What Does Time Warner’s Purchase of Insight Say About Your Worth (to Them)?

The next time you’re feeling down in the dumps, just remind yourself: “I’m special, and people (cable execs) like me”

Actions speak louder than words. And if actions can speak, then wallets can scream.

You see, companies and their executives may say one thing, but their purse strings often tell a different story.

Take the current upheaval in the cable industry. Cable executives like to publicly claim that they are eager to embrace new technologies and the opportunities for online content consumption presented by the Internet.

Really? Then why have they been frantically searching for ways to harness, control, suppress and hog-tie the online competition?

How do we know this? Just look at recent cable and media deals: Comcast’s purchase of NBC Universal — “Let’s control the content,” the Hulu joint venture — “Let’s control online viewing habits,” just to name a few.

This is what makes mergers and acquisitions (M&A) so fascinating. Company executives publicly claim that they are ready to embrace new platforms, but behind closed doors they privately fret over how to tackle this complex behemoth of a competitor called the Internet.

And when they find a temporary fix — “Let’s buy more customers!!!” — the whole world gets a peek inside the deal-making machine.

Time-Warner Cable’s recently announced plan to purchase Insight Communications falls into this latter category of deal motivations. Traditional TV viewers are becoming an endangered species. The economics of supply and demand thus dictate that these viewers are becoming more valuable. So how can we track this?

Take a look at Insight’s recent M&A deal-making history. At the end of 2005 Insight was taken private through a management buyout led by the Carlyle Group. This deal valued Insight at roughly $3.3 billion (including debt). Back then Insight had around 1.3 million subscribers, so each subscriber was worth in the ballpark of $2,500 ($3.3 billion divided by 1.3 million).

Insight sold about half of its subscribers to Comcast in early 2008, and as of June 2011, the firm listed a total of 759,400 subscribers. Since Time-Warner is proposing to pay roughly $3 billion for Insight now, this implies a per-subscriber valuation of about $3,950. That’s more than 50 percent greater than just six years ago.

How have dynamics in the cable industry evolved over the past six years? According to Nielsen, the number of traditional TV subscribers in the 18-34 year old bracket has been dropping steadily for the past two years. Cable companies are under pressure to report subscriber growth for shareholders, and networks are under the same pressure in order to procure advertising dollars.

The robust demand for subscriber growth coupled with a dwindling supply of young traditional TV viewers is creating the perfect storm. Cable companies are responding by paying more now than ever just to call those viewers their own.

And for good reason: The average subscriber generated around $850 in annual revenue for Insight in 2005, compared with $1,400 estimated for 2011.

Each customer is worth significantly more now that many households subscribe to TV, Internet, and phone services from a single cable provider.

So the next time you’re feeling down in the dumps, just remind yourself: I’m special and people (cable execs) like me. I’m worth more to them now than ever before.

Then go catch your favorite show for free online.