Discovery’s Zaslav hints at possible global OTT ambition

David Zaslav

Discovery CEO David Zaslav has dropped a hint that the factual giant could look to develop a wider global OTT play either on a standalone basis or with partners.

Speaking to analysts after the company posted its Q1 results, Zaslav said that the US market in particular is underserved with offerings catering to non-sports viewers and services not tightly focused on movies and scripted content, and this could provide an opportunity for a player such as Discovery.

Hinting at a potential new distribution strategy for the factual giant, he said that Discovery could potentially offer a standalone service or team up with partners to fill what he sees as a gap in the market in the US and internationally.

He said that “if you just put together our entire portfolio, that we own globally, and you said that we are going to offer that platform on its own”, this could present a major opportunity for the broadcaster.

“We could do it with one of the broadcasters, or we could do it with a broadcaster in each market, but let’s assume we did it just ourselves globally,” he said, answering an analyst question on digital opportunities.

“What other company could offer a multitude of 18 brands, 10 of them that people know everywhere in the world, and offer it for less than any of those [alternative providers] and have content whether you’re in Brazil, Mexico, Italy, Poland, the US or Canada, where you can watch that content and say there are loads of characters, stories and brands that I love?”

He said that the OTT market was currently dominated by Netflix and Amazon, with Disney aiming to try to match them. However, he inidated that the next player “to get to 100 million subscribers” was not going to be another scripted content player in an overcrowded market.

Zaslav said that going “direct to consumer” globally or regionally, alone or in partnership with a FANG company, was now a possibility for Discovery. “All of that looks attractive to us,” he said.

Zaslav said that skinny bundles and virtual MVPDs in the US were falling short, and that the industry was failing to “fully meet the needs of its viewers”. He said the majority of skinny bundles were “anything but skinny” with monthly fees “inflated by the heavy costs of retransmission consent and sports”.

Zaslav said that close to half of US homes were light sports viewers or non-viewers of sports, meaning that there is effectively a gap in the market for a player that is offering something different. He said that gap was now beginning to be filled as new players enter the market and that “these bundles present a terrific sweet spot for content providers like Discovery”.

More concretely, he said that Discovery aimed to further develop its range of OTT products, which currently encompass services including Eurosport Player and Motor Trend, to extend to “other key verticals” such as food and home.

Zaslav emphasized the extent to which Discovery is cash-rich, arguing that the company is “a free cash-flow machine”. He said that free cash flow was “like a moat in turbulent times” but also a “strategic asset” that would “provide us with a loaded gun”, enabling the company to deploy cash “like bullets where we see opportunities to drive shareholder value”.

Discovery’s international networks were responsible for the bulk of its revenue growth, but also of the decline in its operating income, in the first quarter.

Revenues were up 43% to US$2.307 billion on a reported basis thanks to Discovery’s Scripps acquisition. On a proforma basis, total revenues were up 10%, with international networks up 26% and US networks up 2%.

While operating income before depreciation and amoritisation was up 16% to US$697 million on a reported basis, on a proforma basis, total Q1 adjusted OIBDA was down 6%, with a 1% increase in the US more than offset by a 30% decline in international, primarily due to costs associated with the Olympics. Discover posted a net loss of US$8 million compared with a profit of US$215 million for the same period last year.

CFO Gunnar Wiedenfels said that Discovery was raising its target for synergies from its Scripps acquisition from the initial US$350 million over two years to “at least” US%6020 million, thanks to a reduction in head count, consolidation of real estate assets, marketing and supply chain efficiencies and content costs.

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