DirecTV Extends Its Deal With NFL For $12 Billion

DirecTV (NASDAQ:DTV) has renewed its agreement with the National Football League (NFL) for another 8 years. However, this time around, the price is increased by 50% to around $1.5 billion a year. ^[1] This is very expensive and far more than $1 billion what CBS, NBC and Fox pay for their respective NFL coverage. The satellite company offers to its subscribers the popular NFL Sunday Ticket, a sports package that broadcasts NFL regular season games that are not available on local affiliates. Aided by the NFL, DirecTV has managed to attract customers even at times when other pay-TV operators were losing subscribers. The extended deal with NFL will aid to the overall subscriber growth for the company. Moreover, the agreement was of key importance for DirecTV, as its proposed merger with AT&T (NYSE:T) to some extent was dependent on this deal.

However, the cost of such exclusivity will remain high for the company. Earlier in 2009, the company renewed its agreement with NFL till 2014 for $4 billion. ^[2] Given the high costs involved for acquiring the programming rights, the company needs to come up with different options to boost the revenues from this package. The company expanded its NFL services by offering streaming services for 2014 season. However, this might not be enough to make up for the cost incurred to get the event rights.

See our complete analysis for DirecTV

The NFL Deal Is An Expensive Option For Exclusivity

NFL Sunday Ticket is a sports package that broadcasts NFL regular season games outside of their local markets on Sundays. In the U.S., the package is available exclusively to DirecTV subscribers, thus giving the company a unique edge and selling point. The NFL is one of the most popular domestic sports and maintains substantial viewership. It is consistently one of the most watched programs in the U.S.

DirecTV will now have to spend about $1.5 billion a year on NFL programming while it charges only $300 annually for the exclusive package subscribed by more than 2 million people. The company would be earning around $600 million in revenues, which appear to be far less than the costs involved for NFL. Recently, it introduced a new service to stream the NFL matches, which will allow subscribers to stream live, out-of-market games without requiring a satellite dish. The content can be streamed over laptops, tablets, smartphones or gaming consoles. The new streaming service is priced at $199.99 for laptop, computer and phone services, and $329.99 for the full package compatible on all devices and gaming consoles (see – DirecTV Expands its NFL Package by Offering Streaming Services). Even if DirecTV manages to attract a million subscribers for its streaming services, it will generate another $200 million to $300 million and could not make up for the cost incurred to secure the NFL rights.

The NFL Sunday Ticket has been one of the unique selling points for DirecTV, helping it gain subscribers in the past. Since the past few years the pay-TV subscribers have been increasing at an average annual rate of 4%. ^[2] Given the saturation in the U.S. pay-TV industry, the company risks a slowdown in subscriber additions if it opts for non-exclusivity. The renewal would thus help DirecTV in a time when its Latin America pay-TV growth has also slowed, and the domestic competition has intensified with the rise of alternate video platforms such as Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) (see – DirecTV’s Latin America Operations See Continued Subscriber Growth But Declining Currencies Stall ARPU Growth)

One of the important aspects of DirecTV’s relationship with NFL was the merger with AT&T. Earlier this year, when AT&T agreed to buy DirecTV in a $48 billion deal, a regulatory filing revealed that if DirecTV didn’t renew the deal with NFL, the mobile carrier could walk away from the deal with no penalty. This could be one of the reasons why DirecTV agreed to pay a 50% premium to the previous contract rates.

We estimate gross revenues of around $33 billion for DirecTV in 2014, with EPS of $5.75, which is in line with the market consensus of $5.73-$6.17, compiled by Thomson Reuters. We currently have a $95 price estimate for DirecTV, which is more than 5% ahead of the current market price.

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1. NFL, DirecTV extend deal for 8 years, ESPN, Oct 1, 2014 [↩]
2. DirecTV’s SEC Filings [↩] [↩]