DirecTV (NYSE:DTV.DL) overcame perhaps the biggest threat to the potential AT&T (NYSE:T) merger when it announced it would continue to be the exclusive provider of the NFL's Sunday Ticket. The Washington Post reports DirecTV inked an eight-year deal for $12 billion, or $1.5 billion per year. The deal wasn't cheap, costing DirecTV an estimated 50% more per year than its current cost of $1 billion.
Did DirecTV overpay for the service, perhaps (more on that later). But one thing is for sure, this negotiation reflects the fact the NFL held all the cards. DirecTV's Sunday Ticket is considered so essential to the company's value that AT&T put a clause in the $48.5 billion merger that it had the ability to walk away if DirecTV was unable to keep Sunday Ticket exclusive.
What exactly is Sunday Ticket and why is it so important?
For the non-rabid sport set, Sunday Ticket is an exclusive agreement between AT&T and the NFL to carry all NFL games. For a current cost of nearly $240 ($330 for its added-feature version dubbed Sunday Ticket Max), subscribers are treated to "every minute of every out-of-market game, every Sunday." In-market games and non-Sunday NFL games (Monday and Thursday) are generally covered by normal programming channels (CBS, Fox, and ESPN).
Sunday Ticket provides a two-fold value proposition to DirecTV (and by extension, AT&T post-merger). In addition to being an incremental revenue driver in its own right, Sunday Ticket provides a tremendous competitive advantage to DirecTV. By offering out-of-market games, DirecTV is the only option for "dislocated" fans -- ones who don't live in the broadcast area of their favorite teams.
A tale of two organizations
In a way, this is more of the same for beleaguered NFL Commissioner Roger Goodell. On one hand, in his eight-year tenure the league has performed outstanding from a value and financial standpoint. Matter of fact, the NFL collectively is worth an estimated $45 billion -- almost as much as DirecTV's merger price. And if anything, this deal cements the fact that the NFL has continued strength in negotiations for further increases with its content partners.
With that said, the Commissioner has widely been faulted on a host of off-the-field issues -- the current one is the NFL's widely panned handling of the Ray Rice domestic abuse incident; before that, the contentious NFL bargaining agreement that almost led to a lockout. In many cases, the NFL's top-down organizational structure is finding it hard to keep up in a world in which news travels so quickly.
Why AT&T instituted the clause
While directly attributable revenues are hard to peg down (DirecTV is notoriously tight-lipped about the direct figures), the exclusivity has the potential to be further monetized. While looking at the numbers, it appears the NFL won the negotiation, but DirecTV got an important concession: The new agreement allows DirecTV (and now AT&T) rights to stream Sunday afternoon games.
What AT&T gets from this is the ability to bring DirecTV's streaming rights to its smartphones and tablets. This is a win over competitor Verizon's NFL Mobile app that only allows in-market games. What that means is AT&T has the ability to cross market its newly acquired DirecTV to its built-in wireless and wireline customers with an emphasis on those changing addresses. In addition, it gives out-of-market fans an incentive to switch wireless providers to AT&T.
On the surface, it appears the NFL won the negotiation -- can you disagree with a 50% increase? However, considering the deal is locked in for eight years and adds a better streaming experience it could be a win-win. In the end, Sunday Ticket is a lucrative entity and has the potential to be further monetized. The ultimate winner could be AT&T's investors.
Jamal Carnette owns shares of Verizon Communications. The Motley Fool has no position in any of the stocks mentioned. 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.