While a downturn economy continues to afflict middle and lower income America, it doesn’t seem to be doing much harm to Time Warner Cable’s profits.

America’s second largest cable operator saw profits jump more than $150 million higher to $564 million last quarter, compared to $392 million at the same time the year before.  Time Warner’s revenue grew by 4% to $5 billion in the fourth quarter alone.  In fact, the company is performing so well, executives announced they would return $3.3 billion in earnings to shareholders through share buybacks and dividend payouts, in addition to the forthcoming $4 billion share repurchase program.  Wall Street liked what they saw, boosting shares 7% after the company posted its quarterly and annual results on its website.

Time Warner’s biggest success story remains its broadband service, which consistently delivers the company new subscribers and has helped offset the loss of video subscribers, numbered at an additional 129,000 who “cut the cord” in the fourth quarter of 2011.

Time Warner Cable earned $1.148 billion in revenue from broadband in the last quarter, an increase of 8.6% over last year.  For 2011, the cable operator earned $4.476 billion selling residential Internet access, also representing an 8.6% growth rate over earnings across 2010.

The company attributed this to “growth in high-speed data subscribers and increases in average revenues per subscriber (due to both price increases and a greater percentage of subscribers purchasing higher-priced tiers of service).”

The increased costs incurred by Time Warner Cable to upgrade and expand their network and cable systems were well offset by the aforementioned price increases and subscriber upgrades.  The company increased capital expenditures to $942 million in the last quarter.  Results over the full year show just a 0.2% overall increase in capital investment, now at $2.937 billion.  System upgrades, Time Warner’s plans to move their systems to all-digital cable television, the ongoing rollout of DOCSIS 3.0, new home security and automation services, and investment in online video and data centers are included in these costs. But a more significant reason for the increase comes from the company’s ongoing expansion into business services, which requires wiring more office buildings for cable.

Time Warner Cable CEO Glenn Britt led off the conference call with investors with an explanation for the increased expenses.

“We plan to continue our aggressive growth in business services by expanding product offerings, growing our sales force, improving productivity and increasing our serviceable footprint. This means continued investment, both in people and in capital,” Britt said. “Projects include expansion of our content delivery network, which powers our IP video capability, our 2 international headends, completion of DOCSIS 3.0 deployment, and conversion to all-digital in more cities. We expect to be able to accomplish this while maintaining the capital spending of the last 2 years — that is, between $2.9 billion and $3 billion, which represents a continued decline in capital intensity.”

Nothing in Time Warner Cable’s financial disclosures provides any evidence to justify significant changes in their pricing model for broadband, which currently delivers flat rate, unlimited service to customers at different speed rates and price points.  In fact, the company’s investments in DOCSIS 3.0 upgrades, which can support faster broadband speeds and a more even customer experience, have already paid off with subscriber upgrades.

Robert D. Marcus, president and chief operating officer, noted subscribers are increasingly considering faster (and more profitable) broadband tiers.

“Once again, high-speed data net adds over-indexed to our higher-speed tiers,” Marcus noted. “Roughly 3/4 of residential broadband net adds were Turbo or higher. And DOCSIS 3.0 net adds accelerated for the eighth consecutive quarter to an all-time high of 54,000.”

Time Warner’s biggest challenges continue to be the current state of the economy, which has made subscribers much more sensitive to pricing and rate increases, and cord cutting traditional cable television service.

“One group is extremely price-conscious, perhaps due in part to the ongoing economic malaise,” Britt said. “The other group is willing and able to pay for more features and service. We’re going to focus more attention on products and services that best meet each group’s needs rather than pursuing traditional one-size-fits-all solutions.”

That is clearly evident in the company’s bundled service options, including increasingly aggressive discounted pricing for new customers and for those threatening to leave and Time Warner’s super-premium Signature Home service, which delivers super-profits.  Average revenue from Signature Home customers averages $230 a month.  Traditional “triple play” customers who buy phone, Internet, and cable service only bring the cable company an average of $150 a month.

The company’s plans for 2012 do not include a specific statement about implementing an Internet Overcharging scheme like usage billing or usage caps.  But it is unlikely such an announcement would be made explicitly at an earnings announcement.  In the last quarter, Stop the Cap! reported comments from chief financial officer Irene Esteves that the company was still very interested in the concept of selling broadband with usage pricing as a “wonderful hedge” against cord-cutting.

Esteves told a UBS conference she believes usage-based pricing for Time Warner Cable broadband will become a reality sooner or later.  Charging “heavy users” more would already be familiar to consumers used to paying higher prices for heavy use of other services, and she claimed light users would have the option of paying less.

But despite favorable reception to the idea of usage pricing by Wall Street, Esteves acknowledged the company’s past experiments in usage pricing didn’t go as planned, and she suggested the company will introduce usage pricing “the right way rather than quickly.”

Other developments and highlights

• 

  Time Warner faces Verizon's $500 rebate offers in NY City

  Time Warner Beats Up DSL: Time Warner Cable’s most lucrative source for new broadband customers comes at the expense of phone companies still relying on DSL to deliver broadband service.  As DSL speeds have failed to stay competitive with cable broadband, the cable operator has successfully lured price-sensitive DSL customers with attractive ongoing price promotions delivering a year of standard 10/1Mbps cable Internet access for $29.99 a month, often less expensive than the total price of DSL service that frequently delivers slower speeds.

• Stalled Verizon FiOS deployment has limited the amount of competition Time Warner faces from fiber optics to just 12% of the company’s service area.  Where competition does exist, especially in New York State, Time Warner has had to stay aggressive to retain customers with deeply-discounted retention deals to keep up with Verizon’s high value rebate gift cards and new customer offers.  AT&T now provides U-verse competition in about 25% of Time Warner’s service area, but like satellite, AT&T U-verse pricing is less heavily discounted.
• Retention pricing and new customer deals deliver lower prices than ever.  In November, Time Warner started selling a triple play offer for $89.99 a month that includes DVR service and now also includes deep discounts or free 90 day trials of premium movie channels. That is $10 less than the same time last year.
• Premium movie channels continue to take a major hit as subscribers try to reduce their bills, especially after Time Warner began increasing rates on those networks.  HBO now sells for as much as $15 a month in many areas.  Time Warner Cable hopes to ‘revitalize’ premium movie channels with online video services like HBO and Max Go and promotional discounts.
• Long-standing customers of Time Warner’s “triple play” package received a “thank-you gift” — free voice-mail in 2011, something that will continue in 2012.
• Customers signing up for Time Warner’s premium-priced Wideband (50/5Mbps) service ($99/month) are being offered free phone service to sweeten the deal.

What to Expect in 2012

• Time Warner is moving forward to create its own Regional Sports Network for southern California;
• Los Angeles will continue to see large-scale expansion of Time Warner’s growing Wi-Fi network, available for free to premium broadband customers, with thousands of new access points on the way;
• The cable company will introduce Wi-Fi service in other, yet-to-be-announced cities in 2012, with up to 10,000 access points planned.
• Time Warner will be making its “digital phone” product more attractive with lower prices and more features, especially in product bundles, as consumers increasingly discard landlines;
• Expect to see the end of analog cable television in a growing number of Time Warner Cable areas, requiring customers to use new equipment (initially provided free) to continue watching on older televisions and those without existing set top boxes.
• Time Warner will continue to expand its “TV Everywhere” project to include live streaming TV on smartphones, video game consoles, computers, and more.  On-demand programming will be available as well sometime this year across all platforms.
• A nationwide channel re-alignment will move subscribers to consistent channel numbers across the country, in part based on grouping them together into “genres.”  Many areas already have digital cable channels arranged this way, but now they will be consistent from coast-to-coast.
• Time Warner will complete DOCSIS 3 deployment in all areas this year.
• The company is moving to introduce 2-hour service call windows almost everywhere, and 1-hour windows and weekend appointments in some markets.  Several cities now allow customers to select specific times for service appointments.
• Self-install kits will become increasingly available for different products, allowing customers to install equipment themselves;
• Time Warner’s IntelligentHome home security, monitoring, and automation product will expand beyond its launch markets (Syracuse and Rochester, N.Y., Charlotte, N.C. and Los Angeles/Southern Calif.).  The product currently has customers in the thousands, considered relatively small.  But Time Warner has learned subscribers are using the service in surprising ways, which will let them adapt their marketing.  Among the most popular features: remotely watching your pets at home.

Most Memorable Quote: “I think, more than anything else, our pricing strategy is dictated by what the marketplace will bear as opposed to what our underlying cost structure is.” — Robert Marcus, president and chief operating officer, Time Warner Cable

Which is more important:

1. Spending hundreds of millions of taxpayer dollars to finance sports facilities, stadiums, and “incentive packages” to attract and keep major sports franchises calling your city home;
2. Building quality digital infrastructure that will deliver 21st century broadband service at affordable prices for every local citizen that wants the service.

Here in western New York, the city of Buffalo — the third poorest city in the nation with 28 percent of its residents living in poverty and suffering chronically high unemployment — is about to the recipient of a one billion dollar bailout courtesy of the state government (a/k/a taxpayers).  That, even as some in the city are howling that the promised tens-to-hundreds of millions in promised renovation funding for the Ralph Wilson (Buffalo Bills) Stadium is apparently not included.

While hundreds of millions of taxpayer dollars are readily available to finance sports stadiums, getting privately financed bonds for public broadband is somehow the real crime in states like North and South Carolina.  North Carolina already has legislation in place that virtually assures broadband service is under the control of the state’s largest phone and cable companies, or it simply is not provided at all. Evidently in a battle over worthwhile public spending, financing a reported $260 million for Charlotte, N.C.’s Time Warner Cable Arena remains a higher priority than making sure the people of North Carolina have decent broadband service.

South Carolina this week is considering extending a similar courtesy to companies like AT&T and Time Warner Cable.  They need better broadband even more than their neighbors to the north.

Happily, broadband advocate Craig Settles has found a way for broadband lovers to have their cake and eat it too.

Why not construct public, non-profit broadband networks by selling ownership shares to the general public?

All of you who believe in broadband’s impact on economic development (or are a little jealous of stories like this about Chattanooga’s 1 gigabit network), should look to the Green Bay Packers of the NFL for the key to financing your broadband network.

Yeah, they kind of choked in last Sunday’s playoff game against the N.Y. Giants. But the team is a surefire winner when it comes to raising money. The franchise raised $70 million to rehab its football stadium (Lambeau Field) by selling 280,000 stock shares to individuals at $250 a pop. They pulled off this amazing feat in just five weeks!

With apologies to New Orleans Saints fans — “Who Dat” is bringing big bucks into town for a project that will pump up the local economy? The citizens of Green Bay. Literally. The Green Bay Packers are a nonprofit corporation owned by local residents and businesses. Packers pride enabled Green Bay to outdo tech companies that can’t get an initial public offering off the ground, let alone raise $70 million.

If Green Bay can do all this for a football field, can’t your hometown or county convince constituents to raise just a few million for a broadband network?

$250?  That’s the combined price of today’s cable and cell phone service over just a single month.  Should a private non-profit group act as coordinator for the project, they can walk right past existing restrictions on municipal broadband enacted at the behest of big cable and phone companies.  Self-financed fiber to the home service could pay dividends… to customers instead of Wall Street.

Settles lays out the parameters and the challenges, namely fighting that old meme that only giant telecom duopolies know how to run a broadband business.  But as we’ve seen from small scrappy private providers like Sonic.net in California and publicly-owned EPB Fiber, providing superior service at a reasonable price will bring customers to your door.  Even more so if they also happen to own the door.

Would-be customers of Time Warner Cable’s broadband service in Vienna, a small town in Oneida County, N.Y. are confused about why the cable company will not provide them with broadband service, even though cable company lines pass right over their respective driveways.

Pete Rauscher sees neighbors within a mile away happily using Time Warner’s Internet service, even though he cannot buy it for himself.

“I’d like to get the service…so do [my neighbors],” Rauscher told WSYR-TV in Syracuse. “It isn’t right that somebody within a mile of us has the same cable service, but we don’t.”

Rauscher and his neighbors are victims of a de-facto cable industry standard that says wiring fewer than 35 homes within a mile is not financially viable.  Rauscher might understand this, if a Time Warner-owned cable line didn’t pass straight over his driveway.

The cable company says it would cost at least $17,000 to provide Rauscher with broadband service, an installation fee way out of his budget.

Parts of Oneida County are still without any broadband service, except for those lucky (and wealthy enough) to receive and pay for a wireless 3/4G broadband connection from Verizon Wireless.  That company charges $80 a month for up to 10GB of usage, much more expensive than what Time Warner would charge.  DSL is not provided in that section of Vienna.

Time Warner says it regularly re-evaluates expansion into currently unserved sections of its service area.  Two sections of nearby Camden now receive cable service from the company, partly thanks to new housing developments in the rural region.  But for now, the cable company remains resolute in not serving customers who do not meet its population density test.

[flv width=”480″ height=”290″]http://www.phillipdampier.com/video/WSYR Syracuse Fight for High Speed Internet 1-12-12.mp4[/flv]

WSYR-TV tells the story of rural Oneida County residents who cannot get Time Warner Cable broadband service, even though the cable company lines cross their driveways.  (2 minutes)

When Massena, N.Y. town supervisor Joseph D. Gray balked at Time Warner Cable’s demands for a 15-year franchise renewal agreement, especially after the cable company never bothered to show up at a hearing on the subject, he thought he could send a message by supporting a renewal expiring after just one year.

But there was a reason Time Warner never bothered to show up to defend their performance in northern New York State over the last decade of increasing rates and unwanted channels shoveled at subscribers — they did really have to answer to local officials.

Gray assumed playing some hardball with the cable company might get their attention and bring them to the table to discuss the demands of local Massena residents he hears from all the time.  At the top of the list is a-la-carte cable — paying only for channels you want.

No deal.

Mr. Gray has since admitted in conversations with the Watertown Daily Times he is frustrated by the town’s inability to effect “any real change.”

This despite the state cable franchise law which declares communities have the right to establish and negotiate “cable-related community needs” as part of the final contract with cable operators.

In fact, the cable industry has spent millions lobbying federal and state governments to deregulate their operations, even though most communities are served by just one cable operator.  While phone companies have made limited progress competing in larger urban areas, most of upstate New York is left choosing between a satellite provider or a cable company — usually Time Warner Cable.

That lobbying paid off in the 1990s when the federal government swept away considerable government oversight of cable operations.  While municipalities technically still control the basic franchising process, those dissatisfied with service from an existing provider rarely find other companies willing to take over.  That leaves Massena stuck with Time Warner Cable, who isn’t giving an inch on how they package their programming.

“We can make some gains for the community. Can we get free service for a couple of municipal buildings? Probably,” Mr. Gray told the newspaper. “They continue to say there’s nothing they can do about programming, there’s nothing they can do about bundling.  That’s from the programmer.  Until we get … a la carte, where people get the channels they want, we’re never going to satisfy people.”

With no progress in sight, stalled contract negotiations between a popular sports cable network and New York’s dominant cable TV company continues to test the patience of customers and sports fans across the state.

Scores of Buffalo-area sports bars have canceled their commercial cable service with Time Warner Cable, generating plenty of business for DirecTV, which still has MSG on the lineup.  Customers across New York have also started to demand a refund of the estimated $4.50 a month Time Warner Cable no longer pays MSG, but still collects from cable subscribers.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/WGRZ Buffalo Time Warner and MSG Network plan meeting this week 1-8-12.flv[/flv]

Time Warner Cable and MSG’s dispute is ticking off Buffalo sports fans.  WGRZ visits area sports bars and talks with both sides in the dispute to learn the latest.  (4 minutes)

Now New York Attorney General Eric Schneiderman is brokering discussions between the two sides, in an effort to restore coverage of the Sabres, Rangers, and Knicks games all displaced from the Time Warner Cable dial.

“We have had constructive discussions with Time Warner and MSG Networks as part of an ongoing effort to facilitate progress in their talks,” said Schneiderman. “We are hopeful that the two parties will come to an agreement in short order.”

So far, those negotiations seem to be going nowhere, and Time Warner released a statement stating they have not had any further discussions with the network.  The cable company has also hardened its position with respect to refunding customers for the lost networks.  While early attempts to win credit were successful, Time Warner representatives are now refusing to compensate customers for the loss of MSG.  Instead, they are offering a free month of their mini-pay sports programming tier, which must be requested to access.  After the first month, the cable company will bill customers $5.95 a month for the channels.

“That’s no help,” says Stop the Cap! reader Jean, a Sabres fan in Amherst, N.Y.  “Not only don’t we get our $4.50 back, they want to set us up to pay an extra $6 a month after the 30-day trial of their ‘compensation’ is up.”

Many of her friends who live in suburban Buffalo are dumping Time Warner in favor of Verizon FiOS.  Area sports bars are following.  At least a dozen have canceled their commercial service contracts with Time Warner Cable, many switching to satellite provider DirecTV.  Buffalo’s love affair with hockey is so intense, 5,000 people showed up last week at the First Niagara Center stadium to watch the Buffalo Sabres away game on large screen televisions hung above the rink.

Sports bars depend on lucrative sales during major sports events, so being without the Sabres proved unacceptable, a point driven home by MSG itself which continues to host free viewing parties at local establishments.  Buffalo wings were included for free.

Stop the Cap! reader Ruth Grunberg, who lives in Cortland, N.Y., has started a petition to demand the cable company refund subscribers the $4.50 a month effectively paid for channels they no longer receive.

“They recently raised rates 7% for the second time in a year and they no longer are sending this money to MSG,” Grunberg says. “They have no right to keep it and pay their bloated executives even more money. It is fraud and bait and switch to promise one thing and deliver another. They should offer a la carte service to solve a multitude of problems.”

The city of New York apparently agrees and continues efforts to pressure the cable company into compensating subscribers for the network loss.

[flv width=”640″ height=”500″]http://www.phillipdampier.com/video/WIVB Buffalo Bars Cancel Time Warner 1-10-12.flv[/flv]

WIVB in Buffalo reports area sports bars are canceling Time Warner Cable in droves as its programming dispute with MSG drags on with no end in sight.  (2 minutes)