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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.
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.