DirecTV To Raise Its Subscription Prices Amid A Continued Growth In Programming Costs

DirecTV (NASDAQ:DTV) will raise its subscription prices between 3.5% and 6% starting February 2015. ^[1] The company has been raising its subscription prices every year due to soaring programming costs. Content owners demand higher prices every year and the cost is eventually passed on to the end consumer. There have been several instances where pay-TV operators ended up in a dispute with content owners over the rising programming costs, the latest being Dish Network (NASDAQ:DISH) and 21st Century Fox (NASDAQ:FOX). Currently, Dish is in a feud with Fox News over carriage agreement and the network has been blacked out since December 21st for Dish’s subscribers. Earlier this month, Dish had a dispute with CBS (NYSE:CBS) and the network was blocked for 12 hours, after which both the companies reached a deal. However, even there, Dish paid a huge price by disabling some of its ad skipping features in its popular AutoHop DVR, which has helped it gain subscribers in the recent past. While the arguments made by the pay-TV operators in such disputes are justified over the steep price increases by the content owners, the high demand for their programming gives content owners the upper hand. On that note, we discuss below the trends in DirecTV’s subscription prices over the past few years.

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Prices To Go Up Across Packages Amid A Rise In Programming Costs

DirecTV is the second largest pay-TV operator in the U.S. with more than 20 million subscribers. Raising the subscription prices will help the company offset some of the growth in programming costs. The company will raise the prices across its packages including, Entertainment, Xtra and Ultimate packages. While the baseline package will now cost $59.99 a month, up 3.5%, the Ultimate package will cost $86.99 per month, up 6%. The company will also raise the fees for additional set-top boxes and hike the surcharges for regional sports networks. ^[1]

DirecTV has seen a solid growth in average monthly subscription fees over the past few years. It has grown 20% from $68.50 in 2009 to $82 in 2013, according to our estimates. However, the broadcast programming costs grew 45% during the same period. ^[2] The growth in subscription fees has helped the company offset some of the rising costs. However, the margins have narrowed over the past few years. The estimated gross profit margins for DirecTV’s U.S. satellite operations have declined from 49% in 2009 to a little under 46% in 2013.

We believe this trend will continue in the coming years and the company will have to raise its subscription pricing periodically amid continued growth in programming costs. However, the company has been focusing on retaining high value subscribers, which can offer better margins. While we expect the average monthly subscription fees to be north of $110 by end of the decade, we don’t expect any significant change in the profit margins in the coming years.

The growth in subscription pricing will be driven by the periodic price increases. The company has high quality subscriber base whose ability to pay was not affected significantly by the previous economic downturn, thus allowing it to raise prices and still gain subscribers. The price increase is industry-wide phenomenon and all service providers are facing pressure of rising programming costs. Moreover, as economy improves, DirecTV will have opportunity to market higher priced programming packages, thus lifting the average fee per subscriber. Looking at the profit margins, we don’t expect any significant change in the coming years, as DirecTV may not be able to pass 100% of the cost increase to its subscribers and it will have to absorb some of it. This will put some pressure on margins, despite the growth in high priced packages.

We estimate gross revenues of around $33 billion for DirecTV in 2014, with EPS of $5.81, which is in line with the market consensus of $5.73-$6.10, compiled by Thomson Reuters. We currently have a $99 price estimate for DirecTV, which is around 15% ahead of the current market price.

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1. DirecTV to Hike Rates as Much as 6% in 2015, Variety, Dec 29, 2014 [↩] [↩]
2. DirecTV’s SEC Filings [↩]