Summary
- Discovery's implied threat to sue T-Mobile effectively announces the end of the pay-TV bundle since only T-Mobile's approach could save it.
- Discovery will soon launch a new DTC service.
- The service has a chance to close, at least partially, Discovery's large advertising CPM gap with other content producers.
- Discovery will need that boost since the service may struggle to fully replace pay-TV revenue on the subscription side.
- Altogether, Discovery's upside seems stronger than its downside.
Up until now, I have never owned Discovery (DISCK) (DISCA) (DISCB) shares, though I've thought about it more than once. I was recently considering taking another look at them, so I was pretty quick to wade into the earnings call transcript from their recently released earnings last week. However, before I got very far, I was thrown for a loop by an apparently developing dispute with Discovery's newest pay-TV partner, T-Mobile (TMUS) with their new TVision service.
Ironically, after I started to shift my research to this new subject in detail, I realized that it was sort of irrelevant; studying a new pay-TV partner for Discovery only reconfirmed that Discovery's value probably doesn't have anything to do with pay-TV anymore. There is, now, only one relevant consideration for content companies: Direct-To-Consumer.
So, after a bit of a segue, turns out this article will indeed focus on what I originally intended: Discovery's potential revenue increases in a DTC world, and whether those gains have been priced into the stock or there is still some potential appreciation?
A Quick Divorce?
I'll get the distraction out of the way first. The quote that drew my attention was this one:
[CEO Zaslav]: We were very surprised with how T-Mobile decided that they were going to bundle our networks, particularly because we have a clear agreement where our networks are required to be carried on all their basic tiers OTT offerings... We're in active discussions with them to quickly resolve that issue. We don't believe they have the right to do what they're doing right now. And they know, it's very clear to them, and they're focused on it.
What immediately struck me as odd was not just that Zaslav was so definitively accusing a distributor partner of breach of contract, but also that he seemed to be contradicting himself. As I said, I've followed Discovery for several years, even though I've never taken the plunge. And I distinctly remembered the Discovery CEO saying before that he wanted a super-skinny bundle of channels priced at $10 per month, with Discovery's networks but without sports. Now, he finally has precisely that... and he's apparently pretty mad about it?
This is not to say Discovery is being unreasonable. Concern about T-Mobile is apparently pretty widespread since ViacomCBS (VIAC) (VIACA) and Comcast's (CMCSA) NBCUniversal followed up shortly thereafter with similar expressions of concern, though it's not yet clear if all are citing the exact same issue.
But it ought to be clear by now that what T-Mobile is doing today is non-negotiable, if not by the letter of the contract, then by the implacable might of the consumer. For the first time, the day is coming into sight when there will be more non-pay-TV households than pay-TV households, which is expected to happen no later than 2024. The one and only thing that might save it is the approach T-Mobile is taking: breaking down the bundle into a series of smaller, thematic packages that consumers can mix and match into a customized bundle of their own choosing.
If Discovery is not willing to allow even the most mild version of that - remember that T-Mobile, like DISH's (DISH) Sling, has only broken the bundle into two different pieces, while a truly successful transition would probably require seven or eight - then pay-TV is doomed. In this case, the question Discovery is asking, "can we take them to court to stop them doing that?" is as revealing as the answer is.
