Fortune
 Fortune editor at large
January 21 2008: 1:21 PM EST
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Oprah's high-flying partner

Shares in the talk show host's new cable partner, Discovery, are outperforming all other media stocks - including Google's.

By Richard Siklos, editor at large

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Discovery CEO David Zaslav is looking to Oprah Winfrey to boost subscriber fees and the cable channel company's profile.

NEW YORK (Fortune) -- Headlines about Oprah Winfrey last week focused, quite rightly, on the icon's plans to start her own cable television channel. But there's another story to be told about Winfrey's partner in the venture, Discovery Communications, and how its relatively new CEO is on a mission to remake the company.

In fact, if you were to guess the best-performing media stock of the past 12 months you might be surprised to know that it's not newsmakers like News Corp (NWS, Fortune 500), Disney (DIS, Fortune 500), Scripps, Viacom (VIA), or even mighty Google (GOOG, Fortune 500).

Instead, it's Discovery Holding Company (DISCA), an oddly-constructed public vehicle for housing the 66 percent stake that Liberty Media (LINTA) holds in Discovery Communications (more on Discovery Holding later). Since former NBC Universal executive David Zaslav took the reins of Discovery Communications in late 2006, shares in Discovery Holding have increased more than 50 percent, even after some recent declines with the market turmoil.

The planned Oprah Winfrey Channel - or OWN - will be a relaunch of a snoozy channel called Discovery Health, and the plan is to flip the switch between the two channels some time next year. In a nifty bit of deal-brokering, Oprah will be chairman and contribute her existing Oprah.com website and, sometime when the contracts for her hit syndicated daytime show expire in 2011, will probably move it onto the channel she will "own" half of.

But Oprah isn't the only star of this show. Based on his first year, Zaslav himself could easily headline his own program, where he catapults into a sleepy or ailing channel ("Next week: Extreme makeover of channel 464, the Farming Channel!") and whips it into shape. Kinetic, unsubtle, and thoughtful, Zaslav was a corporate lawyer in private practice when he became enamored of media (Discovery co-founder John Hendricks was a law firm client back in Discovery's early years). He eventually quit the law practice and joined NBC Universal, where he helped launch CNBC, oversaw distribution, and eventually ran the business side of the General Electric Unit's cable channels.

As Discovery's CEO, he's shaken up the senior management ranks, and pulled the company out the retail business - all while taking a fresh look at Discovery's cable channel assets and boosting investment in online and multimedia businesses.

There is plenty to work with. The heart of the business is the namesake Discovery Channel, which is known for non-fiction fare like "The Deadliest Catch" (following the lives of lobster fishermen), the self-explanatory "Dirty Jobs," and its annual "Shark Week" scary fish-fest. On paper, Discovery boasts an impressive lineup and reach: More than a dozen channels with distribution in more than 170 countries with upwards of 1.5 billion subscribers. (And, unlike other big networks that rely on syndicated or licensed fare for much of their schedules, Discovery owns the vast majority of its shows outright so it can "repurpose" them at will internationally or for video-on-demand or online or what have you.) The rub, however, is that too much of the programming the company has produced over the years has been pleasantly forgettable.

In the United States, the company boasts 13 cable channels but, as analyst Richard Greenfield of Pail Research says, the business is "extremely lopsided." The core Discovery Channel and TLC account for 80 percent or more of the overall company's cash flow. Indeed, the subscriber fees it has negotiated with cable and satellite operators to carry Planet Health, now in 70 million homes, are so small that they contribute little to Discovery's ledger sheet. Presumably, Zaslav's plan is to leverage Oprah's star power into higher subscriber fees.

Zaslav says he approached Oprah a few months into his new gig after his wife gave him a copy of Oprah's magazine, O, to peruse. Thumbing through, he sensed a fit with Discovery's "knowledge and curiosity" ethos and the solution to a bigger riddle in Discovery's portfolio. As Zaslav explains it, cable operators spend all their time trying to do three things: Get their channels in as many homes as possible, build their brands, and develop winning programming . At Discovery Health, he already had broad distribution, but not much else.

"When I looked at that I thought `We've got the platform and how do we take advantage of that in a meaningful way?'" Hence, Oprah: "There's no more powerful brand in the media marketplace," he says. As far as the third component -- programming - both Zaslav and Oprah aren't saying yet what the channel will offer, although it's no secret where Oprah's interests lie.

Zaslav is making a similarly bold move by announcing he will shutter the low-rated Discovery Home channel and replace it with a channel called Planet Green. If these deals are any indication, Zaslav has a keen sense of trying to meld the zeitgeist with Discovery's non-fiction mission. Whereas OWN will be devoted to leading better lives, Planet Green will be about making a better planet to lead them on.

Another instance of Zaslav's makeover mindset: The former Discovery Times channel - in which the New York Times Company sold its 50 percent stake back to Discovery last year - will be relaunched this week as ID, for Investigation Discovery, to capitalize on the higher ratings that crime and sleuthing shows generate. Next up, in February, the company is planning to revamp its Animal Planet (whose ratings have been flat for a few years) as a channel that is less about animal fancy and more an adult TV channel featuring stories that include animals.

There's one overarching change in store: Discovery Holding was a vehicle that Liberty's John Malone set up a few years ago without the acquiescence of his co-owners in Discovery, Cox Communications and Advance/Newhouse. But Cox was bought out last year and the Newhouse family and Malone have agreed to take Discovery Communications public later this spring, at which time his Holding vehicle will disappear.

Pail Research's Greenfield estimates that Discovery Communications logged 2007 earnings before interest, tax, depreciation and amortization of $922 million on revenue of $3.1 billion, up from $747 million and $2.85 billion, respectively, from the year before. However, Greenfield also noted in a research report last week that there are risks inherent both in the rebranding efforts of the individual channels and in betting on the future growth of cable networks in the face of all the disruptive new video technologies swirling around.

That said, the rapid rise in Discovery Holding shares represents investor confidence that Zaslav and Co. will build more value out of the company in light of the fast-changing media world and with the new transparency and flexibility that being a public company will give Discovery Communications.

In upcoming episodes of Zaslav's show, look for remakes of other sleepy Discovery properties like The Military Channel and Fit-TV. And, once Discovery is public, he'll have a currency to make acquisitions - not to mention the backing, via major shareholder Malone, of a tireless deal-maker - to buy more channels and businesses to provide plenty of material for future seasons. To top of page

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