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DIRECTV (DTV - Analyst Report), the largest satellite TV operator in the U.S., has started charging an extra fee of $3 per month from some of its new customers on program packages, which include multiple sports channels. DirecTV follows in the footsteps of rival Time Warner Cable Inc. (TWC - Analyst Report), which is charging nearly an extra $4 per month for the sports channels.

DirecTV’ is charging the monthly surcharge in the regions where there are multiple regional sports channels including News Corporation’s (NWS - Snapshot Report) Prime Ticket, Fox Sport’s West and Time Warner’s SportsNet. However, the additional fee structure will only affect 20 percent of the total 210 markets in the U.S.

The additional monthly fee of $3 will be levied on all the channel packages above the lowest tier. The lowest tier starts at $30 per month. The next step, called “choice” starts at a promotional price of $35 per month, exclusive of any extra fee and includes 10 more channels including the local sports channels.

Recently, DirecTV inked a deal with Time Warner Cable that will allow the satellite TV provider to broadcast the cable company’s two sports channels in the Los Angeles area. The deal puts DirecTV in a winning position against arch rival DISH Network Corp. (DISH - Analyst Report), which is still negotiating with Time Warner cable over a possible deal.

Sports entertainment has become the most expensive form of programming with nationwide sports channels charging as much as $5 per month per subscriber while regional sports channels are charging only $2-$3 from their customers. DirecTV has argued that the additional fee will allow the company to recover some of the sports entertainment cost in some of the market.

The rising sports programming cost is based on the fact that the network owners are winning the right to broadcast the games and then passing on the higher cost by raising the program fees. We believe that the regional sports surcharge is an attempt by DirecTV to reduce their expenses by passing on the rising programming cost to the customers. Nevertheless, the company faces the risk of higher customer churn as continuous hike in pay package rise may induce the customers to think about other alternatives. 

We maintain our long-term Neutral recommendation on DirecTV. The company also retains a Zacks #3 Rank, implying a short-term Hold rating.

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