Discovery CEO: Scripps Helps Distribution Efforts, Leaves Option For More Deals

Associated Press

The cable programming business is playing a game of musical chairs where the tune is about to stop.

And Discovery Communications CEO David Zaslav is betting that his $14.6 billion agreement to buy Scripps Networks Interactive will ensure that he won’t be one of the players caught without a seat.

Discovery’s largest shareholder, Liberty Media’s John Malone — a fan of consolidation with interests in Charter Communications, Liberty Global, Lionsgate, SiriusXM, and Live Nation — “loves this deal,” Zaslav says.

“I would say it’s a very big step one because there is no final step for any media company today,” the CEO adds. And with the way this deal is financed, “we’re not out of bullets. Over the next two years we still have enough room to do some selective purchases that are smaller if we need to.”

By 2020 “we’ll be, in today’s numbers, a nearly $40 billion company, enterprise value, with a very strong balance sheet….and the optionality at that point to look at what else do we need to have sustainable, high-growth” makes the deal attractive.

Investors aren’t so sure. Discovery shares are down more than 6% in early trading. Scripps is up about 1%.

Zaslav hopes, among other things, to address a problem that he cited in a call to discuss this morning’s news: that his larger channels lost about 3% of their subscribers in Q2 while smaller ones dropped by a percentage that’s “a bit larger than that.”

Customers are either cutting the pay TV cord — or not signing up in the first place — because they no longer have to pay more than $100 a month for hundreds of channels just to receive the 17 or so that they want to watch. Lower priced alternatives include Netflix, Hulu, Amazon Prime, Sling TV, DirecTV Now, and YouTube TV.

Faced with this growing competition, many operators want to cut the number of channels they carry as well as the price they pay for them.

With Scripps’ networks including HGTV, Food Network and Travel Channel, Discovery expects to have the negotiating muscle to persuade distributors to not only carry the channels, but pay higher prices for them.

“When you put us together, we’re about 20% of the viewership on cable, but we’re less than 10% of the economics,” he says. “So we’re very low priced, which gives us some headroom and opportunity to move that up.”

Another possibility: Distributors who want to offer more narrowly targeted bundles may be less eager to leave Discovery out of their offerings — or offer one build around Discovery.

“We have quite a compelling offering that we can bring to any distributor,” Zaslav says. “Or we can come together with a few others and do it ourselves” by creating a low-priced, direct-to-consumer broadband subscription service.

AMC Networks and Viacom have also been talking about the advantages of a low-priced, entertainment-only service without costly sports programming.

Zaslav still might have to winnow out, or refurbish, some of Discovery and Scripps’ weaker channels.

“We haven’t really gotten into it with [Scripps Networks CEO Ken Lowe] and the team to try to get their best sense of whether all of them are going to be survivors and winners or whether some of them need to be invested in more, or maybe some of them could be taken in a different way — to mobile or consumers,” Zaslav says.

Lowe says that “some of these brands have a passionate base that may not, for the future, be a linear platform or a platform that we necessarily have thought about in the past….It’s way too early to think about which brands go away.”

For example, he says that people interested in Italian, French, and comfort cooking “may or may not support a video or social model or short form model.”

Zaslav also believes Scripps can help him sell ads. “Nobody’s done a better job” than Scripps in endemic ad sales — closely tying sales pitches to programming.

In addition, “one of the things Scripps has done better than anybody” is collect data about viewers that can lead to high-priced ad sales as technology improves to target specific messages to different viewers.

Lowe says his networks “bring along a passionate group of folks that we like to say ‘do what they view’…We can find out viewing patterns, find out behavior patterns, and most importantly, buying patterns.”

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