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recently reported its third-quarter earnings. Based on continued subscriber gains and cost improvements in its Latin American business, we have increased our price estimate for DirecTV's stock to $42.51 which is very close to its current market price.

DirecTV competes with satellite pay-TV providers like

Dish Network

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, cable companies like


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Time Warner Cable


, and telecom operators like


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in the pay-TV business.

One of the key aspects of the earnings was strong net subscriber gains in the U.S. given the amount of competition in the industry. DirecTV added about 174,000 subscribers in its third quarter, which is about 28% higher than for same period in 2009.

We now expect the company to have close to 19.1 million subscribers by end of 2010 which amounts to a pay-TV market share of 18%. Although we forecast stabilization in market share, if DirecTV adds another 2 percentage points of market share over the course of our forecast period, this increases our price estimate by almost 7%.

Interestingly, while DirecTV gained a significant number of pay-TV subscribers in its recent quarter, its competitor Dish Network lost about 29,000 subscribers. Dish Network seems to be struggling while DirecTV is flourishing. What is the company doing right?

The company spent about $420 million in marketing in 2009, which was about $110 million more than Dish Network's marketing spend. Moreover, DirecTV reportedly spent a significant amount on new advertisement for NFL Sunday Ticket.

Dish Network got caught up in carriage fee disputes with content owners like


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and Fox, which led to programming interruptions. We think blackouts hurt the brand value as a result. DirecTV has been successful in avoiding such disputes and inconvenience for its subscribers.

As DirecTV is seen as a premium brand, it attracts a higher quality subscriber base with customers more likely to have higher incomes and lower churn rates. Dish dolled out compliments to this effect in its recent earnings call.

We believe DirecTV's audience is more likely to take up promotional offers like free HD since a higher proportion might have high-definition TVs or be willing to commit to longer contracts. This leads to lower churn, higher net subscriber additions and market share gains.

You can see the complete $42.51 Trefis price estimate for DirecTV's stock



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