DirecTV ( DTV - Analyst Report ) , the largest satellite TV provider in the U.S., is planning to take part in Brazil’s 4G wireless broadband spectrum auctions, expected to be held in mid-June. We believe that by offering a by-product bundled service, DirecTV wants to exploit the under-penetrated pay-TV and wireless broadband market in Brazil.

DirecTV, which operates under the brand SKY Brazil, is among the six companies that have submitted bids for the auction. The other bidders include America Movil’s ( AMX - Analyst Report ) Claro, Telefornica’s ( TEF - Analyst Report ) Vivo, Oi S.A. ADS ( OIBR - Snapshot Report ) , TIM Participacoes S.A. ( TSU - Snapshot Report ) and Sunrise Telecomunicacoes. DirecTV – already selling 4G wireless broadband services in the country’s capital, Brasilia – could bid for the spectrum in Sao Paulo, Rio de Janeiro (two biggest cities of Brazil) and other small cities where fixed line internet service is unavailable.

Brazil is a key market for DirecTV with the South American nation’s rising household income and an increased standard of living creating demand for pay-TV – one of the biggest growth drivers for the company. Brazil has nearly 14 million pay-TV customers, covering only 22% of the population, representing a widely under-penetrated market. The company wants to cash on to this opportunity to gain market share from cable TV rivals.

Quality and quantity of fixed-line internet is not very high in the smaller cities of Brazil. Furthermore, poor terrestrial landscape and high build-out cost act as hindrances for internet service providers.

DirecTV wants to grab this opportunity by providing high speed internet service at affordable price. According to IDC, Brazil will have 4.7% of the world’s total smartphone market share, thereby providing growth opportunity for wireless services.

We believe that DirecTV can improve its ARPU and reduce its churn rate by offering both wireless and pay-TV services simultaneously. Moreover, the company’s failed bid with Verizon Communication Inc ( VZ - Analyst Report ) to launch 4G wireless broadband service in the U.S. is another prime reason to bid for the spectrum in Brazil. However, deepening economic uncertainty may act as a downside for the company, reducing the demand for 4G service in Brazil.

Recommendation

We are maintaining our long-term Neutral recommendation on DirecTV. Currently, DirecTV has a Zacks #3 Rank, implying a short-term Hold rating on the stock.