The disruptive power of the internet can make or break an industry, a prime example being video. Blockbuster filed for bankruptcy in 2010 while internet content distributors such as Netflix and Amazon have attained multi-billion dollar market capitalisations. The internet has provided these companies with a new avenue for distribution increasing the competition for the best content. This is exciting news if you are a content provider. One of the only listed pure play content providers is Discovery communications (DISCA). DISCA operates in more than 200 countries with over 1.7 billion subscribers around the world and more importantly owns all their content with a 27 year library. Discovery is better known as the producer of shows such as Dirty Jobs, Mythbusters, Gold Rush, Man vs Wild and Deadliest Catch.
Source: 10K
Another industry improvement has been the availability of products which can properly view and stream content. Television used to be just in the home but thanks to gadgets like the iPhone consumers now have televisions in their pocket. The advent of the internet is similar to the rise of the television decades ago for film producers, there were initial concerns over cannabilisation but it actually opened up an additional audience to whom they could sell their products. Half of DISCAs profits are affiliate revenues (shared subscription fees with cable operators) and the other half advertising so the larger the audience the better. According to Neilson, the average American spends 146 hours a month watching traditional television. With the internet and great products like iPhone and iPads the time available to watch favourite content has increased. This has lead to extra revenue to DISCA with very little costs.
DISCA recognised $50m in revenue this quarter from online distributors Amazon and Netflix. DISCA sells content over 18 months olds (average 2-3 years old) to digital distributors generating significant value from their old content. This differentiation of new content from old is important as it does not cannibalise the value cable viewers receive in paying for the most recent content, creating a win-win scenario for investors. Neilson has also announced that it is looking to track online video consumption for advertising purposes at the end of the year. In addition DISCAs affiliate deals with the cable companies come up for renegotiation over the next few years with the bigger renewals occurring in 2014, given the ratings success investors can look forward to increases in subscriber fees.
DISCA main problem has been its joint venture with Oprah which contributed a loss last quarter. The network started out strong however audiences eventually became confused with the absence of Oprah and Oprah like shows that did not embody her values and beliefs. Oprah is now totally focused taking on the CEO and chief creative officer roles. She has made public comments that she will not be campaigning for Obama in his re-election campaign as she is preoccupied with turning around the network. This is a massive change from when she gave Obama her first ever political endorsement in 2007.
DISCA documentaries are highly profitable, they are not like a movie business where hundreds of millions of dollars are spent for an uncertain return. They typically involve following around entertaining people and educating viewers. The shows tend to be culturally neutral, maintain relevance for an extended period of time and translate well internationally with half of content produced shown overseas.
There are plenty of opportunities to grow internationally as viewers and advertising dollars move to cable from broadcast, similar to the US experience. For example in the last quarter DISCA added 766,000 subscribers in Brazil, more subscribers than the US has added in 3 years.
In summary, we believe this environment has created one of the best times to ever be a content provider. The internet and the addition of products that can efficiently stream and show content has increased the competition for the best content and increased the amount of time available for viewing. In our opinion investors need to channel Bear Grylls from Man vs Wild to survive this uncertain market, holding DISCA might just help.
Disclosure: Decisive is long DISCA
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