Time Warner Left Bruised in Fee Battle With CBS

The CBS blackout in homes with Time Warner Cable ended in early September. But the damage from the feud is still being tallied up - and it may be lasting.

On Thursday, Time Warner Cable reported the steepest quarterly loss of television subscribers in its history, which it partly attributed to the monthlong battle it began with the CBS Corporation in August over fees. When the third quarter wrapped up at the end of September, Time Warner Cable had shed 306,000 of its 11.7 million TV subscribers - a loss even worse than the company had anticipated.

The results underscored, to a degree rarely seen before, the damage that can be done when distributors and programmers publicly feud over contracts. They also offer vivid evidence that content has the upper hand in disputes with distributors.

The disappointing quarter comes amid continued questions about the short- and long-term health of cable television amid ever more serious competition from Internet streaming services. The incumbents have held up remarkably well - only a small fraction of American homes have stopped paying for monthly TV subscriptions in the last few years.

Thursday's results suggest that self-inflicted wounds like the CBS blackout are just as serious a threat to cable and satellite companies, at least now. Consumers who are displeased with their TV provider are suddenly motivated to switch when their favorite shows are taken away.

A vast majority of contract negotiations between programmers and distributors, even the hard-fought ones, end peacefully. But some industry officials say the number of blackouts has increased as distributors hold the line against deep price increases. A major contract between the Walt Disney Company and Dish Network expired at the end of September, and the two sides still have not reached a new deal, though they have averted any interruption in programming by agreeing to short-term extensions.

One Wall Street analyst called the subscriber losses at Time Warner Cable 'shocking.' Another said the results were 'just horrible.' The financial results also prompted new speculation about a possible merger between Time Warner Cable and a smaller operator like Charter Communications.

Then again, they could have been even worse - the company persuaded other subscribers not to cancel by offering credits for the downtime, particularly for Showtime, the premium cable channel owned by CBS that was also blacked out in August. Time Warner Cable disclosed on Thursday that it dispensed about $15 million in such credits.

Robert D. Marcus, the cable company's incoming chief executive, said on a conference call with investors that the blackout 'clearly resulted in short-term pain for us.' But he reiterated what the company said during the battle - that it had to resist CBS's attempts to win large increases for the right to rebroadcast its programming. 'In the end, the deals we reached were far better than when we started,' Mr. Marcus said without elaborating.

But CBS still came away with significant fee increases, and it will most likely celebrate those when it reports third-quarter earnings next Wednesday.

For the last few years, Time Warner Cable and other cable companies have lost small numbers of TV subscribers each quarter, but they have more than compensated by gaining broadband and phone subscribers. The dispute with CBS, however, caused so much subscriber anger that Time Warner Cable reported a drop in broadband and phone subscribers as well.

In broadband, the dip was slight - just 24,000 homes. By comparison, though, the company gained 131,000 broadband subscribers in the first quarter of the year and 8,000 in the second, traditionally the weakest for cable companies.

Despite the subscriber slump, Time Warner Cable said revenue rose 2.9 percent in the third quarter, to $5.52 billion, partly because of continued gains in a relatively new category for the company, business services. The company said net income fell to $532 million, or $1.84 a share, from $808 million, or $2.60 a share, in the period a year earlier.

Excluding one-time costs, earnings were $1.69 a share in the third quarter, beating analysts' estimates of $1.64 a share and exceeding the adjusted earnings per share of $1.41 in the third quarter of 2012.

Slivers of good news were in the results. With growth in Internet hookups for businesses, the company made significant gains in broadband revenue as more households chose to pay for faster, costlier service. But analysts' focus on Thursday was on subscriber losses, and it furthered the notion that Time Warner Cable is underperforming its peers.

'The CBS dispute apparently took a much larger toll than anyone would have imagined, and this colored all of the results,' Craig Moffett of MoffettNathanson Research wrote in an analysts' note. '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.'

Thursday's earnings report was the last for the company's longtime chief executive, Glenn A. Britt, who announced in July that he planned to retire at the end of the year and pass the company over to Mr. Marcus, who is chief operating officer. This week, Mr. Britt told staff members that he was battling a recurrence of cancer, five years after a bout with melanoma. He said he was getting 'terrific care' and would continue to work until the end of the year.

Mr. Britt and Mr. Marcus cautiously addressed the continued merger speculation, which surfaced this year when the cable pioneer John Malone, who controls 27 percent of Charter, started suggesting a tie-up. Mr. Britt said the company had been 'open to deals,' but only if they benefit shareholders. 'Consolidation can be a good thing,' he said, 'but the terms really matter.'

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