DirecTV Could Share Rights Of NFL Sunday Ticket To Improve Margins

by Trefis Team
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DirecTV‘s (NASDAQ:DTV) management has not ruled out the possibility of sharing the rights for NFL Sunday Ticket, if it makes economic sense to do so. [1] NFL Sunday Ticket is a sports package that broadcasts National Football League’s (NFL) regular season games that are not available on local affiliates. DirecTV has been in an exclusive contract of this sports package for a long time. But exclusivity costs more money, and it seems that the company is struggling to justify the expenses for NFL Sunday Ticket. This is especially a concern in an environment where pay-TV margins are getting squeezed for the entire industry.

However, churning out profits is not the sole purpose of having such unique programming. NFL Sunday Ticket has been one of the unique selling points for DirecTV, helping it gains subscribers in the past. Given the saturation in the U.S. pay-TV industry, the company risks a slowdown in subscriber additions if it opts for non-exclusivity. There is no definite answer to this scenario, and if the expected slowdown is worth improving the profitability by sharing the rights, DirecTV will likely go for it, but it all depends on the price of re-negotiation.

See our complete analysis for DirecTV

NFL Is Costing Huge Money For DirecTV

Due to limitation of current data, we use older data to establish the importance of NFL Sunday Ticket expenses for DirecTV. At the end of 2011, The Wall Street Journal reported that DirecTV spends about $1 billion a year on NFL programming, which is a large amount of money. At that time, we believed that the gross margins for NFL programming would be lower than those for the entire company. The underlying logic being that the company cannot charge higher margins on a service that is already very costly. In 2012, DirecTV slashed its NFL Sunday Ticket pricing by 40%, charging higher amount only to those who wanted access to games on their mobile devices as well. [2] But despite the high programming costs and pricing cuts, DirecTV is finding it hard to maintain profitability.

Bloomberg reported last year that DirecTV had between 2 to 3 million NFL Sunday Ticket subscribers in 2011. [2] Let’s assume the figure to be now higher than this range. With 3 million subscribers, and reduced pricing of $200 per subscriber per year ($300 for those who want mobile access), DirecTV would be earning between between $600 and $900 million in revenues from NFL Sunday Ticket. If we compare these figures to the company’s reported costs for 2011, it appears that the company is running into significant losses on this offering. It has evidently led the company to re-think its strategy of staying in an exclusive contract.

Our price estimate for DirecTV stands at $58, implying a premium of more than 15% to the market price.

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Notes:
  1. DirecTV floats possibility of sharing NFL Sunday Ticket rights with cable operators, FierceCable, Mar 7 2013 []
  2. DirecTV Lowering Price of NFL Sunday Ticket to Lure Users, Bloomberg, Apr 20 2012 [] []
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