Are There Better Options for Discovery in Streaming than its "SUV"

After a major executive departure, and in a tough streaming marketplace, what battles is Discovery willing to pick?

Fun question that came to mind during a conversation last night: at what point does Discovery look its own efforts in streaming, and at legacy media efforts in streaming, and opt to partner instead?

I ask this, first, because the confident cheerleading of CEO David Zaslav has sounded less convincing in investor calls lately. Before, it was bullish takes on a Food Network Kitchen partnership with Amazon being in over 40MM homes. Now, with Global Streaming Head Peter Faricy no longer on board, Zaslav's tone is more humbled:

Well, look, everything that we've done, we've been in the direct-to-consumer business for the last couple of years with the Eurosport Player, with Dplay, with Food Network Kitchen and each one of them, we've learned, we've fallen down, we've picked ourselves up. What do people like, what do they want more of, how do we create a product that people love every month, reduce churn, how do we get partners to help us?

He has also introduced a new paradigm: whereas other streaming services are "all scripted series and scripted movies, effectively, they built a road and they all have great sports cars, fantastic and they're beautiful, scripted series and scripted movies", Discovery is an "SUV". Here is how Zaslav describes it:

We have a new SUV, we will be coming to you very soon with more detail on exactly how we're going to roll it out, but our SUV is filled with large fresh content, a huge amount of original content and it comes at a time when people have been, because of quarantine, consuming and consuming Netflix and Disney+ and Amazon and what's on these different AVOD and SVOD services and they've been picking at them, and picking at them, and picking at them.

And so, we think we will launch with a differentiated service, this new SUV, which people will, unlike a lot of these other products, though this is -- it's used, it will be useful every day, all the time, it'll be dependable all the time. And your friends and all the characters that you love, which really differentiates us, fit in this new product, this SUV, there's plenty of room for everyone, all the characters that you love, your favorite brands. It will be a great value and the most important thing is, it's going to be a terrific companion. And we think we got a great lane, it's almost like that lane is ours. If you have Netflix, if you have Disney+, if you have Amazon, if you have any video product, who wouldn't want what we have. It's what most women in America are watching all the time.

And then, you add to that, Discovery, the BBC and all the Planet Earth content, all the environmental and Animal Planet content, so you have the most compelling, high quality content for women and men, that people can watch anytime in the background, their favorite characters, their favorite brands, together with the definitive collection, the World Book effectively, in the science, natural history and environment area. And I think when you put those two together, we're pretty great alone and we're pretty great with everyone else and the road is there for us and we'll be giving you a little bit more detail but we're going to be hitting that road very soon.

This is a long way of saying, it is not quite clear what the value proposition of the SUV is, or who the intended audience is.

Discovery OTT Streaming vs. Free-to-Air

Ssecond, a recent announcement that Discovery is buying the New Zealand free-to-air TV business from MediaWorks, the country's biggest independent commercial broadcaster, reinforces that its best business model, globally, continues to be in broadcast and not in OTT streaming. As Zaslav said on the call:

Europe, I think is much more stable and in terms of what we're seeing in terms of viewership on that platform, viewership was way up on traditional television, it was -- the whole marketplace performed very differently and much more favorably. The idea that we were significantly up and all of our sports weren't even on. And people are watching so much more of our content, which by the way, I think the fact that people are watching a lot more of our content, in the end, we're an IP company. The fact that people are watching, spending more and more hours with our brands, with our characters in the U.S. and around the world, just means that our overall IP library we emerged from this, behaviorally that they're spending more time with our brands and our characters and they love us more. And we love them more and we know them better.

So, with less clarity and confidence in its streaming strategy, and a continued focused on investing in broadcast globally for the distribution of its valuable unscripted library, what will Discovery do in streaming?

Will it launch the SUV? They probably have to at this point, but given the difficulties every service not named Disney+ or Netflix are having with their go-to-market strategies, it is not a stretch for Zaslav and team to be considering their options.

If we take Zaslav at his word that "in the end, we're an IP company", he faces the question of whether the IP is more valuable than the company. Because a streaming service like Netflix or Amazon Prime will value the IP of Discovery more than the entire company, and will pay significantly more for that IP than to own 100% of Discovery Communications, because it can easily assign a Net Present Value to that content. It has no use for a New Zealand broadcasting company, free-to-air networks in Europe, or U.S. pay-TV networks.

So, there is more value in Discovery IP than in Discovery Communications.

Does "SUV" help to unlock that value for Discovery?

We do not know what it will be priced at, and the SUV does not have scale, yet. In fact, right now it has a customer base of zero.

With existing partner Amazon it quickly gets reach to 40MM households, and presumably can lock down deals with Roku and Comcast, thereby getting it into nearly 100MM households total. But it also has carriage deals in place with cable providers and MVPDs that it needs to be sensitive to, and it is unlikely to imitate Disney's approach in the UK of eliminating cable channels (The Disney Channel, Disney XD, and Disney Junior) in favor of its Disney+ streaming service.

I think Discovery will launch its SUV, but one has to wonder whether Discovery is already considering to be too costly. As Zaslav's Europe quote, above, and its acquisition of free-to-air New Zealand TV channels suggest, its international opportunity is not in OTT streaming. And, looking at HBO Max's launch and Peacock's launch, its domestic opportunity may underserve the value of its IP in the U.S. On top of all of this, they have lost their global head of streaming.

One has to wonder whether Discovery is reconsidering its streaming strategy given that all evidence suggests that demand for its content may be best maximized outside of an owned-and-operated streaming platform.

[h/t to Scott Porch for this topic]