This Is Why Netflix Shouldn’t Fear the New Media Monster Known as Discovery-Scripps

Where does the cable industry go next?

The streaming revolution seems to have only gained steam with the pending merger of two cable powerhouses, Discovery Communications Inc. (DISCA) and Scripps Networks Interactive Inc. (SNI) . In the deal announcement on Monday, July 31, Scripps president and CEO Kenneth W. Lowe stated outright that the merged entity would be looking at cable alternatives.

“This agreement with Discovery presents an unmatched opportunity for Scripps to grow its leading lifestyle brands across the world and on new and emerging channels including short-form, direct-to-consumer and streaming platforms,” Lowe said.

The fact that Discovery and Scripps may want to develop an over-the-top, or OTT, service should come as no surprise. Pay-TV subscriber growth has been negative since 2013, and the cable pay industry has been declining 2.4% annually since then, according to a recent MoffettNathanson LLC report.

Many cord-cutters are defecting to streaming services such as Netflix (NFLX) and Amazon (AMZN) Video or opting for skinny bundles such as Dish Network Corp.’s (DISH) Sling TV. Should a potential Discovery-Scripps bundle worry the former group?

Even though Discovery and Scripps together account for 20% of the viewership on cable, that statistic means less and less as more people cut the cord. Discovery’s acquisition of Scripps will give it access to networks with higher operating income, which could be allocated toward an OTT offering. Discovery Communications CEO David Zaslav has envisioned a nonsports skinny bundle that would be offered at a low price point like $10, a reality that seems closer now that Discovery will have popular Scripps channels such as HGTV and Food Network in its arsenal.

It will still be an uphill battle for an OTT offering to be meaningfully profitable, though. A nonsports skinny bundle, as Walt Disney Co. (DIS) CEO Bob Iger has said, would not be “practical in terms of gaining penetration.” Sports games remain the most popular programming on television, and a skinny bundle without it would be a difficult sell.

Additionally, while Scripps and Discovery operate five of the top pay-TV networks for women, skinny bundles have to appeal to every demographic if they are to replace cable in most households. The bundle that Zaslav has talked up would have to include options for kids, such as Viacom Inc.’s (VIAB) Nick Jr., and also for adult men, such as AMC Networks Inc.’s (AMCX) namesake channel.

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