What the New Sunday Ticket Deal Means for DirecTV
NFL fans stuck in a two-year contract with DirecTV can breathe easy after the satellite TV provider struck a new deal with the NFL for its Sunday Ticket package. The NFL's price tag continues to increase, though, and some DirecTV investors may worry that $12 billion over eight years might be a little pricey for such a niche product.
But sports have quickly become the last bastion of live television, and the NFL is by far the most popular of all the major sports. Perhaps more important to investors, though, is that the deal means AT&T no longer has the option to back out of the acquisition offer it made earlier this year. The removal of that risk caused DirecTV's stock price to rise, but what does the Sunday Ticket deal mean for the next eight years of DirecTV's operations?
Only a 50% price increase. What a deal!
DirecTV's previous contract with the NFL was worth about $1 billion per year over four years. The new deal has DirecTV paying $1.5 billion per year, a 50% increase. That's actually a pretty good deal if you compare it to recent contract negotiations between the NFL, Twenty-First Century Fox, CBS , Comcast's NBC, and Disney's ESPN.
$713 million per year
$1.11 billion per year
$620 million per year
$1.08 billion per year
$603 million per year
$1.05 billion per year
$1.1 billion per year
$1.94 billion per year
$1 billion per year
$1.5 billion per year
What's more, the NFL just sold CBS half its slate of Thursday Night games, which it had kept for its own NFL Network in previous seasons. CBS paid the NFL more than $34 million per game.
Even with the rapid price increases coming from the NFL, DirecTV was able to keep its costs under control. In fact, the $12 billion deal was better than expected. The new contract averages out to a 6% annual increase in programming costs. Overall, DirecTV expects programming costs to increase 7% to 9% during the next few years. The extra room provided by its centerpiece and most costly content gives DirecTV room to negotiate with other content companies.
Is it really worth it?
The NFL hasn't made it easy on DirecTV in recent years. Not only is it charging high prices for the rights to Sunday Ticket, it's offering its own competitive services -- like the RedZone channel -- which offers commercial free in-game looks at every NFL game, all Sunday afternoon. The NFL offers the channel on most major cable providers, and it costs about $10 per month. The move forced DirecTV to reduce the price of Sunday Ticket ahead of the 2012 season from starting at $335 to $199.
Of DirecTV's 20 million U.S. subscribers, only about 2 million have the Sunday Ticket package. DirecTV is expanding its audience to college students living in dorms and apartment dwellers with online streaming packages, and the new deal likely has wireless streaming rights with AT&T in mind, but those numbers are negligible right now. Those 2 million subscribers are only generating $400 million to $600 million in subscription fees per year.
In order to break even on its Sunday Ticket deal, DirecTV needs to generate about $1 billion per year in advertising during the games. That might be asking a lot. Take a look at the expected and historical ad rates from NBC, CBS, and ESPN.
ESPN Monday Night
NBC Sunday Night
CBS Thursday Night
What's worth noting here is that ESPN has a much smaller reach compared to NBC, and its ad prices reflect that. DirecTV's reach is even smaller, however, with 2 million subscribers. An aggressive estimate of its average ad rate might be $50,000. I'd think it's much lower considering not all 2 million subscribers can watch every game at the same time, so the actual audience per game is lower. But at that rate, DirecTV would be able to break even on its Sunday Ticket contract.
A great loss leader
Investors shouldn't fret. Even if DirecTV is losing money on its deal with the NFL, and it certainly seems that way, it draws in new subscribers, and keeps them around. Without an exclusive deal with the NFL, those 2 million subscribers may look elsewhere for pay TV.
Indeed, those 2 million Sunday Ticket subscribers are getting subsidized by the 18 million non-subscribers in the U.S. Overall, that makes the whole deal profitable for DirecTV.
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The article What the New Sunday Ticket Deal Means for DirecTV originally appeared on Fool.com.Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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