Seeking Alpha
Long only, value, growth, long-term horizon
Profile| Send Message|
( followers)  

Overview

Recently, there have been rumors that Google (NASDAQ:GOOG) is in talks with the National Football League (NFL) about possibly buying the rights to the coveted NFL Sunday Ticket, since DIRECTV's (NASDAQ:DTV) contract with the NFL is expiring in 2014. About two million people subscribe to the NFL Ticket per year. Thus, it should be no surprise that the NFL is the biggest and most profitable sports industry in America with close to ten billion dollars a year generated in revenue, according to Forbes.

Currently, the NFL Ticket gets consumers every NFL game on their TV, however, it is exclusive for only DIRECTV subscribers where they must bundle with some type of cable package. It is estimated that it costs about one billion dollars per year to obtain the rights to the NFL Ticket and DIRECTV is estimated at losing about $450 to $600 million per year on it. The obvious reason it's willing to lose money is because it uses the NFL Ticket to entice the ten million NFL fans to bundle their cable with DIRECTV.

Google has over $14 billion in cash and generates over $16 billion in operating cash per year. So the question is not whether it has the financial capital to pull off the deal, but rather if it's ready to take on a whole new avenue with live sports (if the NFL is willing to sell to them of course).

Based off Google's history of numerous acquisitions (big and small), I believe this is a deal it would be willing to embark on. If not now, sometime down the road. And if not Google, I am sure companies like Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), Hulu, Amazon (NASDAQ:AMZN), and so on are taking a hard look at live sports and what better place to start than the NFL. No matter when or whom, I believe the acquisition of the NFL Sunday Ticket by one of these companies will be the beginning of a paradigm shift in the TV industry.

What it costs

If you want the NFL Ticket you must bundle with one of DIRECTV's packages. These packages range from $35 per month to $90 per month. So this means consumers must pay $420 to $1080 per year minus taxes, applicable start up fees, and a possible "regional sports fee" to have every NFL game in their home. This is not cheap for those who are just looking to have the NFL Ticket.

Through Google TV, consumers can watch Netflix, Amazon Prime, Hulu, millions of videos on YouTube, and buy or rent movies and shows. Consumers can buy a Google enabled TV or the cheaper alternative Google Chromecast for $35 which simply plugs into an HDMI on a TV set and allows consumers to stream any type of apps from their smartphone or tablet onto their TV. Consumers can then watch their movies and shows through YouTube, Amazon Prime, Netflix, or Hulu on their TV for under $100 per year.

The talks of Google buying the rights to the NFL ticket are too speculative to define a precise price it will charge per year but my personal guess is somewhere between the $150 to $250 range to start off (If Jeff Bezos, CEO of Amazon, buys it, we may be talking under $100 per year given his notorious appetite for volume over margins). It may keep it low to entice traditional TV consumers over to its services, then eventually raise prices as it builds the base of consumers as well as its content. Also, doing some simple math I actually think Google has the potential to profit from the NFL Ticket. As Motley Fool points out, if it can convert just 0.5% of its roughly one billion YouTube users that should put it at break even. Although to be fair, some have estimated Google could lose up to $850 million per year. But again this is all just speculation at this point. So I will just say it charges $200 per season plus a $100 per year Netflix or Hulu subscription to cover consumers' need for movies and shows. Consumers would pay $300 per year versus $420 to $1080 with DIRECTV and they would have greater selection, flexibility choosing content, and mobility.

This is why I believe live sports is the big elephant in the room that is standing in the way between consumers paying for traditional cable and paying for internet TV. It will begin to change the way consumers think about how they watch TV. If they have the ability to watch preferred movies, shows, and live sports for a lower price than the bundled packages offered by traditional TV providers and with greater mobility, then there is very little incentive to go with the latter.

Implications for Google shareholders

Just like DIRECTV, Google would be willing to lose money on this deal because it would clearly be focused on the long-term. The TV ad business is a very lucrative one. According to data from Magna Global, in the U.S., advertisers purchased $63 billion worth of TV time last year. Also in 2012, cable and satellite brought in $97 billion in subscription fees. The bottom line is people love spending hours in front of the TV every day. If Google goes down this path of purchasing live sports, and possibly live news and events, it will open the door for rather steady, predictable cash flows for years to come. It will get an increasing amount of yearly subscription fees from consumers and advertisement spending from companies as it builds up content.

Also, this gives Google the opportunity to grow its ecosystem of product and services. Just like Apple flawlessly built its ecosystem since the invention of the iPod, where all its products are easily compatible with each other. In other words, if you buy an iMac you may be more inclined to by an iPad versus an Android (Google's operating system) tablet since it's easier to transfer data between the two through the Apple cloud. Further, consumers may be more inclined to purchase Apple TV since all the movies and shows they purchased through iTunes are in the Apple cloud.

Thus, if Google can build out its TV consumer base, then more people may be inclined to buy Android enabled products. It would have a multiplier effect on its business. If someone subscribes to Google TV, then they may be more inclined to buy an Android phone or tablet and in turn may search on Google's search engine more which is still its core source of revenue.

Bottom line

I like to first off say I do not believe this shift will happen overnight. People generally dislike change. It would take years of building up live sports content, along with live news and events not aired on basic cable, in combination with successful marketing campaigns. Also, cable companies are currently very profitable. I am not saying they will all be filing chapter seven bankruptcy. They have the ability to adapt and evolve. Some probably will and some probably will not just like any other industry going through major changes. Currently, some cable providers offer mobile capabilities and some are starting to offer a bit more of a selection versus full bundles that make consumers pay for channels they never watch.

Nevertheless, traditional TV business models are not fully aligned to take advantage of consumers' need of selection, lower costs, and mobility like Google and the other internet TV companies are. I believe once the first domino falls it will trigger the beginning of a paradigm shift of the TV industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.

Source: Google's Potential Acquisition Of The NFL Sunday Ticket Could Be A Game Changer