The National Football League continues to be embroiled in an impasse between team owners and football players. While the story has faded from the front pages because the traditional start of the NFL season is still a summer away, this lack of broad market attention makes this the perfect time to start thinking about the companies with the most riding on a normal start to the NFL season.
The satellite television provider is adversely exposed to the NFL lockout because of this premium NFL Sunday Ticket service, where subscribers get access to all NFL games in HD. In addition, subscribers also have access to the Red Zone channel which jumps coverage to any game where a team is within the field's red zone. If the lockout continues, there are various possibilities. If the season is truncated, the company will only charge subscribers for games played. If the season is skipped altogether, then DTV will not charge subscribers at all. In addition to the the direct reduction in revenues if there is an NFL lockout, there is also the reduced "stickiness" that could lead to subscriber losses as DTV loses one of the company's defining products. Under the current contract with the NFL, DirecTV pays $700 million annually for the right to act as the exclusive carrier of the Sunday Ticket. The contract extension for the 2011 to 2014 period increases the annual cost to $1 billion annually.
During the question and answer portion of the Q1 2011 conference call, Michael White estimated that among the 1 million subscriber additions in the previous year Q3, about 25% of them subscribed to NFL Sunday Ticket. Management continues to offer limited transparency on the potential effects of a continued lockout, but a back of the envelope analysis gives us some clues.
According to the company website, NFL Sunday Ticket costs $66.99 per month for the five month package. This implies that a lost season will cost the company at least $83.75 million in sales since the Q3 new subscribers are probably the ones that are largely motivated by the NFL product. Based on DTV's price/sales of 1.48, this impact will reduce the market capitalization by at least $123.95 million.
As of December 31, 2010, Dish Networks (DISH) had 14.133 million customers while DirecTV (DTV) had 19.2 million subscribers. On average, DISH generated $894 annually per customer and DTV generated $1,255 annually per customer. Of course, DTV's advantage over Dish is the result of several factors, but if we naively assume that NFL Sunday Ticket contributes almost completely to DTV's subscriber and unit revenue advantage, we can calculate the worst case scenario cost.
- DTV loses pricing power: If the loss of the NFL season costs DTV their pricing power and average annual sales falls to $894 per user, this would cost DTV $6.93 billion in sales. At a price/sales of 1.48, this would cost the company $10.267 billion of market capitalization.
- DTV loses subscribers: If the loss of the NFL season costs DTV their user advantage over DISH and assuming they don't lose subscribers to other content providers, DTV's subscribers fall to 16.66 million. This would cost the company $3.185 billion in revenues and $4.71 billion of market capitalization.
- Minimum Negative Impact on Market Cap: -$123.95 million
- Possible Negative Impact on Market Cap: -$4.71 billion
- Maximum Negative Impact on Market Cap: -$10.267 billion
Going forward, it is important for investors to remember that the lockout's effects on DirecTV are ultimately unknown to everyone. Our crude attempts at approximating the costs are really just a thinking exercise to show the potential for serious adverse consequences. But it is also important to remember that the adverse effects, even in the worst case, will likely be mitigated by the fact that the lockout will likely be a one time event. Even if the lockout costs the NFL the full season it is unlikely to cost more than one season.
Sirius XM Radio (SIRI)
The company is popular because it offers commercial free radio stations. But there is much more to the company's offerings. They also distinguish themselves through original content. Howard Stern was probably the company's most famous source of original Sirius XM content, but they also have a large following because of their sports channels. An NFL lockout would hurt the company's Sirius NFL radio and could lead to marginal subscriber defections.
In a sense, the effect of a lockout may appear to be less dire for Sirius XM because the revenue effects are not direct and are less defined than those at DirecTV, but it would be wrong to ignore the effect altogether. The flat subscriber pricing structure masks much of the lost revenue but without a doubt, the loss of the Sirius NFL radio network diminishes the company's product.
Still, we are generally bullish of the satellite radio company because of their growth opportunities, positive operational leverage and their attractiveness as a buyout candidate. Missing out on an NFL season will likely be only a modest stumbling block for the company, especially with potential catalysts that could double Sirius XM's stock price.
Yahoo Inc. (YHOO)
The internet giant may seem like an unlikely addition to this list, but the company's Yahoo Sports segment is one of their most important brands. Regardless of revenue generation potential, Yahoo Sports is a major defining asset and web traffic driver. Without an NFL season, the web company will likely lose advertising revenues related to NFL news and fantasy football. According to Alexa.com's most recent category based rankings, Yahoo Sports domains are three of the world's top five sports related websites and two of the top three football related websites. While they will likely maintain their relative dominance in this area, the company stands to lose web traffic if there is an extended NFL lockout.
OTHER COMPANIES THAT COULD BE AFFECTED
Best Buy Co Inc (BBY) - It is a well known fact that the Super Bowl is a major catalyst for television purchases. But the football season itself also drives television, surround sound and other purchases. With the NFL lockout, investors will find out if consumers would put off major electronics purchases until the season resumes. In the last twelve months, 55.82% of revenues came from the quarters ending February 26, 2011 and November 27, 2011. This reliance on the last half of the year is not unusual for a retail company, but it still demonstrates a potential succeptibility to the NFL labor issue.
Under Armour (UA) - The popular athletic clothing designer and distributor could also be hurt by a lost NFL season. The quarters ending September 30 and December 31 contributed to 54.76% of the revenues during the last twelve months.
Buffalo Wild Wings (BWLD) - The chain of casual dining chicken wing restaurants will likely face adverse consequences from the NFL lockout. The company specifically addresses the risks related to their dependence on professional sporting events in the Risk Factors section of their most recent 10K.
Our quarterly operating results depend, in part, on special events, such as the Super Bowl and other sporting events viewed by our guests in our restaurants such as the NFL, MLB, NBA, NHL and NCAA. Interruptions in the viewing of these professional sporting league events due to strikes, lockouts, or labor disputes may impact our results. Additionally, our results are subject to fluctuations based on the dates of sporting events and their availability for viewing through broadcast, satellite and cable networks. Historically, sales in most of our restaurants have been higher during fall and winter months based on the relative popularity and extent of national, regional and local sporting and other events
Domino's Pizza (DPZ) - The popular pizza chain has made a name for themselves as a go to choice for pizza delivery. During the last quarter of the year, they benefit from seasonal factors that include the NFL season and the start of the academic year. Over the last twelve months, 30.38% of revenues came from the quarter ending January 2, 2011.