Time Warner first-quarter results show steep declines, growth in subscriber fees

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Don’t look for relief on that cable bill anytime soon. Subscription fees for cable networks are going to be the key (maybe the only) revenue driver for the big media conglomerates in the coming years as evidenced by Time Warner’s first quarter results.

The only bright spot in a report full of downers (revenues down 7% at Warner Bros., down 23% each at Time Inc.’s magazines and soon-to-be-spunoff AOL) were its Turner and HBO cable channels. Revenues were up 6% to $2.8 billion, driven by 9% growth in subscriber fees (what cable and satellite operators pay the programmer to carry their channels) as Turner parent of CNN, TBS and TNT renewed deals with major operators including Comcast. Those gains helped offset a 2% drop in advertising on the Turner channels.

Overall, net income at Time Warner tumbled 14% to $661 million for the quarter, or 55 cents per share, on revenue 7% lower revenue of $6.95 billion.

Unlike advertising revenue, which fluctuates with the economy, cable subscriber fees have proven resilient. Rarely does one hear of a cable network’s fee going down and because the majority of cable channels are owned by a handful of companies (Time Warner, Viacom, News Corp., Disney, NBC Universal), programmers often bundle their services together for leverage with cable and satellite operators and smartly never have all their deals with distributors expire at the same time.

But as more and more viewers flock to the Internet, it may become harder for cable networks to protect their golden goose. Small wonder that Time Warner Chief Executive Jeff Bewkes is leading the charge to try to slow the migration of viewers to the Internet (which is kind of like trying to slow the migration to cars from horse-and-buggies in the 1920s).

While recognizing that he can’t squeeze toothpaste back in the tube, Bewkes is spearheading TV Everywhere, a plan that would require consumers to prove that they subscribe to a cable or satellite service in order to watch content from a cable channel online. Not everyone is a fan of the idea. Disney Chief Executive Bob Iger said at an industry convention earlier this month that such an effort could be ‘anti-consumer’ and ‘something we would find difficult to embrace.’ At the same time, programmers don’t want to jeopardize their carriage fees.

TV Everywhere and a similar plan from Comcast may prove a tough sell to consumers and could potentially increase piracy if there is a revolt.

But the media conglomerates may ultimately have to find new subscriber streams from the online world. Rich Greenfield, a shoot-from-the-hip industry analyst, is advocating that cable networks get fees from Internet Service Providers (ISP) for their online offerings much the same way they get fees for their TV content from cable and satellite distributors. Greenfield wrote in a report today in which he says he has no doubt that an ESPN or Nickelodeon could extract a fee from an ISP.

Greenfield cautions that it is unclear whether any programmer ‘has the guts’ to demand ISP fees, but it may become necessity.

And don’t worry, your ISP will find a way to pass the cost on to you.

-- Joe Flint

Photo: Time Warner Center at Columbus Circle in New York City. Credit: Adam Rountree / Associated Press