Discovery poised for 12%-13% international affiliate fee growth in 2017, analyst says

Discovery Communications CEO David Zaslav speaks at Investor Day 2015
In the U.S., Discovery can expect its affiliate fees to keep growing, but not at the same rate as overseas.

Discovery Communications could be due for some substantial affiliate fee growth overseas, according to one analyst.

“Following the recent deal with Sky, there is a high level of visibility that affiliate fees will grow in the 12-13% range this year. Importantly, we think there are scenarios in F18 where affiliate fee growth can continue at a similar rate. Growth in pricing has been a more important factor, driven by sports content in Europe,” wrote Jefferies analyst John Janedis in a recent research note.

Janedis comes to this conclusion after recent meetings with senior execs at Discovery, including CEO David Zaslav.

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Expanding on sports content, Janedis said it’s important that in Europe, Discovery owns sports rights on all platforms. He also noted that all of the programmer deals to carry the Olympics in Europe seem to have been done at least in-line with expectations. He said it will still take a few quarters to know to what extent those deals were profitable.

Zaslav has been big on Eurosport—a network Discovery fully acquired in 2015 for $534 million—and what that network is doing in terms of OTT. In Europe, Discovery is trying to create a “sports Netflix” by offering live sports content directly to consumers for $8 per month. In addition to the deal for the Olympics, Discovery has aggressively gone after sports rights for Eurosport.

Meanwhile, in the U.S., Discovery can expect its affiliate fees to keep growing, but not at the same rate as overseas.

“With a 13% reach, DISCA continues to have some leverage in the market when renewing deals. We continue to expect mid-single digit growth when factoring in sub losses, with DISCA's nets part of all skinny bundles from the traditional operators,” wrote Janedis.

During Discovery’s most recent quarter, international networks' revenues stayed relatively flat at $819 million and adjusted OIBDA decreased 12% to $231 million, which the company blamed on foreign exchange rates and higher operating expenses. But Zaslav insisted that continued investment will drive future growth.

"Discovery's diversified set of nonfiction, sports and kids' entertainment brands, and strong strategic positioning continued to drive attractive distribution agreements, helping to deliver solid operating and financial results in 2016," said Zaslav in a statement. "As we begin 2017, we will continue to invest in our premier global IP and brands to nourish fans across all screens, all platforms and all services to drive shareholder value and propel our business for years to come amid the rapidly changing media landscape."