DISCA Discovery Inc

By Keach Hagey 

"Shark Week" and "Chopped" could soon be available as part of a new skinny bundle of channels in the U.S. for as little as $6 a month, following the merger of the networks' parent companies.

Discovery Communications Inc.'s $11.9 billion acquisition of Scripps Networks Interactive Inc., which is expected to close Tuesday, will create a nonfiction programming powerhouse of 18 cable networks, including HGTV, Discovery, TLC and Food Network.

The company -- to be renamed simply Discovery after the merger -- will have the heft to sell its own programming packages directly to consumers, in much the same way that Walt Disney Co. has pledged to do with its coming online video offerings, said Discovery Chief Executive David Zaslav.

"We may be, aside from Disney, which is primarily in the kids space, the only deeply compelling, global IP company," Mr. Zaslav said in an interview. This position gives the newly expanded Discovery the opportunity to "put together an offering by ourselves, or with others" for "maybe six bucks or seven bucks or eight bucks."

Such low-price options will be a key part of the new Discovery's efforts to combat the declines in its core cable networks business. Discovery's channels lost 5% of their subscribers in the U.S. last quarter and Scripps channels face similar headwinds as viewers continue to drop traditional cable packages.

Worried that Discovery had bought itself more exposure to the pay-TV industry's woes, investors pushed Discovery's stock down for several months after the Scripps deal was announced in July.

The stock has since recovered most of that ground, and Discovery executives were confident during their most recent earnings call in February that they would be able to realize $350 million in cost savings from the deal.

"This deal has massive synergy," Mr. Zaslav said. "We have 600 ad sales people. They have 500 ad sales people. How many do you need?" The combined company will have 11,000 employees.

Discovery plans to shut down its headquarters in Silver Spring, Md., and open a new headquarters in New York for both Discovery and Scripps personnel. It will keep Scripps' headquarters in Knoxville, Tenn., open as its "operations headquarters," primarily for back-office work.

The company also plans to find cost savings by shutting down Scripps' international infrastructure outside of its successful business in Poland, and by wringing better pricing out of suppliers.

"We were competing very often with HG[TV] and Food and Cooking," Mr. Zaslav said. Now that they are all on the same team, "we should see some real stability" when it comes to content pricing, he added.

On the revenue side, Discovery will begin by testing content from Scripps channels on Discovery's existing international channels. The company might then roll out an international version of Food Network or Travel Channel.

Discovery recently took a $1.3 billion charge related to a write-down of its business in Europe, where Netflix has disrupted pay-TV viewing in some of the most mature markets.

"Our international business was growing in the low- to mid-teens [percentages] for many years," Mr. Zaslav said. "It slowed down in the last two years because we used most of our library. We think that if we can use the Scripps content at no cost, and if we can get some ratings growth, that will be a real revenue synergy."

Discovery also expects the deal will boost revenue as the bigger company, which now accounts for 20% of pay-TV viewing, gains more leverage in advertising sales and in negotiations with distributors to secure higher fees for Scripps's channels.

Mr. Zaslav sees the newly merged company as zagging to nonfiction programming at a time when the rest of the media industry is zigging toward the crowded field of scripted series. Discovery's average hourly cost of content is about $400,000, he said, compared with about $5 million for a scripted series. Scripps' content has historically been even cheaper.

"We look at that side and we say, 'Good luck with that,'" he said. "That's not what we do. We don't do red carpet."

Write to Keach Hagey at keach.hagey@wsj.com

(END) Dow Jones Newswires

March 06, 2018 14:53 ET (19:53 GMT)

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