Smaller channels see the most defections but U.S. distribution revenue rises 6%
By Keach Hagey
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 3, 2017).
Discovery Communications Inc. reported an accelerating decline in subscribers to its channels in the U.S., a sign that the unraveling of the cable television bundle is picking up speed.
The media company lost 5% of its U.S. channel subscribers in the third quarter, an increase from the second quarter and up from 2% in the period a year ago.
The subscriber losses have been concentrated among Discovery's smaller channels, while its flagship channels like Discovery channel, TLC and Animal Planet have held relatively steady. As a result, despite the subscriber decline, Discovery was able to increase its domestic distribution revenue in the third quarter by a healthy 6% and reaffirm its guidance for the year of "mid-single digit growth" in distribution revenue.
But the company's results revealed just how fast cord-cutting and cord-shaving are reshaping the television ecosystems, particularly for media companies that lack sports within the U.S. market. Discovery shares were down 7.5% in midday trading.
"As subscriber declines continue across the pay television landscape, we continue to pursue our strategic pivot, to take our content to consumers across every screen and service," said Discovery Communications Chief Executive David Zaslav in a call with analysts Thursday.
Distributors have also been reporting accelerating declines in their pay-TV subscribers in the latest quarter as customers turn to more affordable bundles of online channels and streaming services. Last week, Comcast Corp. reported its largest quarterly loss of cable television subscribers in three years, while AT&T and Charter also recently reported continuing pay-TV subscriber declines.
Discovery has been positioning itself to beat these trends by investing in digital, buying a stake in Facebook-feeding short-form video company Group Nine and beefing up its direct-to-consumer streaming business in Europe with its Eurosport Player.
Mr. Zaslav pinned blame for the subscriber declines racking the pay-TV industry on sports programming and the rising fees that pay-TV distributors must pay to carry broadcast networks. Echoing arguments long made by major Discovery shareholder John Malone, he argued that the inclusion of sports and broadcast networks in essentially all pay-TV bundles prices young people out of the market, driving them to cheaper options like Netflix.
Mr. Zaslav said Discovery's subscriber picture has also been hurt by its absence from some of the new generation of so-called "skinny" bundles put together by YouTube and Hulu, and that talks with those companies are ongoing. Like Viacom Inc., another company lacking sports in its channel portfolio, Discovery said it is in talks with distributors and its fellow programmers to create a new, sports-free skinny bundle. The Wall Street Journal has reported that the entertainment-focused bundle is in the works and could cost about $20 a month.
The other unpleasant surprise for investors came from the company's international division, where the distribution revenue outlook was lowered, in part due to power outages in Mexico.
Discovery executives reiterated their expectation that its deal to acquire Scripps Networks Interactive would close early next year. But Marci Ryvicker, an analyst at Wells Fargo, said she was "watching headlines" on the fate of the pending merger between AT&T and Time Warner Inc. The Wall Street Journal reported Thursday morning that the Justice Department was weighing blocking the Time Warner acquisition if the companies and the government can't agree on terms to satisfy antitrust concerns.
Overall, Discovery's net income in the third quarter was flat at $218 million, as better operating results were offset by $142 million in charges tied to its pending merger with Scripps. Earnings per share increased to 38 cents, due to buybacks.
Revenue grew 6% to $1.65 billion, driven by an 11% rise in the company's international business and a 4% rise domestically. Analysts had expected revenue of $1.64 billion, according to FactSet.
Write to Keach Hagey at [email protected]