Analysis: Time Warner Cable's missed chances begin slide to takeover buzz

By Liana B. Baker and Ronald Grover

(Reuters) - By some measures, it seems hard to find fault with how Time Warner Cable (TWC) has been run since it was spun off from its parent company, Time Warner Inc (TWX), in 2009.

Its stock price increased more than five fold and it returned more than $9 billion to its shareholders in dividends and stock buybacks, on top of a $10.9 billion dividend at the time of the split.

But in the process of rewarding its investors, the nation's second-largest cable operator may have become one of the industry's weakest performers. Leichtman Research Group estimates that over the past two years, the company lagged rivals by losing nearly 10 percent of nearly 13 million video customers.

In New York, its largest market, it's lost about 45 percent of its customers to Verizon's(VZ) three-year old video offering, according to MoffettNathanson research.

The result is the opportunity for cable billionaire John Malone to pursue a takeover, arguing new managers such as Charter Communications Chief Executive Tom Rutledge could do a better job running the company.

"They under-invested in their core video product and were super aggressive in capital returns which has done great things for their stock price but has left them in a poor competitive position," said Brean Capital analyst Todd Mitchell.

Malone, whose Liberty Media owns 27 percent-owned Charter Communications (CHTR), the country's fourth largest cable operator, is expected to make a bid to buy Time Warner Cable in the coming weeks. Comcast (CMCSA), the nation's largest cable operator, is mulling a bid as well.

How did Time Warner Cable, one of the industry's best performers only a few years ago, fall so far so fast?

Analysts, competitors and former Time Warner executives paint a picture of a company that was eager to please its shareholders, but was timid about spending heavily to take on competitors. It was slow to roll out new digital services just as satellite TV and telecom competitors were offering slick new video technology and super-fast internet speeds.

Its image was also hurt by picking high profile fights that denied its customers must-see programming on No. 1 network CBS.

THE FIOS CHALLENGE

One of Time Warner's biggest mistakes, analysts said, was not reacting quick enough to the mounting threat from Verizon's FiOS video service, which in 2008 entered New York, one of the cable operator's largest markets.

According to one former executive, the company's chief operating officer and incoming CEO Rob Marcus rejected imposing a two-year guaranteed freeze on prices in that market, worried that it would send a signal to investors that the company was powerless to raise prices in the future.

"Time Warner Cable's results in its New York systems have been shockingly bad since the roll out of FiOS," said cable analyst Craig Moffett of MoffettNathanson Research, who estimates it lost a staggering 45 percent of its New York subscribers to Verizon. "And they haven't improved much since."

A Time Warner Cable spokeswoman said Verizon's pricing has made the "company reevaluate our customer value proposition" and it is introducing faster Internet in New York City. It has also introduced a new program to win back subscribers from FiOS that she said has slowed the rate of defections in areas where FiOS has made its biggest gains.

Time Warner Cable also moved slowly to roll out digital technology and hasn't yet converted its entire system to a digital signal, analysts said. A digital signal allows cable companies to offer more advanced features, including faster broadband Internet speeds, a business with higher margins than video service.

Its larger competitor, Comcast, spent heavily starting in 2008 on updating its systems and now provides digital service to all its customers, while Time Warner Cable chose the cheaper route of using "digital switch," a technology that allows the company to ration out digital services and hold onto some of its analog signals.

Comcast unveiled its first cloud-based guide and infrastructure two years ago, and a second version with features such as voice control. Time Warner Cable is still working on getting its first cloud-based guide to its subscribers.

A Time Warner Cable spokeswoman said the company has brought digital service to its entire New York market, and is speeding up the release of its cloud-based guide to 6 million cable boxes by the end of 2014.

CUSTOMER COMPLAINTS

Many customers still complain about Time Warner Cable's clunky technology and spotty internet speeds. While customers from all cable companies complain about their service, Time Warner Cable is dead last in customer satisfaction surveys in three of the country's four regions, according to J.D. Power. In the fourth region, the West, it ranks seventh of nine subscription TV providers surveyed.

Tom Lino is one of those eager to jump to Verizon because he says Time Warner Cable charges too much for Internet service that's too slow and customer service too sluggish. "We chase the Verizon truck every time it goes down the street," said Lino, 53, a Brooklyn audio technician. "It's the talk of the neighborhood: when is FiOS coming?"

Time Warner Cable said it plans to improve customer service, and plans for technicians to arrive within a 1-hour window for service calls in most areas.

The company also says it is contemplating a name change starting in its biggest markets for its top tier of services and then spreading to all of subscribers eventually. Comcast changed the name of its customer brand to Xfinity in 2010 to dramatize its new services.

Time Warner Cable CEO Glenn Britt rejected the idea of changing the company name to "Streem" back in 2010, say former executives, after he was told it would have cost $200 million to rebrand the company.

Even so, a revamp of its name might not be enough for Time Warner Cable to escape the clutches of a potential suitor, says Brean Capital analyst Mitchell.

"If they operated better," he said, "they would be trading at a better multiple and would now be a buyer and not a seller."

(Reporting By Liana B. Baker in New York and Ronald Grover in Los Angeles; Editing by Tim Dobbyn)