DirecTV (NASDAQ:DTV) has started charging an additional fee of $3 per month to some of its new customers who subscribe to programming packages above the basic one.  As an attempt to cover the rising sports programming costs, this charge will be levied on subscribers in some of the biggest markets such as New York and Los Angeles, where regional sports broadcasting is prevalent. 
What does this mean for investors?
We believe that being a satellite-based pay-TV service provider, DirecTV’s presence in these major urban markets is limited. Cable companies such as Time Warner Cable (NYSE:TWC) and Comcast (NASDAQ:CMCSA) typically dominate such markets. As a result, the impact on the average fee per subscriber, and therefore on revenue growth, is likely to be small.
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However, this does bring up the long-debated issue of sports channels weighing heavy on customers’ pocketbooks. They have to pay because the appeal of sports programming is strong and, in fact, is a strong selling point of DirecTV’s service. Until last year, DirecTV spent about $1 billion a year on NFL programming, making its flagship NFL Sunday Ticket out-of-market sports programming package available to its subscribers. Out-of-market sports programming enables viewers to watch games of teams that are not local to their area of residence. However, sports programming is getting increasingly expensive each year. Compared to 24% growth in average cable network fee, ESPN’s fee grew by 42% between 2006 and 2011.  This stands as a testament to the sports networks’ contribution to increasing cable bills.
See our complete analysis for DirecTV
The choice for pay-TV companies really comes down to taking a margin hit or passing on these costs to customers. DirecTV may resort to a combination of both. While blatant price increases could impeded subscriber growth, a complete cost absorption will squeeze profits. The company’s current move shouldn’t affect it much as it has implemented additional fee in upscale markets where customers have higher spending capacity.
We note that DirecTV’s gross margins have come down from 49% in 2010 to a little over 47% currently. We expect these margins to decline further over the course of our forecast period as rising programming costs continue to put pressure on them. You can modify our forecast below to see how a sharper decline in these margins can impact DirecTV’s price estimate.
Our price estimate for DirecTV stands at $59, implying a premium of little less than 20% to the market price.Notes:
- DirecTV Imposes Sports Fee on Some Customers, The Wall Street Journal, Dec 10 2012 [↩] [↩]
- Cable-TV Honchos Cry Foul Over Soaring Cost of ESPN, The Wall Street Journal, Dec 6 2011 [↩]