"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.
Data: Discovery Communications
Data: Discovery Communications
|Travel & Adventure
|People + Arts
|Home & Leisure
|The costs of an hour
"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."
"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."
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
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."
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
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.
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
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 wildand sometimes wackyon-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'Sheagrapple 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.