Traditional cable programmers are coming to a strategic crossroads when it comes to navigating the emerging world of OTT channel distribution, Discovery Communications president-CEO David Zaslav said Thursday during his keynote address at Variety’s Entertainment and Technology Summit in New York.
Zaslav was asked about the burst of activity among digital entrants into the traditional pay TV business of channel bundling. Hulu and YouTube are readying a big push to offer smaller channel bundles via streaming to cost-conscious consumers. Zaslav said Discovery has been in conversations with every major player in the market for high-end programming.
“The biggest question is — do we wall want all of our channels carried or do we as an industry choose the path that we will each pick our best five or six channels,” Zaslav said. “At this moment, we’re trying to figure it out.”
The issue of quality versus quantity has been a challenge for new entrants as they try to assemble cable-like services. It’s understood that the Apple TV service that the company worked to assemble last year was put on hold because programmers including Fox and Disney held out for carriage of a substantial number of their channels, including pricey sports channels, rather than allowing for cherry picking for a smaller bundle.
Zaslav didn’t give a definitive answer on where Discovery stands on the question, but he did note that 83% of its affiliate fee revenue comes from the company’s top six networks. “Discovery will do well either way because we have great content,” he said during the half-hour conversation with CNBC anchor Joe Kernen.
At the same time, Zaslav also noted that the experience with a greater variety of channel packages and options has shown that viewers typically lean toward the larger bundles. “In the last 10 years there’s been a lot of attempts at smaller packages and the uptick has been small.”
The single biggest challenge that all media companies face is delivering distinctive content amid a tidal wave of competition. “Content used to all fit on a TV screen,” Zaslav said. “We used to call it ‘programming.’ Now it’s moving to more and more screens. You have to think about what your content will look like on a phone and what people will pay in order to get it directly from you,” Zaslav said.
The need for greater investment in programming was behind the decision to seek some $40 million to $60 million in staff layoffs this year, as Discovery disclosed late Wednesday. Zaslav told Kernen that Discovery has no choice but to refocus its priorities.
“The company didn’t get bloated,” Zaslav said. “We wanted to invest (more) in our existing channels around the world. As long as we’re continuing to grow our market share, we can continue to grow our business.”
Zaslav talked up the growth of Discovery’s international business during his tenure as CEO, which began in 2007. But currency fluctuations against a strong dollar have been a speed bump in the past two years. If currencies had been stable, Discovery would be generating $1.6 billion in revenue from overseas market but because of the currency headwinds, the total stands at about $1 billion — which is still a triple-digit gain from the $100 million that Discovery generated when Zaslav joined.
The sports arena in Europe has been a big opportunity for Discovery. He likened the sports TV market to the environment in the U.S. about 15 years ago, and he admitted taking a page from the Disney playbook.
“Our strategy is simple. You look at what (Disney CEO) Bob Iger did with ESPN in America. We figured if you can do a fraction of that in Europe, we would have a hell of a business,” Zaslav said.
Discovery acquired the sports TV channel group Eurosport and three years ago launched an $8 a month streaming app designed to appeal to rabid sports fans who can create their own menu of events to watch. “It’s like a sports Netflix,” he said. And having the four Eurosport linear channels in 54 countries in Europe allowed Discovery to bid big for Olympic rights in Europe for the next decade.
The Eurosport app has “a few hundred thousand subscribers” with the goal of reaching 1 million. More important, Zaslav likes the margins for streaming.
“Our (cable) business has about a 10 multiple,” he said. “Now (with the app) we have a business that looks a lot like Netflix — which has a 40 multiple.”