Discovery Communications (NASDAQ:DISC.A) officially made its entry into the streaming wars at the start of 2021, and it already counts over 11 million subscribers for its flagship service, Discovery+.

While the company had a running start with soft launches in Europe and an existing service called DPlay, it added 7 million new subscribers in the fourth quarter. That's far better than the starts of some of its competitors like AT&T's (NYSE:T) HBO Max and more akin to the early success of Walt Disney's (NYSE:DIS) Disney+.

A person holding a tablet streaming video.

Image source: Getty Images.

Subscribers exceeding expectations

Discovery was conscious not to provide any guidance on how many subscribers it expects for Discovery+ in either the short term or long term. When pressed for an outlook on the fourth-quarter earnings call, management once again declined to provide one.

Analysts had been expecting Discovery to report 10.5 million direct-to-consumer subscribers. Management not only exceeded that number, but said to expect 12 million by the end of February.

The number isn't quite as strong as Disney's early sign-ups. The media giant reported 26.5 million Disney+ subscribers about two months after its official launch, and it added an extra 2 million in the following month. But Discovery's numbers are still far better than the 8.6 million HBO Max activations in the first four months of its availability.

Discovery has leaned on distribution partners like Verizon in the U.S. and Vodafone across Europe. Lightshed analyst Rich Greenfield estimates the Verizon partnership added between 1 million and 1.5 million subscribers last quarter.

Subscribers are watching a lot of content

Not only are a lot of people signing up for Discovery+, they're also watching a lot and opting for a broad array of content. Well before Discovery announced the new streaming service, it touted the fact that it has an extremely broad and deep library of content. The question was whether there was actual demand for all of that content.

It turns out there is. CEO David Zaslav says subscribers have watched 93% of its content library already. Furthermore, the top 12 titles on the platform account for less than 10% of global watch time. This suggests enduring engagement among subscribers. Indeed, management says churn has come in lower than initial expectations over the first 60 days.

And not only are subscribers watching a lot of different content, they're also watching a lot of it. The average Discovery+ subscriber watches twice as much as the average linear TV viewer. That may be due to Discovery's vast content library combined with its lean-back experience that automatically surfaces new shows to watch and begins playing them. It could also be the result of early sign-ups being bigger fans of Discovery content, and the number could drop as more typical Discovery viewers sign up.

Advertisers are excited, too

Discovery's management says ad prices on Discovery+ are trending above expectations as well. It's managed to bring 100 advertisers on board and it expects 200 advertisers on the service by the end of the second quarter. The robust demand has led to strong ad prices, as Discovery aims to keep the ad load low for its Ad Lite subscribers.

The media company is working on new ad technology to improve ad targeting and produce new formats uniquely available on digital platforms like interactive ads. As it makes progress on those fronts and it brings more marketers onto the platform, it should help its average ad price continue to climb.

The high ad prices combined with strong engagement has led to an average revenue per user for Discovery's Ad Lite subscription exceeding that of its linear networks in the U.S. of about $7. That was a mid-term goal for the company, but it achieved it right off the bat.

Looking toward the future

These three factors -- higher subscriptions, engagement, and ad prices -- produce a lower subscriber acquisition cost and a higher customer lifetime value. As a result, Discovery's management plans to lean into its early momentum and invest more in building out the distribution and marketing for the service while improving its advertising technology.

That means it's reinvesting free cash flow from other parts of the business into streaming. CFO Gunnar Wiedenfels told investors they shouldn't expect a share buyback anytime soon. He still expects Discovery+ to produce a net loss for the company in 2021, too. 

Building on Discovery+'s early success now will likely pay off in the long term. Disney made a similar move in December, when it announced plans to double its content investment in streaming and provided a massive increase in its subscriber outlook.

Right now, Discovery+ is looking a lot more like Disney+ than HBO Max.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.