NFL Sunday Ticket, which offers access to every out-of-market NFL game, has been the most powerful tool DirecTV (NYSE:DTV.DL) has had at its disposal since launching as an alternative to cable in 1994.
For NFL junkies, fantasy football addicts, people living outside of their favorite team's broadcast market, and, of course, hard-core gamblers, the service represents the only option aside from spending football Sundays in a bar to watch every NFL game. DirecTV's deal with the National Football League costs around $1 billion a season, and AT&T (NYSE:T) finds it so important that it has made its $48 billion deal to acquire the satellite television provider contingent upon its renewal.
The football package has been a key part of DirecTV's identity since the service launched. In addition to Sunday Ticket helping differentiate DirecTV from cable, it is also the main difference between DirecTV and rival satellite service Dish Network (NASDAQ:DISH). Though the two services have some variance in their channel lineup and exclusive content, they're essentially the same aside from Sunday Ticket.
Sunday Tickey has been so essential to DirecTV's success that roughly one in 10 of its 38 million subscribers gets the package, according to The Wall Street Journal. The deal between DirecTV and the NFL expires at the end of the 2014 season. The exclusive negotiating window between the two companies has already expired, leaving DirecTV vulnerable to a rival making an overwhelming, financially reckless offer for the package.
Sunday Ticket has been good for business
DirecTV has also used Sunday Ticket as a loss leader to bring customers into the service with a two-year commitment for its mid-level "Choice" channel package, which costs $39.99 a month, by offering a year of football free with a two-year commitment. Choice costs $10 more than the company's entry-level "Select" package (though DirecTV is currently running a sale on Select).
DirecTV's 38 million paying customers dwarf the 14 million Dish reported in its first quarter 2014 financial press release. If DirecTV loses Sunday Ticket it becomes essentially the same service as its rival with both being basically cable that can go out during bad weather. If that happens it could force DirecTV to lower prices to remain competitive. AT&T clearly shares these concerns -- it wants out if DirecTV can't renew its deal at agreed upon (but not publicly disclosed) terms.
DirecTV thinks it has a deal
Announcing that your $48 billion deal to be acquired is contingent upon renewing your football rights deal may not be the best negotiating ploy. It's sort of like telling a person making an offer to buy your house that you already committed to buying a larger, more expensive home and are in real trouble if you can't sell yours fast.
Still DirecTV and the NFL have been in business together for nearly 20 years so the two sides appear to be negotiating in good faith.
On a conference call Monday, DirecTV CEO Mike White said he and AT&T Chief Executive Randall Stephenson had spoken with NFL Commissioner Roger Goodell as well as New England Patriots owner Robert Kraft who heads the league's broadcast committee, and the parties were in "positive and constructive" discussions with the league, Reuters reported.
"I am still highly confident that we are going to get our deal done," White said.
Does the NFL have other suitors?
DirecTV has been a great partner for the NFL. It has given the league a way to market out-of-market football games without angering the individual cable systems that carry its games. Satellite used to be the only way to offer that type of service, but digital streaming has changed that.
A major player in streaming video -- like Netflix (NASDAQ:NFLX) or Hulu -- could be an option as could an upstart service. Netflix, which charges $9.99 a month, would need to add over 800,000 subscribers paying $120 a year to cover the current $1 billion cost of the deal. Since winning the contract away from DirecTV would likely cost significantly more than $1 billion, the numbers would be even higher.
That's not an impossible number of users for Netflix or another streaming service to add, and the company could charge more for access to the football package. Spending more than $1 billion a year for an NFL package is a huge amount, but offering exclusive access to out-of-market NFL games makes anyone who puts up the funds an instant player.
DirecTV needs this deal
DirecTV is in a very difficult place -- it knows it has to make a deal to keep Sunday Ticket but the company has a ceiling on how high it can bid based on its deal with AT&T.
That added leverage will likely give the NFL a slightly bigger deal, but unless a third party makes a truly overwhelming offer, it's hard to see the league leaving its longtime home. If the NFL leaves DirecTV, it abandons a number of its fans who committed to the service over cable just to have access to NFL games. If Sunday Ticket moves, the diehard fans will follow but a percentage won't, which would cost the NFL some fans.
The reason this deal has lasted for almost 20 years is that DirecTV and the NFL need each other. Digital streaming networks may mean that those days of need will come to an end in the future, but for now the best place for Sunday Ticket is likely still DirecTV.
Daniel Kline has no position in any stocks mentioned. He would get DirecTV if he lived outside of the New England Patriots' television market. The Motley Fool recommends DirecTV and Netflix. The Motley Fool owns shares of Netflix. 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.