Time Warner Cable Loses 306,000 TV Subscribers Amid CBS Dispute

Glenn Britt | Time Warner Cable
Sylvain Gaboury/PatrickMcMullan.com/Sipa Press/Newscom

2010 Pay: $17.4 million (+9.4% from 2009)
Time Warner Cable stock change for fiscal year: +59.5%

UPDATED: The company said the month-long blackout as well as an issue with Journal Communications "negatively impacted" subscriber activity.

Time Warner Cable lost 306,000 TV subscribers over the past three months, in part due to a month-long blackout of CBS, the company revealed when it announced its third-quarter earnings Thursday.

The company also lost 24,000 high-speed data and 128,000 voice subscribers, as the company experienced greater-than-expected declines across all three services.

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TWC's had 11.4 million residential video subscribers at the end of the quarter, down from more than 11.7 million subscribers at the end of its second quarter.

During this quarter, customers in New York, L.A., Dallas and other markets lost access to CBS-owned stations and Showtime during a fight over retransmission fees.

The company also had a dispute with Journal Communications and it acknowledged that this event and the CBS dispute "negatively impacted" subscriber activity.

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Meanwhile, TWC experienced growth in its business services, adding 14,000 subscribers and seeing revenue in that division grow 20.5 percent to $594 million. Total revenue for the quarter was up 2.9 percent to $5.5 billion. Operating income was up 6 percent to $1.2 billion.

TWC also experienced a 14.2 percent gain in residential high-speed data revenue, despite its subscriber loss. The company also saw its average monthly revenue per residential customer relationship increase by 1.9 percent to $105.56.

"We are better off with CBS than we would have been if we had not had this fight," outgoing TWC CEO Glenn Britt said on an earnings conference call on Thursday. COO Rob Marcus, who is Britt's successor, said though that sub losses were "much worse" than expected and would continue to have an effect into the fourth quarter. He also highlighted that customer losses spilled over into the company's broadband and telephony business.

The blackout began Aug. 2 when retransmission consent negotiations over the price TWC pays for CBS channels in New York, Los Angeles and Dallas broke down. TWC also pulled pay TV service Showtime from its systems nationwide, and CBS quickly blocked TWC broadband subscribers from watching programs online on CBS.com.

It was the first time CBS content had been blacked out by a multiple cable system operator in company history. It meant popular shows like 60 Minutes, NCIS and The Big Bang Theory were not available in two of the largest American TV markets.

The early analysis was that this would likely cost CBS some $400,000 a day; but as the weeks wore on it was TWC that was being hurt most. CBS show ratings for the most part, even without the coverage in New York, L.A. and Dallas, remained quite strong, and the network insisted it was easily weathering the storm.

Under the guidance of CEO Leslie Moonves, CBS remained firm throughout. It was asking for an unusually large increase from a little over 50 cents per sub per month to around $2 by the end of the contract. Moonves said that it was a historic adjustment so CBS could catch up with what was being paid to cable TV networks, and that its content -- including NFL football and the top-rated primetime lineup -- was far more valuable, so it was not right for them to be paid less than TNT, USA and other cable networks.

TWC shot back that CBS has over-the-air distribution as well, so cable should not have to pay as much. TWC noted that CBS gets the right to broadcast over the air from the federal government without paying anything; so it is different than a cable channel.

About four days into the blackout, Britt wrote a letter to CBS that was immediately leaked to the media offering to settle if it could offer CBS stations on an a la carte basis. CBS called the proposal a "sham" and turned down any such deal.

There were reports coming out of the CBS side that one issue was TWC insisting on controlling digital rights that would hinder outside deals for the network's content with Netflix, Amazon and other streaming services.

Pressure began to mount from all sides as congressmen issued statements, consumer groups griped and associations -- some backed by the cable and satellite operators -- began calling for retransmission "reform," meaning an end to payments for carrying the local channels and network.

Acting FCC chairwoman Mignon Clyburn threatened some "appropriate" action if the sides did not reach an agreement, but it was correctly taken as an empty threat. The FCC has stayed on the sidelines in retrans negotiations in recent years, saying it was for the market to decide.

It might also take a law, but despite some harping by Congress, there was no sign of serious action to pass legislation to regulate, control or end retrans negotiations.

About three weeks in, TWC began offering to rebate the cost to subscribers of buying an antenna so people could watch some shows, such as the NFL, over the air without having to depend on their cable subscription.

On Aug. 8, talks officially resumed but in reality nothing happened. Both sides simply wanted to say they were talking during that period, but neither was ready to compromise to the satisfaction of the other.

On Aug. 14, some subscribers filed a lawsuit against TWC in Los Angeles, claiming their contract for service was being breached, among other charges.

CBS announced in late August that it had closed a deal with Verizon FiOS to carry the same services at the same cost it was offering TWC, which gave it a PR victory.

As the two sides approached Labor Day weekend, there were signs of progress. With football season about to officially start, and events like the U.S. Open tennis tournament taking place, talks finally got serious.

In the end it appears CBS was the winner, getting the price it wanted and retaining many of the digital rights, so it was still free to do other deals with Netflix, Amazon and others for the same programming.

"The final agreements … deliver to us all the value and terms that we sought in these discussions," Moonves said in a memo to CBS employees that was leaked to the media. "We are receiving fair compensation for CBS content and we also have the ability to monetize our content going forward on all the new, developing platforms that are right now transforming the way people watch television."

Britt was more subdued in his statement: "As in all of our negotiations, we wanted to hold down costs and retain our ability to deliver a great video experience for our customers. While we certainly didn't get everything we wanted, ultimately we ended up in a much better place than when we started."

TWC and others have continued to lobby Congress and the FCC for retrans "reform," while the other broadcast networks have all begun to look at how they can follow the CBS lead and get paid.