TBS 11, Fall-
Winter 2003

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Discovery Communications: "Growing, growing, growing…"

By Chris Forrester

Discovery's has plans for a global high-definition TV channel. But there's much more to this multi-tiered company. Chris Forrester takes a detailed look at Discovery Communications.

Discovery revenues
1997
  $860m
1998
  n/a
1999
  $1.1bn
2000
  $1.4bn
2001
  $1.5bn
2002
  $1.7bn
2003
  $2.0bn Est
Data: Discovery Communications
Discovery's international distribution
Discovery Channel 146m
TLC 8m
Animal Planet 116m
Kids 21m
Health 15m
Travel & Adventure 61m
People + Arts 14m
Home & Leisure 9m
Civilisation 11m
Sci-Trek 11m
Wings 8m
Data: Discovery Communications
The costs of an hour
John Hendricks
"When we launched in 1985 we could barely afford an average programming budget of $7,000 per hour. In many markets around the world today if you really look at the economics of running a channel the budgets would be similar, perhaps in the range $7,000-$10,000 an hour. Discovery's self-syndicated system of operating which gives us all of our international units contributing to the [overall cost of a programme] which in the US means we can recover $400,000 per hour on a production, add in another $400,000 from our international division, and that's $800,000 per hour of production value that we can put on screen. But one of our much smaller markets might only be contributing $5,000-$10,000 of that, yet getting the higher value on screen."
The vision thing
"We try to remain very, very adaptable. In the US the broadcasting industry has been handicapped because they have not thought of their businesses as being content providers. In the period 1975-1985 they missed an enormous opportunity to create cable channels, but they stayed on the sidelines because they misdefined the business they were in. They saw themselves only as broadcasters. Had they realised they were content providers then they would have been much more adaptable. We remain adaptable and this is a key characteristic for us. We will exploit every platform that comes along over the foreseeable future."
John Hendricks

Discovery Communications is a broadcasting behemoth. Its 14 main channels reach a massive 950 million subscribers worldwide (measured in revenue generating units) via 425 million homes in 155 countries and 33 distinct languages. The data is never less than fascinating, and we could easily fill a page with a comprehensive databank of Discovery's notable achievements, not least the 35m students who each year benefit from Discovery's channel-to-the-classroom, and similar charitable efforts in Africa and developing regions.

Indeed, it would not be wrong to say that Discovery, although operating entirely as a firm for-profit company, is the nearest thing America has to a public broadcaster, other than the praiseworthy but unwatched PBS stations. Its 'mission to explain' (or "explore their world and satisfy their curiosity" as the official Mission Statement puts it) is not that distant from most public broadcasters, in particular Britain's BBC. Consequently, it is no surprise that the links between the BBC and Discovery are many and varied. They have joint-venture channels (Animal Planet and People+Arts) and distribute BBC America, the BBC's flagship channel in the USA.

Discovery was founded in 1985, although the big idea had formed in John Hendricks' head when he was just a 30-year-old university administrator in 1982. While Hendrick's first bright idea was to launch a factual channel, his second good idea was not just to seek carriage on the USA's cable systems, but to get them directly involved in his enterprise. He says in his early days he spoke to 211 assorted venture capitalists before New York-based merchant bankers Allen & Co stumped up $3m in first-stage funding to get the ball rolling. The early days were challenging, with miniscule distribution (156,000 homes on Day One, building to 5m by the end of its first years). Discovery's main backers are John Malone's Liberty Media (50%), Atlanta-based Cox Communications (24.9%) and investment house Advance/Newhouse (publishers of Vanity Fair, New Yorker, and Vogue) taking up the bulk of the balance. Hendricks holds some 3%. Liberty Media, arguably one of the savviest players in global media, achieved its 50% share following a $75m investment by CEO John Malone in 1985.

Liberty, in its May SEC filing (Form 10-Q) stated that its 50% holding in Discovery is being carried in Liberty's books at a value of $2.8bn. Liberty say: "During the three months ended March 31, 2003, Discovery reported increases in both affiliate revenue and advertising revenue." Liberty states: "During Q1/2003, DCI continued its strong execution in a mixed global environment. In particular, US advertising sales showed strong performance compared to the challenging marketplace of a year earlier.

Total operating cash flow increased 41%, driven by an increase in gross advertising revenue of 24% and an increase in gross affiliate revenue of 10%. Total revenue and operating expenses increased 18% and 13%, respectively."

Discovery's international division was also moving forward during Q1/2003. Revenue increased by 15% due to increases in both affiliate and advertising revenue. Operating expenses rose 9% and operating cash flow increased by 67% to $15 million.

As for 2003 generally, Discovery's overall guidance is to expect revenues to improve "in the low teens," while operating cash flow improves 15%-20%, and operating income by a similar amount. As far as its international activities are concerned, Discovery says improvements will be more modest - business has not been helped by the challenges of its Latin American channels - with revenues improving "by low to mid single digit percent" and operating cash flow growing by "high teens." In terms of hard cash, this translates into $370m of operating cash flow for 2002 and they are talking of more than $400m for fiscal year 2003, and more than $2bn in overall revenues for 2003.

Despite these impressive figures, Hendricks stressed that his board has no current intention of taking the business public. "One of the advantages of being a private company is that we do not have to worry about quarterly earnings statements. I doubt whether we would have been able to expand as rapidly as we have throughout the 1990's had we been a public company. So our preference is to stay private, reinvesting our earnings into the company." A Discovery insider summed up the company's philosophy: "The 5 year plan is aggressive and bullish. We're growing, growing, growing… We see the world's major media players a little like a six-sided gaming dice. We want to occupy one of those faces alongside News Corp. and Viacom.

Key to Discovery's impressive growth has been perhaps its relationship with the UK's BBC. Initially the relationship was one of distinct arm's length, where the BBC simply licensed much of its documentary archive to Discovery. The BBC was not alone. Other factual film-makers also made good money from Discovery, not least Anglia TV and its highly-regarded 'Survival' strands of programming. But in May 1998 Discovery's relationship with the BBC was elevated to a much higher plane. It struck a bargain that gave it an exclusive 'open door' to the BBC's archives, paying fair prices for the content but also heralding new joint-venture channels (Animal Planet, People+Arts, BBC America) plus a new programming co-production agreement that has led to the widely popular "Walking with….." series of computer-generated documentaries, and the acclaimed "Blue Planet".

The 'Blue Planet' ocean-based wildlife series won praise and awards from all quarters, but has proven to be something of a curse for Discovery. "We sort of have a 'before Blue Planet' and 'after Blue Planet' problem," said the insider. "The series was so good that almost everything else in our 75,000 hours-worth of archive programming looks boring in comparison…" This is good news for high-calibre production outfits like the BBC. Back in 1998 the Discovery joint venture was the most valuable ever signed by the BBC. Discovery paid the BBC $175m to produce new programmes for the channel, plus another $360m to go toward creating new channels. The deal was renewed earlier this year, and there's no reason to see it end. Both parties seem delighted by the relationship which on the day it launched put the BBC's share in Animal Planet at a value of around $600m. It must be worth more today.

Besides high-definition, Hendricks has another firm prediction. "We are going to see a transition into a video-on-demand led world. We have to ask ourselves will there come a time when the market demands ever more channels or will [viewers] demand a menu of programming services. I suspect ten years from now in markets around the world viewers will have enhanced TV, better picture quality and more network choices. But they'll also be beginning to have a menu of choices, where if they're interested in history they will come to Discovery on Demand and be able to access a history or science library with programming they can enjoy right at that moment. We think these are very powerful consumer trends that you really cannot stand in the way of. Consumers world-wide will migrate to much higher picture clarity, closer to reality and real-life experiences, and they will migrate to more choice, so that when they have a precious hour to watch TV they'll watch what they want to watch."

In July this year, Discovery will be fully present with a mini-bouquet of channels on the newly merged Sky Italia platform. Judith McHale, Discovery's president & COO, said the strategy in Italy, Germany "and globally, is to work closely with the native players in each market, having strategic alliances where that makes sense. Our business is global, and when we put together a programme idea we are frequently able to spread the cost of that show over many outlets. With this sort of distribution infrastructure we are able to buy programmes and launch new services much more easily. It is easier for us. Think how difficult it is for a new, start-up channel, going into a market and having to produce programming for a new subscriber base, as well as having to build up programming people, sales and marketing and advertising people. It isn't easy. Our global presence is one of the reasons for our success. We are able to go in early and build our business as that platform is building. The economics are tough for our competitors."

Dawn McHall adds that the programming mix amongst Discovery's channels ideally sees around 50%-60% of globally shared programming, a further 15%-20% of locally produced material, and finally another 15%-20% of locally acquired content. "This gives a nice mix across the board, and includes our high-profile specials. We always have to remember that while a European viewer might find fascinating a programming on life in Taiwan, that same Taiwanese subscriber wants to see a show featuring African animals while people viewing in Latin America are interested in a show on Europe. This curiosity extends around the world and for us to feature just local material, on local topics for a specific market, would be wrong and would not do justice to what the audience is seeking."

There are around 14 key brands within Discovery's portfolio, and while McHale admits they are always on the lookout for new niches, the line-up is more or less complete. "At the moment we are very much focussed on these brands, and we are investing in them to ensure they can be the very best." Discovery admits that the one genre that has worked less well is nature programmes. "We have to figure out a different way to tell their natural history stories. We have seen millions of feet of footage of oceans and marine life and it is always interesting, but then along comes The Blue Planet and none of us had ever seen ocean life captured so magnificently. We have to push this envelope and look for new and exciting ways to tell stories that may otherwise have been saturated."

This need to find fresh ways of keeping viewers happy is behind the decision to relaunch Animal Planet this autumn, complete with three wild—and sometimes wacky—on-air presenters grouped together as 'Men on the Edge' in primetime. Viewers will note a hardening of the usual 'soft and furry' content as Animal Planet's intrepid wildlife adventurers—'Crocodile Hunter' Steve Irwin, Jeff Corwin, and Mark O'Shea—grapple with high-adrenalin adventures. Also freshly signed is primatologist Dr Jane Goodall, who will create specials for the channel. TBS


Chris Forrester is a TBS contributing editor.

Copyright 2003 Transnational Broadcasting Studies
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