DirecTV: Is NFL Sunday Ticket Worth the Roster Space?

Photo courtesy of ariadnerb, licensed via Flickr through Creative Commons.

Broadcasting National Football League games is not a cheap proposition. The NFL is big business; viewership is growing, and forty-six of the 50 most-watched television broadcasts of 2013 were NFL games. In fact, with revenues totaling $9 billion in 2012, the NFL is the most profitable sports league in the world.

With such brand cachet, it is possible for the league’s management to exact a hefty sum from DirecTV (NASDAQ:DTV) for exclusive licensing rights to all NFL Sunday afternoon games. Under the terms of the current agreement that runs through the end of the 2014 season, the satellite-television provider pays $1 billion per season. Those terms allow DirecTV to offer subscribers a package known as “Sunday Ticket,” a channel designed to give football fans access to out-of-market games via a live feed of Sunday afternoon games across the country. Around 2 million of the company’s 20 million United States subscribers pay around $250 for the basic package, and Sunday Ticket is a means for the company to fend off competitors, especially web-based rivals that are hungry to offer subscribers exclusive content. But still, the satellite-television provider is examining whether the programing is truly worth the cost.

“The Sunday Ticket package was a brilliant play for DirecTV, as it gave the displaced NFL fan an option to watch their team in the comfort of their own home and not be forced to go to the local sports bar,” Marc Bluestein, president of consulting firm Aquarius Sports & Entertainment, told the Los Angeles Times. The “association with NFL definitely delivered large brand awareness for DirecTV, especially in its early years,” he added DirecTV launched its satellite service in 1994, the first year that the sports package was created. But the company is beginning to question whether the value of the Sunday Ticket package has peaked.

At issue for DirecTV are the cost and length of the new contract. The current price tag of $1 billion may seem minimal in comparison to the company’s overall revenue; in 2013, the satellite-television provider posted $29.74 billion in sales. However, given that only around 2 million people pay for the sports package, it does cost the company money, even though the channel is what is known in the industry as a key differentiator that attracts subscribers. When, and if, the new contract is signed, the price tag will probably jump as much as 40 percent, costing the company $1.4 billion from the 2015 through 2016 season, after which time the exclusive license will increase in cost by about 4 percent annually for the remainder of the contract.

As a source familiar with the negotiations told the Times, DirecTV would be interested in an eight-year contract. Licensing costs will only continue to skyrocket in the coming years, and the company would be better served by securing a longer-term deal so as to lock in a lower price tag for a longer period of time. Comparatively, the NFL would prefer a five-year contract.

DirecTV Chief Financial Officer Patrick Doyle hinted last year at a meeting of analysts that the company could let go of its exclusive rights to Sunday Ticket, a move that would not hurt the company’s bottom line and provide an opportunity for Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC). If those two pay-television providers gain access to the sports programming, its reach would multiply fivefold — ballooning from DirecTV’s 20 million subscribers to 100 million cable or satellite subscribers.

That would leave CBS (NYSE:CBS) and Fox (NASDAQ:FOX) with a problem. Currently local television stations carry Fox and CBS football, but if Sunday Ticket becomes more widely distributed, those local stations would see ratings slip. Not carrying the Sunday Ticket at all would be a big risk for DirecTV. “They would lose subscribers and their competitive advantage,” Marc Ganis, head of consulting firm Sportscorp Ltd., told the Times. According to Ganis, if every one of the company’s Sunday Ticket subscribers canceled their service it would cost the company billions in subscriber fees. Of course, it is also true that the NFL has made deals in recent years that have decreased the value of the channel to DirecTV. The NFL Network carries 13 Thursday night games, and the league has increased the number of nationally televised games broadcasted by Fox and CBS.

A source with knowledge of DirecTV’s plans told the Times that a new exclusive deal with the NFL would likely be inked eventually, but it might be the last one. After all, as Chief Executive Mike White said at an early December investor conference the company has had ”very constructive conversations with the NFL,” adding that he was optimistic a new agreement could be made.

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