For Discovery Communications, the revenue growth lies in television networks overseas

December 17, 2012

Discovery Communications has inked a pair of agreements with television operators in Europe that will strengthen the cable television company’s foothold on the continent as it forges ahead with plans to bolster its international business.

Discovery has sought to expand internationally in recent years as its saturation of the United States market has slowed growth here. The company’s strategy includes exporting its U.S. programs overseas and buying broadcasters in emerging markets.

The shift has been a hallmark of David Zaslav’s tenure as chief executive. During the past six years, Discovery’s international business has grown from 10 to 35 percent of total revenue.

Discovery posted annual revenue of $4.2 billion at the end of 2011, a figure that includes $1.45 billion from its international business. The latter number is up 16 percent from the prior year.

“We’re the largest cable TV player outside the U.S., and our content works very well” overseas, Zaslav said in an interview.

The Silver Spring-based company’s portfolio of television channels includes Discovery, TLC, Animal Planet and the Oprah Winfrey Network, which broadcast such popular programs as Shark Week, “Say Yes to the Dress” and “Here Comes Honey Boo Boo.”

Discovery will offer on-screen subtitles or voice-overs in a country’s native language, replace hosts with local personalities, or craft completely different shows unique to that particular country, a spokeswoman said.

“If you wake up in Russia and you’re looking at the Science Channel, it doesn’t look like an American channel. It’s their channel,” Zaslav said.

The company agreed last week to pay $1.7 billion for a dozen television networks in Norway, Sweden, Finland and Denmark currently owned by the SBS Nordic operations of ProSiebenSat.1 Group. Regulators must approve the deal, Discovery’s largest to date, and executives expect it will close early next year.

Zaslav said the acquisition will give Discovery greater marketshare in countries where it already operates television networks. The deal also gives Discovery control of 19 radio stations in the Nordic countries.

Michael Morris, a senior media analyst at Davenport and Co., said the deal is consistent with Discovery’s plans to grow its presence overseas, but that it may bear less fruit than investors would like because the Nordic countries are already developed and thus not seeing the same economic growth as emerging markets.

“We do believe that when investors buy Discovery, one of the things they like is the unique ability to get exposure to a growing global middle class,” Morris said.

Discovery has made moves in those markets as well in recent years, including acquisitions and organic expansion in such regions as Latin America, Asia and the Middle East.

A second agreement announced last week will give Discovery a 20 percent stake in Eurosport, a channel that broadcasts sports such as skating and tennis across Europe, as part of a $221.6 million agreement signed with television operator TF1.

The company can opt to increase its ownership to 51 percent in two years.

Discovery will also develop TV programs for TF1 stations in France, and pay $18.2 million for a 20 percent stake in channels there.

The deal marks a shift into new content categories such as sports and scripted entertainment for Discovery.

Most of the company’s television shows are nonfiction, which tends to have greater cross-cultural appeal, analysts said.

“It’s yet to be seen whether additional genres would be an asset for the company, so I think it’s worth noting there is some risk when you talk about investing in a business that isn’t a place of core strength,” Morris said.

Zaslav said that there are still subscribers to be won in many international markets, where there tends to be less competition for viewers and advertising dollars because many countries count only a few dozen channels compared with several hundred in the United States.

“They do have a head start and I would say a competitive advantage [compared with other media companies] given that they have boots on the ground in so many markets,” Morris said.

Discovery has a proven track record for spreading its content: Its flagship channel, Discovery, is now broadcast in 210 countries around the world.

Steven Overly covers the business of technology, biotechnology and venture capital in the Washington region for The Washington Post and its weekly Capital Business publication. In that capacity, he has written about start-up struggles, investment trends and major drug discoveries.
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