Time Warner Cable 2007 Annual Report Download - page 65

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Costs of revenues. The major components of costs of revenues were as follows (in millions):
2006 2005 % Change
Years Ended December 31,
Video programming. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,523 $1,889 34%
Employee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,505 1,156 30%
High-speed data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 102 53%
Voice............................................................ 309 122 153%
Other direct operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 863 649 33%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,356 $3,918 37%
Costs of revenues increased 37%, and, as a percentage of revenues, were 46% in 2006 compared to 44% in
2005. The increase in costs of revenues was primarily related to the Acquired Systems, as well as increases in video
programming, employee and voice costs. The increase in costs of revenues as a percentage of revenues reflected the
items noted above and lower margins for the Acquired Systems.
Video programming costs for the Legacy Systems, the Acquired Systems and the total systems were as follows
(in millions):
2006 2005
Years Ended
December 31,
Video programming costs:
Legacy Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,114 $1,889
Acquired Systems
(a)
......................................................... 409 —
Total systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,523 $1,889
(a)
2006 amounts reflect video programming costs for the Acquired Systems for the five months following the closing of the Transactions.
The increase in video programming costs was primarily due to the Acquired Systems, higher sports network
programming costs, the increase in video subscribers and non-sports-related contractual rate increases. Per-
subscriber programming costs increased 11%, to $20.33 per month in 2006 from $18.35 per month in 2005. The
increase in per-subscriber programming costs was primarily due to higher sports network programming costs and
non-sports-related contractual rate increases.
Employee costs increased primarily due to the Acquired Systems, salary increases and higher headcount
resulting from the roll-out of advanced services. These increases were partially offset by a benefit of $32 million
(with an additional benefit of $8 million included in selling, general and administrative expenses) related to both
changes in estimates and a correction of prior period medical benefit accruals.
High-speed data service costs increased due to the Acquired Systems, subscriber growth and an increase in per-
subscriber connectivity costs.
Voice costs increased primarily due to growth in Digital Phone subscribers.
Other direct operating costs increased due to revenue-driven increases in fees paid to local franchise
authorities, as well as increases in other costs associated with the continued roll-out of advanced services,
including Digital Phone.
60
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)