Time Warner Cable 2006 Annual Report Download - page 46

A limited number of vendors of key technologies can lead to less product innovation and higher costs. For these
reasons, TWC generally endeavors to establish alternative vendors for materials it consider critical, but may not be
able to establish these relationships or be able to obtain required materials on favorable terms. For example, each of
TWC’s systems currently purchases set-top boxes from a limited number of vendors. This is due to the fact that each
of TWC’s cable systems uses one of two proprietary conditional access security schemes, which allow TWC to
regulate subscriber access to some services, such as premium channels. TWC believes that the proprietary nature of
these conditional access schemes makes other manufacturers reluctant to produce set-top boxes. Future innovation
in set-top boxes may be restricted until these issues are resolved. In addition, TWC believes that the general lack of
compatibility among set-top box operating systems has slowed the industry’s development and deployment of
digital set-top box applications. TWC has developed a proprietary user interface and interactive programming guide
that it expects to introduce in most of its operating areas during 2007. No assurance can be given that TWC’s
proprietary interface and guide will operate correctly, will be popular with consumers or will be compatible with
other products and services that TWC’s customers value.
In addition, TWC has agreements with Verizon and Sprint under which these companies assist TWC in
providing Digital Phone service to customers by routing voice traffic to the public switched network, delivering
enhanced 911 service and assisting in local number portability and long distance traffic carriage. In July 2006, TWC
agreed to expand its multi-year relationship with Sprint, selecting Sprint as its primary provider of these services,
including in the Acquired Systems. TWC’s transition to and reliance on a single provider for the bulk of these
services may render it vulnerable to service disruptions.
In addition, in some limited areas, as a result of rulings of the applicable state public utility commissions,
Verizon and Sprint cannot provide TWC with certain of their services, including those that use interconnection
obtained from certain local telephone companies. While TWC has filed a petition with the FCC requesting
clarification that Verizon and Sprint are entitled to provide these services to TWC and, in the interim, plans to
provide its Digital Phone service in these limited areas, where possible, by obtaining interconnection directly from
the local telephone companies and providing TWC’s own 911 connectivity and number portability, TWC’s inability
to use Sprint and Verizon for these services could negatively impact its ability to offer Digital Phone in certain areas
as well as the cost of providing its service.
TWC may encounter substantially increased pole attachment costs.
Under federal law, TWC has the right to attach cables carrying video services to the telephone and similar
poles of investor-owned utilities at regulated rates. However, because these cables carry services other than video
services, such as high-speed data services or new forms of voice services, some utility pole owners have sought to
impose additional fees for pole attachment. The U.S. Supreme Court has rejected the efforts of some utility pole
owners to make cable attachments carrying Internet traffic ineligible for regulatory protection. Pole owners have,
however, made arguments in other areas of pole regulation that, if successful, could significantly increase TWC’s
costs. In addition, TWC’s pole attachment rates may increase insofar as TWC’s systems are providing voice
services.
Some of the poles TWC uses are exempt from federal regulation because they are owned by utility
cooperatives and municipal entities. These entities may not renew TWC’s existing agreements when they expire,
and they may require TWC to pay substantially increased fees. A number of these entities are currently seeking to
impose substantial rate increases. Any inability to secure continued pole attachment agreements with these
cooperatives or municipal utilities on commercially reasonable terms could cause TWC’s business, financial results
or financial condition to suffer.
The adoption of, or the failure to adopt, certain consumer electronics devices or computers may nega-
tively impact TWC’s offerings of new and enhanced services.
Customer acceptance and use of new and enhanced services depend, to some extent, on customers having
ready access and exposure to these services. One of the ways this access is facilitated is through the user interface
included in TWC’s digital set-top boxes. As of December 31, 2006, approximately 54% of TWC’s basic video
subscribers leased one or more digital set-top boxes from it. The consumer electronics industry’s provision of “cable
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