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Could a New Lawsuit Threaten DIRECTV's NFL Sunday Ticket?

By Jamal Carnette, CFA - Jun 27, 2015 at 10:45AM

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The service is already a loss leader, but a new lawsuit could make it even less profitable for DIRECTV.

Source: DIRECTV.

In most cases, it's safe to classify cable and satellite providers as a commoditized business. And that's most apparent when watching competing advertisements in the space. Although service and picture quality are discussed, the key point conveyed for subscription TV services is price. In fact, price is considered so important to the buying decision that most major operators provide package pricing directly in their advertisements.

The reason it's such a price-sensitive market is that you're essentially paying for a pipe -- nothing more than access to your choice of content. As such, there's not much value added from one operator to another, nor are there any huge differentiating features outside of menu and guide options. To most people, these things aren't important enough to prevent subscribers from switching, and those features that are -- such as DVR access -- are quickly copied.

There is one exception to this rule, however. Unlike the other operators, satellite provider DIRECTV (DTV.DL) shrewdly partnered with the NFL for sole rights to air its Sunday Ticket service. The out-of-market NFL package has been quite popular for DIRECTV -- but now it's under threat from a new lawsuit.

The lawsuit ... and the other lawsuit
Last week, fans filed a class action lawsuit against both DIRECTV and the NFL, alleging violations of federal antitrust law, according to The Hollywood Reporter.

At the heart of the dispute is the billing and packaging of the Sunday Ticket service. As of now, a prospective subscriber is required to pay for the entire package, which varies in price from $250 to $350 annually, whereas many only want to watch a single team's season.

This lawsuit is almost a carbon copy of a previous lawsuit filed against the NHL, with DIRECTV as a co-defendant. Last week, the NHL decided to throw in the towel and settle out of court. As a result of the settlement, fans now have the ability to buy a single-team NHL package for nearly 20% below the full-service price.

Of course, the deeper-pocketed NFL has shown a tendency of aggressively defending its business -- the league even goes as far as sending cease-and-desist letters to retailers that use the phrase "Super Bowl" in advertisements.

For DIRECTV, the service is a loss leader
Although DIRECTV's Sunday Ticket is a differentiator, it doesn't appear to be a highly profitable undertaking for the company. In 2012, the company's CEO essentially called the service a "loss leader," noting the costs of the product. And while DIRECTV doesn't directly report revenue attributable to Sunday Ticket, at that time it was widely reported that the company paid $1 billion per year for the rights to Sunday Ticket. Last year, the company successfully negotiated an extension for the service, but it now pays $1.5 billion annually, a massive 50% increase.

As this is a rights deal with a powerful content provider, it's highly likely that any forgone revenue would be at least shared -- if not totally borne -- by DIRECTV. Although the NHL and DIRECTV were open to settlement, I predict this lawsuit to be vigorously defended on the basis of the higher content costs and a more aggressive co-defendant.

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