Discovery Q3 Revenue Rises 6%, But U.S. Subscriber Losses Continue

UPDATED with executive comments: Discovery Communications reported slim third-quarter revenue gains led by its international portfolio, while U.S. networks grew more modestly and saw continued subscriber losses. Net income was flat.

The owner of cable networks including the Discovery Channel, Animal Planet and TLC said total revenue of $1.65 billion was up 6% from the year-earlier quarter. Net income of $218 million was up 14%, but without accounting for currency exchange rates it came in even with a year ago.

Wall Street pounded Discovery’s stock on the news, driving shares down 6% in morning trading. They reached a new 52-week low at $18.02.

U.S. networks’ revenues for the third quarter rose 4% to $823 million, paced by a 6% rise in distribution and 3% in advertising. The gains in distribution came from higher affiliate fee rates and increases in content licensing revenue, partially offset by a decline in affiliate subscribers. Total portfolio subscribers declined 5% in the quarter, while subscribers to fully distributed networks declined 3%.

Doug Creutz, an analyst with Cowen, called the subscriber losses “discouraging” and warned investors that Discovery’s “domestic linear subscriber trends remain under heavy pressure.” He reaffirmed his “market perform” rating on the stock.

Like other programmers, Discovery is battling the erosion of traditional TV viewing as consumers seek out video content through means other than the traditional cable bundle. During a conference call with Wall Street analysts, CEO David Zaslav, who rose through the ranks at NBC as a salesman, mixed spin with candor. He acknowledged that the declines for Discovery were more pronounced at its smaller, fringier networks than its six dominant ones.

“It’s shaving,” Zaslav said. “When someone is paying $130 [per month] for cable, for those extra 30 channels, I’ll save the extra $14 and drop them. … It’s somebody saying, ‘In addition to paying for broadband, this isn’t worth it.’ ”

All TV programmers are experiencing disruption as consumers exert increasing control over the TV experience, watching programming across platforms and on their own schedules, forcing media companies to alter their strategies. “They’re looking at that decline and saying, ‘I don’t like that. Why is Netflix gaining and we’re losing?’ ”

Globally, the U.S. market stands out for having such exaggerated costs associated with sports, Zaslav said, and for years the soaring carriage fees charged by major sports rights holders (such as ESPN, though he didn’t name names) have been passed along to consumers. “I don’t think it’s sustainable,” Zaslav said. “The infrastructure is creaky.” One response is the non-sports bundle proposed by start-up Philo, which will draw from content from Discovery and other programmers.

Zaslav said Discovery is eager to leverage the portfolio of Scripps Networks Interactive when its $14.6 billion acquisition of the rival programmer closes in early 2018. “We are excited by the prospects for a combined Discovery and Scripps as we continue to make progress on the transaction to create a global leader in real life entertainment,” Zaslav said in the company’s earnings release.