Discovery Communications, Inc. Business Information, Profile, and History

Company Perspectives:

Discovery Communications, Inc. is the leading global real world media and entertainment company, creating the highest quality content and services to help people explore their world and satisfy their curiosity.

History of Discovery Communications, Inc.

Discovery Communications, Inc. (DCI) is a leading player in the global cable television market. The company operates 33 channels worldwide including the Discovery Channel, Animal Planet, The Learning Channel, Discovery Health, and the Travel Channel. Discovery Communications also sells videos, CD-ROMs, magazines, and books; runs web sites; and operates 165 retail stores. The privately held company is owned by a group consisting of Liberty Media Corporation (formerly a unit of Tele-Communications, Inc.), Advance/Newhouse Communications, Cox Cable Communications, Inc., and company founder and CEO John Hendricks.

Beginnings

The company known as Discovery Communications, Inc. traces its roots to 1982, when a University of Alabama history graduate named John Hendricks founded the Cable Educational Network, Inc. in Maryland. The new company's goal was to help present informational and documentary programming on television. Hendricks, a West Virginia native, had earlier founded a consulting firm that assisted producers of educational videos with marketing. In 1985, after raising $5 million, Hendricks's small company launched a new cable television network, which was dubbed the Discovery Channel. Discovery, which initially broadcast a variety of licensed documentaries but no original programming, was available in only 156,000 households.

The new channel's revenues were small, and within six months Hendricks owed $1 million to the British Broadcasting Corporation (BBC) but had only $5,000 in the bank. Desperate for funding, he sought out new investors. Alhough he was turned down by the large entertainment companies he approached, he was able to convince a group of cable operators led by Tele-Communications, Inc. (TCI), Cox Cable Communications, Inc., and Newhouse Broadcasting Corp. to take a flyer on the network, retaining ownership of 1.4 percent for himself. TCI (whose stake later was transferred to Liberty Media) owned 49 percent, with Newhouse (later known as Advance/Newhouse) and Cox holding a quarter each. The company now was able to pay its creditors, and the new investors also boosted Discovery's audience base when they added the channel to their systems.

By its first anniversary in June 1986, Discovery counted seven million subscribers. Over the next several years the company broadened its range of programming, with events such as the February 1987 broadcast of 66 hours of live Russian television, gaining the company wider media interest. Discovery also lengthened its schedule to 18 hours per day from 12 during the year.

By 1988 Discovery's growing subscriber base had hit 32 million. The following year saw the company offer its first overseas cable service, with some 200,000 subscribers in the United Kingdom and Scandinavia receiving Discovery Channel Europe. In addition, 1989 was the year Discovery commissioned its first original programming, having heretofore relied exclusively on material from outside sources, among them the BBC. One new show, "Assignment Discovery," was a daily, one-hour program designed to be used in school classrooms. In 1990 Discovery expanded its overseas operations to Israel and began to sell videos through the newly created Discovery Interactive Library unit. The company, which had employed only 19 when the channel first went on the air, now had a staff of more than 250.

1991 Acquisition of The Learning Channel

In June 1991 the company purchased The Learning Channel (TLC) for $30 million. TLC had 15.2 million subscribers at the time of the acquisition, but was struggling financially. In October a new programming schedule for TLC was announced, replacing its lineup of business and career information, self-help, and hobby programs with 18 hours of educational and entertainment programming aimed at an upscale adult audience. The following spring a six-hour block of children's programming was added. October 1991 also saw the company renamed Discovery Communications, Inc. (DCI).

The future of cable was expected to encompass as many as 500 channels, and John Hendricks began giving thought to ways to deal with so many options. Announced in late 1992, Your Choice TV, Inc. was a new subsidiary that offered a prototype cable remote control device that could organize the hundreds of choices into 11 thematic categories for ease of use. Over the next several years the Your Choice efforts also began to focus on creating a time-shifting service through which unused channels would broadcast paid repeats of selected programs for individual viewers. Experiments were carried out on eight cable systems with some success, but the concept faced great logistical hurdles, primarily the problem of reaching agreements with the numerous content providers.

In the fall of 1993 DCI released its first CD-ROM, "In the Company of Whales," which was based on the hugely popular documentary of the same name shown on the Discovery Channel. Discovery now was producing more original programming than ever before, though the company did not have its own production company, but rather contracted with outside firms for all of its shows. Popular offerings around this time included specials marking the 50th anniversary of the Normandy D-Day invasion and the 25th anniversary of the resignation of Richard Nixon. The network was available in 62 million homes by 1994, or 98 percent of U.S. households with cable TV. The Learning Channel also had doubled its own subscriber base to 30 million homes.

During 1994 the Federal Communications Commission relaxed its regulations for cable broadcasters, allowing them to add more channels and charge more for their services. DCI responded by announcing that it would form four new channels in 1995, including ones on nature, science, history, and a home improvement/cooking combination. The barrier to new cable channels was high, however, and a successful launch could require an investment of $200 million or more in cable system fees to get enough subscribers to make the service pay off.

Expansion into Retail in the Mid-1990s

In 1995 DCI spent $10 million to buy the coincidentally named Discovery Store Inc. chain of 11 Texas and southeastern U.S. educational and learning product stores. DCI already had begun selling its own licensed items through such stores as PetsMart and The Nature Company, and the deal was seen as a good fit with its expansion into marketing. Plans soon were laid to add more locations to the chain. DCI also was increasing its advertising, which featured the tag line, "Explore Your World." By 1995 $20 million was being budgeted annually. In some cases DCI used highly targeted campaigns, such as one for a special on submarines that was promoted through U.S. military publications. When the program aired, it received the highest prime-time ratings to date for the Discovery Channel.

The company's brand-building strategy was working well, as was shown in a 1995 study by Total Research Corp., which ranked Discovery second only to the National Geographic Society in consumer perception of brand quality. The company finished ahead of such major names as AT&T, IBM, and the Wall Street Journal in the process. DCI also launched a web site during 1995, earmarking $10 million for the project. The result was an award-winning combination of original articles, video and sound clips, and more. Earlier, DCI had begun publishing a magazine that also complemented its programming.

During the mid-1990s DCI began to focus increasingly on overseas expansion. In 1994 the company launched spinoff channels in Asia, Latin America, and the Middle East, followed in 1995 by others in Canada, India, and Australia/New Zealand. More were added later in Italy, Africa, Brazil, Germany, Japan, and Turkey. Channels ultimately would be available in 150 countries. Dubbing the company's documentary and informational programs into foreign languages was typically much less expensive, and less complicated, than creating foreign versions of dramatic material, and much of the subject matter was universal, appealing equally well to viewers throughout the world. During this period DCI also announced a move into feature film production, forming a new subsidiary for this purpose that was expected to issue one or two titles per year, including some shot in the large-format Imax process.

In February 1996 DCI announced a joint venture with one of its investors, Tele-Communications, Inc. The new company, ETC w/TCI, would offer seven hours of commercial-free cable programming directly to schools, including some material taken from the Discovery and Learning Channels. Former U.S. Congressman Tony Coelho was named chairman and CEO. The new company, which initially targeted some 700 large schools nationwide, planned to charge $265 a year per student for the service. The fee also would cover installation of the necessary hardware and software, as well as training on its use.

A short time after this, DCI broadened its retail presence with the $40 million acquisition of The Nature Company's chain of 110 stores in 34 states. Over time the stores were to be rebranded as Discovery Channel Stores. The move was in line with what other large media companies such as Disney and Warner Brothers were attempting—operating chains of stores that served to bolster brand identity while also trading on public familiarity with the name. A new 25,000-square-foot flagship superstore was soon announced for the Washington, D.C. area, near DCI's Bethesda, Maryland headquarters. Typical stores in the chain were smaller, falling in the range of 3,000 to 5,000 square feet.

In October 1996 two other major steps were taken by DCI. One was a new partnership with the British Broadcasting Corporation to produce a BBC-branded cable channel in the United States. BBC America would feature the respected dramatic and performing arts programming for which the British company was known, with DCI handling the logistics and also contributing some of the content. DCI anticipated spending more than $500 million over a five-year period on the deal, which would possibly include other cable channels and the programming necessary to flesh them out. DCI also was given "first look" options on new BBC programming, putting the company ahead of such competitors as the Arts & Entertainment and Public Broadcasting networks.

Creation of Animal Planet in the Mid-1990s

At the same time the company launched Animal Planet, a new cable channel focusing on both domestic and wild animals, which was 20 percent owned by the BBC. After its launch the channel's audience grew quickly, its appeal cutting across age and ethnic lines. Part of the growth also was due to fees DCI paid cable companies to add Animal Planet to their lineups. DCI simultaneously announced the creation of four digital broadcast channels, which were available to only a limited number of viewers. The channels, Discovery Home & Leisure, Discovery Kids, Discovery Science, and Discovery Civilization, were expected to become more widely seen when digital broadcasting took hold as a popular medium. In the meantime the new channels, produced with smaller budgets than the company's primary ones, served as useful trial balloons to test the viability of new concepts.

In September 1997 Discovery announced that it would buy 70 percent of the Travel Channel from Paxson Communications for $20 million. The Travel Channel had 20.8 million subscribers and presented a mix of travel tips and vacation site profiles. Discovery soon began providing programming and logistical support for the channel. Later, in February 1999, DCI purchased the remaining 30 percent of the operation.

The company's flagship store opened in February 1998, six months late and $10 million over budget. The now 30,000-square-foot store featured a television studio, an 82-seat theater, a T-Rex skeleton, and the nose of a World War II era B-25 bomber that customers could climb into. Products offered for sale ranged from DCI's full line of videos to games, telescopes, fossils, and even an ice-age bear skeleton priced at $75,000.

During early 1998 DCI also attempted to purchase the low-rated Court TV cable channel from its owners, a consortium led by Time Warner. The $350 million deal was nixed by Time Warner shareholder and Vice-Chairman Ted Turner, however, reportedly because he feared DCI might convert Court TV into a concept that would compete with one of his own channels. In December DCI completed another acquisition attempt and bought CBS's struggling Eye on People channel, after initially planning to purchase only 50 percent of it. Eye on People (later changed to Discovery People) had only 11 million subscribers and was losing money for its parent company. DCI planned to continue to air the channel's mix of celebrity news and profiles, which included some content provided by CBS. During the year DCI also added two channels to its digital broadcasting lineup, Discovery Wings and the Discovery Health Channel. A Spanish-language digital channel was being offered by this time as well.

Entering the Field of Health in the Late 1990s

At year's end DCI formed a new subsidiary, Discovery Health Media, Inc., a multimedia venture that was intended to make the company a leader in the field of health and medical information. More than $300 million was allocated for the start-up, which was to include a web site that offered health news and information. The following summer digital channel Discovery Health was upgraded to regular cable status as part of the initiative.

The late 1990s also saw DCI lay plans to move its operations from Bethesda to Silver Spring, Maryland, by 2003. The company would occupy three buildings, two of which were to be newly constructed. Several other high-profile organizations soon followed suit and prepared to move to the once blighted Silver Spring. One was the American Film Institute, which would open a facility there and also co-produce a documentary film festival with DCI.

In November 1999 the company shut down its themed entertainment unit as a cost-cutting measure. The closing would mean the end of Discovery Channel Pictures, which had made Imax films including Africa's Elephant Kingdom, as well as the "Eco Challenge" made-for-TV sports event. At the same time DCI invested in Petstore.com, an online pet supply and information site that was expected to be used to cross-promote Animal Planet. DCI subsequently reshuffled its online operations and placed its web companies in a new subsidiary, Discovery.com, Inc., which was reportedly on the verge of being spun off to investors. DCI head John Hendricks also announced that he was helping to launch a new women's soccer league, which would field eight newly formed teams in 2001.

The summer of 2000 saw Discovery.com's IPO plans shelved, with $500 million in new financing sought through private investors. The move followed a downturn in investor confidence in the potential of the Web as a profit-making entity. In November the company laid off 40 percent of Discovery.com's staff, as profitability for the venture appeared more and more elusive. DCI's web site was redesigned to focus on the core television properties, with news stories and other original content reduced. Later in the year DCI also scaled back its plans for the Silver Spring facilities, canceling construction of one of the new buildings. The company had by this time quietly abandoned its Eye on People and Your Choice TV ventures, as well.

In early 2001 a potential challenge to DCI's dominance of the cable documentary market was launched by the National Geographic Society with the backing of Fox Cable Networks. DCI's Hendricks dismissed the start-up as too little, too late, noting that it would cost at least $250 million to get a comparable subscriber base to meet Discovery on its own turf. An Equitrend consumer survey recently had ranked Discovery as the number one most trusted brand name, eclipsing National Geographic's hold on the top spot. National Geographic went on the air with ten million subscribers, with plans over the next several years to reach 28 million—a figure still far below Discovery Channel's 81.2 million, The Learning Channel's 77.3 million, or Animal Planet's 66.9 million. Meanwhile, Discovery specials Raising the Mammoth and Walking with Dinosaurs set back-to-back records for cable documentaries with 10.1 million and 10.7 million viewers, respectively.

Nearing its 20th year in business, Discovery Communications, Inc. had assembled a formidable multimedia empire that was still growing. Firmly established on cable television, the company's well-regarded brand name was helping drive its moves into digital cable, cyberspace, and retail sales. Although not yet profitable, these operations positioned DCI well for future developments in the rapidly evolving media world of the 21st century.

Principal Subsidiaries: Discovery Networks U.S.; Discovery Networks International; Discovery Enterprises Worldwide; Discovery Health Media.

Principal Competitors: AOL Time Warner, Inc.; Walt Disney Company; The Corporation for Public Broadcasting; Viacom, Inc.; A&E Television Networks; Fox Entertainment Group, Inc.; National Geographic Society.

Chronology

• Key Dates:
• 1982: John Hendricks founds Cable Educational Network, Inc.
• 1985: Discovery Channel debuts on cable television with 156,000 subscribers.
• 1986: Cable system operators buy into the company; subscribers top seven million.
• 1989: Discovery Channel Europe is launched.
• 1990: Line of home videos is introduced.
• 1991: Learning Channel is purchased; company name is changed to Discovery Communications.
• 1993: Company begins marketing CD-ROMs based on its television programs.
• 1994: International expansion widens to Asia, Africa, Latin America, and the Middle East.
• 1995: A $10 million web site is launched featuring original news content and more.
• 1996: Two retail chains, Discovery Stores and Nature Company, are purchased.
• 1997: Company buys 70 percent of the Travel Channel, later acquiring the remainder.
• 1998: Animal Planet is launched as part of a deal with the BBC; Eye on People channel is bought.
• 1999: Discovery Health Channel is launched as part of new Health Media division.
• 2000: Internet operations are folded into Discovery.com; People channel is shuttered.