Discovery CEO David Zaslav explains why he built his company's new streaming video service to complement Netflix, Disney+

Published Mon, Dec 7 202012:20 PM ESTUpdated Mon, Dec 7 20201:36 PM EST

Key Points

Discovery CEO David Zaslav explains the strategy behind Discovery+, his company's new streaming video service.
Discovery+ will launch on Jan. 4, 2021.
Zaslav told CNBC the next 12 to 24 months will determine the winners and losers in streaming. He expects the losers to consolidate.

A View from the Top is a Q & A series exclusively available on CNBC Pro . Alex Sherman will regularly speak with a business leader about decision-making, investing and industry news. It's David Zaslav's moment to shine. The Discovery Communications CEO officially launched Discovery+ last week, his company's flagship streaming service. For $4.99 per month ($6.99 without ads), consumers will get 55,000 episodes from more than 2,500 shows that have historically appeared on networks including HGTV, Food Network, Cooking Channel and TLC. The subscription service also includes a slate of 50 new original series. Similar to Disney+'s launch, Verizon will give 12 months of the ad-free Discovery+ plan away for free to many of its wireless subscribers. During a Dec. 2 remote presentation of the service, Zaslav said Discovery+ was the most "clear and distinct" subscription streaming product, given its complete focus on unscripted series. He explained why the next 12 to 24 months will isolate the winners from the losers in the so-called "streaming wars," and told CNBC why he didn't give subscriber goals for how many people he expected to subscribe to Discovery+. Here's the full Q & A: (This interview has been lightly edited for length and clarity.) Alex Sherman, CNBC: First, I've got to ask you about the outfit you were wearing on stage at the Discovery+ presentation. Was that turtleneck an homage to Steve Jobs? Discovery CEO David Zaslav: No. After nine months of quarantine, a dark turtleneck hides a lot of sins. I hear that. So, talk to me about the timing of this launch. Because you're obviously doing this later than Disney, HBO Max, Peacock...Did you go through a period where you wondered if launching a streaming service makes sense for Discovery? Is that why you guys were on the later end of things? Did you think, 'maybe we don't have enough content, maybe there are already too many streaming services for us to compete?' We never looked at it that way. We see in the entertainment package that 40% to 45% of what people consume is scripted series and scripted movies. It's the sexiest stuff. You have the openings and the red carpet and Jennifer Aniston and Brad Pitt and everybody gets excited and "The Crown," but ultimately, on a day to day basis, 60% of the content that people consume is our stuff. So we've always felt that there's five, six, seven players fighting over there. We've always said we're one of one. But we really need to own the space. We need to be methodical about it. We also learned from being in this business for a long time, we want to launch with partners. We can't launch alone. We want our narrative, but then we want another major marketing partner to be out promoting us side by side, to be giving us to their customers so that they believe that carrying us is going to help them with subscriber acquisition or churn. So we took the last year. We're announcing today 50 original shows. We're going to have over 1,000 hours of original content on this platform. Chip and Joanna Gaines: We think that they're an extraordinary talent and unique. We've got the whole BBC library. And then we said, is there anything else that we need? So we pulled in the best of A & E, Lifetime and and History. We now think we have an extremely broad, complete, robust non-fiction entertainment service. We think we're just in time, because Disney and Netflix have done the hard work. They've gone out and explained to people, here's how you buy a product. Here's how you get it on your phone. Here's how you move it around. People have gotten much more acclimated to buying content and consuming it. When we hit in January, we have a huge population that knows how to consume content. The final thing is that during this pandemic, people have been consuming a massive amount of content. And so, the big question that I get all the time from my family and friends is, hey, what are you watching on Disney+? What are you watching on Netflix or HBO? What should I watch? I've seen everything. So I think we may really get lucky here because we're going to come to the market with a library bigger than Netflix or the same size, fresh. All these original series, fresh. All this exclusive content, fresh. And I think for people who unfortunately are still going to be hunkered down a little bit for a few months, they're going to be saying, wow, this goes with everything I have. And it's all new, just loads of stuff. Was it a more difficult decision for you to make a product outside the cable bundle? Because you've got a bunch of unscripted networks with cheaper production, largely speaking. You've seen all these other media companies that have these expensive shows having to pull them off the networks and put them on the streaming service, thus devaluing their cable networks. You guys aren't in that situation. And from my understanding, you guys have consistently gotten incremental affiliate fee increases even as the pay TV bundle has declined. So as you weighed this, was that a harder decision for you where you're like, you know what? The value of the bundle isn't collapsing for us like it is some other media companies, so why do this? We made the decision five years ago when we saw that the ecosystem was starting to decline. When I got to Discovery, the stock was a $5. Then it went to $88. It was because we had great content and great brands that everyone loved in every language. Everything was going the right way. But then it became very clear that with these [showing smartphone], these are now TVs. Everyone is consuming content on these. So the question was no longer do we have 10 of the 40 channels in France? The question was, do we have content? Do we have IP that people will watch when they could watch anything? That's why we bought Scripps -- massive library, great IP, great brand, great characters. That's why we bought Eurosport, the leader in local sports in Europe. It looked like we were buying channels. But in each case, we were saying, what IP do they own, can we take it around the world, and be sure to do deals that allow us to move any content we want off of free-to-air or cable. So, for instance, all of our sports content in Europe, unlike some of the other players that are in the sports business, we have a right to take any content that we would put on Eurosport and just put it on D+. So if you want to see the French Open, you have to go to D+. So, we've been getting ready for this for a long time. Others have been selling their content to make money. We've been holding our content because we think we have this big opening. And what ended up happening, mostly because of the pandemic, is I think we've gotten really lucky because our content has gotten more popular. Our share is way up around the world because no one else can produce content. So we were producing content aggressively over the last ten months. So, now as we go with Discovery+, we have our existing business stronger than it's ever been with $3 billion in free cash flow trailing and share way up. And our content in terms of IP has never been more popular. The bundle right now looks like news, sports, and us. A lot of those players that you were talking about have already packed their lunch and gone to their streaming service. So we're also more and more important to cable. You guys are, as far as I understand, still in talks with Roku, Amazon and Apple for distribution. We've seen some of these discussions get pretty contentious. Are you experiencing these same hurdles? We're talking to all of them. We expect we will have deals with all of them soon. One, we have relationships with each of those companies where we've been. And the other big advantage we have is we're the largest international media company. We have free air and cable channels in every market and every language. And companies like Amazon and Roku, they want to expand internationally. So when they're talking to a U.S player, they're fighting over our share. When we're talking to them, they're saying, can you help us internationally? And we say, OK, but can you help us with more data or a better arrangement domestically? We want to be available on every platform, on every device. The whole idea here is we're a best-of-class company with growing share and a great model on the existing platform. But there are 3 billion people with smartphones that don't get TV. In many of the markets for it, there's a huge amount of people that are just getting broadband. There are a lot of people that want more than cable. And so now we can reach everyone. What is your bundling strategy? We haven't really seen much bundling yet because we're still early days with streaming. But we saw the first inkling of it with ViacomCBS bundling with Apple TV+ for a discount. Have you thought through that? Are there certain services you'd like to bundle with? Do you not want to bundle with anyone? Well, first, we wanted to make sure that we have a comprehensive offer. So if somebody buys us, they're fully nourished. There's always something on. So we needed a complete offering, and we took a lot of time -- having the definitive collection of natural history, Planet Earth, Frozen Planet for the next 10 years, and everything the BBC does in that space belongs to us. That was important. But the fact that we're different than everyone else, that that we represent the other 60%, means that we're the best complement. Somebody might have HBO and say, do I need HBO and Showtime? Two great services. Do I need Disney Plus and HBO? Two great services. Do I Netflix, Disney and HBO? Three great services. We go with the person that has one of those, we go with the person that has three of those. A lot of them have the same movies -- they're competing with each other. 'I got the best scripted series this week, I have the best scripted series next week.' So we're kind of a mainstay -- a great offering, and we think we're a great complement. But also, we think people are going to watch us differently. Yes, they'll watch us at 8 pm at night. Yes, they'll binge. But most of what's on those services, you view with firm intent, "I want to watch 'The Crown' tonight, it's fantastic.' Or, 'I want to watch the Undoing.' But there isn't a streaming service out there where you can say my favorite characters are Bobby Flay, Guy Fieri, Martha Stewart and Oprah. And you say, I want to create my own virtual channel with the best of their stuff in all their new shows. And it's on all day long -- while you're cooking, while you're home-schooling your kids. So, not only are we a great complement to other streaming services, but we're a companion in many ways. People get up and they put on Food Network, and it's on all day. They get up and they put on HGTV. You don't get up and put on Netflix or Amazon. They're services. I think will we will serve that purpose. And the same way people get playlists with audio, they're going to do playlists with us. And curation is very easy because they're not really, in most cases, saying what's the greatest new series? They're saying I love Food, or HGTV, or Chip and Jo. It becomes a much easier way to curate within our offering. You mentioned during your presentation you felt like the market for this was 70 million homes in the U.S., 400 million homes internationally. Other services put out specific targets. We're going to be in X homes in X years. Most of them chose 2024. Why did you guys decide not to do that? We have a lot of confidence, and Verizon has a lot of confidence in us. But, we don't know exactly what the number is. We don't want to be a in a position if we're in 20 million homes for people to say, well, you said you'd be in 24 million. Why aren't you? There's room for one more global direct to consumer platform. Netflix has done it. Disney has gotten scale and they're going global. And we have the ability because we're in every language, because we own all of our content, because we're differentiated, to be the the the next big, big player. And we go well with both of them. So we don't want to define what big is. We are going to be reporting out every quarter how many subscribers we have. We have a lot of confidence. We're putting our whole company behind it. But we'll see. We think we're going to surprise people. But we didn't think it was a good idea to say we think we're going to be in five years in 100 million homes. Let's see how we do. We're leading with the consumer. We're leading with a great product. And if we're right, we're going to be putting up numbers. And the valuation of our company really doesn't assume any success in this category. If we emerge with real scale, then we really are global IP company. Our multiple will change dramatically. We were trading at a 14 multiple a few years ago. We're down now at a 7 or 8 multiple because the view is, in six or seven years, we don't even know if you're going to be around. Yes, you have $3 billion of free cash flow. Yes, you have great markets. Yes, you have great stuff. But if we can prove this out, we change the whole trajectory of of our company. So if the goal is to be the third big global service, will you at some point need more content? Does Discovery need to get bigger? Because if you're competing against Disney and Netflix, I mean, those guys don't just dwarf you in market cap. They're giants and you're a minnow. Well, those are great companies, but neither of them have what we have. We have all the characters, all the brands and all the content in this nonfiction entertainment space. And so we think we got a good hand because we're dominant in our space. And if we're not, if we need more IP, we'll buy it. Our proposition outside the U.S. is really unique. And it's something that we think could be quite compelling. When you talk to the big players here in the U.S., they're primarily U.S. companies, and they're all grappling with the same issue: How do I get local content? I need some local content in Italy, France and Poland. In northern Europe. If I go to Russia, I need local content. Many of them have put off launching internationally because they're looking at the cost and the time to build a local content library. It's true for the greatest companies. Netflix did a skimming strategy, which was brilliant. Now they're doing some local markets. What we have outside the U.S is a huge library of local content in language in every country, and we have local sports. So outside the U.S., we tried to do sports independently. We did pretty well. We tried to do local language independently. We did pretty well. We think the new recipe is local sports, local entertainment, local nonfiction and original. Put it all in one. There's only one big player outside the US right now. That's Netflix. Everybody else is trying to figure out how to compete with them and how to get local content to do it. We're the only media company in the world that has an in-language library in every country. When we put together all of our local content, together with sport, together with local nonfiction and some original, we think the consumers get it. I know exactly what Netflix is. We're very differentiated outside the US -- local sport in Europe and local language everywhere else in the world -- and in the US, we're differentiated as a complete and broad nonfiction offering. I've asked other media executives if they'd consider buying a traditional media company. Their reaction is no, we can't buy one, our stock would go way down. Do you think, in this moment in time, the era of the horizontal traditional media company merger is at least on pause, if not over? Or do you think that will change? I think it's going to change. Go back to those seven streaming services. They're not all going to make it. What they're doing is extremely expensive. They're all great companies with a ton of dough. But they're all competing for the next great scripted series, the next great movie, the great writers, the great producers. So the cost of talent, the cost of production, it's all going up, up, up because the capital markets are saying, well, maybe you will get big. Well, most of them won't. And they're going to be in a position where they're going to realize we're not big enough. There's 40 percent of people that love scripted series and scripted movies, and we're splitting it. When do you think they'll realize that? How long will it take? A year? Two years? I think within a year or two. Within the next two years, it's going to be put up or shut up for all of us. Can you show you're scaling? Are you going to be a player in the U.S.? Are you going to be a player around the world? In Europe? And for a lot of the companies in the U.S., their whole bet is the U.S. They don't have another strategy outside of the U.S. And in the U.S., they're competing with a lot of great companies whose whole lives depend on them being the winner in that one of seven fights. And so I think ultimately a lot of those companies are going to realize, 'I don't have enough.' And then they're going to say, 'who can we merge with or who can we do a deal with? And if we put together our IP, maybe we can compete with Disney.' Or Disney might find out they've got a fantastic offering with an unbelievable brand, but their library isn't big enough, so they need more IP. A lot of it is unknown. But what is for sure is that it's too bifurcated right now. We wouldn't launch a scripted series/scripted movie service. We wouldn't have launched it three years ago. We thought it was too crowded, too expensive, too risky. I think ultimately one of two things happen. Either a number of them come together and say, OK, let's the three of us come together and we'll do better with scripted series, scripted movies. Or, they're all probably going to take a look at us and go, holy cow, look at all the local language content they got around the world. The local language content and local entertainment content and local sports content that we own is juice. It's real juice for us. We think it's much more powerful than anybody else right now realizes. We're going to have to prove that we're right. But having a 40% share in Poland and being the largest provider of news and sports and entertainment in Poland or in Italy or in Northern Europe -- we think it's really important. Right now, everyone is saying let's fight over the U.S. It's 340 million people. It's one market, one culture. But you can't build a scaled business on the U.S. alone. So when they come up for air, they're going to say, 'wait a minute.' And then we are going to be looking more powerful. And then maybe some of them are going to say, 'you know what, maybe we should just roll in with you in Europe or in Latin America. It's going to take us three years to get there. Maybe we should figure out a way to become part of you.' And I don't think that's just us. I think that ultimately there has to be some consolidation on this other [scripted] side. And in the end, the question is, is anybody going to be able to afford to do all the local content that we've been doing for 15 years because they're going to need local content to be relevant outside the U.S. Is Discovery an independent company three years from now? I sure hope so. This was a big step in that direction. If we become a scaled direct-to-consumer company, we punched our ticket. Not only are we at the big table, but we're at the big table with some enviable assets and IP that we can then maneuver with in order to have a sustainable long-term global IP company and media company. So that's what we're shooting for, and we've got to fight to make it happen. The good news is we have a lot of free cash flow. And we're very good at seeing what's not working. We don't have a lot of pride. We know that what we launch isn't going to be perfect. We'll figure out what consumers want more of, and we'll figure out a way to give it to them. That's what is going to be our daily fight to get to scale so that we we're not only here in three years, but we're one of the the real survivors of great quality, great story and great brand around the world. So, to recap, your view of the new streaming world is basically: Netflix will be there, Disney -- probably a winner. And then there will be a fight among HBO Max, Peacock, Paramount+ to be the third scripted service player? And Amazon and Apple somehow play here too? Is that right? Will there be three? Will there be four? There's not going to be seven. In some way, it will be re-conjugated. We think there will be a rebundling. That rebundling -- our job is to make sure we're absoutely essential. The bet against us is, yes, people right now watch your stuff 60% of the time. But, in the new world, they're not going to do that. They're just going to watch scripted series and movies. And, that may be right. But if we're right, they're going to want to watch what they've watched for the last 50 years, and they want the best of it with the best people and the best quality and the deepest library. Then, we're going to be a winner. AT & T blew up Time Warner because it wants to own the customer relationship with HBO Max. Do you need to own the customer relationship? Or are you just content with being part of someone's offering? Well, we wanted to create an offering that's direct to consumer. So, with Discovery+, we'll own the data. We have their credit card. We're seeing what they're watching. We're able to give them more of what they want. We're complete and broad within ourselves. But we, I think, we fit so well with everybody else, and we're so inexpensive -- $4.99 a month -- that it makes a lot of sense. People aren't not going to have Netflix. They love Netflix. So, we go great with them. I don't think people are going to say, well, let me drop Disney, I'll get Discovery. I think they love Disney. But, us with them, people will say, wow, there's more stuff here. It's great. So -- Jason Kilar and John Stankey at AT & T, they're super smart guys. They've got a lot of great assets there. AT & T, they have over one hundred million customers. They're in the direct marketing business. They know they know their hand. They have certain cards. And they're playing them in a way that I think -- ultimately, they're very clever. I wouldn't count anybody out. But I'm not sure anybody has all the cards. I have to ask you about executive compensation. Looking at your salary in 2019, you made $46 million. This is all public. In 2018, your total compensation was $129 million. The Wall Street Journal reported that you were the highest paid U.S. executive in 2018. Obviously you get paid what you do. But is this too much money for any executive to get paid? Especially in a media industry that hasn't done all that well recently? The metrics that you just gave out were technically true. It's the way the SEC says you have to value these things. But, they're not true. The $129 million is Black Scholes value of options, this and that. The way that my deal works is to align with the shareholders. I was making a lot of money -- more than anyone was reporting -- when our stock was going up 25% a year for eight consecutive years. I took a pay cut when I came from NBC, and I got a piece of the upside of the company. If the stock went down, I would have made less. But as the stock went up, I had a piece of the growth of the company. And that wasn't reflected in those numbers. It was actually much bigger because the company was growing dramatically. When you see those kind of numbers, the stock was flat for the year. In the end, I made 1/10th of that, 1/5th of that. And look, the compensation is significant in the CEO marketplace. There's no question. That's a philosophical question -- is it too much. It certainly is more than it was years ago. But, having said that, in the last couple of years, as our stock has been flat -- and most of media has been flat, because the view is that they've changed the terminal values and the multiples of change. Yes, the numbers that they're putting out there for media CEOs do not reflect the actual compensation thing going on. But the good news about that is my leadership team, who is compensated like me, if we get real shareholder value, then those numbers that reported are going to look like actual numbers. So, the answer is, for me, is that it's really compelling and a great incentive to have the leadership team's comp as directly related as possible to shareholder growth. If it is, then the biggest beneficiary is the shareholder. If you go back and you look at John Malone's companies (Malone owns a stake in Discovery), John has a very strong philosophy. And that philosophy is you should make money with shareholders. And so by a lot of these measures, it looks like John pays his CEOs a lot of money. But you only make money if the company grows. And if you went back and said, how did you actually do? You would see Malone has made more money for shareholders than probably any investor, including Buffett. He's the best investor, and he's created more shareholder value. He wants the leadership team aligned with him and shareholders, and he wants the CEOs aligned. And he wants everyone to feel the pain when the shares don't go up. And so even though the numbers seem big for John's companies, the shareholder return for John companies are at the top, if not the best performers, over time. You're 60 years old. Your contract runs out in 2023. How much longer do you want to keep doing this? Clearly, you don't need the money! For me, this is what I love, so I don't work. I love the people I work for. I love the Newhouse family. I love John Malone. We talk every day, but not that often about business, but about life. I love the leadership team. I've been at Discovery for 15 years. A lot of those people I've been working with for 25 years. A lot of the people at Discovery, we've been together for 15 years. It's like a family. And so I get up in the morning, get up early, and I'm reading about what's Rupert doing.... But there's been some turnover this year. Steve Burke is no longer at NBCUniversal. Bob Iger left Disney. John Stankey is no longer WarnerMedia CEO... There has. But when you look at the media CEOs, you know, I'm the next generation. There's a group of fantastic CEOs that built this business that really focused on great IP and great stories. Iger was probably the best of all of us. It remains to be seen. I think Brian [Roberts] has done an extraordinary job, but a lot of those CEOs -- Bob said he's trying to do something else. So, a lot of those CEOs are 15 years older than me. So, I think I still have some more runway -- hopefully at Discovery. If not, I'll always be part of this business because it's who I am. It's where all my friends are. And that's what I love.

A View from the Top is a Q&A series exclusively available on CNBC Pro. Alex Sherman will regularly speak with a business leader about decision-making, investing and industry news.

It's David Zaslav's moment to shine. The Discovery Communications CEO officially launched Discovery+ last week, his company's flagship streaming service. For $4.99 per month ($6.99 without ads), consumers will get 55,000 episodes from more than 2,500 shows that have historically appeared on networks including HGTV, Food Network, Cooking Channel and TLC. The subscription service also includes a slate of 50 new original series. Similar to Disney+'s launch, Verizon will give 12 months of the ad-free Discovery+ plan away for free to many of its wireless subscribers.

During a Dec. 2 remote presentation of the service, Zaslav said Discovery+ was the most "clear and distinct" subscription streaming product, given its complete focus on unscripted series.

He explained why the next 12 to 24 months will isolate the winners from the losers in the so-called "streaming wars," and told CNBC why he didn't give subscriber goals for how many people he expected to subscribe to Discovery+.

Here's the full Q&A: