While cable companies continue to point to growing subscriber numbers for premium movie channels as evidence cable cord-cutting is not taking its toll, the owner of the country’s largest pay movie channel has undercut their argument.

Time Warner (Entertainment), owner of HBO, disclosed to investors recently that although the network picked up nearly two million new subscriber in the United States, most of those were watching the network for free through temporary promotional offers.

Free or discounted offers for premium movie networks are not uncommon. Time Warner Cable frequently bundles a one-year subscription to Showtime/The Movie Channel in its promotions. HBO and Cinemax are often offered for 3-6 months at no charge by other pay television providers.

Many viewers drop the network(s) (or negotiate another free viewing promotion) when charges start appearing on their bill. For years, premium movie channels cost around $13 a month, and many cable operators sold extra premium channels at a discounted $7 a month. But prices have risen dramatically over the last five years. Time Warner Cable, for example, now charges $15.95/mo for HBO, Cinemax, Showtime, and/or Starz.

Because of higher prices, HBO’s subscription revenue of $1.3 billion during the fourth quarter was up 8% year over year.

For years, cable operators have denied they have a problem.

But new evidence suggests Americans are cutting back on their cable television habit as prices continue to rise and alternatives become available.

One of the worst affected by cable cord cutters is Time Warner Cable, which has been consistently losing video customers month after month since 2009:

Disputes with programmers and competition from satellite and telephone companies may not be enough to explain away the trend of subscriber losses. It also does not explain why Americans under 35 are increasingly unlikely to sign up for cable television at all.

Cable cord cutting — fact or fiction?

Nonsense, replies Bloomberg opinion columnist Matthew C. Klein:

It is tempting to think that the declining number of subscribers at the U.S.’s biggest cable-television companies is a symptom of the industry’s malaise as it slowly slides into obsolescence. Don’t buy it. The losses are accounted for in the gains by smaller and nimbler rivals.

[…] The customers who have been abandoning Comcast and Time Warner Cable in droves haven’t given up on paid TV content, however. Focusing on the travails of the biggest cable companies obscures the reality that, according to Bloomberg Industries, the total number of pay-TV subscribers is slightly higher now than it was at the end of 2008 and that there were probably more people paying for television subscriptions at the end of 2013 than at the end of 2012.

To the extent that individual company results tell us anything, it could be about where Americans are moving, or the relative quality of service offered by the various companies. In the 12 months ended Dec. 31, AT&T Inc. added 924,000 subscribers to its U-verse TV service, while Verizon Communications Inc. added 536,000 subscribers to its FiOS TV service. Since the end of 2008, the two companies best known for their wireless services have added about 8 million pay-TV subscribers — far more than Time Warner Cable and Comcast have lost.

Klein’s views mirror those of many cable industry executives who blame the economy for deteriorating cable television subscriber numbers. Many suggest multi-generational households are responsible — stay at home kids and older parents are sharing a single cable television subscription. Others claim discretionary income is squeezing some to downgrade, but not cancel, cable television service.

Klein’s accounting does not tell the entire story. Competition from telephone companies, especially AT&T’s U-verse, is not as pervasive against Time Warner Cable and Comcast as Klein suggests. In fact, Charter Communications is among the cable companies facing the biggest onslaught of competition from AT&T. U-verse has picked up many of its newest subscribers not because of a sudden urge to switch, but rather because the service has only just become available in several new markets as a result of AT&T’s expansion effort. Verizon FiOS is still slowly expanding within its current franchise areas as well. Neither Comcast or Time Warner Cable consider either service much of a serious competitive threat.

AT&T U-verse, the larger of the two telephone company services, has a TV penetration rate of just 21 percent of customer locations. FiOS, which serves a smaller customer base, has a 35 percent penetration rate for television. Cable remains dominant for now, even as it loses subscribers and market share.

Another way to measure cord cutting is to look at the subscriber numbers of major basic cable networks that are most likely to be a part of any channel lineup. ESPN, for example, lost around 1.5 million subscribers between September 2011 and September 2013. Most of that loss came from cord cutting or downgrades to tiers like “Broadcast Basic,” consisting mostly of local television stations. ESPN’s numbers include all pay television platforms — satellite, telco TV, and cable.

In spite of the subscriber losses, cable industry profits remain healthy. Revenue growth these days comes from broadband service and rate increases.

Bright House Networks is dropping analog service in April in favor of an all-digital lineup that will require customers in Central Florida to have set-top boxes or similar equipment to continue watching.

“Digital is here to stay,” said Bright House spokesman Don Forbes. “Analog is going the way of the dodo bird.”

In a letter being mailed to all affected customers, Bright House notes customers will need a cable box, digital adapter or CableCARD for every television connected to cable.

Bright House will supply each customer with two digital adapters and remote controls at no charge through 2014. But the cable company will bill customers for those devices starting next January.

Sets equipped with QAM tuners alone will not suffice for receiving the entire cable lineup.

Customers are urged to begin requesting any required equipment starting today — either at a Bright House retail store or call toll-free: 1-855-589-8582.

Time Warner Cable executives brushed away Charter Communications’ first public offer to acquire the second largest cable company in the country in a debt-financed deal that Time Warner considers a lowball offer.

“[Charter’s] proposal is grossly inadequate,” Time Warner Cable said in a statement. “We are confident in our standalone plan and we are not going to let Charter steal the company.”

Charter’s combined service areas, if they win control of Time Warner Cable.

On Tuesday, Charter violated a long-standing, informal Code of the Cable Cartel that keeps cable companies from attacking each other.

Charter Communications chief operating officer John Bickham launched an investor presentation that trashed Time Warner Cable and its leadership, and contended fixing the cable company will take more work than first envisioned.

Bickham claimed Time Warner has exhibited a decade of a “failed operating strategy revealed by fact that they are losing customers at an alarming rate,” while Charter has a proven track record of performance.

Bickham

Historians recollect Charter’s recent past differently. In 2009, mired in debt and lacking a disciplined business plan, Charter declared Chapter 11 bankruptcy, wiping out shareholders and stiffing creditors.

Bickham capitalized on Time Warner’s 2013 summer of discontent, when a dispute with CBS resulted in the loss of the network from Time Warner Cable lineups (along with Showtime) in some of the biggest cities in the country. Combined with rate increases, subscribers began switching to the competition, especially where Verizon FiOS and AT&T U-verse gives cable operators stiff competition from money-saving new customer promotions.

Bickham described TWC as a company in shambles:

On Time Warner Cable TV: “It appears that Time Warner didn’t want to spend the money to go all-digital,” adding that the quality of TWC’s TV signal is poor and the company still lacks enough HD channels that could have been on the lineup if the cable company dropped analog service long ago.

On Time Warner Cable Internet: Bickham complained Time Warner is offering deep discounts on slow Internet packages, particularly its campaign targeting DSL customers with 2Mbps service for $14.99 a month. Bickham complains the large variety of Internet speed tiers are unnecessary, resulting in “nickel-and-dime charges to customers.” He argues Time Warner needs to simplify its offering by adopting a digital lineup and boost Internet speeds, so customers get at least 30Mbps service. Bickham did not mention Charter Communications also has a usage cap on its broadband products. TWC does not on most offerings.

On Time Warner Cable employees: “TWC never had a vision on high standards” for how the company manages its 50,000 employees. Bickham feels the workmanship of TWC installers leaves a lot to be desired.

[flv]http://www.phillipdampier.com/video/Bloomberg Time Warner Cable Rejects Charter Offer 1-15-14.flv[/flv]

Time Warner Cable rejected an acquisition offer from Charter Communications valued at more than $61 billion including debt, spurning the biggest unsolicited takeover bid since 2008. Manus Cranny examines why the offer was rejected on Bloomberg Television’s “Countdown.” (2:06)

Charter’s proposed price comparison chart, produced for the benefit of Time Warner Cable shareholders, assumes worst-case pricing almost no Time Warner Cable customer actually has to pay.

Charter is America’s second worst rated cable company. (Consumer Reports, 2013)

On its face, Charter’s plan for Time Warner Cable doesn’t look all bad, but execution is critical and Charter has a long-standing and very poor record of customer satisfaction, typically ranked in consumer surveys as America’s second worst cable operator year after year.

Should Charter win control of Time Warner Cable, big changes will be in store for TWC customers under the Charter umbrella:

• Analog television would be phased out, along with “limited basic” packages. Charter wants to repurpose analog spectrum for faster Internet speeds, but that also means video customers will be required to get more set-top boxes;
• Eliminate “Switched Digital Video” technology now in place on TWC systems. SDV is a bandwidth saver – only delivering digital TV signals customers in a particular neighborhood are actively watching. But those using inexpensive digital-to-analog set-top boxes on analog-only televisions can’t watch SDV channels, inconveniencing customers;
• Increase the number of HD channels to 200+;
• All residential set-top boxes would now support HD signals at no added cost and customers will be able to get up to four DVR boxes for $20 a month;
• Time Warner Cable’s new minimum Internet speed would be 30Mbps with much faster added-cost tiers available, but usage caps will apply;
• Time Warner Cable’s phone product would be repriced at $30 a month in the first year, $20 in the second with all calling features and voicemail included;
• No term contracts will be offered and modem rental fees, regulatory surcharges, added taxes on Internet and Phone, and service visit fees will no longer be charged.

Charter customers can expect aggressive sales pitches for their “high value” triple-play bundle which may include services customers don’t want at a price that is largely non-negotiable. The more boxes and services you add, the greater the discount you will receive. In contrast, Time Warner Cable began de-emphasizing its triple play promotions in early 2012 and now aggressively promotes single and double play packages that typically omit phone service.

Unlike TWC, Charter has been more difficult when trying to negotiate customer retention discounts. Charter generally charges the same prices everywhere.

Their proposed offer for Time Warner customers will be a triple play offer starting at $110 a month for the first 12 months, then increase $20 in the second year to $130 a month and in year three the price will rise again to $150 a month. Charter’s typical “step-up” pricing is in $20 increments.

Charter is reluctant to allow customers to add or drop package components, so for most customers packages will be all-inclusive with no discounts for dropping channels or features. That means customers will likely end up with more television channels, more phone features, and faster Internet speeds, but at the cost of an eventually higher cable bill.

Any buyout could also mean some Time Warner Cable territories could be put up for sale to a third-party. Charter is especially interested in the New York and Los Angeles markets, but may have little interest in western New York and Ohio, New England, Kentucky and Wisconsin. Any orphaned TWC customers would likely be snapped up by companies like Comcast, which may join Charter’s takeover bid.

Any sale would need approval by the Federal Communications Commission and potentially the Justice Department’s Antitrust Division, especially in Comcast becomes involved.

[flv]http://www.phillipdampier.com/video/CNBC Tom Rutledge Explains Charter Offer for TWC 1-15-14.mp4[/flv]

Time Warner Cable rejected a merger proposal from Charter Communications. Tom Rutledge, Charter Communications president and CEO, explains the offer as he describes as “rich and fair.” We feel like we’ve come a far way and have not received a serious response, Rutledge says. A CNBC exclusive. (4:35)

Just months after starting to rollout a new generation of Comcast’s X1 “entertainment operating system” set-top boxes, the cable company is preparing to upgrade the cable television experience with X2.

Comcast, like many other cable operators, is gradually moving to IP and cloud capable set-top equipment as television transitions towards an all-digital platform. The traditional set-top box has proved expensive, cumbersome, and often annoying for customers trying to navigate through hundreds of cable television channels with a less-than-ideal on-screen program guide.

X2 hopes to change that perception with a customizable dashboard that learns viewer preferences over time and makes intelligent suggestions for customers looking for something to watch. Using a cloud based platform also means much easier upgrades. X2 also erases the line dividing traditional cable channels and streaming online video, which would allow Comcast to use its broadband network to distribute video programming and integrate social media.

X2 has, so far, been largely a “by-invitation” affair, with customers invited to preview the new interface on their current X1 equipment by pressing this key sequence with their remote control: EXIT-EXIT-EXIT-X-T-W-O

In addition to improving TV viewing, X2 also sets the stage for a cloud-based DVR being tested in Boston and Philadelphia and live-streaming Comcast’s TV lineup direct to wireless devices in the home.

A Comcast spokesperson tells us the X1 (and X2) platforms will be available to a substantial number of customers this year.

[flv]http://www.phillipdampier.com/video/Comcast The Making of X2 8-2-13.mp4[/flv]

Comcast produced this video showcasing the development of the X2 platform. (3:07)