Summer
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Elisabeth Herd, Candace Klepacz, Riffat Lakhani, Brian Peres
[Type the abstract of the document here. The abstract is typically a short summary of the
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BUSI756: INDUSTRY & COMPETITOR ANALYSIS
11
Executive Summary
The following report is a three part analysis on the future Discovery Communications in
the traditional television industry. Part one of the analysis focuses on the Industry’s Outlook,
including general background on Discovery Communications (Discovery), the world’s #1
nonfiction media company, Porter’s Five Force Analysis, and a deep dive into the driving forces
shaping the television industry. Part two provides four possible future scenarios for the
television industry, key success factors for survival and analysis of Discovery’s ability to meet
the market’s needs. The conclusion of part two provides recommended changes in strategy
Discovery. Part three of the analysis examines Discovery’s competitors, market uncertainties
and provides additional recommendations. Our research finds that while the traditional
television industry is unattractive to existing participants and new entrants, Discovery has been
profitable since becoming a public company. Factoring in the migration to online viewing of
content and viewing the market as a mass media industry including both television and nontraditional online content the industry is both fast-growing and attractive. However, Discovery is
not sufficiently engaged in moving its content online or developing a strategy to generate cash
flow via online content. Moreover, an important consumer preference towards fluid interaction
with brands via social media and online content leaves Discovery in a weak position. Without
swift, decisive intervention, Discovery will not continue to see the growth of previous years, and
may ultimately lose its leadership position in its market.
Part One: Industry Outlook
General Overview of Discovery Communications
Discovery Communications is the World's #1 nonfiction media company, with more than
1.5 Billion subscribers, over half of those outside the US. Discovery encourages exploration and
satisfies view curiosities through 100-plus worldwide networks, led by Discovery Channel, TLC,
Animal Planet, Science Channel, Investigation Discovery, Planet Green and HD Theater, as
well as leading consumer and educational products and services, and a diversified portfolio of
digital media services. This is exhibited through Discovery’s Mission Statement. “Our mission,
as set forth by our founder John Hendricks nearly 25 years ago to this very day, is to empower
people to explore their world and satisfy their curiosity with high-quality nonfiction content that
entertains, engages and enlightens.” (FDCH Congressional Testimony 05/06/2010)
With the increasing popularity and importance of the Internet and online media it is
important to investigate how Discovery will fare in the new and evolving competitive landscape
that has been created for the television programming industry. What is the future of the
educational programming markets? In analyzing these questions there are two main factors that
are considered, the industry outlook and competitor analysis.
Industry Attractiveness: Porter’s Five Forces
In analyzing the attractiveness of the television programming industry, Porter’s Five
Forces Frame work is helpful. In this analysis framework five forces are identified: rivalry,
bargaining power of suppliers, bargaining power of buyers, threat of new entrants and the threat
of substitutes. Additional support information can be found in Appendix I. Given the recent
decline in traditional television watching the traditional television production market is
unattractive. “More than 2.5 million fewer people were watching ABC, CBS, NBC and Fox than
at the same time last year” (Bauder, 2011). Factoring in the migration to online viewing of
content and viewing the market as a mass media industry including both television and nontraditional online content the industry is fast-growing and attractive.
Rivalry. In the television programming industry rivalry is high and increasing due to the
relatively concentrated market that consists of several large players. In theory, there should be
some recognition of mutual interdependence which would decrease rivalry but in reality each is
competing for viewership which is translated into advertising dollars. Additionally, networks are
constantly engaging in copy-cat programming based on a competitor’s successful show. An
example of this includes the multitude of “Auction Shows” available on cable television. There
currently exists a lack of unique programming. A&E has Storage Wars, while the History
Channel has Pawn Stars, and Discovery has Auction Kings. These shows target the same
audience and provide an undifferentiated product. Given this overlap in programming
consumers have a great deal of choice in programming, yet when asked to rank their five "must
have" channels, Pay TV consumers put the "free networks" (CBS, ABC, NBC, FOX) in the top
four slots. (BusinessWire 2010)
Suppliers. In contrast, supplier power is very low in this industry. Suppliers are
considered the production companies that develop programming as well as the on-air talent.
While among the suppliers there is high competition to get programming ideas on the air, there
is an increase in buyer (e.g., Discovery) willingness to pay due to high ratings, increases in
advertising quotes, and increased customer demand for specific programming. Additionally,
successful on-air shows may be able to wield higher bargaining power to demand higher wages
or cuts of DVDs profits. However, this scenario is likely to be an outlier and most on-air talent
and shows are not likely to command significant supplier power, especially as Discovery is in
many cases, the best or only network for that particular show.
Customers. The bargaining power of customers is low but increasing through backwards
integration and aggressive negotiations. Cable and satellite companies are considered the
buyers. Even with their current low-power situation they are attempting to improve their
bargaining position by tougher, higher visibility negotiations, and rallying viewer support in
influencing content providers. While cable companies are buyers, people at home are the
ultimate consumer and in general they are indifferent to who provides the content. The rivalry
within the cable distributors weakens to both their suppliers (Discovery) and customers.
Dissent in the cable industry and a failed attempt to exert power is demonstrated in the
following example: HGTV and Food Network both went dark for weeks during first quarter of
2010 before Cablevision acquiesced to Scripps’ affiliate fee increase demands. Most recently
Cablevision's New York customers had Fox return "just in time for Game 3 of Major League
Baseball's World Series" after two weeks of nasty accusations and calls for binding arbitration
and government intervention. Fox also almost went dark on Time Warner Cable in early January
2010 for the Bowl Championship Series.
Barriers to Entry. Barriers to entry in the industry are high, for example companies as
large as Hasbro, Oprah (through Harpo), and Sony have partnered with Discovery rather than
attempt to create their own channels. This is due to the difficulty in managing government
regulations, the prohibitive cost of transponders, and the high cost of branding. The nature of
the business requires round the clock programming which is also very expensive to buy or build,
established firms have economies of scale and are able to re-purpose existing content.
Even with the above challenges, barriers are decreasing because Internet streaming
provides a cheaper vehicle to distribute content. Distribution through Netflix and Hulu are not
the only avenue. Small start-up companies currently raise capital from investors who are willing
to take on risk and put up huge capital to allow new entrants to enter the market. Companies
providing capital include, but are not limited to: Microsoft, Comcast, and Disney (Smith/WSJ,).
Substitutes. The power of substitutes to the television industry is high and increasing.
This is due to several factors, first of which is that switching costs for consumers is low, just
change the channel or turn off the TV and start doing something else or consuming media in a
different way. Additionally, movement away from cable/satellite viewing to Internet viewing
(YouTube, Netflix, Hulu, Apple, and Google TV), has the potential to negatively affect long term
distribution fees/advertising revenue (Williams/Examiner). In the third quarter of 2010, Comcast
lost 275,000 subscribers, Time Warner lost 155,000, and another two major players lost 88,300.
The total number of subscribers lost in the third quarter was over 500,000 (Lawler/GigaOm).
The Globe and Mail predicts this is a growing trend and not an anomaly (Taylor/Globe and
Mail).
Discovery's strategy minimizes the threat of substitutes in the form of other TV based
content. Discovery aims for a large target market by promoting a differentiated, high perceived
value product, and strives to keep costs low to decrease the direct threat of substitutes of equal
capabilities. Discovery is able to capture a large audience under it’s umbrella. Discovery’s
flagship network captures the 25-54 year old market which is historically known as a key market
to advertisers. Other Discovery networks have a more focused approach and target more
specific groups. For example, TLC focuses on women and lifestyle. Discovery reaches both
children and families through the HUB network and has niche offerings such as Planet Green
and the Military Channel, all of which provide target demographic penetration for advertisers. As
Discovery does not offer any Internet based/streaming way to obtain its content, the power of
alternative distribution methods as a substitute to TV based distribution is high. Overall, the
growth in the use of social networking and video games, including mobile gaming, is a strong
and growing substitute to traditional television content.
3 year industry outlook: Profitability and Competition
Profitability. At present (trailing twelve months) and over the last few years (5 year
average), the industry as a whole has been profitable (positive Net Profit Margin), and Discovery
has been very profitable (See Exhibit 5). However, as discussed further below in Scenarios,
likely future scenarios entail a continued/accelerated migration away from cable/satellite viewing
and towards online/mobile viewing in the next 1-5 years. Unless industry participants find ways
to successfully monetize online streaming, profitability will begin to decline over the next 3 years
and accelerate over that time. Players which already have well developed online/mobile
distribution strategies will likely face smaller declines and be more likely to retain/return to
profitability. Given its current online/mobile distribution strategy, that is to say essentially none,
Discovery is likely to face larger and more rapid decreases in profitability than other industry
participants.
Competition. As previously mentioned above, the television industry is a high rivalry
industry, with some players opting to initiate strategies that may not support the long term
profitability of the industry, e.g., “me-too” programming fights for market share. Technological
advances in television delivery via the Internet (broadband streaming) and mobile devices will
allow for an increase in the number of players and decrease the value of standard television
offerings.
Driving forces
The television industry is one that is rapidly approaching radical change (see Exhibit 4
for life cycle stage) where core assets and core activities are threatened. To avoid a fate similar
to that of the land-line telephone industry, the television industry must take steps to find new
ways to operate in a changing world. In order to select a strategy, it is important to first
understand the underlying driving forces at work.
Technology. Evolving technology is changing many of the ways that society and
business have operated for generations. There is an increasing movement and general
acceptance to an online-centric life. This is possible due to the increased availability and
accessibility of technology such as, broadband, content streaming, smartphones and tablets,
and mobile applications. The 2009 Parent Teen cell phone survey found that American children
spend 7.5 hours per day creating and viewing media. (Mobl21) The short term impact of
technology in the next one to two years is estimated by this report to be moderate but
accelerating. This means that a threat exists, but actual accessibility to television via other
avenues than a TV, at this point, are not widely accepted by the public. At this point in time we
expect only lead users of Internet television and streaming television to fully discontinue regular
television watching. We believe the long term impact of technology on the television industry will
be severe. A recent Harris Interactive survey found that 56% of participants surfed the Internet
while watching television. (PRNewswire) As technology availability and accessibility increases, it
is certain to jeopardize television distribution and viewing as we know it.
Technology advancements represent both an opportunity and threat for Discovery. This
is an opportunity for Discovery to globally reach more customers through new distribution
channels, but is a threat in that there are and will continue to be more rivals/options for
consumers. In addition technology poses a threat in that Discovery is lagging behind its
competitors. It currently has a very weak presence online, including a near-total lack of
streaming options, and lacks the experience/know-how to appropriately leverage technology like
social media. A September 2010 online podcast with Amber Harris, Manager of Digital
Communications for Discovery Communications, highlighted the difficulties Discovery faces as
the future of the industry moves to a social media platform (Discovery). This rapidly evolving
industry demands that corporations change the way they market to consumers, whereas before
a media company’s strategy was to “craft a message, and advertise it to consumers.” With the
growing availability of information and customer desire for a fuller experience with a given
brand, Discovery is moving towards finding a way to tell their stories by empowering others to
tell the Discovery stories. Ultimately, this results in less control over the corporate message, but
a wider distribution of the message.
Discovery can mitigate risks associated with this driving force by performing market
research to better understand target customer preferences. Technology is changing rapidly
and, as such, consumer preferences are bound to move with the technology. Discovery can
monitor competitors’ moves through use of industry association meetings and trade shows.
Most importantly Discovery must initiate development of innovative online platforms that allow
for customer collaboration and improve the overall customer experience with the Discovery
brand.
Market/Consumers. There is an increasing trend towards consumer preference for
online media interaction/use. The previously mentioned Harris Interactive survey is a good
example. Research has shown that relationships between customers have been shown to
influence brand preference and choice of services. (Pitta and Fowler) We believe the short
term impact of the market and consumer preferences is strong and that its impact will only
increase over time to become severe.
At this point in time, consumer preferences for online interaction with brands represent a
large threat. Discovery does not have the interactive brand experience that customers
increasingly desire. Discovery could turn this threat into an opportunity in that the company
does have some online content available and has begun to create the “shell” of some mobile
apps. The weak apps available leave the consumer wanting more, and are merely the
replication of a TV commercial, movie trailer, or a very short snippet of a show. We believe the
market/consumer force is mainly a threat in that developing an overall enhanced customer
experience will be paramount to the firm’s success in the long run. In order to improve its
customer experience, Discovery could encourage customers to review its products, develop
connections with already popular social media site, seek out tweeters or bloggers who are
popular with target customers and ask them to tweet/blog about Discovery’s programming.
Competition. Imitation of programming is rampant in the television industry. We find this
force to be very strong and expect it to rise to severe levels. Discovery touts its value
proposition in offering unique programming; however, going forward, profit expectations may
create risk adverse management strategies and a "blockbuster" mentality similar to what
happened in other media industries (e.g., tv and movies). Blockbuster mentality refers to
reliance on time-proven formulas and genres, copying other's ideas, relying on sequels,
celebrity casting as opposed to a larger number of smaller projects with lower profit margins.
(Fursich, 2002) With highly risk averse management, Discovery may miss out on profitable
projects.
Increased competition through replication of programming or entry of new players
represents a strong threat to the company. Programming offerings are easily copied and other
players may be less risk averse and thus have more flexibility/agility to try risky projects and/or
programming. Discovery can best protect itself by monitoring copy-catting by monitoring YouTube and other streaming site, generally monitoring and seeking out trends and changing
cultural norms.
Part Two: Possible futures and success measures
The following section of this report provides four alternative scenarios that are likely to
play out in the future. Key success factors for survival in the television industry are listed, and
Discovery’s ability to respond to changes are analyzed. Discovery’s strategy is analyzed in light
of the expected industry changes and resulting recommendations for strategy change are made
below.
Alternative Scenarios
#1 – Cash Cab
Scenario Overview. Customer preference for the availability of online/mobile content
increases beyond the status quo, but customers/some customers still retain cable/satellite
subscriptions. Additionally, customer time available for media exposure (TV or TV-based
content, regardless of where consumed) increases beyond the status quo.
Industry Implications. For the most part, customers will maintain their cable/satellite
subscriptions. However, customer preference for where/how they consume media continues to
migrate towards an “anywhere” model in which customers can consume media on their terms,
either via traditional scheduled viewings, DVR (digital video recorder) viewing, via streaming (to
TVs, PCs, laptops, etc.), and mobile streaming (to smartphones and tablets). Networks without
a well executed online/mobile strategy will suffer as customers choose to consume content from
providers who make content available in the forms which customers prefer. Additionally, there
will be increased customer time on the Internet and on TV which encourages mass production
of media content with no particular customer focus. Consumers will have time to seek out
information that is valuable to them due to increased time spent online or watching TV so
ramping up content production will be crucial to gain competitive advantage. Firms with
developed distribution networks in all media forms (online and traditional TV) will benefit under
this scenario. This scenario also results in decreased rivalry, as the “pie” of customer viewing
time increases, and switching, as customers have more time, the time “wasted” on content that
the customer ultimately does not like is less, and increased demand for content.
#2 – Less is More
Scenario Overview. In this scenario, customer preference for the availability of
online/mobile content increases beyond the status quo, but some customers still retain
cable/satellite subscriptions. However, unlike Scenario #1, customer time for media exposure
falls beyond the status quo due to increased time spent at work, on physical activities, using
social networking, and/or consuming virtual entertainment (e.g., video games, VR, etc.).
Industry Implications. Like in the “All You Can Eat” scenario, customers maintain
cable/satellite subscriptions with a change in preferences toward an “anywhere” model. As
before, networks without a well executed online/mobile strategy will suffer. Additionally, as
customers spend less time consuming media content, networks will have to more carefully
target the content they publish. Firms may become less likely to take risks on unproven and/or
novel concepts and stick with more “tried-and-true” content. A risk here is that customers
become bored with the derivative content and move away from a given network or from
television in general. With less time, customers will use what time they have to watch favorite
shows and not be as willing to experiment with new shows and switching costs (time) will
increase.
#3 – Surviving the Cut
Scenario Overview. In “Unwired” Customers abandon cable and satellite subscriptions
en masse, preferring to obtain content via online/mobile. As in Scenario #1, customer time for
media exposure goes up from the status quo.
Industry Implications. Distribution revenue to networks from cable/satellite companies
drops to a small fraction of the current amounts. This causes revenue declines of up to 50% for
some players (e.g., DISCA 2010 annual report, pg 28). Additionally, without having a specific
number of subscriber figures to present to advertisers, networks may/will be faced with lower ad
rates. Advertisers may demand that ad rates be based on actual views rather than subscriber
figures. The results in lower ad rates may reduce or eliminate the concept of “up-fronts.”
Reduction of up-front ad buys and a shift to post-viewing payment based on actual views will
change the network’s financial operating model and will likely affect funding available for
production of new programming as well as how content is paid for and how talent is paid.
Implications relating to increased customer time for media exposure follow from Scenario #1.
#4 – Deadliest Catch
Scenario Overview. The Judgment Day scenario, combines the mass abandonment of
cable/satellite subscriptions in Scenario #3 and the decrease in available customer time for
media exposure in Scenario #2. In this scenario, Discovery is at a supreme disadvantage
because not only does their content not rank near the top of customer choices, evidenced by
ratings, but also their reliance on broadcast television and lack of online content means that
they will not be able to successfully compete with other media producers that have a strong
online presence. Discovery will have to completely revamp their offerings and tailor them to the
consumer preference for online content. Given the lack of spare time Discovery will also need to
create a perceived added value for their online content users. They can do this by creating an
online community that offers more than just content for viewing.
Industry Implications. Industry implications follow from those discussed in the Scenarios
#2 and #3, respectively.
Key Success Factors
TV advertising fees make up majority of the global broadcasting and cable TV revenues,
accounting for 47%, making this a key success factor for the industry (see Exhibit 1 for global
broadcasting & cable TV market segmentation). Accordingly, businesses are the main buyers in
this market. “Broadcasters are therefore more dependent on this revenue, which raises buyer
power as a whole.” (Global Broadcasting & Cable TV, n.p., 2010)
Secondly, TV subscriptions are another success factor for the broadcasting industry.
Individuals can choose whether or not to subscribe to pay TV services. However, since majority
of these services usually have exclusive rights to popular sports and leading dramas they are
viewed as essentials by some customers. (Global Broadcasting & Cable TV, n.p., 2010)
In addition, according to the IBISWorld, the world’s largest independent publisher of U.S.
industry research, the key success factors for the broadcasting industry are as follows:
o
Effective cost controls: It is important for television broadcasters to manage costs
and keep expenditure in line with revenue.
o
Ability to alter goods and services produced in favor of market conditions:
Monitoring the changing needs and desires of target markets through market
research helps television broadcaster to best adapt programming that will retain
and attract viewers.
o
Having a clear market position: Establishing a strong brand and image will help
TV broadcasters to create viewer loyalty and maintain credibility.
o
Ability to quickly adopt new technology: It is essential for TV broadcasters to
adapt to new technologies to take advantage of their potential, especially for
linked and value-added services.
o
Ability to negotiate successfully with regulator: In order to mitigate losses and
continue to be able to compete against other media, it is necessary for television
broadcasters to lobby for industry preferred regulations.
o
Close monitoring of competition: Responding to other media initiative, in
particular, cable TV programming is key for television broadcaster’s continued
success.
o
Cost effective distribution systems: It is important for broadcasters to constantly
reevaluate methods for distributing TV services, such as by sharing programming
or new technologies. (Kaczanowska, 2011)
Expected changes in success factors
The success factors that will be heightened include: Ability to alter goods and services
produced in favor of market conditions (content) including a customized experience and ability
to quickly adopt new technology.
TiVO/DVRs, Internet affect advertising revenue: TiVO and other DVRs have decreased
the amount of attention paid by audiences and thus have reduced the amount advertisers are
willing to pay for ad space. Instead the emergence of social networks has increased the amount
of money spent by advertisers on online customizable ads. The use of the Internet as a
broadcasting platform is becoming more popular with unlimited broadcasting opportunities. “The
industry faces significant competition for advertising revenue from other media, social networks
and satellite and cable TV” (Kaczanowska, 2011). However it is predicted that as broadcasters
develop new shows and commercials, viewers and advertisers will return to the TV medium. As
consumer income increases over the next five years, industry revenues will be supported by an
increase in advertising.
According to IBISWorld, although total advertising spending is expected to increase at
an annualized rate of 2.1% to $308.8 billion in 2016, there will still be fierce competition from
new media advertisers who can target specific audiences for a fraction of the price.
(Kaczanowska, 2011) Additionally, as the general population ages its been noted that younger
people are turning to alternative media and it is becoming difficult for broadcasters to capture
this audience that advertisers desire. The increasing downloads of programs from the Internet
allow customers access to hit shows without watching TV may ultimately dramatically reduce
distribution revenue for TV subscription fees. In general, the threat of substitutes to the
broadcasting and cable TV market is moderate but growing, but something Discovery needs to
actively plan for.
Other forms of entertainment such as films, social networking, and video games can be
considered substitutes and the increase of these avenues may affect the potential advertising
revenues companies can earn (Global Broadcasting & cable TV, n.p., 2010).
Customized experience preferred: To combat the competition of new media and
streaming programming online, it is expected that the TV industry will expand its content to
attract more audiences. In addition, the industry is trying more interactive ways to customize the
viewer experience and also offer a more direct way for advertisers to sell their products. For
example, “some firms purpose a feature where you can order the product in the commercial with
the click of the remote” (Kaczanowska, 2011). Features like this can help track customer
preferences and tailor ads by using technology similar to Hulu and FaceBook.
Discovery’s ability to meet the demands for success
As described below, Discovery has been successful in responding to the changing
business landscape by tailoring its content to meet the demands of consumers, but it has
lagged in taking full advantage of technology, which can be a determent for growth if it is not
addressed promptly.
Discovery’s ability to meet demand for the Internet: Is weak. While, Discovery has
positioned itself to capitalize on advancements in digital technologies (i.e. 3-D television and
movies and high definition TV), it has failed to realize the need to cater to the internet streaming
and smartphone/tablet apps mediums. Discovery is currently well behind its main competitors
as it does not distribute its content through the web, and only capitalizes on the app market by
releasing very basic apps for both its channels and hit shows (GigaOm).
Discovery’s ability to meet demand for a customized experience: Is moderate. Although,
Discovery does not currently provide methods of purchasing products directly from the television
set, it does provide a customizable experience for its viewers through the content it provides.
Discovery aims to differentiate its product by providing top quality, unparalleled programming
and information to its subscribers.
Additionally, the company has been able to establish an International presence and
continues to look for mergers and acquisitions outside of the US. Discovery has been able to
replicate many of its domestic channels in foreign markets, capturing more than 1 billion
international viewers in 180 countries. This international prowess is not easily imitable. It would
be difficult for other companies to replicate Discovery’s success in this arena. Copying one
channel or one program would not allow rivals to succeed with similar profits. The company
often partners with local companies, notably the BBC, for international channels. This strategy
allows Discovery to take advantage of local employees knowledge about customers, laws,
consumer tastes, and infrastructure.
Discovery has also been able to broaden its customer base by forming strategic
alliances versus acquiring all its partners. This has provided the firm access to Oprah and
possibly her network of daytime viewers. Similarly with Hasbro, with its various properties, e.g.,
Transformers, GI Joe, Discovery elicits ownership of the rights to the content.
Success by the Numbers:
•
9th consecutive year, viewers rank Discovery Channel as the highest quality TV network
•
Investigation Discovery ranked #1 among viewers’ favorite channels
•
Science Channel ranked #2 for innovation- being bold/trying new things
•
Viewers ranked Discovery #1 Channel viewers would like to see in HD, because
Discovery is thought of by consumers to be bold/trying new things, informative,
distinctive, and less cluttered with commercials- highlights again Discovery’s ability at
differentiating itself as a corporation
Discovery’s ability to capitalize on Advertising is strong. Discovery’s strong brand
attracts advertising. Discovery’s shared learning and dedicated teams also work across brands
to ensure that no brand exists in isolation. For example, a Discovery Channel employee sits
next to a Planet Green or a TLC employee. Discovery believes in cross pollination of best
practices and learning across brands. Consequently, Discovery was the only publicly traded
media company to grow advertising revenue in 2009. (Black Enterprise, n.p., 2010) Other
Networks, particularly the broadcast networks ones are suffered decreases in advertising
revenues. In direct contrast, JP Morgan reported that Discovery gained a 9% increase in
domestic marketing revenue and a 35% increase in international marketing revenue in the first
quarter of 2010. Barrington Research reported that in the second quarter of 2010 Discovery
realized advertising revenue growth of 10% domestically and 38% internationally.
As the #1 provider of nonfiction media, Discovery’s economies of scale have enabled
them to capture domestic, international, and online markets. The firm uses its brand
image/power to force cable system operators to buy the entire bundle of Discovery Channels.
Discovery also uses bargaining power when dealing with advertisers to capture lower rates and
in return offers a larger viewing platform for advertisers. (Fursich, 2002)
Implications for Discovery’s Strategy
Overall this industry is both a difficult and constantly evolving one but for Discovery it
has been a profitable one. Discovery has created a niche for themselves in the education and
unscripted segments of programming but the evolution of the industry will make future growth
uncertain. Discovery needs to focus on two key aspects in their strategy attracting viewers and
engaging them beyond the traditional programming avenues. Advertising dollars are key to
profitability and increasing viewers is paramount to boosting ad sales.
Two areas where Discovery is lagging behind the competition are in the areas of
programming available online and non-traditional media creation. Audiences are no longer just
watching a program; they are chatting about it in blogs, purchasing merchandise or apps for
their phones and tablets, and otherwise connecting with other fans of the show. All of those
things extend both the investment of the viewer into the program as well as continue to engage
the viewer long after the program has finished airing in its allocated time slot.
While Discovery has a website and has recently published a few apps, they have yet to
effectively join the online content realm, and this is hurting them. As discussed above, the
programming is easily copied by competitors, and one sure way to keep fans is to engage them
and make it worth their time to be a part of the Discovery experience. Creating a community
surrounding its programs is an important step for Discovery.
Exiting the market is not an advisable strategy, given the depth and size of Discovery
they are a big players in the market and they can continue to grow that market share as long as
their programming remains interesting to viewers, and the recognize the importance of
developing a strategy for evolving how they reach their viewers.
Part Three: Competitor Analysis
Industry Competitors
As stated previously the mass media industry is highly fragmented and each of the
industry giants offers a plethora of content. NBC, CBS, ABC, and FOX hold the majority share
of traditional viewers in the market. Additionally the competitors are much larger with greater
distribution and access to subscribers. Unlike the competitors, Discovery only has many small
successful shows, but no programming to the scale of American Idol or major sporting events.
The lack of programming with huge ratings is a major detriment compared to its competition.
Additionally, each of Discovery’s major competitors has created their own form of online content
aimed at reaching additional viewers. From mobile apps to online blogs for characters and
writers on a particular show, each has created an online space to attract viewers and increase
traffic to their sites while generating buzz about their content offerings. Discovery is at a
competitive disadvantage here as it is lagging in distribution capability online, which could hurt
the company internationally as well.
Recommended Strategic Moves
Given the current industry and competitor dynamics Discovery must take steps to ensure
long term profitability. To increase both competitive advantages and sustainability Discovery
must implement the following measures:
o
Continue to form strategic alliances that outsource non-core competencies such as retail
selling
o
Look for more strategic partnerships like The Hub with Hasbro and OWN with Oprah to
take advantage of desirable content and replace less watched channels.
o
Stop expanding channels and focus with commit to ensure that current brands can
thrive. In addition, lose the brands/channels that are not profitable or declining.
o
Focus on customer tastes, with rise of digital media tastes will change rapidly. As well
as vehicles to generate revenue from this distribution channel.
o
Create a community among their viewers through drastically improved social media
interfacing including active FaceBook, blogging and crowd sourcing. Discovery must
develop a real online/mobile strategy and expand its online/mobile offerings. In addition,
it should capitalize the use of its brand through online advertising as well.
o
Continuously monitor uncertainties of the industry and competitors actions through
industry association meetings and trade shows.
Greatest Strategic Uncertainties
At present, based on global and industry conditions, as well as Discovery’s recent
strategy, the company faces a number of strategic uncertainties including: the current, relatively
grim and uncertain, economic environment, significant questions as to how to deal with content
pricing and portability issues, including potential effects of piracy, delayed viewing (DVRs), the
possibility of lower payments from MSOs as they begin to exercise more power, producing
compelling new content, the increasing power of talent, and creating value for customers to
increase willingness to pay.
As global economic conditions remain recessionary (slow growth, no growth, falling
GDP), customer spending on cable and Internet services may/will continue to decline. As
customer subscription numbers decline, advertising and distribution revenue will also decline.
Internet/online viewing is often free (while Hulu is a notable exception, it is far less
expensive than a cable/satellite subscription. Netflix and Amazon Prime, both subscription
services, are not new content but delayed by one or more seasons) which enables customers to
consider cancelling cable/satellite subscriptions and rely on Internet based offerings. As
Discovery generates approximately 50% of its revenues from distribution fees received from
MCOs (Discovery 2010 Annual Report, pg 28) there is the potential for a significant decline in
revenues. A related uncertainty relates to potential piracy. Once content is made available
online, even via paid services, the possibility of piracy exists, which could lower the number of
paid subscribers. However, as seen in the music industry with the success of iTunes and the
Amazon MP3 store, customers appear willing to pay for digital content if it is easy to find and
use and the price-to-value proposition is good.
In a similar vein, increasing numbers of customers using DVRs (Wells, 2010), which
allow customers to time-shift their viewing, may reduce the amount advertisers are willing to
pay. Since customers using DVRs may skip commercials entirely or watch them after they are
relevant to advertisers, there is the possibility that increased adoption and commercial skipping
will reduce advertiser willingness-to-pay for commercial spots may decline. It should be noted,
however, that households with DVRs tend to watch more television, which is a positive for
Discovery and others (Lawler, 2010)
Although Discovery is popular with customers, distributors (the MCOs) are increasingly
willing to push back on content providers and demand price concessions on distribution fees
even at the risk of blacking-out important content including awards shows and sports playoff
games. As content providers integrate forward or distributors integrate backwards, distributors
may gain further leverage over content providers putting additional downward pressure on
distribution revenue. These factors raise the question of whether Discovery can continue to
prosper in an age of vertical integration
As older properties lose favor with viewers or run their natural course and end,
Discovery must find produce or procure new content to take its place. The key challenge is the
ability to find and fund desirable content. Discovery must continue to produce or procure
compelling content in an era of “me-too” programming in which the second-mover can create
copycat programming with relative ease and use the experience of the first mover to fine tune
the content.
A recent survey by Strategy Analytics found that “The average US household receives
nearly 120 channels, yet watches only a handful of those with any regularity. Although, as
mentioned previously, pay TV consumers ranked the major networks (ABC, CBS, FOX, NBC)
as the “must haves.” “13% of Americans intend to drop their Pay TV subscription--and not sign
up with another provider-- in the coming 12 month period. 47% of them cited poor value for
money as their primary reason for cutting the cord. This trend is growing, and with a lack of
online/mobile distribution Discovery viewership could suffer both domestically and abroad.
(Businesswire, 2010)
Imminent competitors, substitute products and potential new competitors
Discovery’s imminent/main competitors are the four major broadcast networks (ABC,
NBC, CBS, FOX). Each of those players is much larger than Discovery, with greater distribution
and access to subscribers and, as discussed above, are considered the “have channels” by
customers paying for cable/satellite subscriptions. Each of these networks owns multiple
channels and could re-brand an existing channel (a la what Discovery did with The Hub and
OPN) to compete directly against Discovery in its key categories. Each of these major
competitors also has a far more well developed online/mobile distribution strategy (Hulu,
website, Netflix) than Discovery.
However, given the relatively smaller audience sizes for many of Discovery’s most
popular shows compared to broadcast networks, it seems unlikely that the major networks
would launch shows in direct competition on their flagship channels. National Geographic and
A&E produce similar content in many key categories (nature, unscripted series) and both have
well developed online/mobile distribution strategies.
Finally, Discovery is not forward integrated and the Comcast/NBC combination and
others like it could damage Discovery’s market share and bargaining power relative to forward
integrated competitors.
Potential new competitors to Discovery are virtually anyone who can put together a show
in a category Discovery competes in. With consumer level access to high-definition video
cameras and video editing software, it is now possible to skip network distribution and use
YouTube, Netflix (which has begun to stream original content), Hulu, or Roku (which offers
various free and paid steaming channels). (Seigler, 2011) With the rise in popularity of social
networking and the blogosphere, it is much easier for a new show, even one produced by
Hollywood newcomers, to gain popularity. Such success may lead to a purchase offer by
Discovery or another network or offers of sponsorships and ad buys in the existing distribution
medium. Additionally, as mentioned above, any of the big 4 networks could re-brand an
existing channel or even use size and leverage to introduce a new channel that directly
competes with Discovery’s offerings.
Over and above any concerns Discovery has about it existing or future competitors, an
area of significant concern should be the risk posed by substitute products. Key substitutes to
maintain awareness of are the increased use of social networking, i.e., FaceBook, et. al.,
(including on smartphones and tablets), video games (including any virtual reality type
products/services that may arise and mobile gaming), movies, whether shown in theaters or on
increasingly sophisticated home theater systems, or outdoor activities. Essentially, anything
that the customer can do or participate in that will cut into his or her time for media exposure.
Since, at present, Discovery content is only available via direct viewing and DVR, a decrease in
time may result in customers migrating to competitors with online/mobile viewing options.
Conclusion
The television industry is constantly evolving due to the rapid and continuous change in
consumer preferences for both content and delivery method. Discovery is an industry leader,
providing a wide range of content to a large audience throughout the world. This dominance is
being challenged due to Discovery’s lack of response to changing consumer viewing
preferences. The lack of significant online content and overall online presence has rendered
Discovery vulnerable in this highly competitive industry. A change to this strategy and entry into
the online market is vital for the growth and ultimate continued success for Discovery.
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Exhibit 1: Scenarios
Exhibit 2: Scenarios
Exhibit 3: Global broadcasting & cable TV market segmentation (From Datamonitor)
Exhibit 4: Life Cycle Stage of TV Broadcasting
Exhibit 5: Financial Performance Measures for Select Media Companies
1yr
Gross
Operating
Returns
P/E
Margin
Margin
Discovery
7.83%
22.19
69.44
37.59
S&P500
component
average
18.14%
16.66
33.37
n/a
Disney
11.85%
16.59
18.38
18.72
CBS
94.55%
19.68
38.04
14.36
News
Corp
31.84%
15.03
36.49
11.95
Time
Warner
11.74%
15.51
42.14
19.41
Viacom
40.57%
15.11
47.97
24.81
Source – Reuters Finance, retrieved on 6/24/2011
Net
Profit
20.21
Return
on
Assets
7.06
Return
on
Investment
7.62
11.92
12.18
7.05
9.42
9.16
14.3
6.49
6.91
3.73
5.31
3.79
8.82
8.37
8.5
4.48
6.48
4.33
10.63