The Internet-delivered television revolution is fast approaching, with multiple companies planning to launch over-the-top services in 2015. DIRECTV (NYSE:DTV.DL) beat them all to the punch a couple weeks ago, though, when it launched Yaveo. The only catch is that it's a Spanish-language service.
While DIRECTV's new service is targeted at a specific audience, it's still a threat to cable companies like Comcast (NASDAQ: CMCSA) and Time Warner Cable (NYSE: TWC). Offering Yaveo for $7.99 per month, DIRECTV is essentially unbundling the premium Spanish-language packages provided by cable companies for about $10 a month on top of their regular cable bundle price.
How big is this market?
According to U.S. Census Bureau numbers from 2012, 17.1% of the 316 million-person U.S. population identified themselves as Hispanic or Latino. With a little over 100 million pay-TV households, the market for Spanish-language television is roughly 17 million people (possibly higher if it is unbundled). The number of households in which Spanish is spoken and occupants speak English less than "very well" was approximately 6 million, according to the Census Bureau.
Those 6 million households are DIRECTV's primary market for Yaveo, with the additional Hispanic households representing a secondary market. With approximately 20.5 million Hispanic households in the U.S. altogether, that means some of those households are subscribing to cable primarily for the Spanish-language channels.
Cord-cutting could get real
Yaveo might be the first over-the-top service that causes a significant amount of cord-cutting. While other on-demand over-the-top services have inspired a few households to do without a pay-TV subscription, the impact on pay-TV providers has been relatively muted.
But I think Yaveo has the potential to capture 4 million to 6 million households by unbundling the Spanish-language channels and offering them for less than competitors. (Comcast charges an extra $9.99 per month for Xfinity Latino, its Spanish-language bundle.)
That's bad news, especially for cable companies such as Comcast and Time Warner. The pay-TV market is saturated, and the old cable companies are losing subscribers as AT&T (NYSE:T) and Verizon expand their pay-TV services. Now, they'll have to compete with Yaveo, which is aimed directly at valuable customers.
On the flip side, Comcast and Time Warner will still be able to attract Yaveo customers to their broadband Internet services. Additionally, they might be able to offer discounted bundles to some customers to keep them subscribed to their video services instead of switching to an over-the-top service. Naturally, that move increases revenue, but only marginally increases profits due to the bundle discount.
DIRECTV, though, could be able to bundle Internet service with Yaveo in the near future as the company's merger with AT&T moves forward. AT&T continues to develop its U-verse televison, internet, and phone bundling services, and it's even starting to roll out gigabit Internet service. As AT&T covers more territory, both companies stand to gain from Yaveo.
What does it mean for DIRECTV?
Yaveo probably won't move the needle for DIRECTV shareholders. For one, DIRECTV's stock price is heavily tied to the AT&T merger. More important is that the revenue and profit opportunities pale in comparison to DIRECTV's current operations.
Let's say Yaveo eventually attracts 5 million subscribers, each paying $8 per month. That's a total revenue of $480 million per year. Analysts expect DIRECTV to report revenue of $33.26 billion for 2014. So, the theoretical revenue opportunity near the high end would be just 1.4%. However, considering forward estimates only call for 5% revenue growth in 2015, it's not completely insignificant.
Applying a 20% operating margin to Yaveo sales -- slightly higher than DIRECTV's average operating margin -- Yaveo subscriptions could add $96 million in operating profit. Again, this is just a 1.8% increase.
The larger impact of Yaveo could be felt in the following years, though. Yaveo allows DIRECTV to test an over-the-top service and build the infrastructure necessary to provide it. The company has been looking to build a personal streaming service. That product would offer a bundle similar to those of other pay-TV services, but subscribers could only stream to one device at a time. This would be another threat to the pay-TV industry.
While Yaveo probably does not impact DIRECTV too much in the near term, it could have a big impact on the cable operators in the future. Down the road, Yaveo sets up DIRECTV and its future acquirer, AT&T, to inflict even more pain on Comcast and Time Warner Cable.