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Edited Transcript of DISCA.OQ earnings conference call or presentation 5-Aug-20 12:00pm GMT

Q2 2020 Discovery Inc Earnings Call

SILVER SPRING Aug 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Discovery Inc earnings conference call or presentation Wednesday, August 5, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew T. Slabin

Discovery, Inc. - EVP of Global Investor Strategy

* David M. Zaslav

Discovery, Inc. - President, CEO & Director

* Gunnar Wiedenfels

Discovery, Inc. - CFO

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Conference Call Participants

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* Alexia Skouras Quadrani

JPMorgan Chase & Co, Research Division - MD and Senior Analyst

* Benjamin Daniel Swinburne

Morgan Stanley, Research Division - MD

* Brett Joseph Feldman

Goldman Sachs Group, Inc., Research Division - Equity Analyst

* Jason Boisvert Bazinet

Citigroup Inc., Research Division - MD, Global Head of EMT & Analyst

* Jessica Jean Reif Ehrlich

BofA Merrill Lynch, Research Division - MD in Equity Research

* Meghan Durkin

Crédit Suisse AG, Research Division - Research Analyst

* Michael Brian Nathanson

MoffettNathanson LLC - Founding Partner & Senior Research Analyst

* Richard Scott Greenfield

LightShed Partners - Partner and Media & Technology Analyst

* Steven Lee Cahall

Wells Fargo Securities, LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the Discovery, Inc. Second Quarter 2020 Earnings Call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy. Sir, you may begin.

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Andrew T. Slabin, Discovery, Inc. - EVP of Global Investor Strategy [2]

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Good morning, everyone. Thank you for joining us for Discovery's Q2 earnings call. Joining me today are David Zaslav, our President and Chief Executive Officer; and Gunnar Wiedenfels, our Chief Financial Officer. You should have received our earnings release. But if not, feel free to access it on our website at www.corporate.discovery.com.

On today's call, we will begin with some opening comments from David and Gunnar, and then we will open the call to take questions.

Before we start, I'd 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, 2019, and our subsequent filings made with the U.S. Securities and Exchange Commission.

And with that, I'd like to turn the call over to David.

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David M. Zaslav, Discovery, Inc. - President, CEO & Director [3]

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Good morning, everyone, and welcome to our Q2 earnings conference call. Last quarter, we noted that these uncertain times highlight unique competitive advantages that distinguish us from many of our peers strategically, creatively, operationally and financially. We benefit from content leadership in core genres that are relevant, popular and durable, an efficient low-cost content production model with a long tail and global appeal; short production cycles that allow for quick content development; the most international and diverse mix of assets, platforms and brands; and among the most trusted family-friendly brand portfolio that offers safe environments for advertisers. And while our relentless focus on content that nourishes and delights our fans has always been our North Star, its impact couldn't be more significant than it is right now. In a world that offers viewers greater choice than ever before across an increasing array of delivery platforms and added competition for viewers' time, more and more viewers are choosing to spend time with us everywhere around the globe. It's emblematic of our differentiated model. At a time when most broadcasters and networks have been relying on tied repeats and reruns of scripted shows, we brought over 1,000 hours of fresh original content to our networks since the world shut down due to COVID. It's been cost effective, creatively shot and produced and well received. In fact, Amy Schumer Learns to Cook, which was shot from home for Food Network, was nominated for a Primetime Emmy. But most importantly, our ability to continuously refresh and update our IP further adds to the strategic value of our global IP library, particularly as we drive our content increasingly direct-to-consumer. And its attraction increases to others during a time when nearly all platforms require more and more depth of content to attract, delight and maintain subscribers. Our content is differentiated in the marketplace and is a great consumer complement to others.

The appeal of our IT continues to increase. In the United States this last quarter, even though we do not own a broadcast network, we were the #2 portfolio on all of linear TV in total day among our target demos, and we grew our #1 share of pay-TV. While internationally, building off Q1 success, we grew our record-high share another 4%, despite not having any sports and helped by tailwinds from our global brands as well as impact of our local contact offerings.

The impressive ratings and share narrative couldn't be happening at a more critical time, particularly as we put finishing touches on bringing an aggregated direct-to-consumer product to the market here in the United States and enhancements to our SVOD offerings like Dplay in many markets around the globe, the details for which we look forward to sharing in the very near future.

We believe there exists a great opportunity to reach the growing quadrant of viewers who either don't have access to our brands and content or want to consume content out of the traditional video ecosystem. And informed by the growing engagement of authenticated and unauthenticated viewers to our GO platform here in the U.S., we remain excited to hit the ground running.

Underpinning all of our efforts is a financial model that is super solid. We generated a Q2 record of nearly $900 million of free cash flow. And while some of the growth was driven by timing factors, the performance is emblematic of the efficiency of our model and the resiliency of our cash production. We remain a free cash flow machine. Having ended the quarter with $1.7 billion in cash on our balance sheet, minimum debt due over the next 3 years and an undrawn $2.5 billion revolver, we are pleased to now resume our equity buybacks at what we believe represent very attractive levels. We are pleased to be able to bring long-term value to our shareholders by investing in our future growth prospects as well as return capital to shareholders even in the current environment.

We've recently completed important renewals with 4 major distributors in the first half of 2020, Cox, Charter, Comcast and Sky, and we are pleased with both the value we are receiving and delivering within the traditional distribution ecosystem. We view these renewals as mutually beneficial and help us in efforts to further develop our next-generation direct-to-consumer offerings, drawing upon the stability of our distribution profile in linear and increased flexibility for next-gen products.

Turning to the advertising marketplace. From a high level regarding COVID, it feels like the advertising markets have largely bottomed, and the worst is behind us, though I would caution that visibility still remains relatively limited. April was low in the U.S., with a nice recovery in May and June. While internationally, with some regions like LatAm still searching for a bottom, we have seen a noticeable return of advertiser spending money against the TV marketplace where economies have increasingly begun to open, particularly in Europe. In fact, a number of markets in EMEA, such as Poland and Germany, 2 of our largest and most important advertising markets, are experiencing a much faster recovery than we thought against our internal projections.

As I noted, we continue to grow share internationally, both for the entirety of our international marketplaces as well as the top 10 advertising markets, each up 4%. We saw a particularly strong growth from our locally focused free-to-air channels, notably in Italy, with Giallo and in the U.K. with Really and Quest as well as continued momentum at HG, Food, TLC, Discovery and DMAX. Our efforts from day 1 post the Scripps merger to further drive their lifestyle brands around the globe has also proven to be an important element of our share story. This quarter, HG and Food became our #3 and #4 global brands by audience, up 160% and 50%, respectively, in the quarter, helped in part by continued new channel launches.

From a ratings perspective here in the U.S., we were led by TLC, which is the #1 network across all of TV on Sunday nights and solidified its position as the #1 pay-TV network across all of primetime among our target female demos. In fact, TLC delivered the biggest primetime gains this quarter for any non-news network among the top 25 pay-TV nets. The network is on fire. And Howard Lee and his team continue to innovate with content that resonates with audiences around the globe.

Overall, in 2Q, we owned 4 top 10 pay-TV channels in primetime, in P2+ and total viewers, TLC, HG, Discovery and Food, which means that when people weren't watching the news, viewers chose to spend time with us.

Turning to the upfront. While without a doubt, this is an unusual upfront market. No one has as much momentum as we do. We have fresh content, a ratings tailwind, the hottest network bar none with TLC and an exciting, clearly anticipated new network soon to launch with the Magnolia Network, all underpinned across verticals that uniquely resonate with advertisers. Collectively, we offer advertisers an even greater reach than our broadcast peers, particularly in the coveted 25 to 54 demo, having outdelivered each of our broadcast competitors on C3, 95% of the nights in Q2. It's quite an accomplishment for Discovery's networks in the aggregate to provide more reach 95% of the time than our broadcast peers. And in addition, we had longer length of view and time spent on our networks. As such, given the glaring discrepancy in CPM pricing while we have broader reach and delivery, we continue to lean in to package our content to drive greater share of wallet spend in the upfront and in scatter. And market challenges notwithstanding this year, I feel our hands has never been stronger than it is right now, given the full arsenal and complement of our nets that we have to offer and how well we align with advertisers and brands, particularly when eyeballs are scarce. Thus, whether in the upfront or in scatter, we will work closely with our advertising partners as we always have to offer real differentiated value, fresh value in the marketplace.

Building on this strength, and as I noted, we couldn't be more excited about our plans for the Magnolia Network, which is coming into focus. Chip and Jo are hard at work on 36 originals, 14 of which are already in production. And I truly couldn't be more thrilled that just yesterday, we announced that Fixer Upper is coming back to delight of so many viewers and advertisers. And all the new episodes will be exclusive to our network. We hope to pick up right where we left off. During the final season, an astounding 75 million people tuned in, including 20 million people on an average weekly basis.

As for distribution, we naturally won't be immune from subscriber churn, particularly in cases where it's driven by economic pressures, though we remain well represented, may be the best representation of anyone across the VMVPD landscape in the U.S., where there continue to be pockets of strength, such as from Philo offering a more affordable entertainment-only, true skinny bundle. In fact, Philo has had great momentum, topping 700,000 subscribers, double where they ended 2019. And our recent renewals provide us with a healthy pricing backdrop to help mitigate the revenue impact from subscriber churn. Outside of the traditional bundle, we continue to enhance our portfolio of global AVOD and SVOD content and lifestyle platforms.

Lastly, while there are still a number of COVID-related uncertainties that we are addressing head-on, I remain enthusiastic about the strategic course we are on behind an increasingly relevant global portfolio of assets and passion verticals and the addressable market opportunities that we see unfolding for our next-gen products. Moreover, the financial backdrop that underpins our ability to navigate and invest against these remains on solid footing. I'd like to once again thank our hard-working employees for their dedication and resiliency in this most uncertain time to deliver an outstanding product on a global scale.

And now I'd like to turn the call over to Gunnar.

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Gunnar Wiedenfels, Discovery, Inc. - CFO [4]

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Thank you, David. Good morning, everyone. As David noted, we continue to operate under less-than-optimal conditions around the globe. However, I remain very pleased with how our organization has adapted and evolved in the face of current uncertainty and limited visibility. The benefits of a dual revenue stream model are apparent, particularly long-term contractual subscriber-based distribution revenues, which I'm pleased to report we continue to renew with solid pricing and mutually beneficial terms with our partners. This highlights not only the tremendous value of our content on the linear platform, but also supports the evolving nature of how we may reach audiences on a D2C basis. I'm looking forward to discussing our plans with you in greater detail in the near future.

And even as we continue to invest to support these initiatives, the efficiency of our operating model has never been more critical or more apparent. While there were some timing-related benefits, most importantly from a decreased content spend, particularly on delayed sports events, we achieved our highest free cash flow in the first half year in the company's history. Consequently, over the trailing 12-month period, we have again generated $3.1 billion in free cash flow in an environment when global ad sales were down 11% ex FX in the first half and down 20% ex FX in the second quarter. I'll provide some modeling help on the cadence of our free cash flow drivers and content spend specifically shortly.

In the U.S., advertising decreased 14% year-over-year in an environment characterized by overall weaker demand stemming from COVID-related issues. Though while demand was weaker, we were able to hold firm on pricing and our overall CPMs for the quarter were up mid-single digits year-over-year. Scatter pricing was solid, up 25% above last year's broadcast upfront. Interestingly, much of the movement of dollars initially out of the upfront commitments and then later brought back into scatter ultimately returned at a higher pricing. Also, in a number of cases, we extended the content length of our shows.

We were pleased that primetime delivery across the portfolio was flat year-over-year in our target demo during the second quarter versus the rest of pay-TV down in the mid-teens. As expected, April was the toughest month in the quarter and, at present, appears to have been the trough with both May and June, on average, much stronger. Week-to-week and even month-to-month, while the trend line is still slightly irregular, it is indeed pointing in the right direction. To that point, I'm bearing in mind that we haven't closed the books on the month. Our latest estimate is that July will be down in the low-teens year-over-year, a sequential improvement over the second quarter. That said, with the return of major league sports in the U.S., we may see some shift of ad dollars away from our verticals. Additionally, we continue to remain cautiously optimistic and mindful of the pace of recovery in the U.S., given the resurgence of the pandemic in parts of the country in recent weeks.

Distribution revenues increased 7% year-over-year, including a 500 basis points benefit from a nonrecurring item. The underlying year-over-year growth rate was 2%. Performance was impacted by a 5% decline to our fully distributed networks and 17% decline to the total portfolio, a slight acceleration versus the first quarter, which we had expected as we lapped the YouTube deal during the quarter in April. We continue to foresee subscriber declines for our fully distributed networks to be more or less in line with industry trends.

Now turning to international, and note the following commentary is provided on a constant currency basis. International advertising decreased 37% year-over-year, given COVID-related demand weakness around the globe. Across the 3 main international territories, Asia Pac, our smallest region, began to stabilize towards the end of Q1; EMEA, the largest, appears to have bottomed and stabilized during Q2; while LatAm, unfortunately, may not have bottomed yet. Again, while the level of visibility is still reasonably opaque, we are increasingly encouraged by the pace of recovery in a number of key territories, particularly in EMEA. In countries where COVID is reported to be better under control and steps taken to further open up, we have seen a sequential resumption in the pace of TV advertising. While we still don't know to what extent sports will resume in the second half of the year based on our latest estimate, DNI advertising in July is estimated to be down high teens year-over-year with Europe slightly better than that while LatAm is down significantly more. Overall, like in the U.S., this points to further sequential improvement in July versus the end of the second quarter.

Distribution revenues decreased 2% year-over-year, in part impacted by little to no sports programming in the quarter across our various platforms: Eurosport Player, GOLFTV and certain premium Dplay tiers as well as the previously noted impact from our more aggressive stance to drive D2C distribution in countries such as Denmark. Worth noting is that we recently exited our agreement with the German Football League for the fourth and final year of the Bundesliga, while beneficial to AOIBDA. Had we not, distribution revenue would have been meaningfully higher this quarter. This comp will exist for the next 3 quarters.

Now turning to costs. Total operating expenses were down 10% year-over-year ex FX in the second quarter, resulting in AOIBDA margins that were relatively flat. Total cost of revenues declined 12% ex FX, in part due to the timing of sports costs. We recognized very little sports rights costs during the quarter, approximately 35% of what we recognized last year as a result of the shutdowns. Many of the events have been deferred to the second half of the year rather than being canceled. As such, we will be recognizing those expenses as sports resume in what admittedly looks to be a rather condensed schedule in Q3 and Q4.

Outside of sports, we realized modest savings across traditional content spend while continuing to invest in content and rights gear to our next-generation initiatives.

Overall, SG&A decreased 8% ex FX, largely helped by lower marketing spend. As we continue to lean in on our next-generation initiatives, we expect marketing spend will begin to tick up, both to build awareness and for continued performance marketing. T&E was also minimal during the quarter as the vast majority of our employees continue to work from home and travel was virtually stopped. As we continue our office openings around the globe and employees return to more of a business-as-usual cadence, inclusive of travel, incremental spend should be expected, though it is reasonable to envision these returns rather slowly.

We continue to take the necessary steps to align our overall cost structure with the changes that are taking place within the TV ecosystem, the evolution of the transformation we began in 2018 following our merger with Scripps. Though as we continue to refine and broaden our next-gen strategy, savings from our continuing focus on operational efficiencies will primarily be redeployed towards these initiatives.

I continue to expect total full year operating expenses to be flat year-over-year on a constant currency basis, slightly lower in the first half, slightly higher in the second half, given the more condensed sports schedule and content investments that I've previously laid out. Keep in mind, for modeling purposes, that to the extent sports do resume in full, we expect to compress nearly an entire calendar year into 2 quarters, at a time when the advertising market, though improving in Europe, is still in recovery mode. We continue to expect that core business OpEx will be down mid- to high single digits year-over-year, offsetting the increased spend for growth initiatives.

A couple of comments on below-the-line items for the second quarter. First, our effective tax rate for the quarter was 34%, primarily due to withholding taxes outside of the U.S. that are calculated for the year and spread evenly across quarters. We expect that the book tax rate will finish the year in the low to mid-20% range.

Second, additionally, in conjunction with the debt that we tendered during the quarter, we recognized a $71 million or $0.08 per share net of tax debt extinguishment charge. Adjusted EPS for the quarter was $0.77 after adding back purchase price amortization. Excluding the aforementioned debt extinguishment charge, adjusted EPS would have been $0.85 per share in the second quarter versus $1 per share last year on a like-for-like basis.

FX was approximately a $40 million drag to revenues and a $15 million drag to AOIBDA in the second quarter. For the year, based on current rates, we expect FX to have a negative $35 million to $45 million impact on revenues and a negative $25 million to $30 million impact on AOIBDA.

Turning to capital allocation. As you may have noticed in our earnings release this morning, we are pleased to announce the resumption of our capital returns to shareholders via our share repurchases, where $1.8 billion remain outstanding on our authorization. As per the end of the second quarter, as David mentioned, we had $1.7 billion of cash on hand. As a matter of fact, as per the end of July, 1 month into the quarter, that balance has grown to over $2 billion, plus, of course, $2.5 billion of undrawn revolver commitment and very little debt maturing over the next 3 years following our successful refinancing measures earlier in the year. As always, we will be tactical and flexible regarding any repurchases. However, a sensible construct to consider as you think about the cadence of our activity would center around us allocating roughly 50% of our free cash flow to share repurchases for the time being. That said, our overall capital allocation priorities have not changed, which, having properly levered the company as reflected by our commitment to investment-grade ratings and our 3 to 3.5x target net leverage range are to, number one, invest in support our core business to drive future growth; number two, evaluate inorganic growth opportunities such as strategic M&A, if presented with attractive opportunities and where it makes sense; and number three, return residual capital to shareholders.

And now with that, I'd like to turn it back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Steven Cahall from Wells Fargo.

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Steven Lee Cahall, Wells Fargo Securities, LLC, Research Division - Senior Analyst [2]

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So I'd love to talk about the medium-term outlook for U.S. affiliate revenue growth in light of some of the accelerating sub declines. You've had a pretty good kind of industry-leading affiliate growth rate. So I was wondering if you could just give sort of the longer-term outlook about how you're thinking about your ability to keep getting price on linear deals versus those sub declines.

And then relatedly, a big part of the country now is not subscribing to the linear bundle. So how are you thinking about taking that content kind of more direct-to-consumer?

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David M. Zaslav, Discovery, Inc. - President, CEO & Director [3]

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Thanks, Steve. Well, we just did, as we said, 4 big deals, 3 of them here in the U.S. The good news for us is our content is hugely overperforming. The not-so-good news for us is that our content is cheap. And so we've been able to get increases. I believe that we should be getting significantly more for our channels. We have the #1 channel in America in TLC. We're #2 or 3 in America for women. Aside from the news networks, you look at Food, HG, OWN, TLC, ID, our portfolio is extraordinarily strong and growing with characters and brands that people love. And they watch these channels like they watch FOX NEWS all day. And so we're taking that into the upfront. But as we sat down with distributors, they recognize that we're providing huge value. They make a lot of money by selling them. So I expect we'll continue to do quite well in renewals that come in the future. But right now, we're very stable. And we're very happy about that, so we can get on with getting on.

To your second point, which I think is an important one, is that there are 30 million subscribers or more, maybe 33 million that are broadband-only. There are a lot of people that want to watch content with no commercials. And there are some strong players out there that have built a great road to this direct-to-consumer business. And we think we can get on that road. Netflix and Amazon and Disney+, it was hard work building behaviorally that road of getting people to pay for content. And gestationally, we're now like in the third or fourth inning, and people are comfortable with that. But those services are all scripted series and scripted movies. Effectively, they've built the road, and they all have great sports cars, fantastic and they're beautiful, scripted series and scripted movies.

We have a new SUV. We'll 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, free -- 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 hey, 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, they'll -- this is -- it's used. It will be useful every day, all the time. It will 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've got a great lane. It's almost like that lane is our. 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 2 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.

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Steven Lee Cahall, Wells Fargo Securities, LLC, Research Division - Senior Analyst [4]

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Sounds good. Can we take the SUV offer?

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Gunnar Wiedenfels, Discovery, Inc. - CFO [5]

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Yes. Let me just add one thing, Gunnar here, on the affiliate question, Steve. So a couple of points I want to make. Number one, as you know, we have a very clean affiliate number, and that's why we point out when there's sort of special effects like in this quarter, the underlying number is 2%. If you combine that with a 5% sub decline sort of across the industry, essentially in our main part of the portfolio, then you get to sort of the implied pricing number. As David said, we're pretty happy about how those deals have gone. No visible trend change here when it comes to pricing. The big factor that we don't control, of course, is sub declines. So we'll see how that turns out over time. And then there is going to be an increasing contribution, both in international and the U.S. from D2C subscription revenues. And again, that's a little more difficult to plan out, but you should start assuming some positive contributions over time.

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David M. Zaslav, Discovery, Inc. - President, CEO & Director [6]

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One more point, Steven, because the focus generally here in the U.S. tends to be the U.S., but we are the #1 global media company outside the U.S., leader in sports, leader in our -- the aggregate local content that we have in every language. And I just laid out what our strategy is here in the U.S., and we'll be talking to you exactly about when we're coming to market, how we're doing it, exactly what it looks like, which is very exciting. But outside the U.S., we have a very compelling differentiated strategy as well, local content, local sports. So Netflix and Disney, fantastic services. They're coming over the top, primarily U.S. Eventually, Netflix has a little bit of local. Disney will have some local. Others will do a little bit of local, but we're a local content, local sports. So we think that differentiated above-the-globe attack. Outside the U.S., local language, local sport, very strong, very differentiated. In the U.S., very differentiated, a great companion, great content, great brands, great characters, great original. So we like our hand.

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Operator [7]

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Our next question comes from Doug Mitchelson from Crédit Suisse.

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Meghan Durkin, Crédit Suisse AG, Research Division - Research Analyst [8]

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This is Meghan Durkin standing in for Doug. I wanted to see if you could talk a little bit about the progress with Food Network Kitchen? Any update on subs post the Amazon promotion? How much is it contributing to advertising? Is there any e-commerce revenue coming in and any learnings there? And I have a follow-up for that.

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David M. Zaslav, Discovery, Inc. - President, CEO & Director [9]

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Great. Great. Thanks. 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 to reduce churn? How do we get partners to help us? Partners to help us is hugely important. Being -- having Amazon together with us, built into echo. There's a huge number of people that are on Fire TV that Amazon is pointing to and driving. How do we get those people to convert to be Food Network Kitchen subs. What does Amazon do? What do we do? How effective can Amazon be as a partner in driving free funnel subs and pay subs? All of that is stuff that we're learning. It's very -- it's going to be very helpful to us.

Same is true across Europe as we're getting distributors to align with us and have gotten distributors to align with us and driving our -- driving Dplay in our direct-to-consumer products. So it's going well. We're learning a ton from it. We get to talk directly to customers. And as we lay -- as we roll out our big aggregate attack in which will take you through in the near term, we'll -- at that point, we'll figure out what other details on some of our vertical products will give you.

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Meghan Durkin, Crédit Suisse AG, Research Division - Research Analyst [10]

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And then on a follow-up for Gunnar, if you can just give us a little bit more color on exactly where we're going to see the investments flowing through the model. Is it going to be U.S., International or a combination of both?

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Gunnar Wiedenfels, Discovery, Inc. - CFO [11]

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Yes. It's going to continue to be a combination of both. I mean, as David said, we're increasingly looking at the U.S. market. So if you look at last year, the majority was hitting international. You should assume that, that's going to be a bit more balanced mix for this year. Other than that, we had given guidance initially as we went into the year on our investment levels. I know we have retracted guidance, but we have continued to invest, and I continue to expect us to keep investing at pretty much a similar level as what we originally guided to, roughly $600 million of losses from those new investment activities for the year.

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Operator [12]

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Our next question comes from Jessica Reif Ehrlich from Bank of America Securities.

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Jessica Jean Reif Ehrlich, BofA Merrill Lynch, Research Division - MD in Equity Research [13]

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I have 3, 4 questions. Can you talk about what you're seeing on pay-TV subs outside the U.S.? Disney called that out on their earnings call yesterday.

Second, on costs, you've had amazing cost control. I know, Gunnar, you said it's flat on a full year basis. But when you look forward, can you parse out how much of these -- of the cost containment or decreases? And how much is permanent? And how much is just deferred costs that you have to spend like T&E and sports?

And then finally, David, you mentioned advertising, the upfront. Can you talk about the process now and expectations as well? How are you selling differently? Are you targeting different metrics? Or are you doing more addressable advertising? And what's the new time frame for the upfront? Is it the broadcast year? Or are you going to a calendar year?

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David M. Zaslav, Discovery, Inc. - President, CEO & Director [14]

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Okay. Why don't I start with the upfront and then, Gunnar, why don't you take the metrics on international and cost control? The upfront would have been over in a normal year. And so it's a bit of a dance. But the market has gotten -- has really picked up. It's getting better. I think the -- in terms of the upfront, I think we have the best hand. We have original content. We're continuing to produce original content. Most of what you're going to see right now from us is very dependable, a fully engaged audience. And we come with -- on some Sunday nights, we get a 4 -- we get over a 4 or a 4.5 on TLC's 90-day alone. We have the #1 franchise on television.

So one is we're way underpaid for all of our channels. And we expect that even at significant increases, we will be a great value because when people look out to the other services, what are they buying? They're buying a lot of reruns. They may be buying sports. They may not be buying sports. We're the new sports. People are coming on every day and watching Food and HG. TLC is the most popular service in women 18 to 25, 25 to 54, 18 to 49. So -- and the -- and HG is the #1 channel for women in the aggregate. So if you want to reach women in America, you want to reach them in watching live or close to live. We're the only place to come. We still have the #1 channel for men with real strength with Discovery. And so we've got some swagger. We really have some swagger because we look at the advertising market, and we see broadcast charging $65 for a CPM and delivering 0.4, quite delivering 4.5s, and we have historically been relatively cheap. And we think right now, since we're the #2 media company in America in what we deliver and we have the most fresh content and dependable fresh content going forward that if you want to play, you've got to pay. And if you want to reach people, women live, men live and know that you're going to reach them between now and the end of the year at this crazy time, you're going to want to be with us. And that's -- as we talk to advertisers, they recognize that, and they recognize the strength of our brands. And I think we're going to -- we certainly are going to do very, very well. And I hope that we're going to make up a big piece of the differentiation because it shouldn't have existed. And we're a hell of a buy compared to everyone else even at a big increase.

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Gunnar Wiedenfels, Discovery, Inc. - CFO [15]

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Okay. Let me cover the other 2 questions quickly on the pay-TV subscribers, Jessica. So right now, it's mildly up across the board. Obviously, JB would say, looking at international, it's just a collection of very, very many market with very different dynamics going on, but it's up a little bit.

I think the one outlier, I guess, we should point out is Brazil, which, obviously, given the current environment, was down in subscriber numbers. But other than that, we continue to see growth.

On the cost control side, what's permanent, what's deferred, let's just go through a couple of elements. I would start with, let's call them, the windfalls, travel, the T&E overall, events, some marketing, real estate, et cetera. A lot of that obviously was a windfall and is going to come back if and when we start opening up again.

I think the second big savings driver here, ironically, of course, has been the absence of sport events and some other original productions. Again, we have been able to maintain a very, very healthy schedule from the perspective of fresh content. And again, financially, in a positive way because we're producing a lot of content and we're producing it at a much more attractive cost per hour. And our audience is loving the authenticity, continue to enjoy it. So that has been a positive driver overall.

As things go back to normal, you should see some of that content coming back at higher cost. There may be even additional costs from some COVID-related additional health protocols, et cetera. Again, I would hope to be able to offset some of that with more efficient overall production approach. But that's sort of the second building block.

And then you shouldn't forget that we're still on our transformation journey, what we started 2 years ago. We went into this with a massive team, hundreds of people working on hundreds of initiatives. We've worked through a lot of that list, but we still have a lot of initiatives of more complex, more long-term nature that we're working through, and we're committed to continue adjusting the structure of this company to the best possible setup for the operating environment.

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Operator [16]

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Our next question comes from Michael Nathanson from MoffettNathanson.

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Michael Brian Nathanson, MoffettNathanson LLC - Founding Partner & Senior Research Analyst [17]

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David, a couple for you. On the new renewals, were those deals accelerator? Or was that a natural timing? And then can you talk a bit about the alignment you now have given those deals? Does that allow you now to do your bigger SUV build? And then on the SUV build, would you consider adding a noncommercial tier and also non-Discovery content in terms of making SUV even bigger and more attractive to people who don't like commercials?

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David M. Zaslav, Discovery, Inc. - President, CEO & Director [18]

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Sure. Thanks, Michael. We don't really talk specifically about when our deals come up and what we do. But we had a significant amount of flexibility. We now have more flexibility. So we have the lane, the full lane that we need in order to be effective. What's interesting that we found that we think is going to help us in this drive is a lot of the competitors now are coming out with their scripted series or scripted movies with the same drive. We got more stuff. We've got more shows. Hey, buy us, we have more shows. And those shows are actually really good, and they're great companies. More shows, more shows, more shows. You know what people were saying? I got enough shows.

What we have is great brands, great characters. And we think that, that's going to make a huge difference in an environment with a lot of blaring lights for shows. And as we build that and as we have been very quietly aggregating content, creating original content, we are looking at the full gamut of what will nourish and create the most compelling product that's the most differentiated. We think we have the right recipe, and we'll take you through it very soon, and we think you're going to love it. We hope you like it. And we hope, more importantly, that when we get out to consumers in the U.S. and around the world, that they like our hand as much as we do.

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Operator [19]

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Our next question comes from Brett Feldman from Goldman Sachs.

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Brett Joseph Feldman, Goldman Sachs Group, Inc., Research Division - Equity Analyst [20]

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And just to stick with the direct-to-consumer theme, I listened to some of the language you used during your prepared remarks. You highlighted the importance of reaching this 30 million-plus broadband-only households. You talked about the importance of being a companion to any pay-TV service. You think about those broadband households that are predominantly served by cable companies, which are current distribution partners for you. Is it safe to assume that as you look to sort of accelerate your direct model, you're looking to do it in partnership with your existing partners, not only because of the reach but also because the importance of just continuing to be respectful of those relationships?

And just as an extension of that with Fixer Upper coming back on Magnolia, which is awesome, should we assume that Magnolia could potentially be a centerpiece of your accelerated direct-to-consumer model as well?

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David M. Zaslav, Discovery, Inc. - President, CEO & Director [21]

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Sure, thanks. Look, I don't want to get into any more of the details. You can expect that we think we have the best content, the greatest brands. And in a world where it's hard to curate, which is why people say up on more shows, we have this ability to curate through brands and through characters that people already know and they know how to navigate. You should expect that we'll be offering our content in ways that are competitive in terms of whether they have commercials or don't have commercials or how much commercials they have. We've thought that out carefully, and we intend to -- our product will be very competitive and flexible. And we expect to have multiple partners, and that's how we're going to be successful domestically and around the world. And we'll take you through that. But Disney has been very successful by using partners. And as where we have been more successful, we've been more successful when -- not only we are marketing our product, but other distribution platforms are marketing our product. And so whether it's cable distributors, mobile distributors or larger players that are pushing other products, like Amazon is doing with us with Fire, every one of those is an added opportunity. And we, like everyone else, are looking for all of those to get the scale and build scale as quickly and as aggressively as possible.

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Operator [22]

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Our next question comes from Ben Swinburne from Morgan Stanley.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [23]

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Maybe one for Gunnar, just on the near term. Anything you can tell us, Gunnar, about affiliate trends as we think about the back half of the year and of the second quarter? Is it a decent kind of run rate for U.S. and international?

And then maybe for David, just going back to your point about lanes and open lanes. AVOD is an area where we're seeing at least a lot of growth in consumption. And your company, given its scale and advertising at audience, seems perfectly situated to exploit that as the ad market comes back. Is that a strategic priority for you -- for Discovery in terms of investing in either ad technology, a more targeted ratings approach than just standard Nielsen demos? And there's been some acquisitions in the space, like Tubi and Pluto. I'm just wondering how you think about that opportunity and whether that's an area of focus for the company.

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Gunnar Wiedenfels, Discovery, Inc. - CFO [24]

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Ben, let me start with that trend question. Again, I don't want to give specific guidance, and there's not too much to add to what I said a couple of minutes ago. U.S., feeling good about the pricing trends. We don't control the subscribers. And we'll see over time as D2C ramps up, how that starts contributing.

On the international side, a similar answer. The key factor here is sports, and that's twofold. Number one, as we already pointed out, the termination of the Bundesliga contract is going to be a little bit of a drag on affiliate revenues. But again, as I pointed out, obviously, very beneficial on the AOIBDA side.

And the second factor is some sports have come back, but the majority of the big events is still slated for us a bit later in the third quarter and probably the fourth quarter. That's going to be a driver, and we'll see how that pans out.

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David M. Zaslav, Discovery, Inc. - President, CEO & Director [25]

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I guess to answer your question on the AVOD, we've been quite successful with our GO products, even though they're just individual channels that are authenticated. But we've been able to get a very young audience and get additional data, which has helped us get -- which the advertisers have liked. We have -- we do have a team that's driving our data. We're also working innovatively with a number of the cable operators who have set-top box data. I do think data is a huge piece of our future in order to be able to get higher value for our existing content. And in products where we're going direct-to-consumer AVOD or SVOD that has commercial light, I think you'll see that ability to provide data to advertisers that benefit both us and them.

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Operator [26]

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Our next question comes from Jason Bazinet from Citi.

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Jason Boisvert Bazinet, Citigroup Inc., Research Division - MD, Global Head of EMT & Analyst [27]

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In your prepared remarks, you talked about increased flexibility on next-gen products. Do you mind just elaborating on what flexibility you're seeking? And with those 4 renewals you talked about, do you have that flexibility globally now? Or is it still just in a subset of your global footprint?

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David M. Zaslav, Discovery, Inc. - President, CEO & Director [28]

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We have it globally, fully globally. And when we take you through our aggregate global plan, we'll give you more detail.

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Operator [29]

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Our next question comes from Alexia Quadrani from JPMorgan.

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Alexia Skouras Quadrani, JPMorgan Chase & Co, Research Division - MD and Senior Analyst [30]

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Just sort of a general question on advertising. You guys continued to extract higher pricing. And I'm curious if the ratings continued to go up the way that they have. Can you -- are all the old rules sort of throw out the window in terms of broadcasting, getting premiums versus cable? Can you sort of surpass that eventually?

And then my second question is really on the rebranding of DYI in terms -- in early 2021. Any progress so far in terms of potentially getting more distribution for that channel?

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David M. Zaslav, Discovery, Inc. - President, CEO & Director [31]

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Sure. Thanks. We have gotten more distribution for DIY. I mentioned, I think, on the last call that when Chip and Jo were on DIY on a Sunday night, that you could actually see people on Google trying to figure out what channel DIY was so that they could watch it. And they did watch it, and it was the #2 show on Sunday night on television behind 60 Minutes. So we think we're super excited about what they're doing. I spent -- I spoke to Chip and Jo yesterday for 1.5 hours. They're excited, not just about Fixer Upper, but about everything that's going on in Waco, with the production, with the brand. So very exciting. And they'll come on to DIY with more subs. And as a channel, it's been growing significantly because of the environment where people at home and the content works very well. So we feel very good about it. It will be early in -- early next year. And what was the other question?

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Alexia Skouras Quadrani, JPMorgan Chase & Co, Research Division - MD and Senior Analyst [32]

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Really on pricing in general, can the gap really disappear between you and broadcast?

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David M. Zaslav, Discovery, Inc. - President, CEO & Director [33]

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I hope it does. Because if it does, then you can put a multiple of 2.5x against our ad revenue. The -- all kidding aside, we're dealing with a legacy issue. And that legacy issue is -- really doesn't make sense anymore. How much do people watch? How much do they watch live? How engaged are they? And if anything, if you're selling products, being on HG or Food or cooking is probably a lot more important for a lot of advertisers than to be on a regular show. Even a sports show and a lot of advertisers have told us their ability to convert product is stronger on us. So we have this inverse problem that's really based on the fact that cable was at the kids' table. Well, we've aggregated the very strong brands. We're investing -- have invested hugely in building those brands, building the characters, building the relationship with the audience. And we're starting to really break through, and we have to fight to get our fair value. And we have to be -- and in the end, I think the equitable argument that we have has broke -- started to break through a little bit in the last 2 years. You've seen us outperform quarter-by-quarter. You should see us outperform by a lot more, in my opinion. Because in the end, we have great content that people love. And in this very unusual environment, we also have original content and a dependable ongoing product at a time when some of our competitors can't do it just because of sports and scripted is harder.

So I hope so. We're fighting for it. We've got a great leader in Jon Steinlauf. We've got a great team. We're very engaged in the upfront. We're engaged in scatter, and we got to keep telling our story. They know it. We have to figure out how we wrestle it.

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Operator [34]

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And we'll take our final question from Rich Greenfield from LightShed Partners.

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Richard Scott Greenfield, LightShed Partners - Partner and Media & Technology Analyst [35]

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David, I guess the question is, as you and others -- I think of NBC, I think what HBO Max just did, as everybody is finally kind of making the pivot to direct-to-consumer, where do you think -- I mean, we're probably around high 70s, 80 million subscribers in the multichannel bundle today, where are you thinking it bottoms out? And as you think about Europe, with Disney taking a huge write-down and sort of pivoting to D2C overseas, how do you think about kind of the state of Europe relative to what you're seeing in the U.S. for the multichannel universe?

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David M. Zaslav, Discovery, Inc. - President, CEO & Director [36]

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Thanks, Rich. Well, first, let me just start with Europe. Europe, I think, is much more stable. And in terms of what we're seeing in terms of viewership on that platform, dealership 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 were 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. And so I think we emerge stronger. But Europe is more stable. Europe is -- the decline is much slower. And the difference is the huge broadband here. And Amazon is a great, great product, but it's not deployed with local content the way it is here in the U.S.

U.S. is 1 market, 330 million people. And Netflix has been extraordinarily successful. Amazon is successful. Disney+ is successful. And so -- and there's huge amount of broadband. So you see this and a lot of marketing dollars telling people what are on those platforms. None of that exists in Europe. So our local language, local sports, we think is pretty compelling. And the fact that the ecosystem is more stable also gives us -- given how big we are in Europe in both sports, free-to-air and cable, gives us, I think, a much...

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Richard Scott Greenfield, LightShed Partners - Partner and Media & Technology Analyst [37]

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Are you surprised by Disney's move to sort of a band in Europe?

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David M. Zaslav, Discovery, Inc. - President, CEO & Director [38]

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I don't really want to comment on Disney. It's a great company. I think Bob has done an extraordinary job in building IP and in building that company. For us, I look at what we have, and I really like what we have in Europe. I like the differentiation of what we have. I love the IP that we have.

In the U.S., I can't predict where it's going to go, but we're on every skinny bundle. We are -- everybody has taken real notice. We have content that people love and with a very core of that bundle. If people have cable TV and they have 6 channels that they watch in almost every case, 4 of the 6 are us. So we'll do very well on the platform across the advertising that we deserve. Our sub fees, I think, we'll continue to be good because we deserve it. And we can't -- the reason that we're going so hard in direct-to-consumer is because it's -- we want to make sure that our great content is on every platform and has an opportunity for everyone to see it, how they want to see it, when they want to see it. And when they do, we think they're going to be very happy, and we think we're going to do very well.

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Richard Scott Greenfield, LightShed Partners - Partner and Media & Technology Analyst [39]

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We really look forward to trying it.

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Operator [40]

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Thank you. And that does conclude our question-and-answer session for today's conference.

Ladies and gentlemen, this now concludes today's call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day.