TWC to Charge Modem Fees

In a bid to mitigate mounting programming expenses, Time Warner Cable Inc. ( TWC - Analyst Report ) - the second-largest cable operator in the U.S. - plans to charge modem lease fee of $3.95 on a monthly basis, starting next month.

Already 275,000 broadband customers, who have subscribed to Time Warner Cable’s service from the beginning of 2012, are paying the additional fee. The company estimates a $128 million increase in its revenue per quarter, once the additional modem fee is levied on the company’s existing 10.77 million Residential High-speed Data subscribers.

However, subscribers who are looking to avoid the monthly modem lease fee will have to purchase the modem Docsis 2.0 and Docsis 3.0, priced between $50 and $137.

Continuous loss of video subscribers, mainly due to stiff competition from telecom carriers and other online video distribution companies have forced Time Warner Cable to adopt aggressive policies to regain market share.

Firstly, Time Warner Cable deployed Docsis 3.0 technology, which offers faster internet speed to its subscribers, across its footprint to further boost its high-speed internet business.

Secondly, Time Warner Cable started offering value-added services like DVR, HD videos and video-on-demand services to its subscribers at a discounted rate. However, sluggish economic growth coupled with higher programming expenses have induced the company to cut down its promotional expenses, hence charging extra fees for other value-added services from its subscribers.

Comcast Corporation ( CMCSA - Analyst Report ) - the largest cable operator and AT&T ( T - Analyst Report ) , the second largest telecom operator in U.S. are also implementing a similar strategy of charging $7 and $6 per month respectively, as modem lease fee.

However, we believe that by inflating the internet cost of its fastest growing business segment will lead to subscriber losses, thereby affecting the future growth prospect of the company.

We maintain our long-term Neutral recommendation for Time Warner Cable Inc. Currently, it has a Zacks #3 Rank, implying a short-term Hold rating on the stock.