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The house rules are simple in this weekly column.

I bash a stock that I think is heading lower. I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, DirecTV (NYSE: DTV  ) .

Cord cutters of the world unite and take over
DirecTV customers have a right to be angry. Viacom's (NYSE: VIA  ) roughly two dozen channels went dark on the leading satellite television service yesterday.

The two sides failed to work out a deal, stripping nearly 20 million DirecTV customers of Nickelodeon, MTV, Comedy Central, VH-1, and countless other Viacom cable properties. Viacom wants more money, of course. DirecTV, on the other hand, wants to pay less as ratings for some of Viacom's key channels have fallen sharply.

In the end, it's the customers that stand the most to lose. These disputes happen all of the time with satellite television and cable providers. However, this one will sting a bit more because DirecTV charges more than its satellite rivals and the upstart broadband television players that are eating into the market.

DirecTV's nearly 20 million U.S. customers paid an average of $91.99 a month for the service during this year's first quarter, up considerably from the $88.79 monthly average a year earlier.

It's not just greed on DirecTV's part. Cable networks and broadcasters naively continue to demand more money for their programming, and DirecTV has to push those costs through. It doesn't make sense for most channels.

The multichannel video programming distributor model is broken. Nobody wants to pay for dozens or hundreds of channels when they are only watching about a half dozen. However, that's exactly what's happening these days. The industry doesn't seem to realize that there are growing streaming options, or that CNN ratings are hitting 20-year lows because information is being disseminated in new ways.

The "cord cutting" trend may seem to be reversing, but it's going to go right back in that direction as consumers tire of their growing cable bills.

As good as DirecTV's performance may have been during the first three months of the year, it landed less than half as many net subscriber additions as it did a year earlier.

Why would folks pay more for DirecTV and put up with the installation and temperamental limitations of satellite TV? The one distinctive feature of DirecTV has been the NFL Sunday Ticket. It's the only legal source broadcasting every single pro football game during the regular season. However, the NFL finally caved in and gave rival providers access to RedZone, a channel that bounces from game to game as scoring opportunities arise.

In short, DirecTV continues to grow more mortal.

Yes, this bearish opinion clashes with the thoughtful bullish argument present by fellow Fool Michael Lewis yesterday. He sees strong bottom-line growth, major upside in Latin America, healthy recent share buybacks, and a bargain at just nine times next year's projected profitability. We're Fools here. We have a right to our own opinion as individual investors.

I just have to respectfully disagree. DirecTV is a fat cat swinging on a model that's about to snap. Revenue growth will continue to decelerate, and things will get ugly as the inevitable future gives consumers the freedom of choice in paying for only what they want to watch in the future.

DirecTV may be doing its customers a favor today by eliminating Snooki and SpongeBob from their lives, but it's the one that will ultimately pay the price is higher churn and lower revenue as customer dissatisfaction grows with both the service and the model.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

  • Apple (Nasdaq: AAPL  ) : We still don't know what Apple will do when the inevitable iTV -- or an actual smart TV -- hits the market. Steve Jobs famously told his biographer that he solved the biggest problem with TVs, and that probably has nothing to do with the remote control. The proliferation of Web-tethered TVs is already giving folks at home more to watch beyond what the networks are cranking out. When Apple raises the bar, it will lower the boom on the archaic multichannel video programming distributors of today.
  • Netflix (Nasdaq: NFLX  ) : A popular scapegoat for the sharp drop in ratings at Viacom's flagship Nickelodeon channel is that many of its most popular shows are now streaming through Netflix and other sources. Don't buy it. Netflix is also the reason why Mad Men ratings spiked in its fifth season. Netflix can be a threat to weak content, but it's an opportunity to expand the demand for superior programming. Netflix has been on a strong run since revealing that its subscribers streamed more than a billion hours of video last month. If you don't think that time spent streaming Netflix translates into less time viewing the cable programming that they're paying DirecTV more than 12 times as much for, you need a new calculator.
  • Sirius XM Radio (Nasdaq: SIRI  ) : Satellite radio will never be as lucrative as satellite television in terms of revenue per subscriber, but at least this company has a monopoly on the niche. More importantly, you'll never see Sirius XM locking horns with a particular content provider. Sirius XM owns a lot of its original programming, and music is just a matter of paying a fixed percentage of revenue for licensing. This is a major advantage for Sirius XM that bears ignore in assessing how scalable this model will truly become. Oh, and Sirius XM already has more subscribers in this country than DirecTV -- so there.

I'm sorry, DirecTV. I'm trading in your Sunday Ticket for a one-way ticket out of here.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Netflix. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

The Motley Fool owns shares of Netflix. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and Netflix. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (7) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 12, 2012, at 1:47 PM, doubting wrote:


    It appears I cannot but add my five cents when I read,

    "Satellite radio will never be as lucrative as satellite television in terms of revenue per subscriber, but at least this company has a monopoly on the niche."

    What you are saying is correct... BUT you are missing one huge point. Sirius XM will be much more profitable than any other media company, including direct TV. I expect profit margins in the next 5 years between 40% and 60%. This is a dream come true for any, not only media company.

  • Report this Comment On July 12, 2012, at 1:56 PM, drcewnc wrote:

    Our experience (after 12 years with DirecTV) was very disappointing yesterday. We lost all of our movie channels, most local channels, the expected VIACOM channels and many more unrelated ones. Customer service was in absolute chaos and they did not accurate information or could provide any information about the larger outage or when service might return. Fortunately, they offered some account credit, several months of "free" movies, and most of the impacted channel returned by this morning (1 full day outage).

    This is the worst outage we remember and the lack of accurate info from CS and management clearly means there are bigger issues than only VIACOM negotiations.

  • Report this Comment On July 12, 2012, at 2:22 PM, TMFBreakerRick wrote:

    doubting, I agree with you on the profit potential, that's why I specifically pointed out REVENUE per subscriber. Sirius XM will never approach the $92 a month that DirecTV subscribers are paying.

  • Report this Comment On July 12, 2012, at 2:43 PM, southernbeachguy wrote:

    "Oh, and Sirius XM already has more subscribers in this country than DirecTV -- so there.' Luv it.

    Keep up the great articles Rick, I have had DirecTV over 15 years (now paying nearly$200 month), but as soon as U-verse comes to Destin, Fl, I'm changing, but I'll never give up Sirus.

  • Report this Comment On July 12, 2012, at 2:52 PM, Austin77478 wrote:

    To be honest, when I saw the headline of the article, guess what came to mind? Rocco!!!!!!! BTW, Rick, your analysis about Sirius was fair. Where are Rocco, Regarded Solutions, Weinstein, and Cameron Kaine Saintvilus?

  • Report this Comment On July 12, 2012, at 8:25 PM, lowmaple wrote:

    Sirius trades at a fair price but a buy? Sorry. not convinced.Tred and trade carefully.

  • Report this Comment On July 15, 2012, at 1:05 PM, grumpfish wrote:

    In theory XM/Sirrus can thrive. While they do walk the walk about commercial free radio *on most stations* they don't talk the talk. They break down genres of music to supposedly satisfy your flavor of music. Rock for rockers, 80's for the mod/new wavers, and so on. But they limit themselves in what they play. They are no better than FM radio who stick to the same artists and songs.

    XM/Sirrus tends to stick to certain bands and the same songs from those bands rather than explore other songs from these bands and other artists.

    Unless they break that pattern and begin to offer more variety, they will suffer in earning and keeping subscribers.

    The more you listen to XM/Sirrus, the more you realize how it's not live radio most of the time, but taped shows being played over and over.

    XM/Sirrus seems like the Viacom of radio, charging to play repeats of old shows, again and again and again, without adding anything new.

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