and/or home phone unlimited nationwide: $82.49 to $85.49
• Basic cable, standard Internet and home phone unlimited nationwide: From $162.89 to $167.89
• Cable card: From $2 to $2.50
• Digital equipment primary outlet: From $6.82 to $8.99
• Navigator interactive guide: Not applicable to $2.17

Customers affected should consider reviewing our tips on how to fight for a better deal from Time Warner.