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TWC To Invest In Super Headend, All-Digital Projects

Time Warner Cable will increase capital spending the second half of the year, as the operator builds out a new "super headend" facility in Charlotte, N.C., and embarks on a five-year plan to convert to all-digital across its footprint, executives said on the company's earnings call Thursday.

In addition, the MSO said its DOCSIS 3.0 buildout currently covers 60% of Time Warner Cable's footprint and that it expects the upgrade to the next-generation broadband technology to be completed in 2012.

The operator's planned 178,000-square-foot, two-story data center in Charlotte -- expected to be finished by the end of 2012 -- will include 1,600 racks of technical equipment. The facility will provide a virtualized "cloud" environment that will represent one of the MSO's two national super headends, complementing the current facility in Denver, Time Warner Cable chairman and CEO Glenn Britt said on the earnings call.

"Over the next two years, we plan to migrate the origination and distribution of our video service to this facility and to a matching one in the Denver area, generating operating cost savings and enabling us to more completely standardize the provision of services across our footprint," Britt said.

On a separate track, TWC said it has initiated an all-digital conversion project in its Augusta, Maine, system, using digital terminal adapters to replicate the analog lineup for customers with older TVs who don't want a digital set-top. Time Warner Cable currently operates all-digital systems in New York City and parts of Los Angeles.

Initially TWC will use Technicolor DTAs in Augusta, with potentially other vendors for later deployment.

"As I've said for some time, our long-term plan is to supplement switched digital video by gradually going all digital," Britt said. "Our plan is to migrate our managed systems to all-digital over the next five years or so."

The MSO's capital spending for the first half of 2011 was down 7.4%, to $1.36 billion. Time Warner Cable president and chief operating officer Rob Marcus said full-year capex will be $2.9 billion to $3.0 billion, in line with previous guidance. In 2010, TWC capital expenditures totaled $2.93 billion.

On the product front, Time Warner Cable is more aggressively targeting Hispanic households with a triple-play bundle (dubbed El Paquetazo) that includes Spanish-language programming and a "robust" international calling plan, Marcus said. The MSO has a high concentration of Latino customers in its Southern California and Texas markets, where Hispanics represent more than 30% of the population.

"Really what we're doing to focus on that market is ensuring that we've got the right products," Marcus said.

At the end of June, Time Warner Cable had about 130,000 customers taking the El Paquetazo triple-play.

Other initiatives include adding 25 Spanish-language channels to the TWCable iPad app and introducing a version of the high-end SignatureHome package for Hispanic customers. The operator ended the second quarter with about 17,000 SignatureHome subs, paying an average of $220 per month.

Asked about TV Everywhere on the earnings call, Britt said Time Warner Cable is a big advocate of the authentication model but said "it is not the easiest thing to pull off in a deal sense... Negotiating deals with programmers one at a time with different programs is very complicated."

Marcus added that Time Warner Cable is trying to hammer out a deal to bring HBO Go to its subscribers. "We've said repeatedly that we think HBO Go is attractive and we'd like to deliver that to customers. We're merely working through the structure of the deal to make that happen," he said.

Britt touted TWC's iPad app, which now offers more than 100 live channels, and said the operator is continuing to target additional platforms, including Internet-connected TVs. But he didn't address the negotiations with Viacom about adding its networks to the service.

The next iteration of the iPad app, to be released in about a month, will add a full-keyboard search feature. Time Warner Cable serves the IP video for the iPad app from its Denver data facility, Britt said on the call.

Earlier this month, Time Warner Cable named Jeff Hirsch, previously in charge of the iPad launch, as its new chief marketing officer replacing previous CMO Sam Howe.

"A lot of our marketing focus over the last several years has been on selling triple-play bundles, and we've done that to great effect," Marcus said. "But in the process of focusing on the fact that we're selling three products... we probably didn't take as much time and focus on the underlying virtues of the individual products that comprised those bundles, and we're definitely committed to doing just that.... Obviously, we made a management change recently and I feel very, very confident that Jeff Hirsch, who's our new CMO, is the right guy to take us to the right next level."

The Time Warner Cable execs said competitively, offers from satellite and telco competitors are becoming increasingly aggressive. Marcus noted that DirecTV in particular is offering a $29.99 per month video package that includes the NFL Sunday Ticket package for no extra charge.

"It's really just a progression of more aggressive offers," Marcus said. He added that TWC estimates Verizon spent more money marketing FiOS in the cable operator's footprint in the most recent quarter than in the past.

In the second quarter of 2011, despite losing 128,000 video customers, Time Warner Cable boosted overall average revenue per unit (ARPU) per customer by 4.8%, to $113.64. Marcus said a disproportionate number of video losses were analog, single-play video customers, while Time Warner Cable added digital and bundled video customers.

On video, ARPU increased 3.8%, to $73.46, driven by increased equipment rental fees and subscribers taking higher-priced tiers. That was offset by a $14 million year-over-year drop in premium and transactional VOD, with the biggest component of the decline (more than one-third) represented by fewer adult VOD rentals.

Residential broadband subscribers increased 54,000, to 9.7 million as of the end of June. Of those, 25,000 took a DOCSIS 3.0-based service, twice as many as in the first quarter of 2011, Marcus said.

Business services surged 35% in the quarter, to $361 million, which included $34 million in revenue from cell tower backhaul services (double from the year-ago quarter). Marcus said TWC's commercial services are on track to increase organically 20% year over year, and more than 30% including revenue from NaviSite.

Regarding its wireless strategy and relationship with Clearwire, in which TWC has a minority stake, Britt said the company's approach hasn't changed.

"You should look at it as one of optionality," he said. "What we've been trying to do is create the ability to experiment with that through market testing without investing or risking huge amounts of money. And all of our move to date are in that context." Britt added that TWC is not obligated to make any additional investment in Clearwire.

Asked about the threat of over-the-top video, Britt said that seasonality -- meaning cable TV's historically weak second quarter -- in combination with continued macroeconomic weakness had a bigger effect on Time Warner Cable's residential business than cord-cutting.

"To the best of our market-research ability... the effect right now [of over-the-top video] is very, very modest," Britt said. "It's hard to measure, it's so small."

Time Warner Cable is scheduled to report third quarter 2011 results on Thursday, Oct. 27. Recently appointed chief financial officer Irene Esteves will provide discussion for the first time on the Q3 call, Britt said.