The NFL (National Football League) will be negotiating an agreement with its broadcast partners including News Corp’s (NASDAQ:NWS) Fox, Comcast’s (NASDAQ:CMCSA) NBC and CBS (NYSE:CBS) to raise its fee by 60% and collect a total of about $3.2 billion annually from these broadcasters.  Something similar could happen to DirecTV (NASDAQ:DTV) which offers NFL Sunday Ticket to its subscribers, a sports package that broadcasts National Football League (NFL) regular season games that are not available on local affiliates. The company risks a slowdown in subscriber base expansion. To understand the extent of this impact we have to understand what proportion of subscribers it affects.
Close To 2.25 Million NFL Sunday Ticket Subscribers For DirecTV
DirecTV spends about $1 billion a year on NFL programming.  Although we know that company’s overall gross margins amount to close to 49%, we believe that gross margins for NFL programming would be lower. The underlying logic is that the company cannot charge higher margins on a service that is already very costly. High margins would imply much higher costs for subscribers, which may result in lower subscriptions. To stay on the conservative side, we assume the gross margins for NFL Sunday Ticket to be around 30%, an annual costs of $1 billion and gross margins of 30% imply total annual NFL Sunday Ticket revenues of about $1.43 billion.
Given that the company charges about $52.99 per month for NFL Sunday Ticket, annual revenues of $1.43 billion implies about 2.25 million subscribers.
NFL Fee Rise Affects 11% Of DirecTV’s Subscriber Base
We expect DirecTV to have a little under 20 million subscribers by the end of 2011. This implies that about 11% of the subscriber base subscribes to NFL Sunday Ticket. If we talk in terms of dollar contribution, the significance would be even higher since the ARPU (average revenue per user) for these subscribers is higher.
DirecTV Risks Slowdown In Subscriber Expansion If NFL Fee Rises Too Much
One of the prime reasons why DirecTV has been able to expand in the U.S. is appeal of NFL Sunday Ticket. If the costs continue to rise, the company may have to raise prices for customers. However, it then risks lower subscriber additions. In such a scenario, DirecTV’s unique value proposition gets challenged and there is a risk of potential customer defections along with a slowdown in gross additions.
Our price estimate for DirecTV stands at $53.26, implying a premium of about 10% to the market price.Notes: