DirecTV’s Subscriber Gains Continue

| About: AT&T Inc. (T)
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DirecTV (NYSE:DTV) recently reported its Q3 earnings. Based on continued subscriber gains and cost improvements in its Latin American business, we have increased our price estimate for DirecTV’s stock to $42.51 which is very close to current market price.

DirecTV competes with satellite pay-TV providers like Dish Network (NASDAQ:DISH), cable companies like Comcast (NASDAQ:CMCSA) and Time Warner Cable, (TWC) and telecom operators like AT&T (NYSE:T) and Verizon (NYSE:VZ) in the pay-TV business.

One of the key aspects of the earnings was strong net subscriber gains in the US given the amount of competition in the industry. DirecTV added about 174,000[1] subscribers in Q3 2010 quarter, which is about 28% higher than for same period in 2009.

We now expect the company to have close to 19.1 million subscribers by end of 2010 which amounts to a pay-TV market share of 18%. Although we forecast stabilization in market share, if DirecTV adds another 2 percentage points of market share over the course of our forecast period, this increases our price estimate by almost 7%.

Interestingly, while DirecTV gained significant pay-TV subscribers in its recent quarter, its competitor Dish Network lost about 29,000 subscribers[2]. Dish Network seems to be struggling while DirecTV is flourishing. What is the company doing right?

1) Market Push Paying Off

The company spent about $420 million in marketing in 2009,((DirecTV Creative Shifts to Deutsch N.Y. From Deutsch/LA)) which was about $110[3] million more than Dish Network’s marketing spend. Moreover, DirecTV is reportedly spent a significant amount on new advertisement for NFL Sunday Ticket.

2) Avoiding Pricing Disputes

Dish Network got caught up in carriage fee disputes with content owners like Disney (NYSE:DIS) and Fox, which led to programming interruptions. We think blackouts hurt the brand value as a result. DirecTV has been successful in avoiding such disputes and inconvenience for its subscribers.

3) High Quality Subscriber Base

As DirecTV is seen as a premium brand, it attracts a higher quality subscriber base with customers more likely to have higher incomes and lower churn rates. Dish dolled out compliments to this effect in its recent earnings call[4].

We believe DirecTV’s audience is more likely to take up promotional offers like free HD since a higher proportion might have high-definition TVs or be willing to commit to longer contracts. This leads to lower churn, higher net subscriber additions and market share gains.

Notes:

  1. Taken from DirecTV’s Q3 2010 SEC filing
  2. Taken from Dish Network’s Q3 2010 SEC filing
  3. Calculated by subtracting Dish Network’s spend from DirecTV’s spend of $420 million. Dish Network’s spend is available from Dish Network Shifts $270 Mil. in Biz to Horizon Media
  4. Mentioned in Dish’s Q3 2010 earnings transcript

Disclosure: No position