As more and more customers migrate from paid cable subscriptions to skinnier, lower-cost bundles delivered over the internet, investors are questioning how niche content companies such as Discovery, Inc. (DISC.A) (DISC.B)(DISCK) might fit into this brave new world. Last year, Discovery saw its subscriber count fall by 4% on a pro forma basis, though pro forma distribution revenue still grew 1% due to affiliate rate increases. (Pro forma numbers measure organic subscriber growth across Discovery and Scripps Networks, which Discovery acquired last year.)
Adding insult to injury, AT&T's (T -0.14%) DirectTV Now service just dropped Discovery, along with AMC Networks and Viacom, in order to make room for HBO on its new "Plus" and "Max" plans.
However, immediately after that bit of bad news, Discovery received some counteracting good news: It reached a new deal with YouTube TV, Alphabet's (GOOGL 4.20%) (GOOG 4.16%) Google's live TV subscription service that just reached 1 million subs in March. Following the YouTube deal announcement, Discovery shares rocketed over 6% the next day.
People want Discovery's content
Before DirectTV Now cut ties with Discovery, YoutubeTV was the only "skinny" bundle with which Discovery hadn't struck a deal. But no more -- while financial terms weren't disclosed, Discovery will immediately bring eight channels to YouTube TV as of April 10: Discovery Channel, HGTV, Food Network, TLC, Investigation Discovery, Animal Planet, Travel Channel, and MotorTrend networks.
A ninth channel -- Oprah Winfrey's OWN network -- will also come to YouTube TV by the end of 2019. Not only will Discovery's channels be offered on live YouTube TV, but content will also be available via YouTube's on-demand service.
The press release announcing the deal was particularly encouraging for Discovery shareholders. In it, YouTube TV global head of partnerships Lori Conkling said that Discovery's channels "have been a key ask from our subscribers."
In conjunction with the announcement, YouTube is also raising the price of YouTube TV by 25%, from $40 to $50 per month. Perhaps the addition of Discovery was the spoonful of sugar to help a pre-planned price hike go down, but it could also be the case that YouTube merely saw more value in offering a $50 bundle with Discovery's lineup than a $40 bundle without it.
Discover the viewership
Discovery trades at just 7.6 times forward earnings estimates, as investors have become wary of relatively smaller content companies in a world in which people are shedding their full cable packages for more unbundled choices. Still, Discovery's management has long pointed to its large primetime cable audience as a reason why it will survive and thrive in the new over-the-top world. The Discovery Channel is the No. 1 non-sports cable channel among men 25-54, and Investigation Discovery is the No. 1 channel among women in total-day viewing.
Just recently, Discovery announced it will begin selling individual niche channels a la carte starting in 2020, including a natural history-themed offering for less than $5 per month, with plans to potentially offer others across home improvement, cooking, and cars, as well. So, if a viewer, say, really, really loves natural history but not cars or cooking, they can sign up for an individual-interest channel without having to get a Discovery "bundle." This individual-passion focus follows Discovery's strategy with its international over-the-top GOLFTV streaming service.
Still, as the YouTube deal shows, there's also value for distributors in having an array of Discovery content. As mentioned, Discovery still gets significant cable viewership, and unscripted content costs far less to produce and carry than expensive, premium scripted content. Besides the YouTube deal, Discovery recently extended its contracts with SlingTV and Hulu last fall -- another sign that distributors want what Discovery is selling.
Making streaming moves
While it wasn't pleasant news, AT&T's recent dropping of Discovery (and others) was more about how to make room for HBO -- which AT&T now owns -- on DirectTV Now, and not necessarily due to a lack of value in Discovery's content. AT&T has been fumbling with DirectTV Now's pricing and channel mix lately, with DirectTV Now actually shedding some 14% of its subscribers last quarter as aggressive promotions from a year ago rolled off.
If these new skinny bundles really could do without Discovery's channels, I don't think we'd be seeing all of the other skinny packages (besides DirectTV Now) bringing Discovery on board and passing along price increases to customers in order to do so.