National Football League

What's the NFL Sunday Ticket Worth?

Published May. 20, 2014 12:42 p.m. ET

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What's DirecTV's NFL Sunday Ticket package worth?

It's a fascinating question that now stands in the middle of AT&T's proposed purchase of DirecTV. While many have focused on the combining of AT&T's UVerse cable package -- which now has just shy of six million subscribers -- and DirecTV's North American satellite customers -- presently right at 20 million subscribers -- to create the second largest cable and satellite company in the United States, the NFL Sunday Ticket is one of the main deal linchpins. Indeed, if DirecTV loses the NFL Sunday Ticket -- the deal expires at the end of this season -- then according to the fine print of the deal AT&T has the right to walk away from its $49 billion acquisition of DirecTV.

How valuable are NFL rights packages? Losing one of these can kill one of the largest media acquisitions of all time. Congrats, NFL, you just got a tremendous negotiating advantage. DirecTV has to get this deal done if it wants to ensure the AT&T deal takes place. Meanwhile, AT&T also signaled to any competitor who might want to kill the AT&T-DirecTV merger that overpaying for NFL Sunday Ticket exclusivity is one surefire way to help ensure that this deal isn't consummated.

That leaves us with one massive question -- why is the NFL Sunday Ticket so valuable?

It's certainly not because it's profitable.

In fact, DirecTV probably loses hundreds of millions of dollars right now on this deal. Let me explain why. First, just two million of DirecTV's twenty million satellite subscribers purchase the NFL Sunday Ticket. (The fact that only 10% of DirecTV's customers have the Sunday Ticket stunned me. Why else would you even have DirecTV?) The NFL Sunday Ticket package costs $300 a year, but with assorted discounts and promotions factored in, the likely average purchase price is somewhere around $250 a year.

That means DirecTV pays a billion dollars a year to net $500 million in NFL Sunday Ticket revenue from satellite subscribers. Now, that's not the entirety of the deal's benefit, it's likely that many of these two million Sunday Ticket subscribers, the NFL's most diehard fans, are choosing to subscribe to DirecTV exclusively to buy the Sunday Ticket. Given that DirecTV's average customer pays $103 a month, let's presume that these two million customers are adding an additional $250 million a year in revenue. That's probably generous -- not every DirecTV customer would switch providers if the NFL Sunday Ticket didn't exist -- but let's just pretend they would. (Let's also presume that DirecTV is netting some money from sports bar subscriptions, let's say $50 million a year). Even in this best case scenario that still only adds up to $800 million, which would mean that DirecTV is losing at least $200 million a year on the NFL Sunday Ticket.

And now the NFL wants even more money to extend the NFL Sunday Ticket package. So let's assume that the NFL wants $1.2 billion for this exclusive package. That would mean that DirecTV would be losing nearly a half billion dollars every year on the rights fees. How is that tenable? It isn't. Yet AT&T says it has the right to walk away if DirecTV doesn't extend this deal that's costing it nearly a half billion dollars a year.

So what else could be going on here?

AT&T has to be expecting to be cut in on this deal too. That's the only possible explanation here, that AT&T wants U-verse cable subscribers to also have access to the NFL Sunday Ticket. If so, that's a powerful selling point in the cable universe that offers a clear line of demarcation between Comcast, Time Warner, Charter and other cable competitors. If you want cable and you want the NFL Sunday Ticket, then you better get U-verse. (Right now UVerse is also the only cable company with the SEC Network, suggesting that U-verse's marketing strategy may be to focus on sports fans).

What's more, could AT&T also be angling for the NFL Sunday Ticket for subscribers on its phones? Right now AT&T has 116 million wireless subscribers. Remember that Verizon, the nation's largest wireless network with 122 million subscribers, just paid $250 million for exclusive rights to in-market NFL games. Could AT&T want to take the NFL Sunday Ticket to phones and mobile devices, expanding the audience of potential subscribers beyond just DirecTV and driving the NFL Sunday Ticket package to wireless as well?

Here's one bet for yes.

AT&T probably believes that this can help them combat Verizon's NFL marketing plan while also adding additional subscribers. Suddenly the NFL Sunday Ticket audience explodes, from just two million DirecTV subscribers to U-Verse to 116 million wireless customers. Sure, AT&T and DirecTV still probably lose money on the NFL Sunday Ticket, but that loss narrows substantially. And, who knows, they might even make money on the newly expanded deal.

That's the only story that makes sense here, as part of its merger with DirecTV AT&T wants to drastically expand the NFL Sunday Ticket's market. Otherwise, why have language in the deal that allows it to be canceled if the NFL Sunday Ticket goes elsewhere? So what will AT&T have to pay to do that? It could be $1.5 billion a year or more for an expanded NFL Sunday Ticket package. The NFL's financial machine continues to roll and AT&T is going to be happy to add to the NFL's mountain of money.