The NFL has been a consistent lure for DirecTV (DTV), the only source of the league’s all-access Sunday Ticket package. But a funny thing happened in the past quarter, just as hard-core football fans should have been hearing the siren call of the coming NFL season: DirecTV lost 28,000 subscribers. Has the promise of an all-you-can-eat NFL buffet stopped drawing satellite customers?
Executives attributed most of that decline to a conscious decision “to focus on higher-quality subscribers” who will stick around after DirecTV’s promotional sign-up period ends. Those subscribers generate the most long-term profit. That means DirecTV was less willing to extend price breaks to the borderline cases chasing lower prices from the cable-TV competition. Plus, tens of thousands of households each quarter are now canceling pay-TV services all together, unwilling or unable to accept the consistent price increases as providers pass along escalating programming costs.
It doesn’t appear that DirecTV’s rising defections can be blamed on a lagging appetite for the NFL. The Sunday Ticket contract—worth a reported $12 billion to the league over eight years—remains enormously beneficial for DirecTV, which expects revenue from the 2014 football season to rise 13 percent. This season, in fact, saw a 5 percent increase in subscribers who renewed the package. The company also has about 40,000 non-DirecTV customers who have bought online access to stream Sunday games.
The problem for DirecTV and the rest of the pay-TV industry is cord cutting. DirecTV Chief Executive Michael White was philosophical on the subject during this week’s earnings call, grappling with the question of how much further pay TV operators can press consumers’ monthly budgets. At DirecTV, which has 20.2 million customers, the average revenue per user, an industry metric, has advanced nearly $5 over the past year, to $107.27 per month—a $22 monthly jump from five years ago. Here’s how White framed the issue:
“A lot of you [analysts] think the trends are more technology or millennials or whatever, and I would argue there’s a much bigger issue, which is the price elasticity challenge when you’re trying to raise prices when median household incomes are flat, particularly for those making less than $50,000 a year.”
Millions of Americans, in other words, no longer see the point in paying $100 or more each month for a bundle of TV channels. To many of the cutters, the bill has become unaffordable. White continued:
“So there’s no question the distributors, I think, are beginning to realize that, man, these increases are just not something you can just keep doing. … On the other hand, as a distributor, if the cost of content goes up, we negotiate as tough as we can to get a fair deal consistent with the marketplace. But if the market speaks, then we have to pass that on to consumers. And ultimately, I think it’ll be the consumer that will have to be the test of at what point the price vs. the value equation gets further out of whack.”
The average revenue-per-user numbers are even higher elsewhere, since cable customers typically buy both television and Internet access from the same company. Comcast (CMCSA), the nation’s largest cable operator, gets $137.24 per month, 4 percent more than last year. Time Warner Cable (TWC) was at $106.58 in the third quarter. Average revenue at DirecTV’s main satellite rival, DISH Network (DISH), has risen more than 4 percent from a year ago. DISH also lost TV subscribers in the third quarter.
Further adding to its subscriber churn, DirecTV has tightened its credit score criteria for new customers, charging those who are not considered of long-term financial value an upfront service fee. Very few people pay it.
(Bloomberg Businessweek)
