華納兄弟探索 (WBD) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Discovery Communication, Inc.

earnings conference call.

My name is Brian and I will be your operator for today's event.

At this time, all participant lines are muted and in listen-only mode.

However, we will be facilitating a question-and-answer session at the end of today's call and instructions will be provided at that time.

As a reminder, this call is being recorded for replay purposes.

I would like to now turn the call over to Mr.

Craig Felenstein, Senior Vice President - Investor Relations.

Please proceed, sir.

Thank you, Brian.

Good afternoon, everyone and welcome to Discovery Communication's third-quarter 2011 earnings call.

Joining me today is -- David Zaslav, our President and Chief Executive Officer; Peter Liguori, our Chief Operating Officer; and Brad Singer, our Chief Financial Officer.

Hopefully you have all received our earnings release, but if not, feel free to access it on our website at www.DiscoveryCommunications.com.

On today's call, we will begin with some opening comments from David and Brad, after which we will open the call up for your questions.

We urge you to please keep to 1 or 2 questions so we can accommodate as many folks as possible.

Before we start, I would like to remind you that comments today regarding the Company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

These statements are made based on management's current knowledge and assumptions about future events and they involve risks and uncertainties that could cause actual results to differ materially from our expectations.

In providing projections and other forward-looking statements, the Company disclaims any intent or obligation to update them.

For additional information on important factors that could affect these expectations, please see our Form 10-K for the year ended December 31, 2010 and our subsequent filings made with the US Securities and Exchange Commission.

With that, I'll turn it over to David.

Thanks, Craig.

Good afternoon, everyone, and thanks for joining us.

Discovery's sustained financial momentum continued during the third quarter, as the power of our brands and the value of our content to viewers, distributors and advertisers, translated into double-digit revenue and adjusted OIBDA growth.

I discussed last quarter how Discovery's focused investment in content remains a strategic imperative.

The financial results we delivered this quarter demonstrate how strengthening our existing brands and building new genres creates value and drives organic growth.

Domestically, the appeal of our programming allowed us to continue to take advantage of the sustained strength in the ad market and begin to meaningfully leverage our 25-year programming library across emerging distribution platforms.

Internationally, our diverse content offerings and the unparalleled breadth and depth of our global distribution platform enabled us to capitalize on the continued rapid penetration of pay TV around the world, while also leveraging the strong ad environment.

Demand for high quality programming has never been higher, with more platforms than ever before looking to distribute both current and library programming to consumers across multiple delivery mechanisms.

There has never been a better time to be in the content business.

People are watching more TV over multiple platforms and because we own almost all of our programming, Discovery is particularly well positioned to take advantage of these opportunities.

Our recently announced deal with NetFlix is a good example of this.

We were able to generate significant value from library content, mostly 18-months plus old, while retaining flexibility with regards to our other distributors.

A significant portion of the revenues were recognized in the current quarter.

But revenues from this transaction will continue to enhance our affiliate growth rates over the 2-year deal, as we deliver additional content and for an additional year if we exercise our option to extend.

We have said all along that Discovery is platform agnostic with regards to distributing our content.

We will continue to explore additional opportunities where we could find good economics, flexibility in windowing our programming, and a strong brand environment where the trust and loyalty we have established with our audience across our portfolio can be recognized by the consumer.

At the same time, we will be careful to protect the value that our content provides to our existing affiliate partners and will work with them to deliver high quality programming to an evolving customer base.

The bottom line is that we invest well over $800 million annually in content across our consolidated portfolio.

To that end, any relationship that revolves around our programming needs to ensure that we are receiving an appropriate return on that investment.

Our investment in content is not just paying off from leveraging new platforms and providers, but it is also facilitating growth from traditional revenue streams.

As we discussed previously, Discovery is continually focused on strengthening our existing channels and building new brands.

The result is a diverse portfolio of networks that is enabling us to capitalize on the current strong global ad environment.

There is no better example of this than ID, where our investment in content is directly translating into strong advertising gains.

ID was the biggest driver of our ad growth in this quarter, as viewership was up 50%, led by - Who the Bleep Did I Marry; Nightmare Next Door; and I Married a Mobster.

ID remains the fastest growing cable network in America.

It is the Number 1 network in terms of length of tune among adults 25 to 54, and for the year, it is a Top 10 rated network, a Top 10 rated network for women in America in total day.

We have more than doubled our investment in ID over the last 2 years, which has translated into a nearly 4-fold increase in ad dollars.

And ID still has a ton of room to grow as its CPM is not yet close to commensurate with the audience it is generating.

At our flagship network, Discovery Channel, ratings this past quarter were led by Deadliest Catch, and the return of Sons of Guns whose second season delivered 35% viewership growth over season 1.

While Catch was down year on year due to the record ratings it generated a year ago in its sixth season when Captain Phil passed away, it remains the Number 1 show for men on cable on Tuesday nights.

The fourth quarter has gotten off to a great start, with October viewership up 11%, and just this past Friday night, we brought back 2 big hits from a year ago, Gold Rush, and Flying Wild Alaska.

And the results were excellent, despite going up against Game 7 of the World Series, with the premier of Gold Rush up 60% versus the premier a year ago.

TLC grew primetime viewership 2% this quarter in its key women 25 to 54 demo, led by returning series Sister Wives, up 40% from last season, and What Not To Wear while continuing to own Friday nights where we are the Number 1 network for women with wedding programming, including Say Yes To the Dress, and Four Weddings.

TLC's momentum has continued after the quarter, with October viewership up 6% in women, giving us some ratings momentum heading into the end of the year.

Overall, our sustained investment in content has resulted in a domestic portfolio that is broader and deeper than it has ever been.

The size and quality of the audiences we are delivering enable the Company to generate another quarter of double-digit ad growth, despite the 16% increase we delivered a year ago.

I know many of you are concerned about the ad market going forward, and while it is still too early to comment on 2012, we have not seen any meaningful cancellations on options for next year, and current scatter demand and pricing for the fourth quarter remains strong.

The other area domestically where we are investing in content to build audiences and fill a creative white space is our joint ventures, OWN, The Hub and 3net.

In regards to OWN, Oprah is now the full-time CEO and along with her creative leadership team, we are working hard in developing content that will appeal to her target audiences.

We're very pleased with the recent launches of The Rosie Show, Sweetie Pie's, and Oprah's Lifeclass, as well as a strong return of Lisa Ling's Our America.

Oprah is really starting to nurture her audience and we are building some meaningful audience growth and flow throughout the schedule.

Oprah is on the air 5 nights a week at 8 o'clock with fresh content, and this past Friday, Oprah was on for 2 hours for a live event that was both on the network and Facebook and Oprah.com.

She did it the Friday before as well, and she'll be doing it for the next few Fridays.

Viewership of our new shows are up significantly from the network's previous levels, and the audience is starting to return regularly, building some nice momentum heading into 2012, when Oprah's next chapter launches in prime, along with a lot of new original series.

The Hub also has some nice momentum, delivering its best quarterly total day performance ever during the third quarter, among all key demographics, including 24% ratings growth from the third quarter a year ago among kids 2 to 11.

And at 3net, we have worked with our partners at Sony and IMAX to develop the world's largest library of original 3D content.

And we're seeing positive growth signs for 3D television sales heading into the holiday season.

Our early mover advantage in this emerging space should pay dividends, as consumer demand for in-home 3D experiences increase.

The momentum we are generating from our sustained investment in content is not limited to just our domestic channels.

As I mentioned earlier, Discovery's diverse content offerings internationally and the distribution we have built encompassing more than 210 countries and territories is delivering real growth today.

Our subscriber base internationally expanded by over 10% this past quarter, and that translated into double-digit affiliate revenue growth in local currency terms.

We're seeing our fastest growth in Latin America, led by Brazil and Mexico, but there are other great examples of historically underpenetrated markets, delivering real growth across the globe in places like Hungary and Russia, and in Central and Eastern Europe, and in India, in Asia-Pacific.

With our addressable audience expanding quickly, we remain focused on ramping up viewership and taking share by building out the content offering we're providing to this expanding subscriber base.

We are continually looking for ways to further bolster our programming, whether from internal development in partnership with our domestic networks and at our international production group, from sourcing and sharing programming among our international regions, from investing in local productions, and from acquiring content through third party distributors.

And this applies not only to our existing networks, but also for our new networks and brands that we are launching to capitalize on our market position and platform strength.

We have talked previously about how we wanted to build TLC into the most widely distributed female network in the world and replicate our domestic strategy of delivering diversity to our affiliates and advertisers, by offering a strong female flagship to complement Discovery Channel.

Last year, we set a goal of 100 million homes by the end of 2011.

With recent launches across 46 countries in Africa and the debut across 38 countries in Latin America as well as in Finland today, we are pleased to have surpassed that mark well ahead of schedule.

We are now in 171 countries and well over 100 million homes.

We were always confident about our distribution goals, considering the platform we have at our fingertips.

But what has been equally as promising is that the programming is genuinely resonating with audiences around the globe.

After less than a year, we are the Number 1 female cable network in Poland, and we're the Number 8 network in all of Italy, which helped us generate big growth in Italy this quarter, even though the market only grew marginally.

TLC is not the only content asset we are aggressively building.

In fact, over the last year alone, we have added more than 18 feeds across the globe.

Our new initiatives have already created significant value, contributing approximately one-third of our ad growth internationally, and we will continue to be opportunistic in taking advantage of the unmatched platform we have assembled.

The combination of these more robust programming offerings, with the growing pay TV platforms globally, is resulting in substantial viewership gains, and sustained double-digit advertising growth.

Like the US, it is still too early to predict what happens in 2012 because of the macro environment.

But short-term trends remain strong, and we expect to deliver further growth in the fourth quarter.

Investing in Discovery's diverse set of businesses to capitalize on the organic growth potential inherent in our platform remains a strategic priority.

And we are thoughtfully allocating our resources among these various opportunities.

However, with a strong balance sheet and free cash flow of over $1 billion, we are also returning capital to shareholders.

Since last November, we have returned over $1.4 billion in capital, including over $350 million this past quarter alone.

With over $1 billion still available under our buyback program, we will continue to return capital to shareholders aggressively, if we determine it is the best use of our balance sheet.

Discovery's sustained financial momentum throughout the first 3 quarters of 2011 speaks to the power of our brands, the enormity of our distribution platform, and the strength of the operating environment.

Our investment in further building out our brands and platforms around the globe puts us in a great position to take advantage of additional market share and deliver further value and sustainable growth to our shareholders.

And with that, I will now turn the call over to Brad.

Thanks, David.

Discovery continued to deliver robust revenue and adjusted OIBDA growth in the third quarter.

As a favorable operating environment enabled us to enjoy double-digit global ad growth and strong international subscriber gains, while the strength of our content enabled us to enhance our domestic distribution revenues through an expanded digital licensing agreement.

Total revenues increased 18% compared to the prior year, led equally by 19% revenue growth from each of our domestic and international operations.

Please note that the current quarter includes $77 million in revenues from our expanded licensing agreement with NetFlix and the prior year includes $19 million in revenues from the Discovery Health Network.

Pro forma for the Discovery Health Network and excluding the incremental licensing revenues and currency fluctuations, our Company revenue growth was 10%.

Excluding currency fluctuations, our total operating expenses in the quarter increased 17% compared to the prior year, primarily due to $24 million of higher content impairment charges related to our US networks and $11 million of additional expense related to the expanded licensing agreement.

The increase also reflects the higher content amortization that we have highlighted previously, as well as the timing of marketing.

As a result of our ability to generate strong global revenue growth, we increased our adjusted OIBDA 15% to $479 million compared to the prior year.

Excluding the impact of foreign currency and the deconsolidation of Discovery Health, adjusted OIBDA increased 17%.

Net income from continuing operations increased 48% to $238 million, reflecting the improved operating performance and incremental licensing revenue, offset by higher content impairment and amortization, as well as increased tax expense.

Our earnings per share increased 59%, faster than the pace of growth of our earnings due to the 7% reduction of our outstanding shares compared to the prior year from our share repurchase program.

Our free cash flow decreased to $314 million in the third quarter compared to the prior year, due to the improvement in our operating performance being more than offset by the timing of certain working capital expenditures.

Please note the content licensing revenues recognized did not impact free cash flow in the third quarter.

The payments from the licensing arrangement revenue recognized and to be recognized in the future will be received quarterly over the next 2 years.

Year to date, our free cash flow has increased over 70% to $718 million compared to 2010.

Turning to the operating units, our US operations delivered substantial revenue growth with revenues up 19% led by the 33% increase in our distribution revenue, primarily due to the incremental licensing revenues from our 2-year agreement.

A significant portion of the contract revenues are recognized at the front end of the contract corresponding with the delivery of content to our distribution partner.

We anticipate recognizing the remaining revenues over the duration of the contract, as we continue to deliver content and expect that the agreement will add 200 basis points to 300 basis points of incremental growth to our domestic affiliate revenues prospectively.

Our revenue expectations do not include the optional third year of the contract.

Including the impact of the license agreement and Discovery Health, distribution revenue growth -- excluding, I'm sorry, the impact of the license agreement and Discovery Health -- distribution revenue growth was 5% and ad revenue growth over 11% compared to the prior year.

The substantial ad growth was led by the strong performance of Investigation Discovery, as well as the sustained favorable pricing and demand environment.

The attractive current market conditions continue to exist in 2011, and we anticipate our fourth quarter domestic ad sales performance to accelerate from the third quarter levels to a mid-teens increase pro forma for the impact of Discovery Health compared to the prior year.

Our domestic operating expenses were up 33% from the prior year, with a significant portion of the increase due to the expected higher content amortization that we highlighted previously.

In addition, our cost of revenues increased $24 million from the higher content impairment charges, and $11 million related to our expanded licensing agreements.

On a reported basis, domestic adjusted OIBDA increased 9% versus a year ago.

Excluding the impact of Discovery Health, the incremental content impairment charges and the expanded licensing revenue, adjusted OIBDA was flat with the prior year, which was consistent with our guidance on the last earnings call.

We anticipate the resumption of double-digit domestic adjusted OIBDA in the fourth quarter.

Turning to our international operations, our third quarter revenues grew 19%, driven by 20% advertising, and 20% affiliate growth.

Excluding the impact of favorable exchange rates, revenues increased 12%, led by a 16% increase in advertising, and complemented by a 13% increase in distribution compared to 2010.

We enjoyed double-digit ad growth across all of our regions, with particular strength in Asia and Western Europe.

Our strong advertising growth in Western and Eastern Europe was driven by the success of TLC and Real Time in markets such as Norway, the Netherlands, Italy, and Poland.

Our international distribution revenue growth was led by continued strong subscriber additions in our Latin American, Eastern European, and Asian-Pacific operations, with 11% year-on-year subscriber growth at our most fully distributed network, Discovery Channel.

Operating costs internationally were up 7%, excluding currency fluctuations, primarily due to higher content amortization, sales, commission, and personnel costs.

Our international team continued to deliver strong OIBDA growth, up 20%, excluding the impact of foreign currency, while thoughtfully investing in key growth initiatives.

As we look forward to the end of 2011, we remain encouraged by the fact that the beneficial pricing and ad trends we have experienced throughout the year are continuing.

As a result of our third-quarter performance and current conditions, we are raising our expectations for the full year 2011.

We anticipate revenues of $4.175 billion to $4.25 billion, adjusted OIBDA of $1.925 billion to $1.975 billion, and net income of $1.025 billion to $1.075 billion.

With our strength in balance sheet and strong operating performance, we continue to return capital to our shareholders through the execution of our share repurchase program.

Our first priority is to invest our capital in our core business to enhance our shareholders' returns.

To the extent we have not found opportunities with attractive financial returns, we are utilizing the cash on our balance sheet, as well as the cash we generate from operations to repurchase our shares.

We repurchased $355 million of our Class C shares during the quarter and since inception, we have bought back over $930 million under our share repurchase program in addition to the repurchase of $500 million of preferred Class C shares.

I hope everyone's enjoying the return of Gold Rush on Discovery, as well as the return of Next Great Baker on TLC and Disappeared on ID.

And please tune in on the 12, to Pit Bulls & Parolees on Animal Planet.

David, Peter and I will now be happy to take your questions.

(Operator Instructions) John Janedis, UBS.

David, I know it's early, but with YouTube's announcement last week that they had launched a fair amount of original content, it would seem as though the barriers transferred for distribution of that content have been lowered, and I guess I'm wondering, is that as potential a move in this direction?

How does it change the way you think about programming investment if at all, and does it make the launch of newer networks like Velocity more challenging in theory?

Well, YouTube has been very successful over the years and we've been able to grow our channels very effectively and build our brands at the same time that people are enjoying content on YouTube and on a lot of other platforms.

Since we own all of our content, our strategy remains the same.

Quality content, strong characters, great stories, and then we have the opportunity to take that on to all kinds of different platforms, including what we just did now with NetFlix, a new window, that's primarily 18 months and older.

So as long as we continue to build our brands and tell great stories, we feel like we're really in a growth mode.

Okay.

Just quickly on Oprah, can you give us the update in terms of the investment there?

Sure.

We added approximately $12 million to the balance of our investment during the quarter.

$8 million was funded and $5 million was accrued interest.

David Bank, RBC Capital Markets.

Two questions.

The first one is, when you look at advertising growth domestically in terms of what you're seeing in 3Q versus 4Q, how big are the differences in drivers at the kind of pricing -- pricing versus ratings level as drivers for 3Q versus 4Q?

Could you talk about that a little bit?

And secondly, you took a -- some accelerated amortization, a programming write-down in the third quarter on the domestic stuff -- on the domestic division.

And of any of the companies in the space, you guys probably monetize your content most across international territories.

Why was the write-down restricted to the domestic side?

Thanks.

Sure.

David, it's Brad.

I'll take the question you had pricing versus ratings.

The majority of the increase of both the third and fourth quarter is due to pricing, as well as a little bit more on sellout.

Ratings are basically a wash between the two quarters in terms of their contribution, so it's more a marketplace-driven environment.

With regard to the question on where the impairment charge is, if you look at our year-to-date impairment, because of the nature of our business' content and -- it is an uneven in how impairments recognize this when assets no longer have a full value.

And so, year to date, we've impaired about $40 million of content in 2011 and year to date in 2010, it's been about $40 million.

So, it's just the timing of those in which quarter they fall is uneven.

But year to date, they are about the same.

With regard to domestic international, it was primarily domestic this time.

International has a lot of the same, utilizes some of the same assets, and when they feel, and they evaluate their assets, they look at the values and whether it still is meaningful to them and they can generate revenues off it.

So that decision's made every single quarter as we look through our portfolios.

Michael Nathanson, Nomura.

I have one for David and one for Brad.

Dave, let me start with you first.

I know over the years you really thought about how do you work with online distributors like NetFlix.

I wondered, what went on in your head to do the deal now?

What kind of things were you seeing about your ratings or maybe how your distributors reacted to other people's deals?

So what made you get larger with the NetFlix versus kind of where you guys were before and has your thinking changed on that subject?

Okay.

Well, we were always very anxious to figure how out how to monetize our library in a meaningful way.

We didn't see a business model that really worked.

So NetFlix has gotten some meaningful scale.

And the idea of creating a new window of primarily 18 months and older really plays to our sweet spot, because we have all this content; we own all of the content.

The deal is not exclusive, so it gives us an opportunity to play in the same way with anybody else with that same window.

It's not international.

We did domestic only, because although NetFlix and other type players are expanding around the world, we're taking a hard look at where it makes sense.

The economics were strong, and we were able to work with NetFlix in getting some concessions on branding, which we thought the environment was important to us, we were able to get some of that.

When you put it all together, it's a big net positive for us in that we have all of this content, we know how valuable it is, and doing a deal with NetFlix that recognizes that value gives us some additional meaningful economics.

We're going to look and see how that plays out.

We have flexibility in terms of content that's on there.

We'll see how people consume it.

But we were also -- created some flexibility in the deal in that it's a 2-year deal with a 1-year option on our side.

And so the hope is that NetFlix does well and that this creates a whole new window for us that's very effective.

It also -- we don't think it's going to interfere with our ability to continue to monetize our content and our brands in a very meaningful way in the traditional cable area.

And then we have this additional window coming up of TV Everywhere, which represents newer content, both streamed content on other platforms and newer content.

Now, we haven't done any broad deals with operators on that yet, and under our existing deals, no distributors have the right to take our 13 channels onto TV Everywhere, but that's another window that we think could be advantageous, because it's measured and it's authenticated and it presents another opportunity.

So all of these opportunities for content deployment with good economics and value, I think presents an opportunity for real growth for us.

Can I follow-up on that?

Probably go to Brad, does that third window of selling TV Everywhere, do you think this kind of sets principles in place that there is a separate value you guys have crystallized for your programming?

Is that what you're alluding to here?

Well, we have always felt that our content is valuable, and the fact that we have a very good relationship with our distributors, that relationship provides for our content to be provided through to the TV set.

And so to the extent that offering our content on other platforms or being able to have a catch-up of 1 month, 2 months or 3 months of some of the best stuff on all of our channels is -- we think could be a real value to consumers.

The distributors are very focused on providing it, because they believe it could provide real value as well, and for us, we're very supportive of it.

We just feel like we need to get value and how we define value will come through in the negotiations.

Okay.

And to Brad, in the fourth quarter, what percentage of your inventory is from the upfront versus what the third quarter looked like?

So is there a meaningful step up in inventory allocation to the upfront in the fourth quarter?

It is slightly more in the fourth quarter than in the third quarter.

And does that drive more of the pricing?

Is that helpful in pricing?

It is helpful to the pricing, but the scatter market prems are also fairly robust in the fourth quarter, very consistent levels with the third quarter in sort of the percent of premiums.

Jessica Reif Cohen, Merrill Lynch.

I just wanted to clarify something on the NetFlix deal.

Were the costs only $11 million, the close costs that you highlighted in the release, or were there other costs, I mean is it possible that the margin was 86%?

That was the cost that we allocated, Jessica.

We took a portion of our existing programming assets on our balance sheet and we allocated an expense related to it, to the risk.

Okay, and I mean, Brad, how should we think about ongoing costs?

You had the impairment charge, but you said -- you had it last year as well.

Just as we look forward, how should we think about margins, particularly in the US side of the business?

Can you just give us some color on kind of the cost pressures you're seeing?

Sure.

If you look at the US, this quarter was a little bit of an aberration because you had a catch-up of amortization.

So now you're going to have the amortization for the programming, costs or costs of revenues grow roughly in line with our cash spend, which is going to be in the 7%, 8%ish range is where our cash spend has been in content.

In terms of our SG&A costs, we have swapped some marketing costs from the first quarter into the third quarter of this year, so overall, our SG&A have been growing in the low single digits.

So from a domestic point of view, that's been about the run rate, of how we've been running.

Okay, and one last question.

When do your new affiliate deals start to roll through?

David just talked about TV Everywhere, which are part of your next, I guess next contract negotiations.

Can you just talk about how you're feeling about kind of the affiliate?

It sounds like there's going to be increased value for TV Everywhere, but is the timing 2012, or is it much later?

It really depends.

Our -- we don't have any big deals coming up until the end of 2012, and then they kind of lay in from 2012 forward.

The idea of doing something nearer term on TV Everywhere are discussions that we're having.

The distributors are very keen to roll out TV Everywhere.

We're participating in a number of the tests.

And whether we do them or not will depend on how quickly they can deploy it and we can get it measured.

Today, it is measured on the computer, but it's not measured on pads.

So how quickly can it get measured?

And how quickly could we in the content business come up with the right valuation between us and the distributors so that we can provide it?

On a worst case basis, it would be likely dealt with as part of a renewal at that later date.

And there's the possibility it might happen before.

Jason Bazinet, Citi.

I just had a quick question on ratings.

While the ID ratings are quite good, there is some concern I think on The Street about your flagship network Discovery having some ratings declines.

Do you mind just spending a second and sort of highlighting the 1 or 2 shows that have caused the ratings decline and sort of the prospect over the next 12 months?

Okay, just to give you a sense, first, October has been quite strong for us.

We're up about 11% in the aggregate for October.

And so we come into the quarter with some good momentum.

We just launched on Friday 2 shows for us that have been very strong, Gold Rush and Flying Wild Alaska.

The piece that hurt us really a little bit is some year-over-year comparative data, and that's that Deadliest Catch actually did very well when you look at it versus any other year.

It was on par or showed growth.

But the sixth season had one of the very popular captains actually got sick and passed away, and so there was a huge spike.

So there was a little bit of a CAGR issue with that and then we have Friday nights where we do survival programming, which was Man Vs Wild, Dual Survival, and it was -- for a portion of the year, we do Gold Rush and for a portion of the year, we do our Survival.

The Friday night just wasn't working as well this year.

And we haven't figured out yet exactly why.

We're talking to the audience, but more importantly, we've now rolled in Flying Wild Alaska and Gold Rush and Friday night right now is looking up and better.

And so we'll have to figure out what we do with Friday night and whether we go back to Survival.

Richard Greenfield, BTIG.

Two pieces.

One, just a follow-up on Michael's question earlier, when you think about the amount of value you got for NetFlix, it would seem like you and many others in your peer group are starting to sell pretty aggressively to NetFlix catalog content.

When you think about how many hours in a day there are to watch programming, either you're getting a great deal and NetFlix is overpaying, or people are going to start watching more and more content, older content instead of watching newer content when it's airing live or when it's on a DVR, watching live plus 3.

Just wondering, how you think about that trade-off.

Do you actually worry about a significant shift of viewership from live to either a season delayed or multiple seasons delayed because there's great programming being made available on a delayed basis on NetFlix and the risk/reward there.

And then two, Brad, could you give us an update on what Oprah financials look like?

I know you talked about your investment.

Is there a way to think about the actual financial side of what Oprah is generating, or what OWN is doing today in totality?

Thanks.

Rich, I'll take the first one.

On NetFlix, candidly, nobody knows.

What we do know is so far, and this isn't our first foray with NetFlix.

We had a deal with them where they had some of our content.

We couldn't find through our research any discernible degradation.

In fact, NetFlix homes, the people that consume a lot of content on NetFlix were over indexing in terms of how they consumed TV and how they consume us.

But that's just directional.

We -- there isn't enough data out there.

When I ran syndication in the cable group at NBC, on the syndication side, there was some thinking that hey when you syndicate a show, then the ratings of the original's is going to go down.

Well in many cases, in most cases, we found that when we syndicated the shows, that -- and then we brought back the originals, that the ratings went up.

Is that going to happen now with NetFlix?

We don't know.

We have older seasons of shows, so if somebody watches an older season of Gold Rush or an older season of Deadliest Catch, is that going to get them more excited about coming back in and watching more of our shows?

We don't know.

We're going to watch it.

We're going to look at it, we're going to get as much data as we can.

Our inclination is that this will not be a degradation issue, but we do -- one of the reasons why we provided this flexibility of a one-way extension after 2 years is, one, 2 years is up before any of our deals come up, so we can take a look at how is this affecting us, and, two, it gives us a chance that if we find that it's going very well, to just very cleanly optionally pick up the next year.

So we're going to see.

And we'll keep you posted.

Rich, just following up on your Oprah question, while we don't disclose the financials of any of our joint ventures, it is negative cash flow, so we are still funding it.

And in our equity pick up line, and we did pick up a small loss related to it and so this is the 2 financial elements I would point to.

Is there any way to think about though, kind of where -- maybe just update us, where is distribution today in terms of total subscribers?

And is there any like high level revenue number to think about just -- there's some way obviously you're really not getting any value in your EPS at the moment from the OWN Network, but obviously, there is a substantial value.

Is there any way you can kind of help us think about that value?

Well, we don't disclose total revenues.

So at this point, it's still primarily advertising-driven, is the revenue streams.

But our way to think of it is, you have got 2 tent poles, which is -- we have the advertisers that have been supportive and have re-upped.

We have distributors, a number of them we've done deals with, and there is a number we haven't yet.

And the challenge for us right now is putting really good content that nourishes the brand, that goes at -- that drives the Oprah brand and really supports this idea of living your best life.

So what we're putting on the air now, Oprah's doing Lifeclass every day at 8 o'clock.

In that time period, we're up 125% versus last year.

We've got fresh content with Rosie every day at 7 o'clock.

That's up 65%.

We have a lot of activity on Oprah.com.

We have over 3 million streams in the Lifeclass, and what we're getting is this feedback of, okay, I get it.

We have our content that's on brand, whether it be Lisa Ling or Sweetie Pie's, this is -- we're starting to swing in a positive direction in terms of getting people to spend time with us.

And like we said all along, this is going to take us some time.

In January, Oprah herself will launch with more of an entertainment-type show, which is Oprah's Next Chapter, a broader appeal-type show.

Then we have a lot of other development.

But those are the 3 pieces.

Continue to drive the advertising, the advertisers that are with us, and have been supporting work over the next couple of years on the distribution subscriber side, but most importantly, nourish the audience that loves the Oprah brand, the great brand that we've gotten behind that we have so much confidence in.

Spencer Wang, Credit Suisse.

Two questions.

First, for Brad, I just wanted to clarify how we should think about the NetFlix revenue stream in the subsequent quarters to 3Q.

That 200 basis point to 300 basis point I think uplift to US affiliate revenue -- is that going to be relatively ratable over the rest of the term of the deal, or will it be lumpier, just depending on the timing of when shows are made available?

And is 85% a good kind of margin assumption, like you saw in third quarter?

And then maybe the second question for David or perhaps Peter, if the NBA lockout persists longer, do you guys envision that would have a positive impact to some of your more male-skewing networks?

Thank you.

Okay, Spencer, with regard to your question on NetFlix, it will be the 200 basis points and 300 basis points will be on average.

So it will be lumpier as we do deliver product.

And the margin assumption, again, will be lumpier depending on what that asset mix.

But it should be within that relevant range.

Thanks, Brian.

Look, on the NBA front, male audience available is an opportunity for us.

We do have an overlap with sports viewership.

It should work out to our advantage, but we're taking a wait and see attitude.

Peter do you think that, that's helping you in the fourth quarter at all yet?

There's not a lot of that in our numbers.

Yes, it's not on the advertising activity front, no.

Ben Swinburne, Morgan Stanley.

Brad, going back to program amortization growth, we haven't seen the details.

I don't know if the Q is out, but it seemed like it accelerated a decent amount in the third quarter from the first half.

You mentioned the catch up.

I guess I'm surprised a little bit about the quarter to quarter volatility.

I don't know if you could comment a little bit more on just for what happened there, and then you had mentioned high singles going forward.

Do you expect that to be pretty smooth as you move through the next, I don't know, 3 to 4 quarters?

Ben, the Q will be filed tomorrow morning, so you'll have it then.

With regard to the amortization, it's been fairly consistent how it stepped up throughout the year.

It's been almost a sequential $10 million greater each quarter domestically and it was consistent with our guidance exactly how we laid it out.

So at this point, you're at a much more now normalized moving into the fourth quarter going forward and that will be that kind of high, 7%, 8%ish growth rate of cost to revs.

Okay, and then just maybe a question for the team and whoever wants to answer it.

The licensing revenues you've generated here from NetFlix, I mean, there's not a lot of businesses out there that can generate 80% incremental revenues.

I know everyone's sort of trying to figure out how real this all is, but does this entice you to spend more on programming because you've just -- you're seeing sort of new windows being created right in front of you, most of which deal with sort of building a library of content that's pretty powerful, at least on the online front, and then you mentioned TV Everywhere, it's sort of all tied together to powerful programming.

You guys have -- you've always said that the best return on capital investment opportunity you have is your own programming.

It seems like that's never been more true.

And then sort of an absolutely contradictory comment I would love to get your thoughts on, is one of the numbers in the NetFlix investor letter that kind of scared me a little bit was the 8% contribution margin they talked about on streaming.

I think a lot of us feel like there's more NetFlix out there.

We always talk about Amazon, who started to do some business, but how do you guys think about the opportunity set beyond NetFlix, given sort of all the moving pieces out there on online distribution, sort of touching on Rich's question, but sort of adding more to it?

On the investment in programming, we don't really see this -- the new window really doesn't play into our focus.

Our focus is really investment, -- it be thoughtful, and we have a very kind of rigid investment base focus on how we spend money on content, and it's all on success.

So we're spending more money on ID.

We're spending more money on Science, because it's growing.

We spent more money on TLC because we were able to drive it around the world.

So where we can see growth, we're going to continue to invest in our content, and you've seen a meaningful increase in that investment.

On the new platforms, we've always been platform agnostic.

We're about quality content that satisfies curiosity that we can take around the world and put on any platform.

We held back on the web because we just didn't see the model.

So we are rooting for a lot of -- we're rooting for NetFlix.

It's an attractive platform.

We're also rooting for a lot of the other players that are getting into this space, because it provides more value for us, more bites, more people that can see our content, more economics that we can get for our content.

So for us, this is just another manifestation of the fact that it's a good time to be in the content business, particularly if you own your content.

Anthony DiClemente, Barclays Capital.

I just have one question for the team.

It has to do with the guidance for reacceleration in ad revenue growth.

It seems to imply a pretty robust pricing in the spot market.

I'm just trying to square away in my own mind, how much of this is advertiser demand, and how much of it is scarcity of supply across the system?

A couple of the other questions alluded to that.

But if I look across cable TV, it's not just Discovery but there are a lot of other of your competitors that are suffering from ratings declines.

And so I just, I think back to where we were for the broadcast networks a number of years ago, where viewership was declining, but pricing increases were making up for that because the more and more audience fragments, the harder and harder it is to reach a mass media audience.

Therefore the higher and higher and higher an ad buyer would pay for that CPM in order to reach that audience.

I wonder if we're getting you to that point in the world of cable television.

And so I just wonder if you could, on a near-term basis, comment on whether it's demand versus supply scarcity on 4Q pricing and then longer term, maybe talk about the possibility of that longer-term trend.

Thanks a lot.

Okay.

Well, just in terms of a macro point, year to date across our domestic platform, we're up a little bit more than 3%.

In the past several years, we've invested more in content, but we've been able to grow market share.

We're convinced that we're going to be able to continue to grow market share domestically and around the world.

Let me have Brad speak to the specifics of the scatter market and the economics.

A big piece of it, Anthony, is that it's happened pretty much over the last couple of years, that as broadcast viewership declines, that it provides -- the broadcasters end up either out of sale or with less inventory.

And that presents some significant pressure in a positive way for us in the, on the cable content side of the business.

And it has happened.

That doesn't mean it's going to happen in the fourth quarter or in the first quarter of next year, but it has happened and if broadcast continues to decline, that presents a real opportunity, particularly where broadcast is still on a CPM basis garnering 35% or more increases in terms of CPI differential between broadcast and cable.

So if there is head wind in a market where there's no longer sub growth, it's the CPM differential between broadcast and cable, particularly in environments where on a regular basis, cable, including Discovery on a Friday night could be beating broadcast networks and still trading at a discount.

Anthony, to answer your question with demand or scarcity, if you think about the fourth quarter where you're building off a higher upfront base, so you're starting off a high single-digit, low double-digit increase and then you're taking premiums to that increase.

So that provides you with a little bit more acceleration from where you were in the third quarter.

Scarcity may play some role in that and it's in the spot market, but you're also building off just a higher absolute base of pricing.

Does that make sense?

Yes, it does.

Tuna Amobi, Standard & Poor's.

I have a few as well, if I may.

So the first question is on ID.

I think it was David that recently alluded to just about 30% of the audience, just knowing that they have ID, which is mind boggling when you think about the upside on the other 70%.

So I guess the question is, as you now kind of approach full distribution on ID, are there any international markets perhaps where you see that this crime formula can be successfully exported or replicated either, kind of on a stand-alone basis or perhaps in joint venture with a local partner?

Yes.

We -- ID, we have already begun to roll it out outside of the US.

We're finding some meaningful success and we do plan on accelerating that.

Whether we do it by ourselves or whether we do it in some markets with a local partner to provide more local content, we haven't determined that yet.

We tend to like to do it ourselves.

We have a very good recipe.

Our content is strong.

Our library is strong.

We've already tested it in a number of markets and it's working.

And so we think that over time, it could be a very nice leg for us to build on what's already a very robust international platform, which, as you can see from this quarter, continues to accelerate and grow for us, which is a big differentiator, our international business.

And the fact that ID works well, it joins Animal Planet, Science, and Discovery as being channels that we could really amortize over bigger markets in the longer term.

Okay.

Separately, with regard to the education business, I think the past year since it seems like a fair number of acquirers, potential acquirers looking to do some deals in that segment.

Is there any reason why Discovery needs be in that education business at this time, or is this perhaps a good time to try to monetize that asset and kind of get, take what you can get?

We've -- our education business is profitable.

We're the leader in digital content into the classroom.

If there's a computer in the classroom, we reach 95% of that.

It's a very gated community in that if you wanted to try and replicate that distribution, you would have to go school district by school district to do it.

So it's a very valuable path into teachers and into the classroom.

The economics aren't compelling, but the ability to reach and make an impression on both teachers and students throughout America is strong.

It also has been a nice lead horse for us in terms of STEM.

We're working very effectively with Dr.

Holdren and with Obama with respect to STEM; we're a leader in science, and with Secretary Duncan.

And we're finding that being in education also helps us around the world.

A lot of what we own in education is not -- 80% of it is not our actual video content.

It's curriculum-based science, social studies, and education material.

And so when we go around the world being able to have a discussion about where we are with digital content and the ability -- we provide, we find that often it's a helper.

So net-net, it's good for us to be in that business.

It feels good to be in the business, and I think it helps us.

Alan Gould, Evercore Partners.

I've got two questions.

David, what is the size of your library?

And what's the number of hours you licensed to NetFlix?

And, Brad, could you just give us scatter versus scatter for the 3Q and how that's pacing for 4Q?

We don't disclose the numbers.

We have a 25-year library.

We own almost all of it.

And in terms of the percentage that was in this NetFlix deal, the percentage isn't large.

But we tried to be thoughtful with NetFlix as to what content we put on there to provide value to the users.

So there's a lot that isn't in there.

All of it's non-exclusive, as I said.

Brad?

Sure with regard to scatter to scatter, it really depends on networks.

It's usually high single digits to double to teens, even low 20%s depending on which network when you compare year on year scatter, and that trend is somewhat similar scatter to scatter in the fourth quarter.

Michael Morris, Davenport.

Two questions.

First, on the international side, double-digit ad growth in Western Europe, certainly very impressive, particularly in light of the health of the economy over there and what we're seeing in general in the ad marketplace.

Can you talk in a little more detail about -- I'm just trying to figure out going forward what this can look like.

How much of that is share shift into pay TV, how much of it is you being able to roll out incremental channels?

A little more detail on pricing versus units there would be helpful.

And then on ID we've seen the ratings growth for quite a number of quarters now.

But this is the first time at least that I can recall that you've really highlighted the financial power that you're seeing in that.

What happened in the third quarter to kind of kick that into gear?

And when we look at that guidance for ad growth in the fourth quarter, how much is ID contributing to that and how much of it is still your Big 2 networks?

Let me take the first.

ID is in there.

It's not that significant.

The thing -- the opportunity for ID is that the CPM is still quite low, and we've been working very hard, Joe Abruzzese and his team.

We have a team selling just ID.

There's really nothing that's happened.

It continues to grow.

When we look at the fact that it's the Number 10 network in America, when you look in terms of all day rating, it's very powerful in terms of its reach and the amount of time people are spending with it.

So we have focused hard on how do we drive that CPM?

I would say we're in the second inning of that.

So we think we just have a lot of growth left on that asset.

On international, in Western Europe, it was mostly market share.

I'm going to let Brad speak to it.

But we launched a women's platform in Italy called Real Time, and it's the Number 8 channel in all of Italy.

And so by gaining market share, by launching, whether it be TLC or Real Time or ID, in some of those markets, we've been able to gain some share and then monetize that.

But Brad can give more specifics.

Yes, with regard -- it really was share shifting.

Italy was a big part of that, as well as TLC in the other countries I mentioned.

We also -- it also was a pretty good environment for pay TV in terms of price for most of the markets.

I think the one hot market I would highlight that was not as favorable was the UK, and it is our largest market.

That offset a little bit of the growth that we are seeing in Western Europe.

It was a combination of the elements that you walked through.

Thank you, everybody, for joining us.

If you have any follow-up questions, feel free to give us a call.

Ladies and gentlemen, that concludes today's conference call.

You may now disconnect your lines, and have a wonderful day.