) has started charging an additional fee of $3 per month to some of
its new customers who subscribe to programming packages above the
basic one. As an attempt to cover the rising sports programming
costs, this charge will be levied on subscribers in some of the
biggest markets such as New York and Los Angeles, where regional
sports broadcasting is prevalent.
What does this mean for investors?
We believe that being a satellite-based pay-TV service provider,
DirecTV's presence in these major urban markets is limited. Cable
companies such as Time Warner Cable (
) and Comcast (
) typically dominate such markets. As a result, the impact on the
average fee per subscriber, and therefore on revenue growth, is
likely to be small.
However, this does bring up the long-debated issue of sports
channels weighing heavy on customers' pocketbooks. They have to pay
because the appeal of sports programming is strong and, in fact, is
a strong selling point of DirecTV's service. Until last year,
DirecTV spent about
$1 billion a year
on NFL programming, making its flagship NFL Sunday Ticket
out-of-market sports programming package available to its
subscribers. Out-of-market sports programming enables viewers to
watch games of teams that are not local to their area of residence.
However, sports programming is getting increasingly expensive each
year. Compared to 24% growth in average cable network fee, ESPN's
fee grew by 42% between 2006 and 2011. This stands as a
testament to the sports networks' contribution to increasing cable
See our complete analysis for DirecTV
The choice for pay-TV companies really comes down to taking a
margin hit or passing on these costs to customers. DirecTV may
resort to a combination of both. While blatant price increases
could impeded subscriber growth, a complete cost absorption will
squeeze profits. The company's current move shouldn't affect it
much as it has implemented additional fee in upscale markets where
customers have higher spending capacity.
We note that DirecTV's gross margins have come down from 49% in
2010 to a little over 47% currently. We expect these margins to
decline further over the course of our forecast period as rising
programming costs continue to put pressure on them. You can modify
our forecast below to see how a sharper decline in these margins
can impact DirecTV's price estimate.
Our price estimate for DirecTV stands at $59
, implying a premium of little less than 20% to the market
How a Company's Products Impact its Stock Price at