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Discovery Hopes to Mine Gold at Comcast

Throughout the regulatory approval process, programmers had expressed their fear of how a combined Comcast-Time Warner Cable, had it been allowed to go through, would have irreversibly harmed the content landscape.

But with the deal officially off the table, those same programmers may be facing a much more terrifying adversary: Comcast by itself.

Without the specter of regulatory approval hanging over it, Comcast could very well flex its considerable carriage muscles, using its cable industry-leading heft to force pricing and other concessions on programmers, according to some analysts. One of the first tests of that theory will be Discovery Communications, whose carriage agreement with the nation’s largest cable operator expires June 30.


Not that Comcast has been a wallflower in carriage negotiations. With more than 22 million subscribers, Comcast enjoys the best pricing among U.S. MSOs and has managed to squeeze out favorable online, TV everywhere and on-demand concessions in practically every carriage negotiation. But with a couple of big M&A deals in the past few years — its 2010 purchase of NBCUniversal and the just-terminated TWC merger — the company has also been careful not to upset regulators. As a result, Comcast never had a major carriage dispute that involved dropping a major channel for any length of time ever, according to company spokesman John Demming.

While Comcast has had smaller disputes with Tennis Channel and Bloomberg TV over carriage and channel placement, the only channel ever to go dark on the cable giant’s systems was tiny Estrella TV, a Spanish-language network that pulled its signals in February in Denver, Houston and Salt Lake City, Utah. That could change.

“We are concerned Comcast will have greater freedom to flex the muscles of its leading scale, scale that it has often seemed to hold back from fully utilizing in the past,” UBS media analyst Doug Mitchelson said in a research note. “Discovery would have been in a superior negotiating position had the Comcast-TWC merger still been under review at June 30, when the Comcast renewal is up, but the earlier termination of the deal has exposed renewal risk.”

Other analysts, such as RBC Capital Markets media analyst David Bank, have said Comcast is expected to be a tougher negotiator in the wake of the TWC termination because it will no longer have to consider pleasing “regulatory watchdogs.”

Mitchelson mapped out three possible scenarios: The renewal is made with few or no difficulties; Comcast digs in its heels and battles for flat or decreased affiliate fees; or Comcast drops Discovery’s channels altogether, determining that it would save more than it would lose by not carrying the networks. The last scenario is highly unlikely, Mitchelson wrote.

“We do not believe Comcast would drop Discovery’s networks permanently after having spent much of the past 10 years putting the hardware and software in place to offer a leading video service (X1 platform),” he noted.

Discovery told Multichannel News it was optimistic about reaching an agreement with Comcast. Sources familiar with the company, though, said negotiations haven’t officially started yet, with about two months to go on the existing contract.

“We’re hopefully we can engage and have a productive negotiations that leads to a fair deal on both sides,” Discovery said in a statement. “That’s what our hope and expectation is and that is what we’re working for.”

Discovery was outspokenly opposed to the Comcast-TWC merger. CEO David Zaslav criticized the deal publicly, stating that the combination raised “real issues.”

Comcast accused Discovery of demanding “unwarranted business concessions” in return for endorsing the merger.

Sources familiar with the companies insist those harsh words will not hang over the talks.

Discovery has improved its negotiating position by gaining popularity among viewers. In February, flagship Discovery Channel was the top-rated cable network in primetime for men, with shows like Gold Rush, MythBusters and Moonshiners.

“Does Comcast really want to fight that?” said one cable executive who asked not to be named.

Comcast declined to comment on the negotiations specifically.

A successful Comcast negotiation could be a big boost for Discovery, which has seen its stock decline almost 20% in the past 12 months as ad-market doldrums and carriage concerns have weighed heavily.

Although the programmer derives more than half of its revenue from outside the U.S., Comcast makes up about 22% of its total affiliate-fee revenue.

Discovery has for the most part been a pretty easy programmer to negotiate with. Its affiliate-fee increases have generally been in line with inflation (in the single digits) and recently it has struck deals to provide content for TV everywhere and on-demand.


But the programmer had been hoping that as the popularity of its networks in the U.S. increased, its affiliate-fee hikes would also go up.

Discovery’s priciest network is Discovery Channel, which charges about 40 cents per subscriber per month, according to SNL Kagan. That puts it 20th of about 180 networks that earn carriage fees, but dwarfed by cost leader ESPN’s $6.10 per subscriber monthly fee.

According to Mitchelson, Discovery’s overall price per viewer of about $37 per month puts it at the lower end of the spectrum — only CBS, at $11, is cheaper — which may have given it some negotiating leverage in the past.

Discovery managed to negotiate a carriage deal with Time Warner Cable during the regulatory approval process that people familiar with the companies said included a significant step up in affiliate fees.

In January, Discovery moved its popular “Shark Week” programming block from the usual August to July 5-12, which would fall around the time its deal with Comcast expires.

But only time will determine who will ultimately play the role of predator or prey in the coming negotiations.