Time Warner Cable 2006 Annual Report Download - page 65

consisting of approximately 4.0 million acquired subscribers and approximately 0.8 million subscribers transferred
to Comcast. The systems transferred to Comcast that TWC owned prior to the Adelphia acquisition have been
reflected as discontinued operations for all periods presented. Refer to “Recent Developments” for further details.
At December 31, 2006, TWC had approximately 13.4 million basic video subscribers in technologically
advanced, well-clustered systems located mainly in five geographic areas — New York state, the Carolinas, Ohio,
southern California and Texas. This subscriber number includes approximately 788,000 managed subscribers
located in the Kansas City, south and west Texas and New Mexico cable systems (the “Kansas City Pool”) that were
consolidated on January 1, 2007, upon the distribution of the assets of Texas and Kansas City Cable Partners, L.P.
(“TKCCP”), an equity method investee at December 31, 2006, to its partners, TWC and Comcast. Refer to “Recent
Developments” for further details. As of December 31, 2006, TWC was the largest cable operator in a number of
large cities, including New York City and Los Angeles.
Time Warner Inc. (“Time Warner”) currently holds an 84.0% economic interest in TWC (representing a 90.6%
voting interest). The financial results of TWC’s operations are consolidated by Time Warner.
TWC principally offers three products — video, high-speed data and voice, which have been primarily
targeted to residential customers. Video is TWC’s largest product in terms of revenues generated. TWC expects to
continue to increase video revenues through the offering of advanced digital video services such as video-on-
demand (“VOD”), subscription-video-on-demand (“SVOD”), high definition television (“HDTV”) and set-top
boxes equipped with digital video recorders (“DVRs”), as well as through price increases and subscriber growth.
TWC’s digital video subscribers provide a broad base of potential customers for additional advanced services.
Providing basic video services is a competitive and highly penetrated business, and, as a result, TWC continues to
expect slower incremental growth in the number of basic video subscribers compared to the growth in TWC’s
advanced service offerings. Video programming costs represent a major component of TWC’s expenses and are
expected to continue to increase, reflecting contractual rate increases, subscriber growth and the expansion of
service offerings, and it is expected that the Company’s video product margins will decline over the next few years
as programming cost increases outpace growth in video revenues.
High-speed data has been one of TWC’s fastest-growing products over the past several years and is a key driver
of its results. At December 31, 2006, TWC had approximately 6.6 million residential high-speed data subscribers
(including approximately 374,000 managed subscribers in the Kansas City Pool). TWC expects continued strong
growth in residential high-speed data subscribers and revenues for the foreseeable future; however, the rate of
growth of both subscribers and revenues is expected to slow over time as high-speed data services become
increasingly well-penetrated. In addition, as narrowband Internet users continue to migrate to broadband connec-
tions, TWC anticipates that an increasing percentage of its new high-speed data customers will elect to purchase its
entry-level high-speed data service, which is generally less expensive than TWC’s flagship service level. As a
result, over time, TWC’s average high-speed data revenue per subscriber may decline reflecting this shift in mix.
TWC also offers commercial high-speed data services and had approximately 245,000 commercial high-speed data
subscribers (including approximately 15,000 managed subscribers in the Kansas City Pool) at December 31, 2006.
TWC’s voice service, Digital Phone, is TWC’s newest product, and approximately 1.9 million subscribers
(including approximately 141,000 managed subscribers in the Kansas City Pool) received the service as of
December 31, 2006. For a monthly fixed fee, Digital Phone customers typically receive the following services:
unlimited local, in-state and U.S., Canada and Puerto Rico long-distance calling, as well as call waiting, caller ID
and E911 services. TWC also is currently deploying a lower-priced unlimited in-state-only calling plan to serve
those customers that do not use long-distance services extensively and, in the future, intends to offer additional
plans with a variety of local and long-distance options. Digital Phone enables TWC to offer its customers a
convenient package, or “bundle,” of video, high-speed data and voice services, and to compete effectively against
similar bundled products available from its competitors. TWC expects strong increases in Digital Phone subscribers
and revenues and during 2007 intends to introduce a commercial voice service to small- to medium-sized businesses
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TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION — (Continued)