Discovery dropped $14.6 billion to buy the dying cable TV business model more time

July 31, 2017

Discovery dropped $14.6 billion to buy the dying cable TV business model more time

Shark Week

Having spent $14.6 billion to buy Scripps, Discovery has more negotiating leverage with TV distributors and advertisers.
That's good news for smaller cable networks that could otherwise be on the chopping block.
The Discovery-Scripps combo can also look to accelerate the growth of data-driven TV ads and digital.

There are many reasons that Discovery Communications is snatching up fellow cable TV stalwart Scripps Networks for $14.6 billion. But there's one that stands out: this buys the dying cable TV business model more time.

In the short term Discovery gets more leverage to squeeze as much as it can out of the cable model. More specifically, the combined power of the two companies makes it easier to keep smaller yet solid revenue producing networks alive for a few more years until the cable business reinvents itself.

Earlier this year, the TV industry was abuzz with the news that NBCU was shutting down the Esquire network, while A+E was killing the cable network FYI, as Variety reported. Many saw this as the beginning of the end for the bloated universe of cable networks, in a world where most people only watch a handful of channels if they're not streaming their favorite shows.

But now with Scripps, Discovery boasts of 19 cable channels, including five of the top 10 rated cable networks among women aged 25 to 54. Over the next few years, when it negotiates with traditional distributors like Comcast or Time Warner, it can say to those companies something like:

"If you want to offer Discovery or Food Network, you need to also pay us to carry smaller networks like Velocity or Great American Country."

And as Discovery executives negotiate with newer cable alternatives (the so called "skinny bundles") like YouTube TV or Sling TV, they also now have a much better chance to make sure their networks make the skinny bundle cut.

The company can have the same type of horse-trading conversations with advertisers: "If you want to run ads on our highest rated networks, well, you need to buy some ads on our smaller networks."

In a few years, the TV business will likely have been reshaped dramatically. But cable executives believe that there are several more lucrative years ahead before cord-cutting and streaming do irreparable damage. So the Discovery-Scripps combo lets them wring as much cash out of cable's envied dual revenue business model (where they make money from subscription fees and ads) for as long as they can.

Here are some other benefits for Discovery:

Discovery is now more of a digital player

It's worth noting that Discovery recently invested in the digital content rollup Group Nine Media, which includes publishers like Thrillist and NowThis. Now, between Discovery and Scripps, the company believes it can better compete with the BuzzFeeds of the world in web video scale and video ad money.

Plus, like in the cable universe, Discovery has more clout when negotiating deals with the likes of Facebook, YouTube and Snapchat.

Discovery has a better chance to shape the future of ads

As digital advertising surges and traditional TV viewing dips, the TV industry has looked to embrace data and technology to offer more advanced ad targeting. That's the premise behind Open AP, a joint initiative between Viacom, Turner and Fox aimed at accelerating this trend. Now with Scripps, Discovery can essentially build its own version of that data-infused TV ad platform, theoretically enabling advertisers to buy ads reaching specific audiences, such as new moms eyeing minivans in the next six months.

Here's a key line from Discovery's presentation announcing the deal:

"Combined data expertise and strong short form/digital scale will offer a compelling proposition
to buy targeted audiences across platforms"

Among Scripps' quiet strengths in this realm: it has a large amount of data on consumers from an ongoing series of sweepstakes and special products it delivers to viewers, like HGTV's "Smart Home" giveaway. And Scripps also makes web video content on behalf of many advertisers.

It should be easier to invest in new technology

For any big TV company, there's an ongoing need to invest in technology and engineering talent. These are areas the TV business isn't necessarily known for. Yet these companies can't make every bet. They can't build their own ad tech and VR studio and artful intelligence lab, for example. The combined heft of Scripps and Discovery lets the two companies spread out these costs more effectively.

There are lots of other motivations for the deal, such as:

Scripps networks have lots of room to grow internationally, where Discovery is strong.
The company is better positioned to launch its own "non-sports" skinny TV bundle.
The company's fledgling Discovery GO app, which allows cable subscribers to log in and watch shows on demand, already makes Discovery tens of millions of dollars, according to a person familiar with the matter. After this deal, that app can now be bolstered by all of Scripps' shows.
The two companies say they'll save a lot of money, referencing an "estimated $350M annualized run rate cost synergies"

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