Navigating the Shoals

Concluding his second year as head of Discovery Communications, David Zaslav is bullish about the company’s near-term prospects, despite facing one of the worst economic climates in decades. Two months after taking the company public, Zaslav talked with Multichannel News editor in chief Mark Robichaux and programming editor R. Thomas Umstead about the company’s business prospects in 2009. An edited transcript follows.

MCN: You went public at one of the worst possible moments in a down market, yet the company shows signs of strength and growth. You mentioned something [at the recent UBS Conference in New York] called 'the secret sauce.’ What’s in it?

DAVID ZASLAV: I would say that there are three big differentiators that make us unique as a media company. One is the core strength of Discovery Communications as a platform leader. We have 13 channels here in the U.S. and we have between two and 12 channels in 173 countries.

In the late 1980s, John Hendricks raised his hand and said we need to take Discovery and our content around the world and Discovery Communications was one of the first media companies to establish channels, multiple channels, all over the globe. And as a result of that, we sit today with 50% of our revenue as long-cycle revenue — sturdy and strong sub fees that have growth built into them and with great real estate domestically and internationally.

Second is that most of our content works really well around the world and we own it.

It’s really very unusual. If you look at 25 or 30 brands in the U.S., there’s just not that many of them that have global appeal and don’t need to be changed that much as they travel around the world. So when we look at Discovery, which is about curiosity and is universal; Science, which is a common denominator language around the world; and Animal Planet, which is really a shared value and interest around the world, we have the ability with those three channels to have content travel, and travel in bulk.

So if we focus on high-quality content in those three genres, we have the ability not to amortize that cost just over our platforms in the U.S. but, by owning it, we can take it into all those 173 countries around the world and it’ll look fresh, authentic and local in those markets. So that is a very big advantage to us — three common language brands. That’s an advantage for margin and that allows us to play the quality game.

It’s also what’s driven us to own all of our content. Because by owning it, we could take advantage of the domestic and international distribution, we also could take advantage of moving it onto other platforms.

And three, the geographic diversity that we have. We get a full third of our revenue now, a little more than a third of our revenue, comes from outside the United States. And so, when we look at the venue, which is a mix of sub-fee revenue and ad-sales revenue, it’s an additional piece of sturdiness for us.

So as you look outside the U.S., you have the U.K. and Italy and France in a recession, but you have Eastern Europe really growing dramatically. And you have a lot of Latin America growing. And so, when we look at our ad sales across 173 countries, we have real diversity of source that allows us to draw strength.

So with those three together — fantastic platforms that lead into 50% of long-cycle revenue, content that travels really well, particularly Discovery, Animal Planet and Science, and finally geographic diversity — we feel that we’re well-positioned to have good growth even in a difficult environment if we continue to create strong content and continue to build our ad-sales capability.

MCN: Roughly a third of your revenue is from international. How much growth are you expecting from that? Are you going to lean on that in the following year? And is that proportionally going to grow your revenue?

DZ: We’ve seen enormous growth. Two years ago, we had about $100 million in operating cash flow coming out of international. And through nine months of 2008, we have $280 million dollars of operating cash flow, so we’ve seen a lot of growth. It is a key differentiator for us that we are in business in 173 countries. We run cable channels, multiple cable channels in countries around the world. That is a big differentiator for us and we think a big economic advantage, because a lot of those markets look like the U.S. 10 years ago. There’s growth in subs, there’s growth in advertising and there’s growth in audience.

I’m spending about 40% to 50% of my time on our international. We’re in a lot of markets where, if we execute over the next couple of years, we could reap some significant rewards. I can’t speak to what kind of growth we’re gonna get next year or the year after, but we believe that we have a very strong foundation outside the U.S. and so that’s where I’m spending a lot of my time.

MCN: Have you fully completed your restructuring of Discovery?

DZ: We’re still in the process, both domestically and internationally of focusing on the overall core structure and productivity of our business. We think on both sides we have some real opportunity to drive our productivity and to reduce our cost base, but we’re looking at in terms of how do we make ourselves faster and stronger to build growth.

MCN: Does that mean cuts ahead in 2009?

DZ: Look, when I got here almost two years ago, we did a reorganization. The focus of that was to drive productivity so we took out some layers and we looked at all of our costs. And we’re doing that again. We’re doing that because it’s a difficult environment, and we’re also doing it because we think we could be more productive. But we’re not gonna do it at the expense of driving and pushing for sustainable growth.

MCN: Let’s talk about the networks. Are you still scheduled to launch [Oprah Winfrey’s] OWN network in 2009?

DZ: Yes. Right now we’re scheduled for some time at the end of 2009. I was out this past Monday, we had a good meeting with Oprah, looking at where we are. We’ll have a lot more to say over the coming months. It’s exciting, it’s a great brand — is doing very well and we think it’s going to be a very exciting property.

MCN: Are you looking to make any other changes to your emerging networks that are coming up in terms of rebranding or repositioning?

DZ: We got a few that we feel we’re really gaining momentum with. One is ID [Investigation Discovery], which has been the fastest-growing cable network in the industry for the last year. This past Sunday night, with no promotion, we got a 0.6 in the household and a 0.41 in the demo. The network continues to build, it is gaining a loyal audience so we’re feeling really good about ID.

Science is building a good library of content. It’s got a great demo, it’s primarily male and young. The average age of Science viewers is under 35, which is six or seven years younger than Discovery so it’s a very attractive demo.

We have Planet Green, which we launched a few months ago and where we’re building I think a strong advocacy brand that’s a great companion to Discovery. And we have [Web site] to work along with Planet Green, and that’s going very well.

And then we have OWN, which we’ll launch at the end of 2009 with Oprah, which we’ll talk about in the coming months, which we’re excited about.

MCN: What is your primary focus right now?

DZ: To grow our existing brands. Discovery is really back on track, our ratings are up this quarter significantly. We have a number of shows that are working — Storm Chasers, Time Warp, Destroyed In Seconds, Extreme Loggers. We have four new shows that are getting very strong ratings this quarter.

TLC, as you know, we had a real struggle over the summer, but it’s come all the way back and it’s up double digits in the fourth quarter. It delivers a great female demo. So we have Discovery strong male, TLC very strong female.

And we’re starting to make some real progress with Animal Planet. We have a new brand, we have a great new show with Whale Wars as well as a lot of other new content on Animal Planet that’s working. And we’ve been focusing Animal Planet on a female demo, 25 to 54, and we’ve been hitting that demo.

And so we have a ways to go, but we’ve made some real progress. You know, we’ve had growth over the last ten months, every month. So we’re making real progress, we’ve got a good creative team in place there.

MCN: Do ratings increases translate into ad sales? What’s the ad sales perspective for 2009?

DZ: Well we’re going to give guidance on our ad-sales [efforts] next year in February. But let me give you the things that we do know.

Fourth quarter will be up, versus fourth quarter last year.

We had a very good upfront. We sold almost half of our inventory in the upfront, which was our biggest upfront. It was up almost double digits in terms of our CPM.

We haven’t gotten that much cancellation in the first quarter — its been really consistent with the past, which is a little bit of a surprise to us. So far, we haven’t seen anything more than that and the transparency into the first quarter really just isn’t there for us.