Discovery Communications came out with a massive uplift this week in its profitability, on the back of its ambitious sports rights work it has built around Eurosport. It has also raised its guidance for the rest of the year and the year after, based on the transformation it has wrought around such rights. Net income for Discovery was $408 million, up 43% from a year ago on revenue that lifted just 8%.
Essentially Discovery has put its non-fiction TV channels in bed with its sports offerings which has led to better renewal deals with its existing customers. The company’s management touted renewed and more profitable deals with Liberty Global right the way across Europe, as well as Telenor and Telia across the Nordics. And there’s more to come.
Eurosport gained hugely from the decision by regulators in Germany to stop the Bundesliga, which sells soccer TV rights, from having a single buyer, which had favored Sky in Germany. Eurosport has managed to pick up 45 games a year, and so in Germany at least will have the equivalent of Monday Night football, a slot that has elevated parallel US channels ESPN and ABC massively.
The Discovery management claims that it got these games very cheaply and so is set to make profits, and sign carriage deals for the next four years, with impunity. But the nature of the deals also allows it to spearhead a shift into a European OTT sports force, going direct to consumers. It has also landed OTT viewing rights to future Olympics.
Not only has this been one of the most effective diversification strategies in recent years, the Discovery figures act as a glowing example for every content business out there that a life based on sports rights it there for the taking, if you get the sums right.
International distribution at Discovery has returned to double digit increases and it says it expects that to continue for many years to come, in turn bolstering spare cash and further sports right content purchases.
So while US and international affiliate revenues makes up around 50% of Discovery’s revenue, these are now locked in at a higher level and that puts it in a powerful position for those renewals with Liberty Global, and others, so got Discovery an even better price.
It has now embarked on a new deal with Wimbledon and will now bring all four tennis majors to 25 countries from next year. Today because only half of the 300 million homes in wider Europe (not just EU) take Eurosport, there’s a pretty big opportunity to sell an OTT package to the population of over 700 million people.
Discovery also highlighted early Virtual Reality experiments, launched just a year ago, which has resulted in its app being downloaded 1.4 million times and delivering 60 million streams. It also mentioned improvements in Latin America, with its TV Everywhere product, now sold in 11 countries across nine carriers.
Discovery increased its full year guidance from the high teens in terms of growth to least 20%-plus and said its free cash flow would grow at a similar rate.
Discovery looks to the 330 million mobile phone data subscribers in Europe and points out that even if it snags just 1% at $8 a month for its OTT app, that would represent $330 million of extra revenues from the same content. Secretly it thinks that a 5% penetration may be possible, which would deliver $1.6 billion with much of its going straight to the bottom line, plus there would be additional advertising possibilities.
Discovery now has three Eurosport channels and has gone from 120 million subs to almost 150 million and it’s still on a lower margin right now than the original Discovery channels and it sees around 10% affiliate growth each year.