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Discovery, Liberty Look Abroad

5/23/2009 2:00 AM Eastern

With the advertising market expected to be flat at best for the next several months, two smaller programmers are beginning to see growth opportunities overseas.

Last week at the J.P. Morgan Global Technology, Media and Telecom Conference in Boston, two such programmers — Discovery Communications and Liberty Media — said that despite weakness in the domestic ad market, international revenue could see a boost.

Discovery Communications chief financial officer Brad Singer repeated the cautious stance he took on the programmer's first-quarter conference call last month, telling the J.P. Morgan conference audience that second-quarter advertising growth should be flat.

But Singer also saw some daylight on the international side.

International accounted for about $1.2 billion in revenue in 2008, compared to $2.1 billion in domestic revenue. And though the biggest component of international revenue — the United Kingdom, representing more than 50% — has been equally hammered by the global recession, there is a lot of runway left in other countries that do not rely as heavily on advertising. Singer estimated that outside of the U.S. and United Kingdom, 70% of revenue is generated through affiliate fees and 30% through advertising.

“As you keep getting more subscribers, you have more of a critical mass and you can sell [advertising] to it. That's why you see in certain markets, Latin America especially, our advertising grows in excess of our subscriber growth because it is becoming a larger piece of our revenue stream,” Singer said.

Later in the conference, Liberty Media CEO Greg Maffei said that the international market is beginning to show greater promise because of the digital terrestrial television initiative, which brings more channels via free over-the-air digital TV to consumers. Called the DTT initiative, it has already been launched in the United Kingdom, Ireland, and other European countries. In 2005, the European Union recommended that all of its member countries convert to DTT by 2012.

Maffei said that the DTT initiative in Italy alone could increase the number of TV households to about 20 million, in addition to the satellite-TV homes there, which would make launching new networks more economically viable.

“That creates an opportunity,” Maffei said. “The scale we need [is] 10 [million], 15 [million], 20 million homes to make a useful go at it, where we have the ability to have a relatively modest number of channels but a high amount of distribution. That happens with DTT.”

But Maffei said Liberty would take a “judicious” approach overseas.

While Discovery outperformed its other programming brethren in the first quarter — it reported 2% domestic ad-sales growth, while others reported declines — Singer's prediction of flat second-quarter domestic ad growth appeared to contradict other top media executives who have said previously that the worst appears to be over.

“The worst is over, it's kind of hard for anyone to make that statement on a completely data-driven basis,” Singer said. “What we think is that things are about the same. We felt that 2% revenue growth was a very good number to deliver in the first quarter. The second quarter, when we say flat, that is about where the market is. When you look into the third quarter, we don't have the book firmed up yet.”

Singer said that while it is still early in the upfront process, so far it is consistent with the first quarter.

“It is a much slower to come together advertising environment,” Singer said. “We're still selling the second quarter and this is mid-May.”

But Singer was optimistic that the ad market will work itself out over time and networks that continue to air compelling programming, maintain their ratings momentum and manage their costs smartly, will ride out the storm.

“This is not right now what we would call by any stretch of the imagination a robust environment,” Singer said. “But we are managing it fairly well.”

October