Time Warner to make over $350 million-a-year from cable modem rentals

Time Warner Cable (s TWC), a cable broadband service provider, has started to charge its customers a $2.50 monthly (broadband modem) rental fee, a fee that is going to increase to $3.95 a month in the fourth quarter of 2012. The modem rental fee doesn’t impact about a million Signature Home, Price Lock Guarantee and lifeline subscribers.

But that shouldn’t have much of an effect on the money Time Warner Cable is about to make. According to UBS Research estimates, Time Warner Cable will bring in an additional $360 million to $370 million in annual revenues for next few years, thanks to these new cable modem fees. UBS thinks TWC will make about $3-per-subscriber-per-month in incremental data ARPU (average revenue per subscriber). The research group notes:

The new fee drops straight to the EBITDA line, boosting margins by ~50-60 bps from 2013-15E. Our model reflects this, with EBITDA growth of 7.6% in 2013E to $8.53B (prev. $8.29B) vs. prior expectations for mid-single digits. Given TWC’s 3.25x leverage target, the ~$360M in extra EBITDA should enable TWC to boost the buyback by ~$1.2B. We model repurchases of ~8.5% of the market cap in ’12/’13 but leverage of ~3x at YE13 and YE14 suggests more room.

With the buyback as a possibility, it is hardly a surprise that Wall Street loves this move. The stock in the company surged past $100-a-share since the news first emerged earlier this month. It is currently trading at around $99 a share.

And while it is good news for Wall Street, the news can hardly be described as good for the consumers who are footing the bill for the modems. Unfortunately consumers can’t do much: They have two options, either buy the modem outright or switch to another provider.

Your own modem? Not so fast

You can buy a modem for between $50 to $150 — and perhaps you should, but what follows is a nightmare in itself.  Fox News in a piece noted:

There is a way to beat the fee — but Time Warner is making it as difficult as possible. Customers can purchase an “approved” cable modem….There are only five approved Motorola models listed on the Time Warner site …Time Warner doesn’t make it easy to switch, however. To begin with, the company doesn’t sell modems directly to subscribers, so a trip to your local Best Buy is the first step. Then customers must call in to Time Warner to switch modems — my initial service call without any hitches or having to wait long was roughly 45 minutes.

The first time you call, all the cable company does is enter the request to change the modem. It takes another four to five days to provision (or configure) the line. This kind of manual provisioning is a throwback to the pre-Web era of ISDN lines. So after first installing the new modem to alert the cable company, one then has to uninstall it; reinstall the old modem and wait. (My service rep called back in three and a half days.)

In other words, Time Warner will make it as tough as possible for you to get you modem.

Competition? What Competition.

And switching to another provider is not much of an option — Verizon (sVZ) is one of Time Warner Cable’s main competitors and it has been quietly jettisoning the DSL business, while putting spending on its FiOS broadband network on the back burner. AT&T too has been focusing its attentions away from slower DSL to its higher-priced services, which too are available selectively. Both Comcast (S CMCSA) and AT&T (s T) serve much larger footprints compared to Time Warner Cable and Verizon.

There is not much competition, and that is why Time Warner Cable can charge a modem fee and get away with it. Time Warner Cable isn’t the first one to do so — Comcast too charges outrageous modem fees — about $7 a month. If the Comcast and Verizon relationship got any cozier, it would become R-rated.

Charging for modems is yet another example of how the U.S. Federal Communications Commission — whose ultimate task is to work for the citizens of the country — has failed to watch out for the interests of the people. If we had more competition in the marketplace — and we don’t — the broadband providers wouldn’t think about it. But as long as we have an FCC which is blind and deaf to competition, Time Warner Cable and their peers don’t have to worry about anything.