Discovery prepares for public battle

Channel to hit stock market with license fees looming

Going public next year will shove Discovery Communications under Wall Street’s magnifying glass, which could boldly highlight the company’s most vexing problem: getting cable operators to pony up proper license fees.

That’s the one area where Discovery Communications prexy David Zaslav will have to work hard to shore up a revenue stream that can make or break a company that distributes 15 different networks in the U.S. and is worth more than $12 billion.

Wringing more dollars out of giant cable operators like Comcast and Time Warner will be a grim business for Discovery, because the giants are in no mood these days to put their names on fat renewal contracts, for at least two reasons:

  • The FCC and Congress seem to take delight in giving cable a regular dressing-down, chiding it for gouging subscribers with yearly increases that soar well beyond the national rates of inflation.

  • And cable is facing stepped-up competition for customers from Verizon and AT&T, which are gradually building a powerful video alternative.

But things are looking better for Discovery Communications’ second revenue stream: advertising. Discovery Channel and TLC, Discovery’s biggest networks, both engineered strong primetime Nielsen turnarounds in 2006 after heavy declines in 2005.

Each of the two networks also has risen by double-digit percentages again in 2007. Thanks to “Planet Earth” and the annual “Shark Week” series of specials, Discovery is chalking up a primetime average of 1.3 million viewers, putting it in the top 10 year to date. TLC, buoyed by series like “Little People, Big World,” “American Chopper” and “Miami Ink,” is averaging 931,000 primetime viewers.

Madison Avenue has taken notice of the improved numbers, with many advertisers also attracted to the two networks’ family-friendly programming.

Discovery’s third biggest network, Animal Planet, despite the popular “Meerkat Manor,” is down this year in primetime by an average of 9%.

Rich Greenfield, an analyst with Pali Research, says the ratings of all three networks could get a bump up from Discovery’s aggressive rollout of high-def simulcasts on DirecTV, EchoStar and Cox, among others distribs. Nielsen will combine the national ratings of Discovery and its HD clone — and better ratings mean more ad dollars.

And Zaslav says his networks could draw more viewers early in 2008 if the writers strike persists, because none of the networks owned by Discovery are signatories to guild contracts. While reruns take up more of the schedules of the broadcast networks, Discovery’s networks will continue to funnel originals to their lineups.

Still, originals are expensive, and Wall Street expects to look closely at the amount of money Discovery, TLC and Animal Planet will spend next year on programming, which could rise to more than $430 million overall.

On top of that expense, Discovery will be shelling out more programming dollars on the Science Channel, which Zaslav says has the potential to become a breakthrough network on the level of the History Channel, only with greater appeal to young viewers. Right now, Science reaches only 52 million subs (TLC gets to 96.2 million) and averages a mere 157,000 viewers in primetime.

Two other Discovery networks will require lots of money for both programming and marketing, because they’re getting a change of identity in coming weeks: Discovery Home, which soon becomes Planet Green (an advocacy channel that will beat the drum for protecting the environment), and Discovery Times, which morphs into Investigation Discovery.

But Zaslav says he’ll be able to keep costs down on Planet Green and still get big-name hosts because “celebrities like Leonardo DiCaprio are so passionate about the future of the planet” they’ll work at discount rates.

And Investigation Discovery will be able to draw on a vast library of crime programming already owned by Discovery, Zaslav says.

Zaslav has become the high-energy pied piper of nonfiction television. He took over Discovery Communications 11 months ago, hell bent on shaking up what had become an unwieldy, bureaucracy-swollen operation. He didn’t waste any time, laying off more than 3,000 people, shutting down all 110 of the money-losing Discovery retail stores and handpicking new presidents for the company’s Big Three networks: John Ford (for Jane Root) at Discovery Channel, Angela Shapiro-Mathes (for David Abraham) at TLC and Marjorie Kaplan (for Maureen Smith) at Animal Planet.

Earlier this month, Zaslav was a cheerleader for the decision by John Malone, head of the parent Discovery Holding Co., to turn Discovery Communications into a publicly traded, stand-alone company.

One of the best things about selling stocks to the public is that the result yields a higher quality currency for acquisitions, Bear Stearns analyst Bryan Goldberg says in a report, adding that the balance sheets of Discovery Communications will be easier to figure out.

But Wall Street’s scrutiny will challenge Zaslav to revert to the reputation he established as president of NBC Universal Cable, his previous job, of being a brass-knuckled bargainer in order to extract more money from cable and satellite distribs for USA Network, CNBC and other NBC U properties.

Zaslav declines to talk about his negotiations with cable and satellite distribs, but he’ll need to pack some muscle. For example, while the MTV Networks average a collective monthly license fee of about 19¢ a subscriber, the 15 Discovery channels pocket only about 11¢, on average, according to industry estimates.

Individually, MTV’s most lucrative network, Nickelodeon/Nick at Nite, generates a sub fee of about 45¢ a month; the equivalent Discovery Channel net brings in about 33¢, according to SNL Kagan.

In total net revenue (consisting predominantly of ad dollars and cable/satellite license fees), SNL Kagan says Discovery Channel’s 2.4% annual growth rate over the last 10 years is lower than that of any other cable network in the top 50. The projection for 2008, however, is a more palatable 6%.

A die-hard optimist, Zaslav is convinced that within a few years, Discovery should be raking in big bucks from as many as nine different domestic channels.

One of the beauties of the Discovery networks, he concludes, “is that we’re not in the entertainment business. We don’t deal with writers and actors. Our job is to satisfy curiosity. If you want sex, drugs, and rock ‘n’ roll, don’t come to Discovery.”

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