Time Warner Cable 2007 Annual Report Download - page 15

from a limited number of suppliers. For more information, see “Risk Factors—Risks Related to Dependence on
Third Parties—TWC may not be able to obtain necessary hardware, software and operational support.”
Historically, TWC has also relied primarily on set-top box suppliers to create the applications and interfaces
TWC makes available to its customers. Although TWC believes that its current applications and interfaces are
compelling to subscribers, the lack of compatibility among set-top box operating systems has in the past hindered
application development. CableLabs, a nonprofit research and development consortium founded by members of the
cable industry, has put forward a set of hardware and software specifications known as tru2way (formerly known as
OpenCable), which represent an effort to create a common platform for set-top box applications regardless of the
box’s operating system. If widely adopted, tru2way could spur innovation in applications for set-top boxes and
cable-ready consumer electronics devices. TWC began deployment of tru2way in 2007 and expects to continue to
deploy it during 2008.
TWC’s digital video subscribers must have either a digital set-top box or a “digital cable-ready” television or
similar device equipped with a CableCARD
TM
. However, a “digital cable-ready” television or similar device
equipped with a CableCARD cannot receive certain digital signals and signals for premium programming that are
necessary to receive TWC’s two-way video services, such as VOD and TWC’s interactive program guide. In order
to receive TWC’s two-way video services, customers generally must have a TWC-provided digital set-top box.
Suppliers
TWC contracts with certain third parties for goods and services related to the delivery of its video, high-speed
data and voice services.
Video programming. TWC carries local broadcast stations pursuant to either the Federal Communications
Commission (the “FCC”) “must carry” rules or a written retransmission consent agreement with the relevant station
owner. For more information, see “—Regulatory Matters” below. Cable networks, including premium services, are
carried pursuant to written affiliation agreements, usually with a term of between three and seven years. TWC
generally pays a fixed monthly per subscriber fee for such services. Payments to the providers of some premium
services may be based on a percentage of TWC’s gross receipts from subscriptions to the services. Generally, TWC
obtains rights to carry VOD movies and Pay-Per-View events through iN Demand L.L.C., a company in which
TWC holds a minority interest. In some instances, TWC contracts directly with film studios for VOD carriage rights
for movies. Such VOD content is generally provided to TWC under revenue-sharing arrangements.
Set-top boxes, program guides and network equipment. TWC purchases set-top boxes and CableCARDs
from a limited number of suppliers and leases these devices to subscribers at monthly rates. See “—Technology—
Set-top Boxes” above and “—Regulatory Matters” below. TWC purchases routers, switches and other network
equipment from a variety of providers. TWC’s most significant supplier of these items is Cisco Systems Inc., a
manufacturer of routers and other network equipment and the owner of Scientific Atlanta, Inc. (“Scientific
Atlanta”), the supplier of a significant portion of TWC’s set-top boxes. See “Risk Factors—Risks Related to
Dependence on Third Parties—TWC may not be able to obtain necessary hardware, software and operational
support.” TWC has developed and, in a number of its divisions, uses its Open Cable Digital Navigator (“ODN”) and
Mystro Digital Navigator (“MDN”) program guides. It also purchases program guides from Scientific Atlanta and
Aptiv Digital, Inc., which is owned by Gemstar-TV Guide International, Inc.
High-speed data and voice connectivity. TWC delivers high-speed data and voice services through TWC’s
HFC network, regional fiber networks that are either owned or leased from third parties and through backbone
networks that provide connectivity to the Internet and are operated by third parties. TWC pays fees for leased
circuits based on the amount of capacity available to it and pays for Internet connectivity based on the amount of
data and voice traffic received from and sent over the provider’s backbone network.
Digital Phone. Under a multi-year agreement between TWC and Sprint, Sprint assists TWC in providing
Digital Phone service by routing voice traffic to and from destinations outside of TWC’s network via the public
switched telephone network, delivering E911 service and assisting in local number portability and long-distance
traffic carriage.
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