Soft TV Ad Sales Reflect Short-Term Strategies, Not Shift To Digital, Discovery CFO Says

This is one of the hottest questions among media investors:  Are advertisers beginning to rebel against the high prices for commercials on broadcast and cable TV as they discover less expensive opportunities to reach consumers on digital video platforms such as YouTube, Yahoo, and AOL? But Discovery Communications CFO Andrew Warren says not to worry: “Advertisers aren’t seeing as much benefit from going there [to digital] than in the broader reach of television,” he told the Nomura Digital Media Conference this morning. He acknowledges that the recent upfront market was “more soft than weak.” But that’s because many advertisers are betting  that they’ll see lower prices in the scatter market. “Across all television there’s going to be more demand for scatter than in the past,” Warren says. “It’s more of a shift than a degradation of overall volume.” Discovery made the opposite bet, that prices will hold or improve, by choosing to sell just 50% of its inventory in the upfront market. It was “really about preserving price… We’re still seeing a scatter market that is fully there and fully desiring to buy.”

The CFO acknowledged that Discovery’s ratings in July and August were “disappointing, and below what our expectations were.” But he says the numbers should improve when Discovery presents Skywire Live With Nik Wallenda, with the recent return of reality series Fast ‘N  Loud, and from strengthening performances at networks including Destination America, Velocity, ID, and the recently rebranded American Heroes Channel. The remake of what used to be called The Military Channel is “incredibly advertiser friendly,” he says.

Discovery is bracing itself for Comcast’s planned acquisition of Time Warner Cable, and AT&T’s purchase of DirecTV. Warren says the giants will probably become “more contentious to work with.” Execs have already started to talk about whether Comcast can apply the low rates it pays for Discovery programming to TWC’s 11M video subscribers. But the networks company believes that federal officials will move slowly to come up with a comprehensive and consistent set of terms for the deals. “We think it will take more time than other people do.”

Warren didn’t rule out the possibility that Discovery might use its recently acquired TV assets in Europe to reduce its tax outlays. “I’m incredibly bullish on what we can do with our tax rate to drive it down,” he says. Since the company owns its content “the question is: where do you domicile that [intellectual property] and how do you allocate the revenue to where its domiciled?” The company could engage in a corporate tax inversion — buying a property in a country with lower corporate tax rates and then claiming it as a home for U.S.-based assets. That infuriated politicians across the ideological spectrum, including President Obama, after Burger King unveiled its plan to move its corporate home to Canada when it buys Ontario based doughnut chain Tim Horton’s.  “It’s a possibility [for Discovery] but not a probability,” Warren says. Inversion “can make a very good deal great. But it can’t make a bad deal good.”

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