Cable companies, including Time Warner Cable, are offering a mix of threats and financial incentives to keep popular cable programming away from online video competitors.

Bloomberg News today reported the private discussions primarily target upstart streaming video services from companies like Intel, Apple, and Google, which are all proposing multichannel streaming video services that could one day replace the local cable company.

All three would-be competitors have been stymied, some for years, from signing contracts with popular cable networks like HBO, USA, ESPN and Comedy Central. If a viewer wants to watch those networks, they usually have to authenticate themselves as existing cable, satellite, or telco-TV customers to get access to live and recorded programming. The cable industry prefers it that way as a customer retention tool.

Time Warner Cable CEO Glenn Britt admitted to Wall Street analysts attending this week’s Cable Show his company probably insists on contract language that bars programmers from providing content to online video services.

“We may well have ones that have that prohibition,” Britt said at the conference in Washington. “This is not a cookie-cutter kind of business.”

Some cable company contracts are more benign, only requiring programmers to license content on the same terms offered to their online competitors. Britt said some of Time Warner Cable’s contracts fall into this category.

Britt

Britt has repeatedly emphasized Time Warner wants to license content more broadly to allow the company to include it in its TV Everywhere platform, which streams video content to wireless devices. The cable operator adopted a policy in 2009 that sought to deliver content to customers on any device they wish. Restrictive contracts have kept that policy from being fully implemented.

AT&T U-verse says it won’t pay full price for cable programming sold to its online competitors.

“If they’re going to go over-the-top, then that’s a very different conversation and a very different value for our customers,” Jeff Weber, president of content, said last month at an investor conference. “Exclusive versus non-exclusive has materially different value for our customers. And I think we would want that reflected.”

Restrictive contracts are all about protecting the existing pay television ecosystem, according to Charter’s chief financial officer, Chris Winfrey.

“It’s in everybody’s mutual interest that we are protecting the ecosystem in a way that continues to keep the value of that programming that we have and the way it’s delivered to our subscribers today,” Winfrey said added.

Consumer groups say restrictive contracts are the epitome of anticompetitive industry behavior that should be examined by the Justice Department.

“Is it anticompetitive generally? Of course it is, they are keeping programming from their competitors,” said Gigi Sohn from Public Knowledge.

Satellite companies were originally in this same position, unable to carry popular cable networks on reasonable terms at fair prices until the 1992 Cable Act mandated reforms that required non-discriminatory access to cable programming. Online video providers have not yet been able to demand the same terms for their competing services.

One of America’s lowest-rated cable companies and an industry legend labeled by consumer advocates as the “Darth Vader of cable” may be joining forces to buy Time Warner Cable, according to Bloomberg News.

The blockbuster buyout would leap Charter Cable from fourth largest cable operator to second place, although still behind Comcast in terms of revenue and number of subscribers.

The spectacular return of Malone to the top echelon of the American cable industry was the talk of the industry’s Cable Show, ongoing this week in Washington, D.C. Those attending are reportedly buzzing Malone’s imminent return is likely to spark a massive consolidation of the U.S. cable industry to as few as three major cable operators serving more than 95 percent of the American cable marketplace.

Malone

Driving momentum to merge, in Malone’s view, is increasing cable video programming costs, which are cutting into profits. Having a fewer number of cable operators could hand the industry more leverage over broadcasters and unaffiliated cable programmers, but could also cut costs through marketplace efficiencies and volume discounts.

“If you’re John Malone, you’re thinking: we’ve got to get bigger,” Jim Boyle, managing director of SQAD and formerly a cable equity analyst for more than 19 years, said in a telephone interview with Bloomberg News. “The bigger Charter can get, the more economies of scale discounts it can get,” he said. “If everyone else is playing checkers, Malone is playing three-dimensional chess.”

For many on Wall Street, the only thing left to do is plan the funeral for the country’s second largest cable company.

“If you’re going to do a transformational deal, your choices are Time Warner Cable, Time Warner Cable and Time Warner Cable,” Craig Moffett, a veteran industry observer told Bloomberg. “You can roll up all the little guys if you want to, but even if you did, you haven’t built something that’s truly large-scale.”

“Time Warner Cable is gone,” Chris Marangi, a money manager at Gamco Investors Inc., said. “I think Charter will buy them eventually, whether it’s Liberty facilitating that or Charter doing it directly or the two companies doing it in partnership.”

Industry observers predict Malone will signal his dream deal by initially launching smaller mergers and acquisitions before attempting a buyout of a cable company considerably larger than Charter itself.

The first target: perennially bottom rated Mediacom, where any buyer is likely to be hailed as a rescuer by beleaguered subscribers who have regularly dismissed the cable operator as incompetent. Next, the Washington Post’s Cable ONE, which may already be plumping itself up as at attractive takeover target through investment in improving its network infrastructure.

But the most obvious foreshadowing of a big deal with Time Warner would most likely come if Charter first successfully acquires always-rumored-for-sale Cablevision, where the controlling Dolan family is rumored to be holding out for an exceptionally attractive buyout package other cable companies aren’t willing to offer. Time Warner itself has been rumored as a buyer, but current management has repeatedly stressed it will not pay a premium price for acquisition targets.

Malone may not be able to help himself. His long history in the cable industry includes a voracious appetite for merger and acquisition deals. For more than two decades, Malone led Tele-Communications, Inc. (TCI). When he arrived in 1972, TCI was a rural Texas and western states cable operation with 100,000 subscribers. By 1981, through mergers and acquisitions, he built TCI into America’s largest cable operator. In 1998, AT&T bought out TCI Cable. The phone company later exited the cable business and sold most of the operation to present owner Comcast.

The level of consolidation proposed by Malone is unheard of in the United States, but is familiar in Canada where two major cable operators — Rogers and Shaw — control the majority of cable subscriptions. Third largest Vidéotron leads in Québec and Cogeco serves pockets of Ontario and Québec bypassed by Rogers and Vidéotron, respectively.

Time Warner Cable has laid the foundation to eventually begin charging broadband customers usage-based pricing, raise the modem rental fee originally introduced last fall, and continue to offer customers unlimited broadband service if they are prepared to pay a new, higher price.

Time Warner Cable CEO Glenn Britt spoke at length at this week’s Bank of America/Merrill Lynch Global Telecom and Media Conference in London about how Time Warner Cable intends to price its broadband service going forward. The moderator peppered Britt with questions as investors looked on from the audience about if and when the cable company can raise prices for its broadband service or start a usage pricing plan that will generate higher revenues based on metering customer usage.

Britt

Britt repeated his earlier assertions that Time Warner Cable has no interest in capping customer usage. In fact, the company sees fatter profits from increased usage, as long as customers are willing to pay for it.

For the first time, Britt admitted customers seeking unlimited service should be ready to pay a higher cost for that option, telling the audience Time Warner would set a premium price on the unlimited tier and offer discounts to customers seeking downgrades to comparatively cheaper, usage-based pricing plans. The company hopes this new approach will limit political opposition and customer push-back.

Britt also said there is room to grow Time Warner Cable’s monthly modem rental fee ($3.95 a month), comparing it against Comcast’s current rental fee, which is $7 a month.

Britt complained that increasing usage and demand for broadband speed was requiring the company to invest more in its broadband service, something not clear on the company’s quarterly balance sheets. Real investment, except for expansion by the business/commercial services division, has been largely flat or in decline for several years. Time Warner Cable’s broadband prices have increased over the same period.

Britt also admitted that the costs to offer the service remain comparatively minor.

“In broadband there are the costs of connectivity and peering and all that sort of stuff, but they are pretty minor compared with (video) programming costs so it appears that broadband is usually profitable versus video.”

Britt also admitted the cable industry in general is increasingly dependent on broadband revenue and the profits it generates to shore up margin pressure on the industry’s formerly lucrative video service. As programming costs increase, pressure on profits increase. Yet the cable industry remains profitable, primarily because broadband earnings are making up the difference.

The meter is lurking

“I think if you look at the U.S. cable companies the EBITDA margins have been remarkably stable over a long time period,” Britt said. “The mix has [recently] changed. The video gross margin is getting squeezed, the broadband gross margin is larger and we are growing broadband so that is helping. The voice gross margin is higher than video and a little less than broadband and until recently that has been a growing part. And then we have business services which are growing rapidly and have a high gross margin.”

Additional Quotes:

Cable Modem Equipment Rental Charge: “It was received with a minimum of push-back and we’re still actually charging less than Comcast ($7/month), so I think there is room to charge more going forward. People can buy their own if they want and a small percentage of customers have chosen to do that which is fine with us.”

Usage-Based Pricing: “In order to keep up with the demand for throughput and speed which is going up every year, we are going to have to keep investing capital which we do on a regular basis, so we are going to have to figure out how to get paid for that. I think inevitably there is going to be some usage dimension, not just speed within the package, so what we have done is to put in place pretty much throughout our footprint, with a few exceptions, the idea that you can buy the standard service that [includes] unlimited usage and that costs whatever it costs, but if you want to save $5 (and that is the first thing we put in place) you can agree to a consumption limit, and we can start expanding on that.”

“I think the key to this — there has been push-back against caps in the past — I think the reason for the push-back is it was perceived in a sort of punitive, coercive fashion. The usual rhetoric is, ‘gee 20 percent of the people use 80 percent of the bandwidth or some number like that — we need to make them stop using so much.'”

“My feeling is we actually want everybody to use more, we want to invest the capital, we just want to get paid for it. So I think we should always have an unlimited offering and that should probably cost more than it costs today as the usage goes up and then people who don’t use as much should have the opportunity to save money. They don’t have to but they can, so I think that is a much more politically and consumer-acceptable way to do it than a sort of punitive thing people talk about.”

Time Warner Cable CEO Glenn Britt considers value conscious customers a nuisance, so much so the company has changed its promotions to make them less attractive to ‘big bang for the buck’-discount hunters.

Speaking at the Bank of America/Merrill Lynch Global Telecom & Media Conference in London, Britt said the company had to beef up its in-house customer retention specialists to try and keep frugal customers who signed up for aggressive triple-play promotions in the last two years that the company now wants to reset to a higher price.

“It’s easy to generate a lot more customers by being very aggressive on price,” Britt said. “It isn’t clear that those customers are profitable. They tend to be lower income — people who tend to rent as opposed to own their dwelling unit. They move a lot and sometimes they don’t pay very well. The real trick is to create the optimum profitability.”

“Going back to fourth quarter of 2011, we pushed too hard on volume and we had very aggressive offers in the marketplace,” Britt explained. “These typically stepped up in price after a year and we kept those offers in place through most of 2012. So we got a lot of customers – particularly voice customers. That seemed good at the time. What we found is as we try to step them up to higher prices, that they are not very sticky. They have worse/bad pay characteristics than our average customers. So that’s all been a problem. Quite frankly we did not prepare our retention centers for the volume of people who are in this. We’ve changed our offers so they are less rich and we’ve stood up and enhanced our retention centers.”

As a result of the changes, Time Warner Cable lost more voice customers than it gained for the first time. That does not bother Britt, who sees selling faster broadband to customers more profitable than discounting phone service to keep phone customer numbers up.

Britt: The Sale is Over

Chief operating officer Rob Marcus told investors this week the company was hiring more in-house customer service representatives in the retention department to keep customers from defecting after their promotional price expires. Time Warner used to outsource many of those last-ditch retention calls, but has now staffed at least 500 new customer service representatives in four retention centers around the country. At least 400 additional hires are expected by the end of the year.

“What that enables us to do is route a greater portion of calls from customers likely to disconnect to these specialists, as opposed to sending them to either our care queue or outsourced reps who we think are less effective at handling those kinds of calls,” Marcus said.

Britt said the biggest segment of customers threatening to disconnect are TV customers who can no longer afford the cable package due to increasing programming costs. Britt does not believe online video cord-cutting is a major threat.

All Arcadia, N.Y. town supervisor Dick Colacino wanted was for Time Warner Cable to consider using some of their profits to expand their cable system by one or two roads a year to offer service where it has earlier refused to go.

Time Warner Cable’s response? No.

But Time Warner might turn that “no” into “yes” if customers offer to cover the cable company’s estimated cost of $22,000 per overhead mile to extend cable service down ignored rural roads. Underground wiring costs much more.

Every year, elected officials in just about every small town and village get an earful of complaints from bypassed residents who cannot get cable broadband service.

Arcadia (pop. 14,900) is a small community in Wayne County, east of Rochester. Time Warner Cable dominates western and central New York, with cable service from Albany west to Buffalo. In Wayne County alone, Time Warner is the only cable provider in the 23 largest municipalities. But the company has routinely skipped over potential service areas it considers not worth a wiring investment. That leaves bypassed residents with one choice for broadband — Verizon Communications, which has not expanded DSL service in the area for some time.

The New York Public Service Commission has mandated that cable service must be available to any area where 35 homes per mile are located within 150 feet of the road.

Time Warner representative Chris Mueller says the cable operator has already cut that benchmark to 20 miles per home, but areas remain that do not meet even that reduced standard. Without an appropriate return on investment within a certain time frame, Time Warner Cable won’t wire those areas for service.

Colacino told Mueller he was very unhappy with that decision and intended to pursue the matter at franchise renewal time, possibly in coordination with other communities that also have a number of bypassed residents. A community can negotiate for changes during franchise renewal talks, but in almost every case, the incumbent cable operator holds the strongest position, knowing a community looking for another provider will be unlikely to find one willing to serve.

Colacino has battled with the cable company since at least 2010 because of complaints from area residents and businesses who cannot get service.

That year, a Time Warner Cable government affairs representative offered Colacino a novel solution to the problem — agree to refund collected franchise fees to Time Warner Cable, after which the company would consider using the money to expand service to more roads in Arcadia.

The only problem with that solution is that it is illegal.

“You can’t do that,” town attorney David Saracino responded. “It’s an unconstitutional gift of public monies.”