Discovery gets more revenue per subscriber from Discovery Plus than it does from being on cable and satellite, CEO David Zaslav said.

At MoffettNathanson's 8th Annual Media and Communications Summit Wednesday, Zaslav was asked if Discovery's pivot from pay-TV to direct-to-consumer streaming would be accretive. Many on Wall Street question if streaming will prove to be more profitable than the high margin cable network business.

Discovery reported last month that it had 15 million DTC subscribers, up from 11 million in February.

Zaslav answered from a revenue perspective. He said that Discovery has been undervalued by both distributors and advertisers as a cable property. While generating about 20% of cable viewing, Discovery’s networks get only about 7% to 8% of distribution revenue, leaving average revenue per subscriber at $3 to $3.50 per month.

Discovery makes another $3 to $3.50 per cable sub in the advertising market, where Discovery commands prices on a cost-per-thousand (CPM) viewer basis that are much lower than the broadcast networks, he said.

Zaslav said Discovery’s ad-free version of Discovery Plus generates ARPU of $7 a month and its cheaper “light ad” version does even better, with ARPU of more than $10, or 30% to 40% higher. He noted that advertising on Discovery Plus was in high demand because of the good demographics of its viewers, the fact that 50% of them aren’t cable subscribers and the nature of the streaming ad market, where Discovery gets parity pricing with OTT offerings from the broadcasters.

With cord-cutting, Discovery is bound to lose cable subscribers. But with Discovery Plus in place, “if we lost a million [cable] subs, all we have to do is pick up 650,000 [Discovery Plus] subs in order to be making more money,” he said. “That’s one of the reasons why we’re investing in Discovery Plus."

He said the economics are even more favorable in Europe, where pay-TV penetration is lower and distribution fees are much smaller.

Zaslav noted that rival media companies also jumping into streaming must clear a much higher bar, because they were getting higher fees from distributors and better pricing for advertising. Other media companies are also spending billions on scripted programming. While Zaslav said Discovery was spending more on programming for both Discovery Plus and its linear channels, Discovery’s unscripted shows are less expensive to produce.

In its first-quarter earnings report, Discovery said Discovery Plus contributed to a loss of about $400 million in what it calls next-generation operating income as the company spent on programming, technology and marketing to launch its streaming product and add subscribers.

Zaslav said Discovery was reducing its ad spending behind Discovery Plus, both on its own channels and on other channels. He said that awareness among Discovery cable subscribers was already high and that after trying many options, the company was getting a better feel for what works and what doesn’t.

“We’re going to be much more efficient,” he said.

Discovery CEO David Zaslav’s total compensation for 2020 was $37.7 million, down 18% from $45.8 million in 2019, according to a proxy statement filed with the Securities and Exchange Commission Friday.

The big change in Zaslav’s pay was that he received no option award for 2020. Last year, he received nearly  $7 million in options.

“Zaslav provided extraordinary leadership during a time of unprecedented challenge and delivered against our strategic priorities,” according to a report by the Discovery’s board’s compensation committee. “ In addition, Mr. Zaslav provided exceptional leadership with respect to the expansion of our direct-to-consumer business and the successful launch of Discovery Plus in several international markets during 2020 and the preparation for the January 2021 U.S. launch of the product.”

The ratio of the CEO’s compensation to the media employee’s total compensation at Discovery was 565 to 1.

Also Read: Discovery Saw $400 Million NextGen Loss Building Discovery Plus

CFO Gunnar Wiedenfels' total compensation was $6.9 million, down from $7.4 million.

Bruce Campbell, chief development, distribution and legal officer, saw his competition hold steady at $9.1 million.

JB Perrette, president and CEO of Discovery International, got $10.4 million, down from $14.5 million.

Peter Faricy, who joined the company in 2018 as head of Discovery’s direct to consumer business and left in 2020, got $5.3 million for 2020.

Discovery Communications could be eyeing the creation of European regional sports networks built on the Pan-European sports networks it already controls through its recently acquired Eurosport channels.

Silver Spring, Md.-based Discovery bought a controlling (51%) interest in Eurosport in May. The service has several pay TV brands — Eurosport, Eurosport HD, Eurosport 2, Eurosport 2 HD, Eurosport Asia-Pacific and Eurosportnews — that generally have focused on lower-cost rights like German Bundesliga soccer outside of Germany, skiing and cycling. The channels recently scored ratings gains with French Open tennis matches, averaging about 1.36 million viewers, and broke the 50-million viewer mark in France with cycling’s Tour de France.

“We think we can build Eurosport by being strategic and working with our partners,” Discovery CEO David Zaslav said at the Communacopia conference last week. Eurosport “has one feed that is sold on a Pan-European basis; we can put it into all 70 countries without adding one sales person. We also have a strong local presence. In some cases we think we can build a very strong local sports channel.”

Zaslav coyly replied “maybe” when asked whether those channels would be based on a U.S. regional sports network model.

The time might be ripe for European regional sports, Lee Berke, CEO of sports consultancy LHB Sports, Entertainment & Media, said.

While most prestige rights are locked into long-term contracts with big European distributors — such as BSkyB’s and BT’s $4.9-billion, three-year lock on England’s Barclays Premier League soccer — Berke sees room for channels built around a particular sport or team. “That’s where I think you can get some traction,” he said.

The biggest questions are which rights, which sports and how much money would Discovery be willing to spend. But the programmer has been willing to open its checkbook. This year, it teamed with Liberty Global to buy production company All3Media for about $1 billion and is expected to team up with Liberty Media to bid on a 49% stake in Formula One Racing, worth about $4 billion.

Berke also said Eurosport could build channels around supplemental and shoulder programming from teams, as well as regional skiing, Scandinavian hockey and European basketball.

Other U.S. networks’ efforts to secure major rights in Europe have not had much long-term success. ESPN, for example, had Barclays Premier League rights for a time, but then sold its U.K. and Ireland channels to BT last year. ESPN still has a strong digital European presence through its espn.co.uk website and others, but has shifted international focus mainly towards Latin America.

That could mean the market has room for a well-run competitor, and Eurosport has the experience to possibly pull it off, Berke said. “They have navigated their way through distribution country by country,” he said. “ My guess is they’re saying some of the same things we’re saying here in the U.S. — more interest in developing a range of programming on a range of screens and a range of distribution outlets.”