For as long as David and Goliath metaphors have been utilized, there can’t have been many instances to cast AT&T as the David. With the recently announced Comcast/Time Warner merger, AT&T finally has the opportunity to hold that unfamiliar position and is looking for a competitive strategy against that looming Goliath. Their proposed $49 billion purchase of DirecTV would bring DirecTV’s 20 million US pay-TV subscribers into the fold and give AT&T a better foothold to compete in the rapidly consolidating communications industry.
Note: Comcast/Time Warner estimate includes proposed divestiture of 4 million subscribers
AT&T’s existing U-verse TV footprint continues to be limited, and they have a modest market share relative to the other products in their portfolio. DirecTV has national and international reach, and has a well-developed customer base that easily beats out its nearest satellite competition. The proposed addition of DirecTV as a subsidiary would not only allow AT&T to fill out their portfolio with more video subscribers, but also provides greater flexibility in the ever-popular bundle offers.
One of the aspects of the proposed merger that is now getting more attention is the impact of the loss-leader NFL Sunday Ticket service on DirecTV. DirecTV pays an estimated $1 billion a season for the rights to Sunday Ticket, and it is purchased by roughly 2 million subscribers. Although the price any individual customer pays for Sunday Ticket varies (due to discounting), if we assume the average price is $250 per season, it stands to reason that DirecTV is taking a loss of almost $500MM per season. However, looking at Millward Brown Digital’s clickstream data you can easily see the halo effect of NFL Sunday Ticket on DirecTV’s business. They received a ~38% lift in Online Prospect Traffic in August 2013, a traditionally slow time in the category, that was driven by the beginning of the NFL season.
That being said, if DirecTV is unable to keep NFL Sunday Ticket, what will happen to those 2 million subscribers? If we believe that around half of the Sunday Ticket subscribers were brought to DirecTV by the key differentiating service, 1 million subscribers are potentially at risk if DirecTV loses the rights as subscribers seek their team’s games elsewhere. If even only those DirecTV customers were to leave, DirecTV would stand to lose around $1.2B in revenue per year (assuming an average monthly ARPU). Somewhat of a gamble on the part of AT&T, which explains why they are hedging with a get-out clause based on the successful renewal of the service.
However, with AT&T’s existing U-verse footprint, broadband connections, and wireless subscribers, there is quite a bit of upside if AT&T/DirecTV is able to retain NFL Sunday Ticket and expand the customer base beyond the relatively paltry 2 million current subscribers. And AT&T has shown in the past that it is adept at absorbing new subscribers and keeping them within the fold. Everything hinges on the successful negotiation with the NFL, but it could cost AT&T quite a bit more than a billion dollars if DirecTV is unable to renew Sunday Ticket and they call the merger off. David doesn’t often get to spend almost $2,500 per subscriber, but in this evolving marketplace the old rules may need to be altered.
Nick Karr is an Associate on the Technology & Entertainment Practice for Millward Brown Digital. In this role, Nick provides data-driven insights and strategic guidance to leading retailers, telecommunications carriers, consumer electronics manufacturers, and their marketing partners. Prior to Millward Brown Digital, Nick worked with Nielsen BASES consulting with clients on the innovation process and how to successfully launch new products. Connect with Nick on Google+ or LinkedIn.