Berkshire Hathaway's (NYSE:BRK.A) recent filings for Q2 of 2012 show that the company has added yet again to a meaningful stake of DirecTV (NASDAQ:DTV), now worth about $1.5 billion. Berkshire's stake has been bought up during the last twelve months and now forms about 2% of the company's common stock portfolio.
So what does Buffett, or actually his lieutenant Ted Weschler, see in this company? DirecTV is the world's largest satellite tv provider with 30 million subscribers in the US and Latin America combined. The subscriber count has risen steadily even amid the recession, as subscribers have cut cords and switched to satellite from cable companies like Time Warner (NYSE:TWX) and Comcast (NASDAQ:CMCSA). The last quarter was an exception though as DirecTV had its first ever net-loss of subscribers in the US. In Latin America the market for pay-tv is growing fast, and DirecTV is clearly the leader of the pack with a premium brand, best sports contracts and best distribution technology in countries with very small cable penetration. On average each subscriber pays about a hundred dollars per month for their tv-channel bundle in the US, and about sixty dollars in Latin America. I won't go deep into the numbers, but let's just say DirecTV's business is very cash-rich, and they've been buying billions worth of their own stock lately. You can check some of their numbers for example here.
So, what's there NOT to like about DirecTV ?
The internet has brought up a generation of people who've never paid for tv, and may never subscribe to a pay-tv. They are 'cord-nevers', and they do pose a problem, along with other cord-cutters who just can't cope with the ever-rising subscription fees. However, producing content costs a lot of money, and if these people still like to watch their Jersey Shore or NFL, they will need to pay for it one way or another. Looking at the pure content producers like CBS (NYSE:CBS), Viacom (NASDAQ:VIA) etc., you'll notice that subscription fees form a very big part of their revenue - even as much as half of it. It hasn't been in their interest to unbundle their channels to be streamed on the internet as it leads to piracy and subscriber losses elsewhere. A la carte programming (you get exactly the channels you pay for, as opposed to bundling of channels) hasn't been introduced, because the whole "bundled pay-tv-ecosystem pie" takes the most lucrative shape as it stands today - this is the main reason why Apple's (NASDAQ:AAPL) and Google's (NASDAQ:GOOG) tv platforms haven't exactly flourished. More than technology, it's about content rights and how they evolve. Here's CEO Mike White's version of what I described:
Content costs are rising like crazy, they can't be passed on to subscribers at these rates.
This is a big problem, and DirecTV CEO Mike White agrees that this is the largest single problem for DirecTV (check the above-mentioned video). This has led to many disputes and blackouts between the distributors and the content producers, the latest of which occurred between DirecTV and Viacom, blacking out about 16 channels including MTV, and Nickelodeon. This problem will probably persist and will eat away at the margins of distributors (as well as content producers). But these guys are in the same boat - they need each other and can't really afford a lot of blackouts with more subscribers cutting cords for good with every new blackout and content producers losing ad revenue.
These harrowing questions aside, I think you've got a very nice business with a simple business model (maintain satellites, distribute channels, collect payments, pay the providers, keep the rest!). Geographically DTV is also operating in markets that seem very promising - US and Latin America - at least compared to the crisis-ridden Europe or the autocratic China or Russia, or the multilingual India. DTV has a premium brand and premium DVR technology that is easily ported to the fast-growing Latin America market. DTV is trading at about 13.4 times last 12 months earnings or 9.6 times forecasted earnings, which doesn't look like too bad a price for a company like this.
Disclosure: I am long DTV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.