CBS Blackout Took a Bite Out of Time Warner Cable Earnings

Operator loses 306,000 subs, $122 million

While there was little doubt that CBS on Sept. 2 walked away the victor in its month-long feud with Time Warner Cable, it wasn’t until this morning that the cost to the operator could be tallied. Quite a heap of cash, as it turns out.

According to Time Warner Cable’s third quarter earnings filing, the company lost 306,000 video subscribers in the period spanning July 1-Sept. 30—nearly double the consensus estimate.

Although TWC didn’t break down the subscriber losses by region—the CBS blackout affected households in operator’s New York, Los Angeles and Dallas footprints—the overall cost of customer churn was steep. Video subscriber revenue in Q3 fell 5 percent, or $122 million, to $2.6 billion.

And that’s not the only expense TWC absorbed over the course of the August standoff. In its 10-Q filing with the Securities and Exchange Commission, the cable giant revealed that its marketing expenses increased 7 percent to $176 million, “and included the impact of increased spending due to the temporary blackouts.”

Another $15 million was earmarked for subscriber credits related to the concurrent blackout of CBS Corp.’s premium network, Showtime.

In a call with investors, TWC chief operating officer and CEO-in-waiting Rob Marcus said that while the blackout “clearly resulted in short-term pain for us … in the end, the deals we reached were far better than where we started.” It’s not entirely clear how the new contract was “better” for the operator; by all accounts, CBS ultimately met its objectives, securing a new retransmission consent fee of $2 per sub per month, up from an estimated 85 cents, while ensuring greater control over digital dissemination of its content. 

Although TWC declined to offer any particulars about the finalized CBS deal, outgoing CEO Glenn Britt reiterated Marcus’ assessment. “We do think that we are better off with CBS than we would have been if we had not had this fight,” Britt said. “Suffice it to say that, that doesn’t mean the deal is cheap, it doesn’t mean it’s wonderful, but we do think it is better than it would’ve been, [and] in a meaningful way.”

If anything, TWC’s results are likely to have a chilling effect on any MSO tinkering with the idea of playing hardball with the likes of CBS. (Earlier this month, ESPN and Dish Network agreed to extend their carriage deal for an unspecified period while the two work out a new contract. Small-fry cable networks are another story.)

“The CBS dispute apparently took a much larger toll than anyone would have imagined, and this colored all of the results,” said MoffettNathanson analyst Craig Moffett in a note to investors. “That’s bad news for future programming negotiations, and not just for TWC. Every cable operator now goes to the table knowing that CBS not only won the war, but left TWC badly damaged even for having fought the fight.”

Moffett went on to warn that the balance of power between operators and content owners effectively has been destabilized by TWC’s “horrible” results. “If you thought the scales were tipped in programmers’ favor before, now you know that it is worse than you imagined,” he said.

Should another epic carriage battle rear its ugly head sometime in the near future, don’t expect the fallout will precipitate a government intervention. “I don’t think this is on the top of anybody’s agenda in Washington,” Britt said. “Honestly, there’s lots of other things they have to worry about. I do think it is way overdue…And sometime, they will [intervene], and my guess is the rules will change at that point in ways that we can’t necessarily anticipate. But that’s for later.

“Unfortunately, I think you’re going to see these fights continue.”

TWC reported $5.52 billion in Q3 revenue, lagging Wall Street expectations of $5.54 billion but marking a 3 percent uptick versus the year-ago period. Residential services inched up 1 percent to $4.58 billion.