Tuesday, April 17, 2007

Time Warner Cable Heading for the Doors?

When a major player in the content business starts thinking that maybe it doesn't need to control distribution to the extent it once did, watch out. It is an indication that the strategic value of distribution networks could be changing. That might be just what is happening at Time Warner, which has generated significant profits from its cable system ownership. The latest thinking is but the latest iteration of a constant theme in the video entertainment business: the relative strategic value of distribution and content assets. Though the mantra of late has been that "content is king," distribution always plays an important role. Sometimes it is the key role. Satellite radio wouldn't be much without the creation of new distribution networks. But movie studios are barred by law from owning theater chains.

Once upon a time a company had to build an operate its own network to deliver voice services. And cable TV wouldn't exist without the cable network. And the same might have been said for the terrestrial TV and radio businesses as well. But there are other media models that show how content businesses can flourish without any ownership of distribution networks. Newspapers and magazines provide a prime example. Grocery stores, kiosks and the postal service provide distribution.

Senior executives at Time Warner are considering whether the media company should substantially reduce its cable holdings over time, says Wall Street Journal reporter Matthew Karnitschnig.

Cable has been a core part of the company and its precursors for decades and is now the biggest contributor to profits. But the long-term future of cable, as the Internet emerges as a viable venue for watching TV, is murky, says Kartnitschnig. Some within Time Warner wonder whether the company wouldn't be better off if it were to get out of cable and double down on the Web, where it already owns AOL.

Getting rid of a big chunk of its cable holdings would transform the nature of Time Warner, making it more reliant on its role as a provider of filmed entertainment and print and Web content. For years, Time Warner has believed in wedding its movies and television programs to powerful distribution networks, primarily its cable operation, as a way to ensure that their content wouldn't be blocked by rivals. But with the Internet increasingly serving as a home for TV and film offerings, content companies may feel they no longer need to control old-style distribution networks such as cable or satellite TV.

The issue will be put before the board at a meeting next month, part of an annual strategic review, say people familiar with the situation. Time Warner management will present several alternatives for future ownership of Time Warner Cable.

The fact that Time Warner is even willing to think about a major reduction of its cable holdings is a sign of how much attitudes toward the cable industry are shifting. Despite cable's recent streak on Wall Street and its success in attracting customers to its bundled offering of Internet, telephone and television service, this is a business some analysts believe will become increasingly commoditized, squeezing profit margins.

News Corp. already has sold its stake in DirecTV Group Inc. to Liberty Media Corp., which continues to believe in the value of distribution networks.

The obvious issue for telecommunications companies active in the access market is precisely this issue of the strategic value of video entertainment, and the effort and expense that requires. One might argue that telcos are getting into a mature business just as key players are getting out. On the other hand, one might also argue that telcos will share immediately in a signficant chunk of the walled garden video business, but would have to create a new role in the as yet unproven Web video market, where control of distribution, by definition, isn't a key strategic imperative.

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