Is The DirecTV Business Model Set To Fail? (DTV, T)

The television industry is in flux, and cable and satellite companies like DirecTV (DTV) and Comcast (CMCSA) have been struggling to keep up. (For more, read: DirecTV's 3 Biggest Risks.) As more people seek out entertainment content online, binge-watch shows on Netflix (NLFX) and stream content via their mobile devices, the DirecTV business model could become a thing of the past.

After the FCC approved AT&T’s (T) $48.5 billion acquisition of DirecTV, the telecom company became the largest provider of TV subscriptions in the U.S., dethroning former first-place Comcast. The company reported nearly 47 million video connections through DirectTV, DirectTV Now & U-verse in Q1 2018. AT&T and DirecTV now package phone service with satellite TV and internet service, offering customers the ability to consolidate their cable, phone and internet bills into one, enticed by special rates or discounts.

Yet DirecTV faces tough competition from direct-to-consumer streaming services like Netflix, Hulu and Amazon (AMZN). DirecTV’s ad campaigns portrayed the company as the cool alternative to competitors like Comcast or Dish Network (DISH), and its NFL Sunday Ticket package, which broadcasts regular season NFL games that the public can't watch on local affiliates, remains particularly popular. However, DirecTV and the NFL have been the target of several class action lawsuits over the licensing of out-of-market games. If DirecTV can’t hold onto its Sunday Ticket package, it could lose one of its main selling points, making it even more vulnerable to streaming services like Netflix.

Though the company merged with AT&T in 2015, DirecTV faces serious challenges ahead. The television industry is in the midst of a revolution, with "cord cutters" increasingly turning to streaming services for their entertainment (see: Top 5 Ways to Legally Cut Out Cable). Cost is becoming a huge factor. With cable and internet bundling, households can pay over $100 a month for the services. Meanwhile Netflix charges less than $15 per month. Granted, Netflix isn’t showing NFL games, but as more millennials​ become heads of households, DirecTV’s business model may seem expensive and antiquated.

After companies reported their 2017 fourth quarter results, Fortune estimated that the total number of paying TV subscribers dropped 3.4% from one year earlier. This signaled the highest rate of decline since the trend of cord cutting began in 2010. With almost 500,000 customers leaving in just the fourth quarter, about 83 million households are still subscribed. In the same article, Fortune reported estimates that approximately 13.5 million households do not currently pay for traditional forms of TV service. They also reported that 79% of households paid for traditional cable or satellite service in last year's annual survey by the Leichtman Research Group, which is down from 84% just three years earlier. The amount of households paying for traditional cable or satellite service peaked at 88% in 2010.

With more consumers experimenting with an ever-increasing number of alternative options like Sling TV, Sony PlayStation Vue and HBO Now, the traditional pay-TV business model is getting left in the dust.

Consumers used to consider their cable bill to be a utility cost for a service they couldn't do without. But the Netflix business model allows users to view what they want, when they want, and for relatively little money. An entire generation is getting used to that model. Netflix shares are jumping to all-time highs, while major media company stocks are on the decline.

In June 2018, Dish network announced a $5 monthly price hike for Sling TV Orange, which remains the cheapest way to get ESPN without cable. The new price of $25 per month will apply to new subscribers immediately, and to existing ones in August. 

A few days after Dish's price hike, AT&T announced a $5 monthly price hike for all DirecTV Now plans from July 26 onward, raising the base monthly price to $40 for all subscribers. Cord Cutters News was the first to report the hike.

All multi-channel PlayStation Vue plan prices will also increase by $5 monthly for new subscribers starting July 24, and for current subscribers after July 31, raising the base price to $45 per month, announced the company on PlayStation.Blog.

So DirectTV will need more than Rob Lowe commercials touting it as the cool satellite TV provider if they want to keep up with their growing and diversifying competition. The company's merger with AT&T greatly expanded its customer base and its NFL Sunday Ticket package remains a big selling point for many consumers. Still, given the apparently unstoppable rise of online streaming services and with more cord-cutting happening in homes across the country, DirecTV might need take a page out of Netflix’s book in order to keep up with changing times.