Time Warner Cable admitted this morning extracting more revenue from existing customers was more important than attracting new ones, and long time subscribers responded by canceling service in above average numbers.

In a conference call largely hosted by incoming CEO Robert Marcus, a number of Wall Street analysts listened to Marcus’ vision for Time Warner under his forthcoming leadership. Marcus offered competing, potentially incompatible visions in his defense of a lackluster quarter: charge existing customers higher prices for service to boost average revenue per subscriber (ARPU) while also improving the customer-company relationship.

For most of 2013, Time Warner has been aggressively moving away from heavily discounted promotional offers to attract customers. Both outgoing CEO Glenn Britt and Marcus have repeatedly stressed heavy discounting of service during the past two years is now over, and the company is looking forward to resetting prices higher when the promotions end later this year.

It is part of the company’s plan to “drive better performance in the residential business.” An unfortunate side effect is that the company continues to lose video and phone customers and its broadband service growth has been so slow, one analyst called it “anemic.” The company’s quarterly results show Time Warner added only 8,000 new broadband customers in the last three months. The company still earned $1.42 billion from broadband sales alone over the last three months, mostly because of rising broadband bills.

Courtesy: Jacobson

Offsetting that growth, TWC lost 191,000 residential video subscribers, leaving it with about 11.9 million video customers. At least 56,000 customers also pulled the plug on Time Warner Cable telephone service.

“As we discussed before, this [new pricing] approach represents a conscious decision to pursue subscribers with higher ARPU, higher profit and lower churn even if that means fewer connects,” said Marcus as he defended the results. “So it’s not a surprise that as in the first quarter of 2013, subscriber net adds were down in the second quarter on a year-over-year basis.”

As customers deal with increasing prices for cable television and broadband service and the irritation of modem rental fees, many are cutting back on their packages to keep their bill stable.

Marcus admitted customer sign ups of triple play — phone, broadband, and cable TV service — were way down in the second quarter and a lot fewer single and double-play customers were convinced to upgrade. The company’s promotional offers have come with a higher price and slower broadband service, often only 3Mbps.

In a number of markets, especially in the midwest, customers are shopping around for other providers. They are finding AT&T U-verse to be a formidable competitor.

“Throughout the quarter, U-verse was pretty aggressive with a beacon price of $79 for their triple play and $49 for their double play,” said Marcus. “I would characterize those as aggressive promotional prices, and they had an impact. I would say that the impact was more pronounced as the quarter wore on. We’ve now responded to that in the market, and I expect that our relative performance should improve there.”

But for much of the rest of the country where competition is less robust, Time Warner intends to continue to hold the line on pricing and resist discounting even if it means subscribers threaten to cancel.

Time Warner Cable has gotten itself ready for an onslaught of unhappy customers, assigning nearly 1,000 employees to staff four national customer retention centers dedicated to trying to persuade customers not to leave. But these specially trained representatives have a dual mission — keep customers with Time Warner Cable, but don’t give away the store doing so.

Stock buybacks and shareholder dividends were a major priority for Time Warner Cable’s cash on hand.

“Not only are our reps saving more customers, they are also preserving more ARPU among the customers they save,” said Marcus. “As promotional roll-offs peak in the second half of 2013, we expect that our new retention capabilities will drive better revenue growth.”

In the broadband market, Time Warner changed little in the second quarter except to raise prices on service and equipment. Marcus could only point to the addition of 3,500 new Wi-Fi hotspots, mostly in New York City, as its signature achievement over the past three months.

On the residential side, broadband revenues were up 12.5%, but most of that growth came from a combination of the modem lease fee, an increase in the number of 30/5 and 50/5Mbps customers and a successful Turbo promotion.

Results for video and voice were considerably worse. Revenues were down about 4%.

But the company managed to report its highest ARPU ever, with customers now paying an average of more than $105 a month for Time Warner service. Most of that increase came from rising broadband prices.

Time Warner Cable has also been preoccupied with spending excess cash on hand to buy back its own stock, which creates shareholder value. Time Warner expects to spend at least $2.5 billion on stock buybacks this year. Shareholders also received $829 million in dividends (113% of Time Warner’s free cash flow).

“We repurchased 6.6 million shares for $638 million, and through July, we have repurchased approximately 83 million shares at an average cost of around $78.50 per share since we began the program in November of 2010,” reported chief financial officer Arthur T. Minson.

Time Warner Cable’s Board of Directors recently approved increasing spending up to $4 billion on stock buybacks.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/WRGB Albany TWC Modem Fee 7-31-13.flv[/flv]

WRGB in Albany reports Time Warner Cable customers are angry about another price hike on the company’s modem lease fee effective Aug. 18. WRGB recommends customers buy their own modems to avoid the fee. Time Warner Cable’s Glenn Britt admitted earlier the fee is really just a hidden rate increase. (3 minutes)

Out

In a widely anticipated move, Time Warner Cable CEO Glenn Britt will retire from his leadership role in December, replaced by his chief operating officer Robert Marcus.

Marcus will assume control of the nation’s second largest cable company with a promise to improve customer service, corporate culture, and growth in residential subscriptions.

Marcus told the New York Times the company has to develop a level of emotional connection with customers, many who loathe the cable company and complain regularly about the increasing cost of cable service.

Time Warner Cable has lost cable television customers and growth in other services has continued to slow as consumers explore competitive offers from the phone company and satellite providers. The company has made up the loss of revenue by raising prices and aggressively expanding business service by wiring offices and complexes for cable broadband.

In

Wall Street has complained Time Warner’s financial performance has fallen behind other cable operators, notably Comcast. Some also mention Time Warner’s broadband speeds are slower than other cable operators. Some analysts also continue to pressure the company to drop flat rate Internet access to accelerate earnings.

The cable company’s current market position has made them a target for a takeover, notably by John Malone and Charter Communications. The two companies have met informally to discuss a potential merger deal, but Britt doubted Charter — far smaller than Time Warner Cable itself — could run the combined entity effectively.

Marcus told the newspaper Time Warner Cable’s attitude towards a merger would depend entirely on how much value it would create for the company’s shareholders.

What was best for customers was not mentioned as a factor.

Bruce

Charging usage-based pricing and monetizing your use of the Internet is key to enhanced profits and higher earnings as broadband becomes the key product for cable operators.

That is the view of Robert Bruce, president of the communications division of Rogers Communications, eastern Canada’s largest cable operator.

“[The Internet] is the key to the future of our business, hence monetizing the increased bandwidth usage will rapidly become the future across all our businesses, whether it is wireless or wireline,” Bruce told a financial analyst in response to a question about ongoing Internet rate increases from the cable company. “There are clearly some unlimited offers out there and we think they are fairly shortsighted as the Internet is the future of the business.”

Bruce believes there is plenty of room for future rate increases, especially as the cable company boosts Internet speeds and ends network traffic management, improving the perceived quality of Rogers’ Internet service.

“We have significantly enhanced the value of this product and over time it is our plan to monetize it accordingly,” Bruce explained to the analyst. “The price increase that you receive in the mail would have just been one step in the monetization that we think will continue as Internet service becomes the backbone product in the home.”

Rogers admits it will continue to lower the bar on customers with usage caps and higher broadband pricing.

Ironically, Rogers is currently offering its own unlimited use plans, primarily in response to a competing offer from Bell.

Dr. Michael Geist, a broadband industry observer and law professor at the University of Ottawa notes competition is the only thing keeping Rogers’ pricing and usage caps in check.

“If the Bell offer disappears, so will the Rogers plan,” Geist predicts. “With limited competition, favorable pricing plans will come and go, with executives anxious to increase prices and implement usage caps. The only solution is sufficiently robust competition that all players are continually forced to improve service and keep pricing in check to retain and attract customers.”

Rogers may tell the public Canadian broadband is robustly competitive but the company signals something very different to the investor community. With OECD data already showing Canada among the ten most expensive countries for broadband service in the developed world, Rogers is primed to raise prices even higher as it further tightens Internet usage caps.

Rogers’ improvements in its broadband service do not necessarily correspond with the company’s pricing power. As consumers increasingly consider Internet access an essential utility in the digital economy, Rogers is finding it can set prices as it likes and regularly increase them without effective subscriber backlash. With most Canadians buying service from the cable or phone company, if both providers avoid a pricing war, investors will be able to extract OPEC-like earnings from the barely regulated service.

Providers routinely claim rate increases are tied to costly upgrades, but Rogers’ own financial statements and comments to shareholders say otherwise. The cost to deliver broadband service in Canada is dropping, but the price charged for Internet access and the overlimit fees collected when customers exceed their usage limit will continue to rise as a growing percentage of company revenue now depends on broadband service.

Now what: AT&T Next and Verizon Edge

Wireless carriers know that the average relationship between a smartphone and its owner is becoming shorter every day. Sometimes the relationship is over when a customer drops or loses their phone and needs a replacement. Others simply covet the next best thing. When a large enough contingent of customers is willing to open their wallets and let their money fall out, what’s a poor wireless company to do? Ignore the pile of twenties falling to the floor? Not on your life.

AT&T last month announced it was dumping its 20-month early upgrade offer, following Verizon (again) which announced it was pulling the rug out on a similar plan in April. ‘Customers should wait a full 24 months before expecting a new subsidized phone,’ said both companies.

Then came scrappy T-Mobile, the company AT&T originally wanted to put out of business. TMO decided to apply some European competitive logic in the U.S. market. No more two-year contracts with nasty termination fees, declared CEO John Legere. But no more “phone subsidy” either. In return for the end of contracts, customers should expect to pay retail price for their smartphone, but at least they can finance it through T-Mobile and have the somewhat affordable monthly installments added to their bill.

Now, in a remarkable about-face for Verizon Wireless and AT&T, the features and promotions diet imposed on customers that has eroded discounts, ended early upgrades, and slapped on early termination fees and opaque junk bill charges might be coming to an end. Early upgrades are back… for a price.

It is the first step in a major shift away from the North American wireless business model which traditionally offers customers cheap devices at massive discounts known as “device subsidies.” Since the early days of cell phones, wireless companies in the U.S. and Canada typically grant customers up to $350 off their phone purchase in return for a 24 month contract (until recently, 36 months in Canada). But wireless providers don’t just give away free money. Carriers get back every penny of this subsidy over the life of a cell phone contract by setting their plan rates artificially high.

T-Mobile isn’t giving away the store either, but at least everything is on sale. By jettisoning the subsidy, T-Mobile’s plan rates are dramatically lower than those offered by its competitors. That is no surprise because TMO no longer has to worry about recouping device subsidies.

When a customer walks into a T-Mobile store, they can buy the latest iPhone for $650 or agree to finance it at the retail price through the carrier. They can even buy it somewhere else. But T-Mobile’s new Jump plan also offers customers a chance to “jump” to a newer phone every 6-9 months with its trade-in program. For avid phone upgraders, the end effect is like leasing your phone. You will always have a device newer than the next guy, and you will always be paying a monthly fee for the phone itself. That looks a lot more attractive than trying to wait 24 months with AT&T or Verizon or frequently buying a new phone for north of $500 and trying to recoup part of the cost by selling your old phone on eBay or Craigslist.

Wall Street would normally punish carriers that do anything to shorten the 24-month traditional upgrade cycle because investors generally hate the whole concept of the phone subsidy. It costs companies liquidity to tie up money fronting that $350 discount and waiting up to two years to get the money back. But since T-Mobile can immediately book the full purchase price of a phone for accounting purposes and does not need to show the amount of money dedicated towards phone subsidies, analysts are not pummeling the stock into the ground.

As Stop the Cap! has written for more than a year, the wireless Golden Calf Wall Street really wants to worship is a cell phone plan priced artificially high to recover a subsidy providers no longer give. That’s a plan only Ma Bell and its shareholders could love. But nobody thought AT&T and Verizon Wireless could get away with it.

Silly people.

Introducing The Wireless Trojan Horses: AT&T Next from AT&T and VZ Edge from Verizon

Yay!: No more expensive subsidies and extra free money

AT&T yesterday introduced AT&T Next — the company’s response to T-Mobile’s Jump with AT&T’s usual gouging touch.

The highlights of the plan include:

• No membership, activation or upgrade fees;
• Buying a new phone under AT&T Next does not require a down payment, any finance charges, or early payoff penalty;
• Customers can trade-in for an upgrade after one year or keep the device for 20 months and own it.

VZ Edge is still a rumor, but leaked promotional material indicates it is nearly identical to AT&T Next, with some important exceptions:

• VZ Edge appears to be an extension of Verizon’s existing 12-month financing plan, limited to two devices at a time with a combined financed balance not to exceed $1,000;
• First payment due at time of purchase with a recurring finance charge of $2 for each month there is a remaining balance;
• No upgrade fees, no contracts, no pre-payment/payoff penalty;
• Customer qualifies for their next upgrade after 50 percent of their current phone’s retail price is paid;

The leaked document does not include details about the disposition of your device when beginning an upgrade. Presumably, Verizon will accept it for trade-in or the customer can pay the remaining balance off immediately and own it.

What sets Verizon and AT&T far apart from T-Mobile are the prices of their service plans. Both AT&T and Verizon are effectively ending their subsidy program for those participating in these early upgrade plans. Customers must purchase (or finance) their next device at the regular retail price, which will range between $500-650 for most top-of-the-line smartphones.

Bunco

But neither Verizon or AT&T are lowering their service plan pricing, which was specifically designed to recoup a subsidy they are no longer providing. T-Mobile has appropriately lowered their plan pricing because the company no longer needs to win back that $350 subsidy they might have given you for the newest Apple iPhone or Galaxy device. That means you are effectively paying AT&T and Verizon twice for the same phone. It’s Wall Street’s dream come true: kill the subsidy and keep the money still being charged to recoup it. That amounts to as much as $29 a month out of your bank account and into theirs.

For now, only those itching for fast upgrades will get the pinch, at least until AT&T and Verizon decide this is the new and improved way to sell phones to everyone without a two-year contract. Now if we can only get AT&T and Verizon to rescind the contract taken out on our wallets….