As expected, DirecTV (NASDAQ:DTV) will increase the prices of its programming packages in the new year. Starting from Feb 2013, the prices will go up by 4.5%.  This isn’t something new and in fact, the satellite company tends to increase its pricing by similar percentage every year around February. We note that DirecTV resorted to 4% increase in 2011 and 2012.   The primary reason behind this move is to counter rising programming costs, which seem to be growing faster than the company’s revenues. As a result, the company will try to ease margin pressure through a combination of price hikes and tight control over marketing and administrative expenses.
Price Increase Should Be Well Received
DirecTV’s customer base is relatively more affluent compared to its competitor Dish Network’s (NASDAQ:DISH). Therefore, the ability to market advanced and premium services is higher. As a result, the company has been able to grow its profits from the pay-TV business while its counterparts haven’t done too well. DirecTV maintains high standards of customer service, is proactive in bringing HD channels and the latest DVR technologies to the market, focuses on subscriber credit quality and offers NFL Sunday Ticket. Given that it seems to be doing most things right, a price increase is more palatable and is likely to be well received by its customers.
Rising Programming Costs
As mentioned before, the primary motive behind these periodic price increases is rising programming costs. We note that while DirecTV’s revenues in the U.S. have grown by 7% in the first 9 months of 2012, the corresponding programming costs have increased by 11%.  Similarly, DirecTV saw 8% growth in revenues from the U.S. operations in 2011 compared to 13% growth in corresponding programming costs. It is interesting to note that this phenomenon of programming costs rising faster than revenues started a couple of years ago (2011 and 2010). Before that, the growth in both figures was comparable.  Several disputes between pay-TV companies and content owners in the last few years further strengthen this fact.
DirecTV’s gross margins declined sharply in 2011. While we expect further declines, we believe they are unlikely to be steep. The company is well aware of this issue, and while it is trying to fight against the carriage fee increase demands from media companies, it is also looking at other ways to save money. This is evident from lower subscriber acquisition costs as well as slower growth in subscriber retention costs.
Our price estimate for DirecTV stands at $59, implying a premium of little under 20% to the market price.Notes: