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Time Warner Cable to Dump Ovation

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Continuous rise in programming expenses has forced Time Warner Cable Inc. – the second-largest cable operator in the U.S. to remove Ovation network from its popular channel lists.

Ovation channel mainly targets U.S. viewers interested in art, music and film. Its popular shows like Song by Song and A Chance to Dance will be greatly missed by the audience from January, 2013 onwards as the second-largest cable operator will be least interested to renew its contract from the beginning of 2013.

During the past few months, Time Warner Cable had been heavily investing its resources in sports channels. Few months back, the company started airing two sports channels – Time Warner Cable SportsNet and Time Warner Cable Deportes to its sports channel lineups. Moreover, the inclusion of NFL's RedZone to its Sports Pass tier will help the company to generate dedicated fan base apart from retaining its subscribers, thereby improving its churn rate.

At present, Time Warner Cable offers video service to 12.159 million video subscribers, of which only 121,590 customers watch Ovation channel. So, paying $10 million annually to the network partner as programming cost for just a handful of customers will continue to hurt margins for the company going forward.

Stiff competition from other pay-TV operators coupled with easy access of TV networks on Internet have forced Time Warner Cable to control cost by upgrading its subscriber base, hence charging same fees from its customers.

Earlier this year, satellite TV giant Dish Network Corp. (DISH - Free Report) dumped AMC Networks Inc.’s (AMCX - Free Report) channels from its program list as the former was demanding higher rates from Dish Network. Likewise, there was a disagreement between satellite TV market leader DIRECTV and TV network major Viacom, Inc. (VIAB - Free Report) regarding programming fees that has led to channel blackouts for DIRECTV customers.

However, both Dish Networks and DirecTV have settled their scores with the respective channel owners and also resumed their services at an increased rate.

However, in this case Ovation has less bargaining power compared to Viacom and AMC Networks, which offer bundled channels inclusive of less popular channels. So, the only possibility for its survival is to slash rates or to host popular shows to gain more ratings.

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.

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