Discovery CEO: Soft Ratings Dampening U.S. Ad Growth

David Zaslav at an annual UBS investor conference also discusses the company's "secret sauce" and the success of OWN and lauds NBC for its live version of "The Sound of Music."

NEW YORK – Discovery Communications expects to see weaker fourth-quarter U.S. advertising growth than previously predicted amid softer ratings at Discovery Channel and TLC, CEO David Zaslav said at an investor conference here Monday.

Speaking at the 41st Annual UBS Global Media and Communications Conference, he said Discovery has, for example, seen weaker ratings for hit shows Gold Rush and Moonshiners than in the year-ago period. During the company's recent quarterly earnings call, Discovery had predicted high-single-digit U.S. ad revenue growth in the current quarter. Back then, the firm said a lower number of season premieres in October and November would be offset by  strong market trends.

Discussing TLC, Zaslav said Monday it was a strong brand with continued success, but also said he was looking for "a steadier hand" to make its ratings performance less dependent on individual hits, such as Here Comes Honey Boo Boo.

Zaslav on Monday also discussed the state of OWN and the company's international business.

OWN is "working great," he said. "Oprah [Winfrey] is just an enormous talent and fighter. She really stuck to her heart" after initial challenges. Now three to four years into the OWN venture, Zaslav said, "we had no sub fees, and today every cable operator in America is paying for OWN." Plus, it is "doing very well on the advertising side," he said.

Reiterating that it will again be profitable this quarter, he said Discovery is getting paid back part of its investment in OWN already. He told investors that they would see a "very significant amount of cash coming from OWN to us."

Discovery earlier this year said that OWN, the company's joint-venture cable network with Winfrey's Harpo, has become cash-flow-positive ahead of management's most recent prediction. It said OWN turned a cash-flow profit during the second quarter without detailing its size. Positive cash flow doesn't necessarily mean earnings in the classic sense of net income, given that this bottom-line figure can be affected negatively by other factors.

Previously, Discovery had said a cash-flow-break-even or maybe a profit would come during the back half of the year. "OWN is now cash-flow-positive and starting to pay down the investment Discovery has made in the venture," Zaslav said back then.

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Zaslav also gave kudos to NBC for putting on the live version of The Sound of Music, saying while digital viewing is up, there is still a big social element to viewing live TV together. "It's great, this binge-viewing," he said. "But there is something [fundamentally] social" to stories. "Linear television has a very strong future," which is good news for Discovery.

Zaslav also told the conference that the company is streaming more of its content now, but isn't making much money there yet.

Asked about the value of TV Everywhere rights, which the company recently gave Time Warner Cable in a carriage deal, Zaslav said the answer is unclear so far. He said the firm is talking to others about similar agreements, predicting they would usually happen when carriage renewals come up. "We want it, because it is measured. We can monetize it," Zaslav said.

He also said the firm is looking at putting "some newer content"  on Netflix and the like. "It provides another bite at the apple" and hasn't cannibalized viewership so far, as Discovery has been offering older content online, he explained, saying he was meeting Netflix CEO Reed Hastings next week. 

Discussing Discovery's "secret sauce," Zaslav said that it has successfully localized network brands around the world. Russian president "[Vladimir] Putin's favorite channel is the Discovery Channel," he said. "They don't see it as an American channel."

He called the international operations the best business segment of Discovery. And he predicted continued healthy growth even in the absence of further acquisitions.

Discovery last month announced that it was fast-tracking talks about a possible acquisition of a majority stake in pan-European sportscaster Eurosport, possibly taking control of the group, currently controlled by France’s TF1, earlier than observers had expected.

Discovery had in Dec. 2012 agreed to pay TF1 $222 million for a 20 percent stake in Eurosport, which airs coverage of such events as the soccer World Cup and cycling’s Tour de France in 20 different languages in some 54 countries. That deal included a call option allowing Discovery to take a 51 percent stake in Eurosport on or after Dec. 21, 2014.

But the partners said last month that they have begun negotiations to “evaluate whether Discovery will exercise its call option prior to the agreed-upon date.” It added, though: "The TF1 Group wishes to indicate that it will retain its 80 percent interest in Eurosport France until at least Dec. 31, 2014."

The addition of Eurosport to Discovery’s stable would further strengthen Discovery’s already strong position in Europe. The Discovery Channel is the continent’s most widely distributed network, with 270 international channels across 212 major operators in 43 territories.

Discovery has invested heavily in its European expansion over the past year, paying $1.7 billion to buy Scandinavian broadcast group SBS Discovery Media from ProSiebenSat.1 and inking deals for TV rights to major European soccer and rugby tournaments.

Asked about international growth areas in his focus, he said TLC and ID will keep getting pushed into new markets around the world.

In addition, he said, the Velocity network, which focuses on male audiences with car and other programming, has also gained traction. He said his team would consider pushing such a network targeting male audiences into more international markets over the next year.

Twitter: @georgszalai