Summary
- Discovery's revenue from advertising and distribution has grown consistently since 2014, both in the US market and the International market.
- Discovery's increasing use of the digital platform to provide content gives an opportunity to capture a growing commercial market.
- While advertising revenues may be deferred due to show cancellations from COVID-19, Discovery has managed to create new content that resulted in Top Ratings across its network channels.
- We estimate Discovery's fair value to be ~USD 36 (44% upside from the current level).
Media companies that provide content through linear platforms are experiencing a decline in viewers and subscribers. Even among major media conglomerates, the hype is all related to their digital platforms. However, one particular company is in a good position to ride the wave of transition from linear networks to direct-to-consumer ("DTC") subscription products. That company is Discovery Inc. (DISCA).
Number of subscribers among major brands (Millions):
Consistent Revenue Growth while keeping costs the same
DISCA generates revenue mainly from sales on advertising on its networks and fees from contracts with cable and satellite operators as well as digital service providers for distributing its network content. Advertising and Distribution revenues grew every year for the last 4 years, both in the US and International markets. Following a successful acquisition of Scrips Networks Interactive in 2017, DISCA was able to offset the subscriber loss in its Discovery Legacy portfolio. Over the last few months, DISCA has been raking in TV ratings garnering new viewers among its core demographic audience. Considering advertising price and distribution fees depend on audience satisfaction level or ratings as well as the number of viewers, DISCA can use their performance ratings to demand higher fees.
Source: Discovery Corporate Newsroom
Revenue by Segment and Geography (US Bn):
Despite decreasing demand in linear TV as shown by the decreasing number of subscribers across its network, DISCA still maintains profitability by leveraging its lower cost production model. DISCA's advertising expenses are captured as selling, general, and administrative costs, whereas distribution cost or COGS primarily derives from content expenses including production.
Flexibility in Digital Platforms Integration
Discovery's increasing utilization of digital platforms to expand reach for advertisers shows versatility in a declining industry, while still maintaining a great partnership with their distributors. DISCA provides existing networks and channels using its distribution relationship with Cable TV providers in platforms such as DirectTV Now, AT&T Watch, Hulu, SlingTV, fuboTV, and YouTubeTV. Moreover, DISCA's current streaming portfolio comprises DPLay, MotorTrend, and Discovery Go. Earlier this year, the media company struck a one-year partnership with Amazon to distribute Food Network Kitchen on FireTV, which has tens of millions of subscribers, at no additional cost for FireTV subscribers. Lastly, we expect Discovery to launch a new global streaming service providing BBC natural history shows following Discovery and BBC's 10-year content partnership since 2019.
