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Time Warner Cable Seeks to Balance Pricing and Growth

Its wide moat comes from its networks; its overvaluation comes from hopes of a buyout.

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The relatively weak subscriber trends  Time Warner Cable (TWC) has posted recently carried into the third quarter and were exacerbated by the programming dispute with CBS, which resulted in the blackout of CBS-owned content in several markets during August. The firm shed 304,000 net television customers during the quarter, more than double the number of a year ago. TWC lost 24,000 net residential Internet access customers as well, its first-ever negative quarter on this metric. Management acknowledged that its decision to reduce emphasis on promotions to attract new customers has had a bigger impact on customer growth than expected. Increasing revenue per customer has allowed total revenue to continue growing, though only modestly.

We believe the dispute with CBS was a failure for TWC. With television service taking a backseat to Internet access in importance to TWC's long-term profitability, we would prefer the firm work constructively with its programming partners, giving more on programming margins to ensure the best possible customer experience. The firm’s satellite rivals can’t afford to be as generous. Still, we believe that TWC's competitive position remains strong and that better execution will enable it to improve its performance over time. We believe the current share price reflects overly optimistic expectations that the firm will be acquired, with Charter Communications (CHTR) the most likely suitor.

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Michael Hodel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.