5 Things DirecTV's Management Wants You to Know

DirecTV's management is focused on running the company in the interest of its shareholders, just as it did before the agreed buyout. Here are five important things from DirecTV's second-quarter 2014 conference call

Aug 20, 2014 at 12:22PM

Since mid-May, when AT&T (NYSE:T) agreed to buy out the company, DirecTV's (NASDAQ:DTV) stock price has steadily floated around the mid-$80s, about 10% below the $95 price AT&T agreed to pay in a combination of cash and AT&T stock. That doesn't mean investors shouldn't pay attention to the company, however, as the deal likely won't be approved until next year. There's even a small chance the deal won't go through.

In the meantime, DirecTV's management is focused on running the company in the interest of its shareholders, just as it did before the agreed buyout. Here are five important things from DirecTV's second-quarter 2014 conference call on July 31.

How the deal with AT&T is affecting company decisions
Management made it clear on the conference call that it didn't want to field any questions about the agreed merger between AT&T and DirecTV. CEO Mike White made it very clear that, while he's excited about the prospects of the merger, he's going to act in the interest of his company first and foremost:

We continue to run our company in the best interest of our shareholders without consulting with AT&T, and we're going to do the right thing for the business. ... All of the decisions that we're making on programming, carriage and otherwise, we're doing the right thing for DirecTV regardless of what happens with the merger.

With the DTV share price, as of midday Aug. 20, about 11% below AT&T's proposed $95 (cash-and-stock) buyout price, it indicates there is some uncertainty in the market as to whether the deal will get through regulatory approval. The fact that management is focused on its own business objective and isn't being influenced by AT&T bodes well for the business. After all, AT&T liked what it was seeing before its proposal. Why should management change anything now?

Getting on board with millennials and cord-cutters
The pay-TV industry is stagnating as cord-cutters and cord-nevers ditch cable for over-the-top services. DirecTV, as well as several other pay-TV providers, are in the early stages of developing a program called "personal streaming services," or PSS, which allow a user to stream video to one device at a time. White gave investors some insight into how the program is developing during the conference call:

I think it's certainly in the industry's interest if we could find a way to better service many of the millennials, apartment dwellers, and low-income Americans that want pay-TV, but it's so overpriced today that they're missing out on that opportunity. So we certainly see the strategic opportunity to service that segment, but it's a very tough challenge. When you talk to... media companies about rights, and what you might do, and the bundling that would end up getting jammed into it, it gets really hard to get to a price point that makes any sense.

The only media company that's been able to make a deal with pay-TV providers to provide streaming content is Disney. The company made a deal with Dish Network earlier this year and is in negotiations with DirecTV.

Disney could bring programming like SportsCenter to DirecTV's personal streaming service. Source: ESPN.

White wants the service to cost less than $30 per month to attract customers used to the low prices of over-the-top services, but trying to include too many channels in the bundle could make that price not viable.   At that price level, though, PSS could help combat the effects of cord cutters.

DirecTV's greatest cost challenge
DirecTV isn't just fighting media companies for streaming rights. The company's programming costs continue to increase at what it's calling an "unsustainable" rate. CFO Pat Doyle gave us a few details during the conference call:

Content cost also increased in the quarter, primarily related to annual programmer rate increases, as average programming costs per subscriber, or ACPU, grew at 5.5%. Our commitment to hold out against exorbitant price increases demanded by certain programmers helped us perform ahead of our plan in the quarter. That said, I would like to reiterate that we continue to expect 2014 ACPU to increase at the low end of the 7% to 9% growth rate target we gave for the 2015 to 2016 time frame.


DirecTV famously blacked out Viacom shows including SpongeBob in 2012. Source: Achim Hepp 

DirecTV hasn't shied away from blacking out channels while negotiating with media companies. As one of the largest pay-TV providers, it has more leverage than others, but strong competition in the pay-TV market puts most of the power in the hands of the media companies. As a result, programming costs are increasing rapidly, cutting into DirecTV's bottom line.

The most important content negotiation of DirecTV's existence
One of DirecTV's biggest differentiating factors is its exclusive rights to the NFL Sunday Ticket package, which allows DirecTV to broadcast NFL games from outside the viewer's market. DirecTV's deal with the NFL ends after this season. While management says it's confident it will renew its exclusive rights, White detailed DirecTV's efforts to expand the service and revenue opportunity:

In the coming months, we'll be launching some exciting new products... [including] significant enhancements to our popular NFL Sunday Ticket offering, such as our new exclusive NFL Fantasy Zone channel and the expansion of our NFL Sunday Ticket over-the-top service for those customers who are ineligible to receive traditional DirecTV service via a satellite dish. 

This is the year for DirecTV to test how expanding NFL Sunday Ticket services to ineligible customers (including people living in apartment buildings or college dorms where rules or logistics prevent the company's equipment) impacts revenue. The company currently pays just $1 billion per year for the exclusive rights, which is extremely low considering recent deals between the networks and the NFL. ESPN is paying $1.9 billion per year to broadcast Monday Night Football.

Nfl Sunday Ticket
Source: DirecTV.

With the growth of streaming media and mobile devices since 2009, when the NFL and DirecTV last negotiated a contract, the NFL's asking price has surely increased dramatically.

The long-term challenges facing the pay-TV industry
It's no secret that many of the top pay-TV providers have been bleeding subscribers for several years now. With problems facing the U.S. economy and the fact that a pay-TV subscription is a luxury that many people in the country simply can't afford these days, management is looking to retain its customers as best it can. White summarized the challenge thusly:

I think we have a collective responsibility between both the media companies and all of us distributors, to realize that the bottom third or bottom half of America is still struggling. I see it in the complaints I get that most of them can probably afford $50 a month, and our average ARPU is $100. And whether it's the PSS concept or something else, the only way we're going to get there is with more flexibility around packaging from the media companies that will enable us to better serve those customers, but we all want to do it in a way that doesn't cannibalize the collective ecosystem. It's a tough challenge.

Again, White puts the onus on the media companies, which have used the cable bundle to increase their rates and revenue for years. Since 2009, the average expanded basic cable bill has increased 23%. Meanwhile, the number of channels included in the bundle has more than doubled.

Indeed, media companies are making it hard for DirecTV to offer a package of channels that appeals to the bottom third to bottom half of Americans who don't want to pay $100/month for service. The future of the pay-TV industry in America, however, may very well depend on it.

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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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