El Segundo, Calif.-based DirecTV Inc., the largest satellite TV service in the United States, concluded that it could at least break even on the five-year, $3.5 billion agreement with the National Football League (NFL) that it announced last week to extend and expand the company’s exclusive rights to subscription-based NFL programming.

“NFL Sunday Ticket” has been a cornerstone of DirecTV’s success and is the satellite TV service’s most distinguishing and important programming service, said Chase Carey, president and CEO of DirecTV Group [DTV], the parent company. The NFL programming that allows DirecTV subscribers who pay more than $200 each to receive the package of all the league’s games has helped to give the company an identity among consumers as a sports programming leader, Carey added.

Only DirecTV, not a cable operator or rival satellite TV service EchoStar Communications [DISH], will be able to offer NFL watchers new interactive services and a new “Red Zone” channel that automatically switches to NFL games in which teams are close to scoring, Carey said.

“We have more knowledge today about how to develop those channels,” said Palkovic, in comparing the merits of the new contract extension with the previous deal.

Under the pact, DirecTV will have exclusive multichannel television rights to air “NFL Sunday Ticket” games through the 2010 season. On the surface, DirecTV appears to have paid 75-percent more for its latest five-year pact than the $2 billion it paid for its last five-year NFL programming deal. However, the extension includes more rights, heightened value and enhanced opportunities for the satellite TV service to generate increased revenues.

Mike Palkovic, DirecTV’s CFO, told Satellite News his company should be able to afford to cover the extension, based on projected revenues. DirecTV’s relationship with the NFL began during 1995 roughly one year after the fledging subscription television service launched its first satellite.

After 10 years of carrying “NFL Sunday Ticket,” DirecTV has a “good feel” for how revenue will grow, he added. It also appears that the NFL did not open up the DirecTV deal to any other bidders in the satellite or cable industries, so league officials must be pleased with the arrangement.

New Rights

NFL negotiators are aware of how much revenue DirecTV is gaining from “NFL Sunday Ticket,” and they factored that information into the latest contract terms, Palkovic said. Despite the high cost, the extension also gives new rights for DirecTV to offer advanced services that could boost customer interest and retention.

Because DirecTV still is in the second year of a five-year, $2 billion, back-loaded deal, the largest U.S. satellite-TV service effectively has locked up its rights to NFL Sunday Ticket and the NFL Channel for the next six years, Palkovic said. The new deal extends the previous one a total of eight years and was worth the additional money DirecTV will need to pay per year.

The NFL extension also gives DirecTV full exclusivity against cable and other satellite-TV services. Those rights will boost DirecTV’s ability to continue to market and to sell its NFL programming package.

“When we ran the numbers for eight years, we think we will break even or do better with reasonable annual revenue increase,” Palkovic said.

DirecTV paid a relatively low amount of cash per year during the early years of its previous contract, so the new pact is not at all out of line with what DirecTV had contracted to pay in the latter years of the previous deal, Palkovic said, adding, “The new deal will track the revenue growth more naturally.”

Average revenue increases of roughly 11 percent a year from the NFL programming will be needed to cover the cost. For the last couple of years, the company’s revenue increases have averaged about 25 percent.

A portion of those additional revenues could be gained from modest price hikes of between 5 percent and 10 percent annually for the subscribers to the “NFL Sunday Ticket” package.

DirecTV’s outside auditors will review the eight-year relationship with the NFL and likely will have the company book the expenses to break-even during the next few years until there is a noticeable path of a profit or loss.

“Before, we had a $400 million a year deal with partial exclusivity,” Palkovic said. “Now, the deal will be a little more than $500 million a year for eight years, offering more time, more features, and exclusivity.”

Another big part of the reason why DirecTV extended the deal now is that the NFL presented the opportunity and agreed to include the new rights. One way that DirecTV will seize on that opportunity is to introduce an additional premium package beyond the “NFL Sunday Ticket” programming.

Most of the advanced features and interactive features would be offered through that new premium package.

DirecTV’s financial forecasts for that higher tier of premium programming are fairly modest, and they allow an opportunity for the company to outperform the projections.

The apparent no-bid contract is causing a bit of a stir in the industry. EchoStar CEO Charlie Ergen said during a conference call with analysts last week he was disappointed that his company was not allowed to bid for the NFL programming rights. Even so, his customer ranks are still growing by an average of more than 300,000 per month without those rights.

Fred Dressler, Time Warner Cable’s executive vice president of programming, said during a panel discussion at Sports Business Journal’s “Sports Media and Technology 2004” conference last week that the sheer magnitude of new NFL rights deals announced last week by DirecTV, Fox [FOX] and CBS — equaling roughly 75 percent, 30 percent and 25 percent, respectively — raise questions about “how the marketplace can continue to absorb these costs and still have viable businesses.” According to sister publication CableFax Daily, Dressler said, “At the end of the day, the biggest concern that we all have is when the government is going to take a look at what we’re doing.”

Lawmakers who field consumer complaints about rising subscription television rates may cite the whopping hikes for the NFL programming deals as examples of excessive increases that ultimately are passed along to consumers.

Dressler said he thought the league was “not in a position to offer [the package] to cable,” adding that the only way the NFL could guarantee continuing fat payouts from its broadcast partners was to ensure the games would not be “ubiquitous in the cable market.”

Fox and CBS are not growing revenue from their NFL rights as fast as DirecTV is, so they could not afford to pay much more than a certain percentage increase, Palkovic said.

“The NFL knows they can ask us for more money,” Palkovic said. “As long as we can cover it without taking a loss and protecting our franchise, we will do it.”

Bob Peck, a satellite analyst with Bear Stearns, wrote in a research note that he continues to view the “NFL Sunday Ticket” as a “loss leader” for DirecTV to gain new subscribers. The extension also will help to keep the estimated 1.75 million “NFL Sunday Ticket” subscribers and to maintain DirecTV’s brand image as a premium service, he added.

(Mike Palkovic, DirecTV, 310/726-4656; Steve Caulk, EchoStar, 303/723-2010; Bob Peck, Bear Stearns, 212/272-6665)