DirecTV (NASDAQ:DTV) is the second largest pay-TV operator in the U.S. with more than 20 million subscribers. While other operators have lost thousands of subscribers over the past few years in a saturated pay-TV market, DirecTV has managed to grow its subscriber base. DirecTV’s competitive advantage stems from the exclusive programming of its NFL Sunday Ticket package, which has also helped it command higher monthly subscription fees compared to its rivals. Pay-TV operators are also facing increased competition from alternative video platforms such as Netflix (NASDAQ:NFLX) and Hulu. As a consequence of this increased 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.
Our price estimate for DirecTV stands at $95, implying a slight premium to the market.
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How Are The U.S. Operations Trending?
DirecTV has consistently been able to grow its U.S. subscriber base over the past several years. The number of pay-TV subscribers increased from 16.8 million in 2007 to 20.35 million in 2014.  This represents a market share of 20.3% in 2014 as compared to 17% in 2007. The adjusted average revenue per user (ARPU) for the U.S. segment has increased from $64 in 2007 to around $82 in 2014, an average annual growth rate of close to 3.5%. Consequently, pay-TV revenues have gone up from 12.6 billion in 2007 to $19.9 billion in 2014.
We currently forecast U.S. pay-TV households to remain relatively stable at around current levels of 100 million for the next six or seven years. Further, we expect DirecTV’s market share to increase marginally in the coming years and reach 21% by 2021. A market share of 21% will translate to 21.4 million pay-TV subscribers towards the end of our forecast period. We see continued growth in adjusted ARPU and expect it to be close to $102 by 2021. This will translate into annual revenues of $26 billion towards the end of our forecast period.
We estimate that the U.S. pay-TV operations contribute approximately 66% of DirecTV’s value. Given the high value contribution, any change in drivers such as adjusted ARPU will have a meaningful impact on DirecTV’s price estimate. There could be a potential upside of around 10% to our price estimate if the company manages to grow its adjusted ARPU at a higher rate and reach $115 by the end of our forecast period. Similarly, a bearish scenario could pose a downside risk of 10%, if adjusted ARPU fails to cross $90 by 2021.
What Will Drive Our Forecasts?
DirecTV will be able to hold on to its existing market share due to the exclusivity of the NFL Sunday Ticket. The NFL is extremely popular in the U.S. and maintains substantial viewership, and Sunday Ticket is one of the most consistently watched programs. The program is available exclusively on DirecTV, which gives the satellite pay-TV operator a unique advantage. We estimate that around 10-15% of DirecTV’s subscribers subscribe to the NFL Sunday Ticket package and pay around $300 per season. DirecTV realizes the importance of the NFL Sunday Ticket package and has taken steps to maintain its air of exclusivity. The company renewed its agreement with the National Football League in 2014.  In a deal worth $12 billion, DirecTV secured the exclusive right to air out-of-market games for another 8 years. (Related – DirecTV Extends Its Deal With NFL For $12 Billion)
Even though we expect DirecTV to retain its subscribers during our forecast period, the company won’t be able to grow its market share significantly. The U.S. pay-TV market is saturated, with pay-TV penetration currently standing at 84% of TV households.  Given the saturation level and the sluggishness 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 fees for certain packages as it enjoys a quality subscriber base that allows some room for fee increments. DirecTV’s latest fee hike was in early 2015 and we expect the company to continue raising prices at regular intervals throughout our forecast period. 
View Interactive Institutional Research (Powered by Trefis):Notes:
- DirecTV’s SEC Filings [↩]
- NFL, DirecTV extend deal for 8 years, ESPN, Oct 1, 2014 [↩]
- U.S. pay-TV penetration flat at 84% of homes … and Netflix has little to do with it, study says, September 2, 2014, FierceCable [↩]
- DirecTV To Raise Its Subscription Prices Amid A Continued Growth In Programming Costs, JAN 5, 2015, Forbes [↩]