"Discovery Communications Is Over-valued." Wall Street Analysis & Takeaways

Discovery Communications is an “over-valued” company.

That was the influential call last week by a key Wall Street media industry analyst.

By downgrading Discovery as an “underperforming” stock, Sanford Bernstein’s Todd Juenger rang a bell on 30+ years of tremendous growth in the value of enterprises dedicated to Unscripted / Documentary television.

Key Factors

Juenger cites several strategic factors:

Discovery has strayed from its brand, creating openings for Nat Geo and other competing networks.
International revenue growth is decelerating quickly.
With 14 networks, Discovery is just too bulky for the “skinny bundle” universe favored by operators.

Juenger’s analysis is partly based on his decision to use a new valuation methodology that further punishes Discovery’s stock price.

DISCA: Five-year trend

Several related factors came to my mind, and I’m sure they figure into Mr. Juenger’s analysis:

Reality Bust

The waves of BIG, LOUD Reality TV characters finally ran out of steam.
Networks like TLC that depended on them have ended up with muddied brands, and they lack a clear strategic path forward.

SVOD Boom

The sudden SVOD boom is marked by binge-viewing of Scripted series from Netflix and others, leaving the channels’ Unscripted programs out of the buzz.
The SVOD buzz for documentaries tends to be captured by director-led films, often about recognized topics and subjects.
My favorite example for 2015 was What Happened, Miss Simone?
These films often involve A-List celebrities, for example VIRUNGA, EP’d by Leonardo Dicaprio.

Cord-cutting

There is a modest but increasing trend by young viewers to either cut the cord or to never subscribe to Cable/Satellite.
Channels are losing their most valued young viewers, and thus both affiliate fees and advertising revenues.

“All Tentpoles, No Tent”

The lead channels like Discovery, Nat Geo and History are banking on high-cost “tentpole” shows to anchor their brands and ratings.
These costly “Bigger, Better, Fewer” shows, often with expensive talent attached, are hollowing out budgets for shows that aren’t in the “Signature” category.
They are also sucking programming budgets from 2^nd tier channels like Animal Planet and ‘digi-nets’ like Destination America.

International

Investments in localizing the schedules in international territories are also being postponed, thereby crimping international growth.

MY TAKEAWAYS

Maturity…

Discovery’s loss of around 25% of its value over 52 weeks responds to a fundamental shift in viewing to online platforms.
SVOD and other online services like Netflix don’t offer the generous dual-revenue stream of the channel model, thus draining revenues from the Unscripted sector as a whole, including producers.
Discovery and their channel peers are firmly categorized as a “mature” business sector.
They will commit to cost-cutting, including rolling staff reductions, and more concentration on ‘preferred vendors’ amongst their producers.

… Isn’t the End of the World

It is important to remember that the cable operators rely on the established channels.
Video is a loss-leader for the operators. Their success is driven by the high margins of their telephone and Internet ‘Triple Play’ business model.
The channels are far, far from on the ropes. They have built enormous scale, and they enjoy long-term contracts with the operators.
The demand will continue for a pipeline of compelling new programs.
The business will be harder than when it thrived in the glow of a never-ending boom.
But I remember when Discovery could barely meet payroll. It’s been an incredible journey, and team effort, from Landover to a mega-$Bn valuation.
And my guess is that Discovery and other channels in the category will adjust, scale down, and do very well again.

FLASHBACK: THE HOCKEY STICK CURVE (2011)

Congrats to Ontario’s Sidney Crosby and Pennsylvania’s Pittsburgh Penguins for their victory last night in ice hockey’s ferocious Stanley Cup final series.
As I watched the hockey sticks fly, it reminded me of another ‘hockey stick curve.’
That was the nearly 35 years of unbroken rise in the value of the global Unscripted / Documentary sector.
Below is my post, published in 2011, after a great workshop (and roti prata) in Singapore.
And I’ll soon share more thoughts on the ‘broken hockey stick curve.’

The chart describes the growth of the documentary and unscripted business since 1981, when I landed in New York
My first assignment was to cover the peak event in the U.S. doc business calendar: the annual film festival organized by EFLA, the Educational Film Library Association.
Winning an award from EFLA was THE FILTER for selling 16MM prints to U.S. schools, colleges and public libraries, which then comprised the largest market for docs and ‘art’ films.
It’s hard to imagine, but except for a bare handful of producers with access to the networks, the key gate-keepers were politically progressive school and municipal librarians, mainly women, who just loved ‘creative’ docs.

Upcoming Engagements

Sunny Side of the Doc
La Rochelle, France

DEMYSTIFYING VOD
What the Video On Demand Boom Means for Documentaries
Wednesday, 22 June

Established channels everywhere report that they are losing viewers to online video services.
Netflix original documentaries are opening Sundance and winning Academy Award nominations.
Amazon is launching documentary channels as well as commissioning originals.
Niche players like CuriosityStream are racing to market, and so are regional VOD services like Australia’s STAN.
In this session, a panel of SVOD market participants will first define the VOD market, and then analyze the Opportunities, Success Factors & Deal Terms across the VOD sector.
The experts will respond to questions from Sunny Side delegates on key topics such as how to work with these new players and what they are looking for on the international market.
The analysis will uncover the success factors across the online video landscape.

Panel