What does the future hold for DirecTV (NASDAQ:DTV)? In our view, four key trends could play a critical role in shaping that answer. Here we take a look at the expansion of fiber optic service, growth in Latin America, disputes with content owners, and the emergence of alternative content distribution platforms. DirecTV is the largest satellite pay TV provider in the U.S., ahead of its closest competitor Dish Network (NASDAQ:DISH) by 5% in terms of pay TV market share. The company also competes with cable service providers like Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC).
Our price estimate for DirecTV stands at $48.63, which is about 5% above market price.
Fiber Optic Service is One of the Fastest-Growing Pay TV Sectors
AT&T’s (T) U-Verse and Verizon’s (VZ) FiOS service have been quickly expanding in the pay TV space. AT&T, for instance, had close to 3 million subscribers at the end of 2010, representing 40% growth over 2009. While the footprint might not be that large yet, it is certainly growing. Fiber optic lines provide high-capacity bandwidth, enabling these companies to offer increased HD content.
As bundled packages featuring fiber optic service can be a big draw for customers, they create a real market share threat for companies like DirecTV.
Fast Growth in Latin America
DirecTV is making moves in Latin America, where its total subscriber count grew by 22% in 2010 and should see continued momentum into 2011. Interestingly, this high growth is not coming at the expense of average revenue per subscriber (ARPU). Latin American consumers are increasingly adopting advanced services, thereby providing room for ARPU growth as well. However, expenses in this region remain on high side as a result of expansion efforts.
Content Owners Demanding More Money
Dish Network has been involved in scuffles with content owners seeking higher carriage fees. Although conflicts have been centered around Dish, DirecTV can not escape the issue over the long-term. Content owners are looking to receive more money for their content, with advertising sales being dispersed across more media distribution platforms and DVD sales declining. It seems that DirecTV can either raise prices or absorb costs, which would pressure profit margins.
Threat from Alternative Platforms
Service providers (and DirecTV in particular) face a threat from emerging online video platforms like Netflix and Hulu. Although these platforms typically provide content that is not running live on TV, they are gradually brushing up against the pay TV providers’ turf. Netflix’s successful bid for exclusive rights to a new TV show called ‘House of Cards’ is a prime example. The continued expansion of these alternative platforms could ultimately put them in more direct competition with traditional service providers like DirecTV.
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