DirecTV (NASDAQ:DTV) is the second largest pay-TV operator in the U.S. with more than 20 million subscribers. While the country’s pay-TV market is saturated, and cable companies have lost thousands of subscribers over the past few years, DirecTV has managed to grow its subscriber base. Within the satellite arena, DirecTV’s subscriber gains were far more than its rival Dish Network (NASDAQ:DISH). DirecTV’s competitive advantage stems from exclusive programming of the NFL Sunday Ticket, which has also helped it command higher monthly subscription fees (ARPU) compared to its rival. However, DirecTV, along with other pay-TV operators, is witnessing headwinds from the rise of alternative video platforms. Netflix‘s (NASDAQ:NFLX) rapid subscriber growth does not appear to be good news for pay-TV operators. Because of this increase in competition as well as the already-saturated market, we don’t expect any significant growth in the company’s market share in the coming years.
How Are The U.S. Operations Trending?
DirecTV has consistently been able to grow its subscriber base over the past several years. The number of pay-TV subscribers increased from 16.8 million in 2007 to 20.25 million in 2013.  This represents a market share of 18.6% in 2013 as compared to 17% in 2007. In terms of ARPU, the company has managed to post an average annual growth rate of close to 4% over the past few years. The ARPU has increased from $66 in 2007 to an estimated $82 in 2013, translating into $20 billion in annual revenue from the U.S. pay-TV business.
We don’t expect any change in its market share in the coming years. We forecast U.S. pay-TV households to grow from 110 million currently to 116 million by 2020. A market share of 18.6% will translate to 21.6 million pay-TV subscribers towards the end of our forecast period. We see continued growth in ARPU and expect it to be close to $110 by 2020. This will translate into annual revenues north of $28 billion towards the end of our forecast period.
We estimate that the U.S. pay-TV operations contribute more than 65% to DirecTV’s value. Given the high value contribution, any change in drivers such as ARPU will have a meaningful impact on DirecTV’s price estimate. There could be a potential upside of more than 10% to our price estimate if the company manages to grow its ARPU at a higher rate and reach $120 by the end of the decade. Similarly, a bearish scenario could pose a downside risk of over 10%, if ARPU remains range-bound around $95.
What Will Drive Our Forecasts?
DirecTV will be able to hold on to its existing market share due to the exclusivity of NFL Sunday Ticket. The NFL is one of the most popular sports in the U.S. and maintains substantial viewership, and Sunday Ticket is consistently one of the most watched programs in the U.S. and is available exclusively on DirecTV, which gives the satellite pay-TV operator a unique advantage. It is estimated that more than 2 million of DirecTV’s subscribers subscribe to the NFL Sunday Ticket package and pay around $300 per season. However, DirecTV’s current agreement with the NFL expires at the end of the 2014 football season. There could be a drop in its market share if the company fails to renew its agreement with the NFL. Moreover, failure to renew the NFL deal could lead to AT&T walking away from the proposed merger with DirecTV (see AT&T-DirecTV Deal Could Provide Financial, Strategic Benefits If Approved). ((DirecTV deal with AT&T includes NFL Sunday Ticket exit clause, Los Angles Times, May 19, 2014))
Even if DirecTV succeeds in renewing its agreement with the NFL, we don’t expect it to grow its market share primarily because the U.S. pay-TV market is saturated, with pay-TV penetration currently at more than 95% of U.S. TV households. Given the saturation level and the slowdown in the housing market, we are unlikely to see a significant increase in the number of the U.S. pay-TV subscribers. Moreover, there is fierce competition between cable, satellite and telcos as they are chasing the same customers. Additionally, alternative video platforms such as Netflix are adding to the woes of pay-TV operators.
DirecTV’s ARPU growth will be driven by the overall improvement in the economy, which will give the satellite company an opportunity to market high-priced programming packages. The company has periodically raised its subscription fee for certain packages as it enjoys a quality subscriber base that allows some room for fee increments. Its latest fee hike was in early 2014.Notes:
- DirecTV’s SEC Filings [↩]