Discovery Assumes Ad Sales Growth Will Be 'Tepid,' Reality Shows Will Be More 'Real'

U.S. Ad Sales Declined 3% in Fourth Quarter

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Discovery Communications reported better-than-expected fourth quarter earnings Thursday thanks to international growth, but continues to grapple with weakness in the domestic ad market.

U.S. ad revenue declined 3% in the quarter, worse than consensus expectations of a 1% dip. While Discovery is expecting U.S. ad sales to improve in 2015, as it says it sees modest volume and some pricing strength in the scatter market where advertisers buy time close to air, it's still forecasting that the ad market will be relatively tepid this year.

Here are the highlights from Discovery CEO David Zaslav on the company's earnings call with analysts.

On advertising:

The area we are seeing improvement is in volume. For our guidance we assumed it will remain tepid. So far, five, six weeks in, it's better than what we projected, but we really don't have a lot of visibility to how it will be for the next three quarters and so we have assumed that it's going to be tepid.

On canceling its annual upfront presentation to advertisers:

That was really the decision that was driven by Joe Abruzzese [president, advertising sales] and team. We looked at who is coming to the upfront over the last couple of years and then we looked at who comes to a number of the dinners that we do around that time. And we find that the more senior players are coming to the dinners and that we weren't getting the buyers that are making a difference in the upfront. So we are going to have a lot of same material. We are going to have a lot of same sell, but we will do it in small teams going directly to the buyers and the agencies and we think this year that that could be more effective. We'll assess how it goes. It was really Joe feeling that going to the offices of the actual buyers, will be stronger, getting directly to the buyers themselves.

On going direct-to-consumer with "over the top" web-based delivery instead of relying on cable and satellite companies:

Discovery has a direct-to-consumer business that's profitable and growing, something very few media companies can say and our opportunities within this landscape are growing rapidly. Our European OTT offerings is giving us a growing revenue stream, a growing direct-to-consumer offering and valuable learnings that we can apply in the US and other markets. And we're just getting started.

.... I think the ecosystem here in the U.S. is going to stay basically as it is for the next three years. Four, five, six years from now, will there be a peel off of this direct-to-consumer business. I think mostly in the U.S., if TV Everywhere doesn't develop the way it should … it will require all of us to go directly to consumer because the cable guys aren't getting it done.

On programming:

One of Rich [Ross', president, Discovery Channel] key initiatives is to bring more women back. If you look at Discovery outside the U.S., we have much more co-viewing in terms of a younger demographic and we have much more women watching.

We are going to get back to some of our traditional programming, a little bit more of our natural history, science and space. That stuff is working much better outside the U.S., and we want the big blue chip stuff … And we'll also push on some scripted, but it won't be a lot. It will be just some because we think it needs to be part of the overall recipe.

"If you look at what's happened to nonfiction, you see the aggressiveness of picking really wacky characters, -- it's almost become scripted in the way that it's presented and I think the audience here in America gets it. They get that this isn't really nonfiction, that some of these fights aren't real, that some of these characters aren't real. And so what's really been working for us is forget about what everyone else is doing which is looking for extreme characters, more extreme contention, to get back to basics and we have actually made a strategic decision to do that and it's working for us.

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