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Discovery Charts a Conservative Course

NEW YORK — Like a scene from one of its documentaries, Discovery Communications tried to put itself in the best possible light in a packed house at its first-ever Investor Day, reassuring skittish media investors with a conservative three-year plan for cash flow and earnings growth.

And while the effort was appreciated, some analysts still needed convincing.

The Investor Day conference, offered so analysts and investors could take a deeper dive, came with the industry at a crossroads. Fears that over-the-top and online video are jeopardizing the existing content model, ad-market sluggishness, declining ratings and uncertainty regarding audience measurement have all pressured media stocks.

Discovery isn’t any different than its peers — its once high-flying stock (it rose 55% and 42.4% in 2012 and 2013) is down 23% this year, coming off a 27% decline in 2014.

CEO David Zaslav didn’t mince words in his opening statement, telling the audience he expected gains in both Discovery’s international and domestic sectors for the next three years.

Overall, Discovery said it expects low double-digit percentage growth in free cash flow between 2015 and 2018 and the same for earnings per share growth, excluding currency fluctuations. In the U.S. market, he said, ad sales — which have been flat to down in the past four quarters — would rebound.


“We will show growth here in the U.S.,” Zaslav said, pledging that domestic ad sales will rise by mid-single-digit percentages in the third quarter.

But despite the upbeat tone, some analysts weren’t buying Zaslav’s pitch. While he expected Discovery’s guidance to be conservative, Sanford Bernstein media analyst Todd Juenger said in a research note that he was worried that the programmer’s caution reflected broader problems.

“The incremental news we got from Discovery’s investor day, sadly, we didn’t think was good — their mid/long-term guidance of only high single-digit growth for international fueled our increasing fear that other markets in the world (especially Europe) are likely to fall prey to the same consumer trends happening in the U.S.,” Juenger wrote.

Discovery, like its programming peers, has been under pressure as the advertising market has declined precipitously over the past two years and as ratings for networks have plunged across the board, as consumers continue to view content on multiple and unmeasured platforms.

Other analysts were a bit more sanguine.

Morgan Stanley media analyst Ben Swinburne pointed to the programmer’s strong international networks. Discovery now derives the bulk of its revenue from sources outside the U.S.

“Discovery attacks the international market from a position of strength, with a long operating history, local feet on the street, and known brands,” Swinburne wrote. “Its pivot into more scripted and more sports is more-expensive, higher-risk, but further strengthens its position with advertisers, consumers, and distributors.”

Although other content providers have embraced over-the-top and online distribution methods, Discovery has been late to the game. Instead, it has used short-form online video to drive viewers to its linear channels. That strategy has changed, as TV everywhere rights have been an integral part of Discovery’s recent domestic carriage renewals.

Outside the U.S., the company has fully embraced over-the-top, especially with its sports network Eurosport, which has its own branded OTT service called Eurosport Player; with Discovery’s own direct-to-consumer Dplay; and through agreements with Hulu, Verizon’s go90 mobile offering, Sony’s PlayStation Vue, Facebook and others.

Dplay, which offers a one-stop shop for Discovery content internationally, is currently available in Italy, Sweden, Denmark and Norway and has grown subscribers by about 40% year-over-year. More market launches are expected in 2016.

The Eurosport Player has grown subscribers by about 30% this year alone, and Eurosport CEO Peter Hutton said that is “just scratching the surface.”

“We’re going to go a lot higher,” Hutton said.

Eurosport Player should gain the most traction when the network begins airing the Olympic Games beginning in 2018. Eurosport nabbed the European TV rights to the games earlier this year for $1.45 billion, including free-to-air television, subscription/pay TV television, Internet and mobile phone in all languages across 50 countries and territories on the European continent, for two Summer Games and two Winter Games between 2018 and 2024.

The Olympics lends itself perfectly to mobile because of the sheer number of events, Hutton said. “The Olympics offers so many hours of simultaneous broadcast, you can only really do it justice on multiplatform.”

In addition, Eurosport’s existing lineup is 50% Olympic-type sports, enabling the network to “tell stories about the characters and events all year long,” he added.

Domestically, Discovery for the moment will concentrate its mobile and online video efforts on the TV everywhere agreements it has reached with U.S. distributors, chief development, distribution and legal officer Bruce Campbell said.

The TV everywhere rollout will give Discovery insight into just how consumers engage with the service, Cambpell said. “We’re not rushing into anything.”


Another area the company isn’t rushing into is the concept of “skinny bundles,” or smaller packages of its programming made available to distributors at a lower cost.

Zaslav said that he doesn’t believe skinny bundles will take hold soon — he believes it will be more like four to six years before they gain traction — but he added that Discovery’s networks are already top of mind with viewers. Discovery Channel, Animal Planet and TLC are among the top 20 networks consumers would choose in an a la carte environment, according to research firm Digitalsmiths.

“We’re protected,” Zaslav said.

When skinny bundles become more of the norm in the next four to six years, he added, “We’ll do well. We’ll be chosen.”