Faced with growing competition from Netflix and HBO in Northern Europe, Discovery Communications is jumping off the “gravy train” of “who’s going to get the movies and the comedy series and the scripted” shows in the mostly English speaking countries there, CEO David Zaslav told analysts this morning.
“We’re getting out of the business of that entertainment stuff” in Denmark, Finland, Norway and Sweden, he said in the company’s call to discuss Q4 earnings. The programmer took a $20 million impairment charge in the period tied to some of the content offered in Northern Europe.
When Netflix and HBO moved in it “had an impact on us in terms of subscribers and viewership,” he adds. “It’s going to continue to decline on a secular basis, but we’ve begun to attack it on a cost basis” — for example by running the region as a single unit instead of four separate ones.
Discovery Beats Q4 Expectations On Earnings, But Not On Revenues
The CEO has to deal with a lot of skeptics on Wall Street, especially after delivering a Q4 report that fell short of revenue expectations — driving Discovery shares down more than 3% in early trading.
Zaslav touted Discovery’s strategies to keep costs low, and focus on what he calls “super fans.”
That effort includes an ambitious drive for deals to offer Olympics programming abroad, especially Europe.
“We said when we bought the Olympics that we would make money, and we think now we’ll make more money,” Zaslav says. “Every deal that we’ve done has been ahead of plan…and in every deal we’re retained digital rights.”
Meanwhile, he aims to sharpen the focus of Discovery’s U.S. channels as the industry prepares for the growth of skinny pay TV bundles offering fewer channels than the traditional package, at a lower price.
About 85% of the economics for the company come from its five biggest channels — Discovery, TLC, OWN, Investigation Discovery, and Animal Planet, “and we’ve focused on making them stronger,” Zaslav says.
He adds that “we’ve been way ahead of the curve” in the effort to focus on a handful of must-have brands, which was part of the new strategy for Viacom that CEO Bob Bakish laid out last week.
As for smaller channels such as Velocity and Discovery Espanol “we’ve been focused on making them super-fan networks.”
The move to skinny bundles “will happen over time,” but for the next few years “the impact is going to be quite small,” he says.
Meanwhile Discovery is talking to companies planning live streaming services, including Hulu and Google — and believes it has a strong case to avoid being left out of their packages.
“I’m not proud of this, but we’re 12% to 13% of the viewership [on pay TV] and we’re about 6% of the money,” Zaslav says. “Most of the money is going to sports” and retransmission consent deals with broadcasters. “So to carry our channels is quite inexpensive.”
Although ratings have declined at major networks including Discovery, TLC and Animal Planet, he says that he feels “pretty good” headed into 2017. “We worked very hard on getting TLC turned around.”
He calls Animal Planet and the Science Channel his “blockers” against competitors including Fox’s National Geographic. They “have us in their sights,” he says.
And he vowed to keep costs under control. For example “we’re doing a lot more content on Velocity for a lot less dollars” as he takes down non-content costs.
The CEO says that he would “feel better if if the universe decline [in pay TV] was less than 2%” instead of closer to 3%. But his affiliation deals leave Discovery “well protected in terms of how we are vs. everybody else.”
As a result, “we can continue to have a nice, sustainable growth business in the U.S.”
Domestic ad sales in the current quarter will come in “at least flat” with last year, with international up by a low to mid-single digit percentage, CFO Andrew Warren said in his last earnings call for Discovery. (He will move to STX Entertainment, the studio disclosed yesterday.)
The company also says that this year’s tax rate should drop due in part to a $340 million investment in solar power — more than offset by tax incentives.
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