Time Warner Cable braces for independence

April 30, 2008: 2:54 PM ET

By Scott Moritz

Time Warner Cable (TWC) posted strong numbers as the unit gets set to fly independent of parent Time Warner (TWX), but analysts see turbulence ahead as Verizon (VZ) enters the key New York market with a rival TV offering.

The No.2 cable shop reversed a trend of losing basic subscribers by adding 55,000 net new customers in the first quarter. Even better, the company added 896,000 so-called revenue generating units, another name for the number of different services like phone, Internet and TV, Time Warner Cable sold its customers overall. That performance beat expectations by 25%, confirming the company's success with the triple play service strategy.

Now that effort will face an even stronger test as Verizon sets its sights on New York. The city's Department of Information and Telecommunications approved Verizon for a city-wide cable franchise Tuesday. The phone giant needs one more city agency approval and an okay from state regulators to officially open up shop.

The move unlocks the market that had been held almost exclusively by Time Warner Cable.

Time Warner Cable executives said they haven't exactly been standing still during these developments. On an earnings conference call with analysts Wednesday, the company said it has extended two-year price lock guarantees to customers who take new services or upgrades. It increased its marketing costs 28% from year-ago levels as it increased advertising and promotions in New York. Time Warner Cable also plans to start offering video caller ID that flashes the name of the caller on your TV. The company also promised to expand its high-definition video offer to half of its market by year end.

Time Warner Cable competes against Verizon's fiber optic system, or Fios in other markets and analysts asked the executives what they expect will happen in New York.

"They will get some video customers from us and satellite but broadly we continue to take a lot of voice customers. I don't expect New York to be different," company executives said on the call.

The sweet spot for any pay-TV provider is Manhattan's high-rise apartment buildings. These properties represent 20% of Time Warner Cable's total revenue. Verizon faces the formidable challenge of having to negotiate access rights on a building by building basis.

On the separation from Time Warner, the cable executives offered no details as to timing and terms. Asked if the transaction would jeopardize the company's debt rating, the executives said they have considered the implications.

Time Warner Cable says it will spend $3.5 billion on capital investments, like set-top boxes and network upgrades. But there is another big expense around the corner. The company says it has been in talks with potential wireless broadband partners about a future "hybrid" network that would combine wireless and cable connections. This helps confirm reports that Time Warner Cable along with Comcast (CMCSA) are negotiating a WiMax venture with Sprint (S) and Clearwire (CLWR).

"It's early, but we are taking a look at it," the executives said regarding wireless broadband.

The proposed Sprint WiMax joint venture with Clearwire will require a big ante from investment partners including Intel (INTC) and possibly Google (GOOG). The cable companies may be required to lay out $1 billion in cash to make the venture happen, say people familiar with the discussions.

Analysts say one reason Time Warner Cable is being set free from Time Warner — Fortune and CNNMoney.com's owner — is the increased costs of cable competition.

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