Time Warner turns to digital and pay-tv deals to buck the cord-cutting trend (TWC)

BI Intelligence

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Time Warner’s Q4 2016 earnings beat analyst expectations as revenue climbed 11% year-over-year to $7.9 billion.

The better-than-expected results come as AT&T is acquiring in the company for $85.4 billion, a transaction that faces a lengthy review process from regulators at a time of heightened uncertainty in Washington.

Here’s a breakdown of how each Time Warner segment performed:

• Turner increased revenue on higher fees from pay-tv distributors. Turner, which is the parent company of cable networks such as TBS, TNT, and CNN, saw revenues increase 7% to $2.8 billion in Q4 2016, even as advertising revenues fell by 2% in the quarter. Despite decreasing domestic subscribers from the company, and the overall cable TV industry for that matter, Turner implemented rate increases across various pay-TV providers, which ultimately led to an increase in subscription revenues of 14% in Q4 2016.
• HBO benefited from Westworld. HBO also had a strong quarter, which saw revenues increase 6% to $1.5 billion in Q4 2016. The cable channel’s success was brought on by subscription revenue growth and the highly successful new sci-fi thriller, Westworld, which was the most-watched first season in HBO’s history, according to Time Warner CEO Jeff Bewkes.
• Warner Bros. had its second-best year at the global box office on record. Revenues from the movie segment increased 17% to $3.9 billion in Q4 2016 propelled by box office hits like Harry Potter spin-off “Fantastic Beasts and Where to Find Them,” and thriller “The Accountant.”

Time Warner’s digital strategy will inevitably lay the groundwork for future growth of the company, especially from its OTT offerings. After launching in April 2015, HBO’s streaming service, HBO NOW, has grown to over 2 million subscribers in the U.S., roughly doubling its total over the last eleven months. Time Warner has also aggressively expanded the number of ways to consume HBO content without the need for a pay-TV subscription, including PlayStation Vue, AT&T’s DirecTV NOW, Dish’s Sling TV, and soon to be Hulu live TV. In addition, the company has expanded its international OTT footprint with launches in Spain, Brazil, and Argentina in the past year.

The Federal Communications Commission (FCC) is on a mission to increase competition in the pay-TV content space. To do this, the FCC plans to ultimately relieve consumers of their set-top boxes — the small box that enables cable or satellite television to be viewed — by providing TV apps that function across digital media devices.

Because pay-TV companies have faced minimal competition for their set-top box hardware, rental prices have been free to climb considerably over the last two decades. On average, US households are spending roughly $232 a year on set-top box rental fees. The new proposal would rid this cost.

Meanwhile, native tech companies have the most to gain from the proposal. Pay-TV providers would be mandated to create apps across streaming media players, further incentivizing consumers to purchase devices from Google, Apple, and Amazon, among others.

Dylan Mortensen, senior research analyst for BI Intelligence, Business Insider’s premium research service, has compiled a detailed report on the death of the set-top box that breaks down the most recent FCC set-top box proposal and outlines the major implications for key stakeholders and how the proposal will affect the pay-TV space moving forward.

Here are some key points from the report:

• There are three key implications of the FCC set-top box proposal, which Chairman Wheeler released in early September. Pay-TV providers would be required to provide free apps to consumers, pay-TV providers would be required to provide a universal search across all video content, and the FCC would administer licensing deals between pay-TV providers and content owners.
• The rental set-top box market is worth roughly $20 billion, according to US Senators Ed Markey and Richard Blumenthal. We estimate that Comcast alone generates over $1.7 billion per year from leasing set-top boxes.
• Native tech companies like Google, Apple, and Amazon, will see a greater presence in the living room through their streaming devices, should the proposal move forward.
• In addition to saving roughly $231 per household in annual set-top box charges, the proposal offers consumers greater choice in how they obtain pay-TV content.

In full, the report: 

• Breaks down the FCC’s proposal to unlock the set-top box.
• Explores the impact the proposal has on major stakeholders.
• Forecasts the rental set-top box revenue for select pay-TV providers.
• Discusses opportunities the proposal presents for native tech companies.

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