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Discovery Communications, LLC — Moody’s says Discovery’s launch of global streaming service, Discovery+, is credit positive

Moody's Investors Service ("Moody's") says Discovery Inc.'s (Discovery or the Company, Discovery Communications, LLC rated Baa3 stable) launch of a global streaming service, Discovery+, is credit positive. On December 2, Discovery announced the global launch of Discovery+ a non-fiction, real-life subscription streaming service, debuting in the U.S. on January 4, 2021. This streaming service will include a huge library of live and library programming, including 55,000 episodes across lifestyle, home and food, true crime, paranormal, adventure, natural history, science and technology, the environment, and documentaries, from most of Discovery's flagship brands including Discovery, TLC, HGTV, Food Networks, ID, Animal Planet, and others. Read More...

Announcement: Moody’s says Discovery’s launch of global streaming service, Discovery+, is credit positive

Global Credit Research – 04 Dec 2020

New York, December 04, 2020 — Moody’s Investors Service (“Moody’s”) says Discovery Inc.’s (Discovery or the Company, Discovery Communications, LLC rated Baa3 stable) launch of a global streaming service, Discovery+, is credit positive. On December 2, Discovery announced the global launch of Discovery+ a non-fiction, real-life subscription streaming service, debuting in the U.S. on January 4, 2021.

Content and programming

This streaming service will include a huge library of live and library programming, including 55,000 episodes across lifestyle, home and food, true crime, paranormal, adventure, natural history, science and technology, the environment, and documentaries, from most of Discovery’s flagship brands including Discovery, TLC, HGTV, Food Networks, ID, Animal Planet, and others. BBC’s Natural History collection, A&E networks, the European Olympic Games and all of the sports programming on Eurosport (including tennis, golf, cycling, motorsport, football, and winter sports) will also be available. The offering will include a wide range of exclusive originals (50 in total initially planned, with a total of more than 1000 hours), as well. The offering is differentiated from its linear pay-TV and direct-to-consumer (DTC) offerings on three basic fronts: Discovery+ will include all of Discovery’s brand libraries (while pay-TV and GO are primarily live), have exclusive originals, and will be commercial free (in the premium package). Additionally, the service will be highly intelligent, able to observe user viewing patterns to deliver curated recommendations to the subscriber, either user-director or automated, and deliver programmatic targeting opportunities for advertisers which produce much better returns.

Distribution partnerships

The company has initially partnered with Verizon for mobile distribution. The arrangement is non-exclusive, and is the first of what we expect will be many additional distribution partners to be announced in 2021 and beyond. The deal with Verizon allows new and existing Verizon customers on certain premium wireless plans, up to 12 months of free access to Discovery+ (Verizon customers on less premium wireless plans will get up to 6 months). Discovery also has a distribution deal with Sky that offers the service to its customers for 12 months at no extra cost.

International Market deployment

Discovery plans to offer Discovery+ outside the US in 2021, with plans to reach more than 25 key markets including Nordics, Italy, The Netherlands, Spain, and Latin America (including Brazil), and parts of Asia). Through its partnership with Sky, Discovery+ was made available to customers in the U.K. and Ireland last month. The offering is also now available in India.

Pricing

Discovery plans to launch with two basic plans in the U.S., a $6.99 ad-free SVOD-like package and a $4.99 Ad-supported AVOD-like offering. Each account will include up to five user profiles and four concurrent streams. The service will be available across all major platforms including connected TV’s and the web through connected devices (phones, tablets, and other devices). The pricing is very well positioned, with the ad-free price at or near the least expensive, relative to the largest players in the business including Netflix (basic, standard, and premium: $8.99, $13.99, $17.99, respectively), Disney+ ($6.99, or $12.99 with Hulu+ESPN), Hulu ($5.99), Amazon Prime ($9.90), CBS All Access — to be rebranded Paramount+ in 2021 ($5.99 with ads, $9.99 ad-free) Peacock ($4.99 with ads, $9.99 ad-free) and HBO Now ($14.99).

Market opportunity/positioning

This is a pivotal and potentially transformative strategic shift for Discovery. The company is fully committed to scaling Discovery+, which has been in development for years, through global distribution, outside the traditional pay-TV ecosystem. Discovery is most certainly late to the dance in the US, with Netflix having first offered its U.S. streaming SVOD service in 2007 with nearly full penetration today, and many others, including Hulu, Amazon, ViacomCBS, HBO, and most recently Disney, quickly building significant market penetration with very compelling pricing and content offerings. According to Nielsen’s most recent total audience report, over 30% of TV households now watch TV programming outside traditional cable, with 13.4% viewed over-the-air, 10.3% viewed on the web/over-the-top (broadband only), and 7.7% viewed through Virtual MVPD streaming services. It’s a very competitive and increasingly crowded — arguably saturated – market, with everyone competing for the same eyeballs and wallets.

However, we believe Discovery will be able to build a significant subscriber base, though not as large as the broader focused platforms, given their unique and competitive content offering, that can be priced aggressively given Discovery’s IP owner-economics, and very low cost, mostly unscripted programming. Stepping in to this party will take well-choreographed moves that are well executed, but given the strength of Discovery’s brands and business model, and loyal fan base, we expect the Discovery+ offering to be successful. We don’t believe this is a necessarily a zero sum game, and while brand loyalties and first-mover advantages will be challenges, Discovery+ will find a seat at this table. Management is positioning this as an “over-the-globe” offering that will nourish its superfans. An all-you-can eat menu, packaged intelligently (by category), built for a wide audience, at a monthly price equal to a premium cup of coffee.

Internationally, the value proposition is less compelling than in the US, given the lower price of pay-TV, but the market opportunity is much larger, especially outside the pay-TV universe, on mobile. Management estimates the population of connected devices / mobile subscribers, in its target market, to be at least 6.2 billion globally — and a direct target for Discovery+. In addition, management estimates another 400 million homes outside the US are target customers. Gaining a small market share of mobile streaming can yield significant subscriber growth, very quickly. In the U.S., the value proposition is more compelling given the ever rising price of pay-TV, but the market opportunity is more challenging given the smaller size of the market and more competitive landscape. Regardless, the company estimates there are approximately 70 million homes in the US that are would-be customers, in addition to the mobile market.

Growth trajectory:

Discovery has disclosed a current base of 5.2 million direct-to-consumer customers on its existing over-the-top streaming offerings including its portfolio of Discovery GO channel applications and Eurosport. The company reports subscribers are up 3x since 2018. While management has not guided to specific growth targets, they do expect tens of millions of subscribers. The company will begin reporting quarterly subscriber results going forward, providing the market with clear transparency on the growth trajectory as it builds. We note, Disney+, which launched just one year ago (November 12, 2019), now has over 70 million subscribers making it the fastest ramp of any streaming service ever launched. While we expect a more modest growth trajectory for Discovery+, it does prove the growth potential of a strong content offering at a reasonable price even if you are late to the dance.

Business model

The revenue model will include a mix of subscriber fees, distribution partner payments, and advertising revenue depending on the delivery model. The company will earn a slightly lower ARPU during promotional periods with Verizon, but expects to incur much lower subscriber acquisition costs (SAC), trading higher volume, margins and profitability for lower revenues. Management expects to earn ad revenue (Cost Per Millions, or CPM’s) that are at least 3x (on average) what they earn on traditional pay-TV distribution, using its experience of earning an average of 2.5x pay-TV on its GO DTC offerings, as the benchmark for reference and modeling. Management also expects the ARPU outside the U.S. to be an average of at least 3x-4x traditional pay-TV pricing.

Three key costs of the service, in order of magnitude, are content, marketing/SAC, and technology. Combined, management is guiding to losses of between $200-300 million in 2021 for the ramp of Discovery+, which is incremental to the $500 million in the current base of losses for building streaming services. Management expects the incurrence of SAC costs, which are not meaningful in traditional pay-TV distribution, to be the second largest cost behind content. It is also the primary variable to better profitability for Discovery+, which is targeted at 20% AOIBDA margins, at full scale.

Discovery Communications, LLC, headquartered in Silver Spring, MD is a leading provider of non-fiction programming. The company largely distributes its content through a branded array of cable networks including Discovery Channel, The Learning Channel (TLC) and Animal Planet, as well as HGTV, the Food Network, and Travel Channel. The company’s parent company, Discovery, Inc., is the publicly-traded stock issuer, ultimate parent of DCL, and the sole guarantor of DCL’s credit facility and notes. Discovery reported revenue of about $10.8 billion in the last twelve months ended September 30 , 2020.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Jason Cuomo Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Lenny J. Ajzenman Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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