Warner Bros. Discovery, Inc. (WBD) Earnings Call Transcript & Summary

Good afternoon. I'm Andrew Slabin, Head of Global Investor Strategy for Discovery. And I'm pleased to welcome you to the second portion of Discovery's announcement today. For those of you that joined us earlier, welcome back. With me here in New York City is David Zaslav, our President and Chief Executive Officer; and Gunnar Wiedenfels, our Chief Financial Officer. And joining us via Zoom from London is JB Perrette, President and CEO, Discovery Networks International. Gunnar will open with some remarks and walk through a brief slide deck, and then we'll open up the discussion to your Q&A. Please select the Raise Hand icon, we will call upon you accordingly, and you'll be prompted to unmute your microphone. You can reference the slides as well as today's press release on our website at www.corporate.discovery.com. And without further ado, the safe harbor disclosure. Comments today regarding the company's future business plans, prospects and financial performance, are forward-looking statements that are made 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 may 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 annual report on 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'll turn it over to Gunnar.

Thank you, Andrew, and good afternoon, and thank you, everyone, for joining us on this very exciting day. As Andrew said, I want to go through a couple of slides before we open it up for Q&A. And let me start by talking about the operating momentum that we're enjoying right now. As you can see on this first slide here, Page 3, we have been able to grow share both domestically and internationally. And as Guy Fieri just said, that's from the moment 2 years ago when we all came together under a new roof between Discovery and Scripps. Also on this slide, as you can see, for the first time, we're talking about the aggregated subscriber number, 5.2 million paying subscribers across our DTC portfolio, up 3x from 2 years ago, tremendous momentum and you will hear more from us about these trends as we go forward, we're intending to report on a regular basis how we're doing. What's most important for me is free cash flow. We've been talking about this a lot, the tremendous ability for this company to generate free cash flow. And let me talk about current trading a little bit here as well. As you heard over the past couple of weeks when we reported Q3 and then the subsequent conferences, we have been seeing improvements week after week since we've started coming out of that summer drop, let's call it. Our advertising revenues are looking better and better. We had already guided to sequential improvement. I want to give a quick update, both internationally and domestically, we're seeing further improvement of the situation. I'm now expecting low to mid single-digit declines for ad sales for Discovery domestically and internationally. And we had already spoken about the sequential improvement for affiliate international and that mid- single-digit number up for U.S. affiliate is solidifying as well. So we're really taking a step back here, looking at tremendous operating momentum. And with this, we're launching into this new product, I want to go back to the addressable market that I just spoke about a couple of minutes ago. To give you a little more detail, we have taken a very systematic approach here, looking at the U.S. and the international target markets. In the U.S., clearly, a huge opportunity of finally being able to address broadband-only homes, which, to this point, have had no access to our content. But as we said and as you could see from the presentation earlier, there's tremendous value in our product as well for those consumers who already have a cable subscription. And in addition to that, 1 deeper engagement, and ad-free experience, et cetera, et cetera. On the international side, we're looking at 1.2 billion TV homes in the target markets that we're addressing here. And then we have applied a number of filters to bring us down to sort of the core serviceable, addressable market that we just spoke about of 470 million homes globally. We do want to quickly talk about mobile and broadband outside of TV homes as well. It's something that we haven't fully baked into our models yet. But as you can see on this chart, needless to say, all of a sudden, with this product, we're able to address a much, much larger global community here. This might be less of a factor in the U.S. even though with the Verizon partnership, obviously, we're making a big step forward here. But you should keep in mind, in our international footprint, we're active in virtually every territory globally. And some of those markets are dealing with very small -- comparably small pay TV penetration. So our access to those territories has been focused on a small part of the country. Now we're open to address the entire population. To give you one example, Italy, a country of 60 million inhabitants, 20 million homes with only a 20%, 25% pay TV penetration, which is also pretty much dominated by one big player. This product here is going to come to the market in partnership with Telecom Italia Mobile, which is going to give us access to 30% of the entire of broadband and mobile communities. So a big difference, and I'll talk more about international because I do think it's one of the key differentiators here for us and gives us enormous opportunity. Talking about monetization for a second here. And this is a very simplified look at our ARPU in linear today, and this is focusing on the U.S. If you just take our reported revenue numbers for the U.S. divided by the number of cable households that were distributed in, it gets you to a roughly $7 ARPU per month per subscriber. And I'm very confident that with our discovery+ product, we're going to be able to achieve at least that same ARPU, if not more, and that can be achieved even in the near term. Clearly, on the right side, you have our retail price points undiscounted for the ad-free version $6.99 and for the ad-light version, $4.99 plus roughly $4 advertising per user per month that we're assuming here. Now I want to qualify this a little bit. Obviously, this is pre-discount. This is pre-partner shares, et cetera. So a lot of this is going to, in actual terms, very much depend on how the mix evolves, how much is going to be direct-to-consumer subscribers? How much is wholesale with partners? How much -- how attractive is the ad-free version versus the ad-light version, et cetera. So a lot of that is still going to evolve. But net-net, I do think that we have the opportunity to generate more revenue per subscriber over time than today. And I do see upside here, both on the advertising side as we generate scale, and that puts us in a position to better monetize these eyeballs. And on the affiliate or the subscription side as well, because clearly, you have seen the enormous amount of content and quality content that we're offering here at a very, very attractive price. I do want to point out, again, this is a U.S. example. Obviously, the international market is much, much more diverse with very different characteristics in individual territories. But you should know that comparing linear and direct-to-consumer ARPU potential internationally, we believe that the uplift can be closer to 3 to 4x what we're generating in linear today. Another very important point that I want to make here is the advertising opportunity from a CPM perspective. And this is not speculation, but we're already seeing a lot of upside potential that has started materializing. If we're starting on the left, our linear CPMs, and again, I mean, this is all against the backdrop in which we have a much stronger position than ever before. We're seeing ratings growth, share growth across global territories. We've had a very solid upfront. We have pricing opportunities in linear itself. But then we've also started to see that in our addressable linear products, in our TV Everywhere product GO, we're already generating 2, 2.5x price premiums. And discovery+ is now going to take us to a whole new level. For the first time, we have full access, real access to first-party data. We're going to be generating that data at scale, at growing scale over time. So our estimate is that we can at least get a price premium of 3x of what we're generating in linear. So again, the product experience from a viewer perspective is going to be less clutter, less minutes and much broader monetization opportunities for us. That is, to a large extent, obviously driven by the opportunity to also offer new advertising products. We're going to be offering over time, Bing Ads, pause ads. You'll have keyword links. Our advertisers can use geographical overlays to whatever advertising we're putting on. So an enormous amount of additional opportunities, again, we've talked about the data impact. We already have our OneGraph product in the market. This is going to supercharge that product and the power of that product. And you have seen in the presentation earlier that we were able to line up some very exciting launch partners here with PepsiCo, Craft, Toyota and the like. Having spoken about the top part of the P&L. I want to focus on expenses and margins as well. Again, we're starting from an ARPU potential that's above we're seeing in linear, and we will apply the same efficient model that has made us so successful financially in our existing business to this business as well. And that's why we are confident that we will be operating this business at a 20% margin once we hit scale. The 3 buckets of costs that I want to talk to are content, technology and marketing, and we have already given you some background here, but I want to quickly go through each one of them and help you better understand why we believe that we are going to be able to operate very, very efficiently in this new space. Starting with content. Again, I think one thing that has, like nothing else, allowed us to be so successful, achieve the margins that we are enjoying, achieve the cash conversion rates that we're enjoying like the content exploitation model. IP is at the core of this company. And David and the team and the Board have made the decision very, very early on, we will own our IP, no matter what. We're not engaging in syndication deals, we have all our rights, we own them across territories, across platforms. And that way, we're getting multiple bites at the apple, U.S. linear advertising, affiliate fees. We have seen very nice contributions from TV Everywhere over the past couple of quarters, years actually now. Then we go into international, same model, pay-TV affiliate fees. In some markets, we've been able to utilize the content to launch free-to-air offerings on top. And discovery+ comes in here, bringing to the table 2 more very nice revenue streams and revenue opportunities that I've just taken you through. And again, let me assure you, we will continue to apply that same model that we have successfully applied over the years, taking multiple bites at the apple and optimizing the value and the exploitation of our content on a global cross-platform basis. The bottom right corner of this chart, very exciting. You can see that we're able to bring in even more of the content. You just saw all the fantastic brands and personalities in the video that we showed earlier. But again, I mean, if you just look at these logos here, this is the definitive home of real-life entertainment. Turning to technology. Again, I want to take a step back here. We have been at this for a couple of years. And especially on the technology side, at least since I can have a view on this here, we have made tremendous progress. We have gone from sort of very entrepreneurial individual parts of technology to, one central platform that I would consider to be state-of-the-art. It's allowing us to leverage financial efficiency across that platform. It has allowed us to be independent from third parties, launching something like discovery+ takes a number of clear prioritization decisions. We were able to make those decisions and just drive it through Avi and the team, a team of very, very professional, very experienced tech software development -- developers and tech leaders from the likes of Amazon, Microsoft, Google, et cetera have done a tremendous job. And just as one example, we've been talking about the Sky partnership a couple of times already this morning and this afternoon. And it's just remarkable that we were able to set this up and roll it out literally within weeks of signing the agreement. So very proud of what's been achieved. And as I said before, this is another content -- sorry, another cost category that is going to give us some real operating leverage as we roll out our product. And as we grow the subscriber base because it has more of a fixed cost nature. Finally, and arguably, the one that's most different here from a traditional media perspective is marketing. But again, I think we're in an incredibly powerful position. We have taken you through this amazing portfolio of brands that we're leveraging and these are beloved brands that that people engage with on a daily basis, which takes us to the global reach. Again, we're in every territory, 800 million monthly unique viewers across our portfolio globally. And as David said earlier, 250 million hours of content watched every day. We have extensive social media following. And all of this is going to be harnessed to help drive this -- the rollout of this product and get people excited to sign up. Another point I want to hit here is performance marketing. Clearly, the most important part for those subscribers that we're trying to target outside of the traditional ecosystem, and again, we have learned a lot over the past couple of years. You're all familiar with the breadth of our direct-to-consumer portfolio, we have very early made the decision to centralize and drive performance marketing out of one center of excellence, leveraging all of the best practices that we're seeing across all these products and platforms and territories and we have learned a lot. And as you all know, the technology advances and we get better measurability and a better basis for a really efficient ROI calculation. As I said earlier, the marketing cost bucket is the one that has the largest variability because the way we approach this is we will spend against a better and better measurable customer lifetime value. If we see opportunity to acquire more customers with -- at a price that's lower than the customer lifetime value, we will get behind it. And...

One point on that. We showed you it in the presentation that if you think about Disney's product, and they've done a wonderful job, they have -- effectively, every time you see Disney+, you see 5 brands or handles or portals. And it's -- from a curation perspective, tells people, I love Disney family or I love Marvel, and they want to go there. We have that same thing in that we have superfans that love crime, that love HG, that love food, that love science and natural history. The advantage that we have is, we have channels everywhere in the world in every language that have those super fans watching. And that one spot that we showed you, we've actually done more than a dozen of those already in the different genres where will be attacking home with all the great characters from HG and all the new products that we're going to be putting on HG and we'll air that on our networks. So we don't have to go out and buy those spots. Yes, we're going to be promoting outside. But we have the ability to promote on all of our food networks around the world and have the characters that are on food, talk about all the great shows that they're doing that are only on discovery+. And what else is up there and that the entire library is up there and come hang out with us. And so we have these super fans in crime, in natural history. And we have the ability -- our inventory is much lower in terms of what we're selling now because of COVID. As Gunnar said, our pricing is way up. The advertising market has been very strong, particularly for us, in our quest to get -- to kind of close that. Part of it is more people are watching our channels and our share is up. But also the value of our channels is being more recognized now in this marketplace. But the ability to promote on those channels is a very unique advantage. And you saw Netflix actually buy a channel in France. And I think the view is, hey, these channels are declining. And for us, as Gunnar said, this is a very compelling business for us right now that's operating at a level in terms of scale and economics that we haven't seen in a long time. A lot of this is moving our way. But the fact that Netflix bought a channel so that they can let people know about what's on Netflix and that to buy Netflix. We have 10 to 12 channels in every country in the world, in every language and free-to-air channel. So -- and the efficiency of putting spots on there is unprecedented effectively.

I mean, again, putting it all together, content fully owned across platforms globally, not encumbered in long-term syndication deals. A technology platform, which is already supporting 5 million, 5.2 million paying subscribers. So we're already seeing some operating leverage out of that. And then these advantages on the marketing side, that's why I have no doubt that we will not only be able to reach an attractive 20% margin at scale with this product, but also probably reach a breakeven point earlier than others in the market. Talking about scale and the technicalities of the rollout here. Again, you've heard this morning already incredibly excited about the partnership with Verizon, an incredible endorsement, I think, for our product, an amazing opportunity to get access to a large number of homes very, very quickly and again, I think this underlines the opportunity that we have in the market in addition to all the other strong affiliate and distribution partnerships that we have. We have already spoken about Sky Q as well, has already been out in the market for 2 weeks, as David said, incredibly excited coming in much better than what Sky expected or what we expected. And this has more to come. You should stay tuned. Obviously, other key partnerships Roku, Amazon are in negotiation, you should consider this to be a when, not if situation, and we will continue to announce more of those partnership deals over the next couple of weeks.

The thing that I would add is that what we've learned is having the -- Disney learned it very effectively with Verizon, who I think is the best-of-class, great marketing company. They understand exactly how to service their subscribers by providing quality video and what they did for Disney, but we've seen that having a partner that will really -- that use our quality content to effectively enhance or decommoditize their platform is really, really effective in terms of scale. And we spent a lot of time with Hans and Ronan and Frank and Aaron, they're a really great team at Verizon. We've been working with them for a few months. You saw some of the creative, but there's a huge amount of creative. We have all of the characters, which makes us unique that will be driving our brand, and we'll be driving Verizon and Sky. And JB will talk a little bit later, but you should expect that there will be multiple deals like this that you'll be hearing about from us in the weeks ahead because we have a very unique product. A huge amount of IP, a lot of original content. And Verizon has had it work very well for them with Disney. And all the mobile players across Europe now are looking for quality IP that could help them. And so we're in a lot of very compelling discussions right now. Europe, Latin America. In Europe, we have a really strong hand because we have all of our sports as well as an extensive amount of local content in every country, which we have around the world, which makes us really ripe for these kind of 1 and 1 equals 5.

Okay. So I want to close by hitting some financials here. And again, most importantly, as you've already heard from us, we're targeting tens of billions of subscribers. And as you would imagine, this is early days. We're still finalizing distribution deals, et cetera, we'll certainly keep you updated. And most importantly, as I said, we are going to continue on a regular basis, providing updates on our next-generation revenue, on our paying subscriber numbers, on the development of our investment losses and hopefully soon, profits. But let's go through a couple of building blocks here. For next year, we do believe that we will see a step-up in start-up losses, an extra $200 million, $300 million on top of the $500 million that we're expecting for this year, so roughly in the $700 million to $800 million range. And as I said, I'm very, very confident that this is going to be the peak investment year because I do think that we're going to generate more scale effects and operating leverage towards the end of the year. And again, keep in mind, we're already looking at 5.2 million paying subscribers as of today contributing to the covering of those fixed expenses. We are also going to continue the transformation journey. For 2 years, hundreds of people across Discovery have worked very, very hard to really not only integrate the 2 companies, but use that opportunity to recreate a new, transformed structure setup of systems, processes and organizations that allow us to be operating much, much more efficiently. We will continue that. We have a large number of additional initiatives in the hopper, not at the $1 billion-plus magnitude anymore that we've achieved in the first wave, but we do think low to mid single-digit cost savings in the core OpEx structure are possible and our target for next year. We had already told you that the Olympics impact with $300 million of revenues and roughly $500 million of cost is shifting over. That's going to be a factor for you to keep in mind for '21 versus 2020. And the last 2 points here, I'm very confident that we will continue to operate at industry-leading cash conversion rate. And it's -- I think it's a remarkable performance that we have seen in the past. Obviously, we are making some investments so you should expect that number to come down a little bit, but I'm very confident that at least 50% of cash conversion is going to be what we're seeing for next year. And again, it's early. There are a lot of uncertainties in the ecosystem right now. So we're not in a position to give detailed guidance for next year, but you should expect very significant growth of our next-generation revenues. Remember, we did $800 million this year, up mid-teens from the number in 2019. We obviously had higher goals, which were part because of -- especially the sports environment as part of the COVID lockdowns. We will see very significant revenue growth next year. And I hope that I can give you more detail on that, once we report the fourth quarter performance and have a better view on what the ecosystem and the macro environment is shaping up to when we come back in early March. And with that, I would finish the presentation here and open it up for Q&A. Andrew is going to take the questions here. We've got JB in London and David and myself here in the room.

Great. Thanks, Gunnar, and thanks, David. So we'll open up for Q&A. [Operator Instructions] And with that, let's turn -- let's go to questions. First question, Jessica Reif Ehrlich.

I hope this works.

Yes. We can hear you.

Right. Perfect. So I guess a couple of things. First of all, can you talk about the cost of the originals per annum? And is that all incremental investment? Or are you reallocating some of the funds? And will these originals find their way on to the pay-TV platform? And then secondly, how are you thinking about cannibalization? Like is there a way to drive discovery+ without changing the trajectory of pay-TV subs, can you give us some color? I know you talked about this a little bit in the presentation, but how many subs do you think will want both services and then just -- sorry, finally, a throwaway, but did Food Network Kitchen get consolidated in this? Or is it -- does it stay separate?

Let me maybe start, Jessica. And by the way, first of all, happy birthday.

Thank you.

Let me start with the content piece. As I've laid out, we look at this as not one or the other. We are exploiting IP. Content is the backbone of our company. And the answer is, yes, we will be spending more. We will be spending more on an aggregate level and there is a component that is original for discovery+. But to your point, we will apply the same logic as always. We will look at the value-maximizing windowing strategy and I would expect that some of the content is going to end up on menu. So the way we manage this, and have always managed this and we'll continue to manage this is one perspective on our content assets across all platforms.

And I think we're going to experiment. We are launching -- we felt it was important that we really make a statement to people that subscribe that not only is it the depth of the library and that we really own real-life nonfiction, all the quality brands, all the great characters domestically and around the world. But that we have a huge amount of original, compelling content, and we're launching with 50 original series. And some of those, Perfect Planet, we've been working on for 5 years without even borrowing the BBC. I think it's some of our best work. That very well may show up on Discovery 6 months from now. Other series may never show up. And so we'll kind of play with it and see how we go. And we may do it differently in different countries depending on the platforms that we have. But we felt that we need -- we want to launch and really provide meaningful nourishment, value and a reason to buy. And one of the big other reasons to buy is value that at $4.99 and at $6.99, and some people may just get this because they love food and HG, but they don't love commercials, and they could see all of our stuff commercial free, our entire library. And so I think we're going to just see how people use it. Are they spending most of their time with our library and a little bit with the originals, what's the most valuable to them, why did they buy it? Why are they keeping it? And will it will evolve?

Well, 1 other thing, Dave, and Gunnar, I was just going to add, and Jessica, that I think is relevant is the majority of the 5.2 million subs that Gunnar mentioned that we have today, have been acquired using essentially prepaid for content. So just as a matter of uniqueness of our model, and I think the power of our content, at least based on the track record we've gotten to date, the majority of those subs have been gotten with content that was already -- was not original for D2C, but it actually existed in our existing multi-platform and linear ecosystem.

And one other point that I thought you were going to make there, JB, is of the 5.2 million subs, the overwhelming or the real majority of those are discovery+ subs. And so we start with -- we launched in the U.K., we've launched in India. And then we have Dplay and the Eurosport Player that it will be seamlessly converted. But the majority of that 5.2 million are at a real $5 ARPU and those -- and their discovery+ subs or as of January or they are today or as of January 4, there will be.

And Jessica, on the -- your question on cannibalization. I mean, the most important point here is, first and foremost, both domestically and internationally, there's a large segment of consumers that we currently don't reach. We believe that the majority of the subscribers we're getting are going to be incremental to what we have today. 30 million broadband homes that we're not covering in the U.S. and I've taken you through the structural difference internationally, where in many markets, our penetration was capped at a pay-TV penetration of 20%, 25% and even lower in some European markets. So that's an important point to keep in mind, a lot of these subscribers, vast majority, incremental to what we have, at least the same, if not significantly better internationally ARPUs, right, so that's one and...

Domestically, we're going to learn. The fact that the -- we don't know people will have us in the home and are there -- people will want to have us on every device, they want us to have us commercial free. They'll love the idea that we're in the bundle. But at the same time, they love the originals, and they want to have access to our entire library on command. So we have the 30 million incremental here in the U.S. but in addition, we have a very compelling and very cost-efficient product, and we've seen with GO how appealing that product is to the young demo. And so we've purposely produced this product in a way that people can have both. And we expect that in many cases, they will have both. And we're going for a scale domestically and around the world. We're going for -- to be a real scale player here. We're not in this to be small. We're in this to be very big. And we think that we uniquely have that ability. We think the pricing and the value helps us, the appeal of the brands and the characters and the old local language, which JB will get into a little later in what our local and sports strategy is. And the cannibalization, we just don't -- we'll see, but people love our channels. They love them more than ever. As Gunnar explained earlier, we've never been stronger to the cable bundle. I mean, we're effectively like the NFL x5 right now for women. If you took our channels off of the cable bundle, then the majority of what women watch wouldn't be on there. We did a survey and we found that the majority of women, 5 or 6 of our channels of where they spend almost all their time. And very few didn't choose us as 3 of the top 6 channels that they watch. So we think that in the end, we are very important to the bundle. The cable distributors and satellite distributors have been extremely happy with us because we've been producing the most content there in COVID, and they're making more money selling us. We're making more money selling us because of the value of our content and the share of us going up. And so we think we're great in the bundle with the glue, news, sports and us. And now we have something that's really unique. At the end -- as you look at all of entertainment, there's 6 or 7 players that are playing for the scripted series and scripted movies. So they're 1 of 5, 1 of 6, 1 of 3 or 1 of 8. We're 1 of 1. And we laid claim today in the most aggressive way to say not only we're 1 of 1, but we're going to have it all. If you love real-life entertainment and you love nonfiction, which is what people spend more than 55% of their time consuming on television. So maybe the scripted series is really sexy. But what they really watch is our stuff. And we've added to it and aggregated to it between the BBC and all the new content and science and natural history and A&E and history and lifetime, as well as all of our originals, we think that this is a really dominating and compelling offer for people. And we think that they're going to want it in addition to it.

To Jessica, then just to close out your question on Food Network Kitchen. I think that product, a, we've had obviously, developed a very powerful and strong relationship with Amazon, which has been very meaningful to us and to them, and there couldn't be more excited about the product. And it was really always designed as more of a utility product, not a viewing product. And so I think discovery+ is obviously the primary focus and our biggest priority as it relates to an aggregated viewing service. FNK will continue to evolve and develop, really focused more on the utility of kitchen and the food in the kitchen rather than a video viewing service.

I'd just say the last point is that Verizon did a lot of work and looked at a lot of different quality IP players. And they came to the same conclusion that we did that we super serve families, we super serve men, we super serve women. We're completely differentiated from great services like Disney, great services like Netflix. We're a great companion to them. We're great on our own and robust with an extraordinary library and easy to curate, and we're a great connector. And Sky and a number of the other players in Europe have come to the same conclusion or finding the same as they do more research. And so I think that's the strength that we bring to the market.

Okay. Good. Thank you, Jessica. Thanks guys. Let's go to Doug Mitchelson.

So Dave up to your commentary over the last year regarding launching OTT and you talked about your brands and marketing efforts, and you saw the fast start Disney+ had. What do you think discovery+ can do out of the gate this first year?

Look, as Gunnar said, you're going to see it along with us. We will be, on a quarterly basis, telling you exactly what we have. There's a lot more subscribers that we have, but we gave you 5.2 million. Those are our paying subscribers. We're giving you the ARPU. We're going to be very transparent about how this is growing. I don't think we can have a better position that right now, with there are other great services, as I said, we're completely differentiated. We've strengthened and we own this area of real-life and nonfiction, which is very compelling. Unlike other services, we have all of our talent that's going to be called. Chip and Jo are already out there saying "You want to see our content, it's exclusive on discovery+", Attenborough is going to be on Fallon talking about Perfect Planet, and it's exclusively on discovery+. So I think we have that advantage. The additional advantage that we have is that our quality brands and family brands have become very comfortable for people. And at a time, that's -- there's a lot of stress and our share has gone up around the world. All of our research says that our brands are more important in our characters and the familiarity is more important. And we hit the market now with a fresh library that's as big as Netflix, with 50 originals and loads of people that you love and brands that you love that you can hang around with it at a time when most people in America are asking the question, like, what's the reason I watch now? I get this call 3 times a week. What have you watched. Actually, Netflix is fantastic. I've seen most of this or Disney+. So they have great services, but with us facing over the next couple of months, a continuing challenge and people spending more time at home. It's one of the reasons why we want to hurry up and get this launched in January. We want to get this into the marketplace. We think this is something that people will really love. And so we think this can be very big. And we got the right partners. We're going to announce some more partners in the coming weeks. We're going to be pushing on it. They're going to be pushing on it. We're fully global. So we have ambitions to be very, very big. And we think, as Barry Diller said to me, "if we could own -- nonfiction is out there for our taking and if we can own it, we could really be a competitive service to Netflix globally." And that is our ambition. That's what we want to be. We think that's who we are. I don't know, JB, you want to talk a little bit about our ambition internationally.

Yes. I mean, I think we see the opportunity as taking all that incredible U.S. pipeline of content and supercharging it with all the great local content and local brands and local stories that we have. And as I mentioned in the talk earlier, I think in this world where -- and credit to Netflix for having actually flattened the content world in a big way, and the world continues to flatten in the content. All that content that is being developed and created internationally is going to find global audiences, whereas historically, it's been confined to borders in individual countries. And so that also is a huge advantage that we have because we don't just bring the great U.S. content to global audiences anymore. We bring all the content we produce globally to global audiences and to your home. And we think that opportunity is also very compelling, so...

Just to clarify, we do see ourselves as a competitor to Netflix and as a competitor to Disney. But we see it in that we're competing to be as successful as they are. Netflix has been able to get so many subscribers around the world to sign up, and they have a brand that people love around the world. Disney has been so successful here in the U.S., and they're taking it around the world. We think we're a great companion to those 2 services. We're not -- we don't -- we expect that there are people love Netflix, there are loads of people that love Disney, there are people that love HBO, but we're 1 of 1. We're completely different. We fill out the entertainment pie. We're at full broad scale in nonfiction and real-life entertainment with all of our brands and characters. And so our -- we're competitive that we should be a real scale player that's profitable and global as an IP company in every language around the world, which Netflix has been able to do. And that's how we want to compete. We want to be there with them. We'd love to be alongside of them and alongside Disney. And alongside all those great services, that are providing scripted series and scripted movies. And I think our competitive advantage in Europe and Latin America is kind of unique, which JB has been all over because we have local content. And in Europe, we're the leader in sports.

Great. Thanks so much. Let's go next to Ben Swinburne.

Yes. Can you hear me?

Yes, we can.

Great. First, just a couple of clarifications from earlier. Is the plan long term to have basically one single app, discovery+, that incorporates all the programming across unscripted and sports and around the world? That's sort of what I heard, but I wanted to make sure that was accurate. And then secondly, are you planning to include any live linear feeds of your networks in these apps at all?

Very, very quick answer. No live feeds. And the portfolio of our D2C assets. We will continue reviewing and looking at them. What we are going to do is there are a lot of services right now, more aggregated nature and JB already spoke about Eurosport in some markets, that we're going to convert into discovery+ at very short notice. Some other models, and JB talked about FNK, it's a different proposition, hard to say right now, whether that's -- that makes sense to be included. We will continue looking at it but we're looking at this as leveraging the same platform, one umbrella and driving a large subscriber base across all of our offerings.

And I think if anything, we see an opportunity for some of the non video-led other products in the portfolio, like Food Network Kitchen, like Motor Trend, that as we grow the base for discovery+, which clearly will be the biggest, most scale product, that we have a very good opportunity for a virtuous flywheel of knowing who the users are within that product that love automotive content, for example. And helping them upsell them to a Motor Trend product, which is much more targeted, much more about being part of a club, an auto enthusiast or FNK, which is all about helping you out in the kitchen, and so I think that, over time, is something we think is obviously not baked into any of our models. But over time, as discovery+ scales, a unique opportunity for us. The other just clarification to Gunnar's point about the live channels. Internationally, we do include live channels because, obviously, our portfolios for live sports, for example, obviously, include the live channels and in markets, just like we've launched in the U.K., they do include our live linear channels, including free-to-air channels in markets where we have them.

Just one final. We still have -- like we have our partnership with the PGA in every country around the world except for the U.S. There may be some markets where we do like what we're doing with the Olympics, it may be that in some of the Asian markets where it's really popular, we may decide to put it together with discovery+ that, that might be the best way to create value. In other markets, we may sell it independently. So with golf, we have -- we're still talking to Jay and trying to figure out and it's probably going to be market by market, whether it becomes a local language, local sport and golf becomes part of that, whether it becomes just part of that in some countries.

Great. Let's go next to Mr. Nathanson.

Can you guys hear me?

Yes.

David, let me ask you one, and maybe I have 2 others for the team. Last week, John Malone was talking about the rise of these new gatekeepers, Roku, Apple, Amazon. And we've seen in the past year or so, those gatekeepers start pushing back on some of the deals, HBO Max and Peacock lines, which you -- so what gives you the confidence as you go forward that you'll be able to get those gatekeepers signed up domestically? Then to Gunnar, how does that answer that affects your look at the net economics on a per subscriber basis? And then to JB, any help you can give us outside the U.S. on the impact of those gatekeepers and the role they play in growing subs outside the U.S.

Thanks. Well, we have a good relationship with Roku and Amazon, ongoing relationship with a lot of products. As you'd expect, we've been in discussions with them, and we feel confident that we'll have deals with them in the near term, and we'll keep you posted. But we -- we're confident that we'll be able to get those deals done. And John and I talk about this a lot. In the end, we want to be on every platform. This is a big moment for us as a company because we're taking all of our content and all of our originals and brands. And we're literally going above the globe. We're going -- this year, it will be 25 countries, but very quickly, we'll have one platform. And will be above the globe. And a lot of our content is long tail, people that love science and natural history or love food, that they'll be able to go to it. The piece that we see happening in Europe that we think will probably happen here is not only do you have these channel stores. In our discussions, by the way, we're making real progress on getting some things that we think are more valuable to us and helpful to them. But in Europe, the distributors themselves are excited about this opportunity. So we're doing deals where we're renewing our deals. We're getting our economics on our traditional channels. And then at the same time, they're offering our products to their broadband subscribers, and they're offering our products to their mobile subscribers. And they're getting a little piece. And so unlike the cable model, where they had to pay, which is great for us, but it's an entrenched model with great margin because the distributor pays the content player for each. In this case, they're paying us on the traditional side, and they're making a little bit of money by marketing us and distributing us to their existing base, whether it be mobile or broadband. And in Europe, they're seeing that as a real opportunity. And ultimately, we're having discussions with Comcast, we're having discussions with Charter. They're both with Cox, with Dexter at Cablevision. And in the end, these are great marketing companies. They're reaching people and the ability to take a great product like ours and make a little bit of money by giving -- and then having the broadband subscribers and the mobile subscribers feel happier and have churn be lower and have the overall value of what the distributor is providing. We're seeing that clearly in Europe, we're seeing it -- Verizon led the way with that in the most effective way here in the U.S. And I think you're going to see it with the cable distributors. It's because it's a win-win. And JB structured some really interesting deals in Europe, where the operators are talking to us and saying, this is really good for both of us. It's working out really well.

And from the perspective of the unit economics, that's factored into our models. And as I said, the actual achieved ARPU is going to depend on mix between channels, et cetera. But I mean think about it this way, we have to spend subscriber acquisition cost for every subscriber. So an ability to partner with someone with these powerful platforms, helping us marketing this product, getting us to much larger scale very quickly. Yes, at the expense of a share or a slight reduction to ARPU, but with a significant reduction as well to our marketing spend against this. So this is factored in, and I think the economics, especially internationally, are still very, very attractive.

JB, you can add something.

Yes. I was just going to say, look, I think international -- the interesting dynamic is the U.S. in terms of connected TVs and connected devices is obviously a much more mature market. And so there, the game is probably they scaled a lot. They've obviously got significant positions in the U.S. market. And so it's in the later innings of the game, and they're sort of flexing a little bit of their muscle. Internationally, it's a completely different story. It's fairly early innings. And as exactly as David said, in most cases, I'd say the telco and cable and satellite industry to their credit have done a very good job of trying to develop and jump on the lessons from the U.S. of trying to actually be more of the in-the-home media offering, irrespective of whether it's in the traditional pay-TV bundle or in the apps world. And so a Sky Q, for example, has been very successful in terms of being the hub for media and entertainment. And so why do you need another device. And so I think the traditional partners internationally, a, are much more relevant and going to be much bigger for us than the newcomers in some ways. But the newcomers are still going to be very important, don't get me wrong. But I also think the second point that differentiates us versus Peacock and HBO is those conversations were U.S. only. And these connected TV players they desperately want to figure out how to grow internationally. And for that, they need us big time.

Great. Let's move next to Steven Cahall.

Can you hear me?

Yes, we can.

Great. Gunnar, hey, I'd love to get a color on exactly how you define significant next-gen revenue. It just seems like that you only need about $3 million subs next year to more than offset the incremental investment. So maybe just any color if I'm thinking about that correctly. And then just a couple of housekeeping questions. Maybe first, is there any change to your existing linear affiliate terms with this launch? And the second one, anything we need to think about in terms of how like a split out to A&E might impact the financials in the coming years?

Sure. I'll handle the last first. In the deals that we did last year and the deals that we were able to get done over the last couple of years domestically and internationally, we have full ability to do this with no impact. So we're free and clear, and it's -- we're out trying to attacking to build the biggest business that we can. And going back to the distributors so that as we get more successful as is happening in Europe, they could be distributors for us on broadband or on mobile depending on the distributor and have a dual success. On the A&E side, we paid fees that are included in everything you've seen. So we own the BBC content as well as all new content that they produce and the nature of natural history area for the next 10 years. We're going to be producing a lot of joint content exclusively together for discovery+ globally. And that's in the numbers. In addition, whether it comes to A&E or whether it comes to all the originals, we now own that content for the next several years. It's ours. It's built into the model. And we think that it enhances and nourishes the audience.

And Steve, no changes to the near term here. And to your first question, let me clarify, when I say an extra $200 million to $300 million of AOIBDA investments, I mean additional AOIBDA start-up losses. So net revenue less expenses. We're spending a lot more than $200 million to $300 million in terms of expenses. But we're assuming a revenue growth against that. So that the net effect is going to be based on our current estimate, $200 million to $300 million. And again, I want to be absolutely clear, the big variable really is subscriber acquisition cost. As we find out that we can spend a fraction of customer lifetime value, and we have the opportunity to penetrate markets even more deeply that we will do that. But as we've said many times, we'll take you with us. We'll be reporting on this on a regular basis, $200 million to $300 million of net additional AOIBDA losses is my best estimate as of today.

Great. Let's move now to Kutgun Maral.

Great. So I just had 3 quick ones on subscribers profitability and maybe pricing. So on the subscriber side, across the 70 million U.S. and 400 million addressable households abroad, it really doesn't take crazy penetration levels to come up with attractive subscriber counts. I appreciate that it might be too early to talk about subscriber expectations, then your hesitancy to put out hard targets at this point. But it's just such a focal point for the investor debate. So maybe looking beyond next year, can you just provide a bit more of a framework of expectations for subscribers over the medium or longer term? And then on profitability, your target of 20% over the long run once you -- long term once you scale in mature markets, what does scale look like from a subscriber perspective and maybe how long do you expect that to take? And maybe I'll just keep it at those 2 questions.

Yes. No, I mean, listen, we've obviously debated this, and I understand that you would like nothing more than us giving you a layout of the 5-year business plan or one of the scenarios that we have calculated. Indeed, it is too early. It is in flux. It's very much assumption driven. We're super confident. I do think we have an amazing proposition at a very, very fair price. We've lined up great partnerships. And we're hitting the running globally with presence in every international market. So I think we have everything it takes to be very, very successful here. We have said this is going to be tens of millions of subscribers. And that's the ballpark that we want to give. David is going to be very, very aggressive with the team here, and I have no doubt we're going to be pushing hard, but that's as much as we want to say now. And again, I mean you go back to what I said earlier in the presentation, across the key cost buckets, starting with the fact that we're already leveraging our platform and a lot of our content to JB's point, with an existing base of 5.2 million subscribers looking at the point that we're expecting to generate a higher ARPU on a per subscriber basis that we're putting to work the same content exploitation model on a global basis. That we're leveraging our marketing footprint and that we're getting operational gearing out of our tech platform already. I have 0 doubt that we're going to get into that 20% margin range. That being said, I don't want anyone to think that we're going to be managing this for margin in the short term. We're going after long-term revenue growth, shareholder value, that's the key objective here for this product. And that's one of the reasons why we're not out here saying, oh, we want to be breakeven in 3 years. Maybe it's 4 years, 3 years, whatever the number is, if we see opportunity to really get behind faster growth, we will go for it and we don't want to be boxed into managing towards a breakeven time frame, a margin objective or so. That -- I think that's fundamentally -- that will be fundamentally the wrong way to get a product like this one off the ground.

We look at ourselves as being differentiated in the U.S. We have this huge appeal with women and families, and we have so much scale in what we've added in real-life and nonfiction. And outside the U.S., we're a full-on global IP company. And we've been waiting now for a few years, working very hard on this, both producing content and holding content. We're not going back and buying back content. We've been holding on to these sports rights. We did deals where we have the right to put the Olympics on discovery+. We have the right to put a lot of our major sporting events on. And so we've been preparing for this moment, and we've been preparing for it because we think we're differentiated. And we can get to real scale, and we could be above the globe with big scale. And if we can get the right distributors working with us, we think with this right proposition that we could accelerate and have a really unique global scaled IP company. And we wouldn't be doing this if we didn't think that's what we could do.

I think also, the other thing I'd just add, David, and Gunnar made it, but I just want to make sure it's not lost on me because it was in a takeaway box on a slide, but he shared earlier, obviously, the ARPU slides for the U.S. in comparison of traditional business versus new business. I think rightly, in the takeaway, you saw sort of equal level and over time, certainly on the ad-supported product and high ARPU with discovery+ in the U.S. than in our traditional model, not in the U.S. In international, almost from day 1, the ARPU is multiples of what our wholesale business looks like. And so I think that also gives us a lot of confidence that, over time, from a revenue generation and an ARPU perspective, this should be a very attractive model as it scales.

Yes. I think just a final point. As we talk about what the opportunity universe is, we have a product now that can reach smartphones everywhere in the world. And we have a very affordable product that has differentiated content that people know. When Oprah went into a rural area of India, and when she was visiting, and she looked inside of a tent, they were watching Discovery. We have brands that people know, and they couldn't get us before without paying for a big bundle. And so it's not in our model, but it's in our heart that there's 2, 3, 4 billion smartphones out there, where people can consume content, they can buy content. They don't want to pay for a big bundle, but they take a look at this huge library and look at all these brands and characters that they know and that they -- and brands that they're familiar with. And in many of these markets, we're less than $5. And so we have an ambition on all of that. And over time, I think we're going to make real progress with those smartphone users.

Okay. Great. Let's move on to John Hodulik. Please.

Just a couple of quick ones. First, anything you can tell us on engagement on the 5 million subs you guys have largely in the U.K.? Or any more specifics on the ad load for the ad-supported product? And then lastly, obviously, it looks like you guys expect the rest of the world will be a much bigger opportunity. You got deals with Telecom Italia and Sky. Should we expect to see more deals, similarly in other markets? And how -- any details you can give on that can of those deals now compares to what you guys are doing with Verizon.

JB?

Yes. I mean, as David sort of alluded to earlier, we absolutely have a strong and robust pipeline of similar deals, ala Verizon, ala Telecom Italia, ala Sky, that we are actively working on now, David alluded to. We hope to have more news, and we'll be putting out, obviously, updates to you all in the weeks and months to come. But rest assured that we think that is not only a really important way for us to scale quickly, but also scale efficiently. And so we have a very robust pipeline of partners that we're in negotiation and closing on deals that we will come back to you with more details on. And we see those economics as net-net positive, not because -- for 2 or 3 different reasons. Number one, is we talked about ARPU of the product over time, particularly internationally, is much more attractive than even our wholesale model. Secondarily, as Gunnar has made the point, it taps into a whole new customer base that we don't have access to today. And so I think those 2 variables for us make us very confident that that we can -- these partnerships are going to really help us scale fast and efficiently and doing some new incremental economics into the model.

There's an experience we had a few years ago. And this really goes to the earlier point of -- we're an IP company. How do we deploy that on different platforms? Well, we decided to take our female content off of Sky Italia a few years ago because the penetration was at that time, about 18% or 20%. And we thought we had some great content in local language. So we bought a free-to-air channel. And instead of running it like a traditional free-to-air channel with news and sports and entertainment, we just bought it, call like a stick, and we put our library of content, female content on there. We called it real time. And within a month, it was the #1 channel for women in Italy. And for several years, we used our existing library to support this free-to-air channel with great margin and great free cash flow, was profitable very quickly because it was new to the rest of the -- to the whole audience in Italy that hadn't seen it. And so that's kind of a traditional way that we innovated, and we did that with free air channels across Europe. But there's a lot of people that haven't seen our content. We're creating this so that people that have seen it, if this is so good and so much and so much more and you get the sports and the local that they're going to want to buy it. But they're loads of people that haven't seen it, that this is going to be really new to them. And for $5 or less, it's going to be a wow when they compare it to buying pay TV for $40.

And on the engagement question, sorry, we don't have any specific metrics we're looking to share today. But certainly, I can tell you from -- we've been in market probably the longest in the Nordics and in Poland and obviously across our Eurosport Player product. And the impressive thing that makes us feel good is certainly as the product has continued to scale, a lot of times, unfortunately, as you add more people in, you usually see some level of engagement erosion because you've sort of saturated your sort of most passionate audiences and you get into a wider, broader base that is less engaged. We've generally seen engagement stays very high, which makes us feel good that we've got a product that is sticky and that people are really enjoying.

Thanks, JB. We go next to Bryan.

We should make that last point, JB, about sports and entertainment as well as all of our U.S. content that when we experiment with putting it all together, that the amount of time that people started spending with the product, not only the more people want it, but they were spending more time with it.

I think, look, one of the things that you've heard us talk about, and I think you've heard when we had the Olympics, for example, back in PyeongChang in 2018, the great thing about sports is an incredibly powerful tool for customer acquisition. And so we experienced that at all big events, but also obviously, no bigger event than the Olympics. The challenge is that people come. And then once they're done watching the event or watching the couple of events that they like, if they don't -- if they're not fans are the rest of the sports or they don't want to pay for the off season, you lose them, and you got to reacquire them. And that model becomes a challenging model. And we've learned that the hard way in the multi sport OTT space. And so by packaging up in the Nordics with our entertainment product, so that if you don't find the sport that you like or it's in the off-season between 2 seasons, the amount of users who are now finding entertainment content that nurtures them through and the churn that we're seeing -- and the churn improvements we're seeing from those packages is greatly supported by having entertainment and sports together. And so that's a big part of the reason why we see pulling together the sports offering into discovery+ as incredibly compelling and better for churn and better for the customer at the end of the day from an engagement perspective.

Great. Let's move on now to Bryan Kraft, please.

Can you hear me okay?

Yes, we can. Little muffled, but go ahead.

Great. So first question, 2 questions. One, will current season content on your TV networks being on discovery+? Or is the idea that only past seasons plus the discovery+ originals will be on the service? And then secondly, Gunnar, I just wondered if you could help us to understand the long-term margin expectations of 20%, a bit better. I was a little surprised that you don't expect them to be higher, given you expect ARPU to be similar or better in the U.S. and much higher internationally. And then most of the contents already paid for. So if you can just give us any additional color there, that would be great.

Sure. Sure. Yes. Let me maybe start with that. Again, keep in mind, this is off of a business case that's driven by assumptions, assumptions that are based in our experience over the past couple of years. But the one big difference here is that in a direct-to-consumer world, we are responsible for subscriber acquisition marketing. That's a cost line item that in the traditional linear world we don't have. Again, I think if you put it all together, the 20% margin again, we should be getting better margins, I think, than some of the peers and competitors, we should be getting to a breakeven faster because of all those factors that you brought up and that we've laid out. But we also have to keep in mind that we are building a platform that we are increasing content spend as a company altogether. Yes, we're leveraging across platforms, but it's an increased content spend. And we're also spending for marketing. But again, I feel very confident in that percentage. We will keep you posted as we go along. Hopefully, you're right, and there's more opportunity. But I don't want to get carried away here. We have a lot of work to do and a lot of subscribers to acquire. And again, that factor, the speed at which we acquire subscribers, ironically, the more successful we are, the more we're going to be spending for marketing. So that's the fact that needs to be taken into account as well.

And the fluid nature of our content window you maybe...

Yes. On the content windowing, listen, the vast majority of our linear content will stay on linear and will only be on discovery+ at a later time once the -- after the end of the season, in line with what has been industry practice. And again, for everything else and for some individual productions, we may be experimenting with windowing and we -- as I said earlier, we are very confident. This is what we do. I mean, this is what we have been doing internationally and globally over the years to find out what's the best way to maximize the value of the content that we invest in. And we're investing more. We're going to be spending more for content with this new product in the mix than before.

And there are some franchises like we look at 90 Day Fiancé, discovery+ is going to be the home of the 90 Day Fiancé, it's going to be the whole fan club. It's going to be -- there will be over 100 hours of 90 Day Fiancé that's original and exclusive just on discovery+. We'll be dropping content. You'll be watching on a Sunday night, maybe from 8 to 9 or 9 to 10 on TLC. And then for the next 2 hours, there'll be fresh content on discovery+. So we are taking some franchises where we can do things that we couldn't do on a traditional platform. If you look at -- we cut down and added 90 Day Fiancé in a meaningful way. And so we could do original series, where we don't have to cut at all. We could follow the couples around. So we've been working for the last 1.5 years on a lot of original series just for 90 Day Fiancé, to create a 90 Day Fiancé home at -- on discovery+. And we think that is the #1 most compelling product on television in the nonfiction space. It's like for us on Sunday and Monday night, it's on 2 or 3 hours. Some of those hours, we get a 4, 5, we're #1 show on all of television. Some weeks, we're #1 on all of television when sports wasn't in. And so we thought that is a -- and when we talk to people, they said they want more, they want it to be more real. They want to see more of the outtakes, they want to see more of the uncut. And so that's an area where we're saying, let's take that -- let's take a huge piece of that universe. And let's make that 90-day at the place where if you really want -- if you really want to see 90 day, you got to go to discovery+.

Great. Let's go next to Alexia Quadrani, please.

Just a question for Dave and a question for Gunnar. I guess, David, you mentioned such a tremendous library of content there. I think 35,000 episodes. I'm curious how much you guys are able to customize that library to help the consumers to engage. We feel the technology, maybe to kind of represent the right content from the right person, great top 10 lists. I'm trying to how you can kind of manage such a best library to maximize the effectiveness the right way. And then just on -- Gunnar, just a follow-up on your question about spending or losses in in 2021, it's probably too early to really comment on how much that might fall off a little bit or get a little bit better in 2022 at this stage of the game. But curious if there's any color on that, meaning is there any kind of onetime-ish cost in that number next year, that would actually disappear the following year.

Yes. Let me maybe start there quickly. And, Alexia, you're right, it's too early to say, but let me just say, I wouldn't be sitting here guiding to a peak investment year for next year if I didn't have a lot of confidence. Just from what we're seeing across the portfolio, that we are -- and again, keep in mind, we're already looking at 5.5 -- sorry, 5.2 million paying subscribers that are already sort of covering some of the fixed costs. We're expecting obviously significant subscriber growth. And on the basis of that, the nature of this business is you're spending upfront subscriber acquisition marketing. And then you start leveraging that subscriber base as the base scales up. So I'm very confident, but I'm certainly not in a position right now to quantify that any further.

On the product itself, we couldn't be more excited about the data that you guys get to play with it. We've been -- we've had it for the last 3 months, and we've been playing with it. The product itself is really compelling. And I think one of it is that Avi Saxena and his team built a great product. We have Karen Leever that has been working with our GO product for the last couple of years. And we know what people like, how they like it, how they like it organized. But more than that, we have a real advantage versus most of the other platforms in that we have multiple ways, but easy ways to curate. When people see our brands, those are like portals, just like Disney, where you want to go play around with Marvel, you go through that Marvel portal. So for people that like HG or food, you can go by brand, you can go -- if you love Oprah, if you look Chip and Joanna Gaines, so you can go by character, you can go by brand. We also have as you -- the more that you use the product, the more it's going to create content for you that's consistent with what you have watched and what you would like. So we have the algorithms. And then we also within a few weeks of launching, we'll have -- you create your own channels. So you can just pick off here to my top 5 shows that I love on HG and food and cooking and lifetime. And then that becomes a channel that you really don't have to do anything with. You could be cooking and you've created your own customized channel. JB, you could add to that. But I think curation is a big advantage for us.

Yes, I think that's exactly right. Curation and I think personalization, we clearly recognize is a massive priority for us and in a service with this much volume and this much breadth that we want to be able to serve up the most personalized experience to every individual user. And so as David said, there's sort of curation at the brand and genre level, which already unlike bigger broadcast brands or more generic entertainment brands where you get a mix of everything. So people don't really know what it is. Most of our brands have a very defined lane. And so those brands mean something. So people can curate by brand, people can curate by genre and find content that way. And we've obviously invested a lot in an artificial intelligence-based recommendation engine that as the user base grows and the engine, obviously, will need several weeks and months to develop more and more based on actual user data and patterns, it will actually begin to develop on its own recommendations that fill out exactly what individual users, if you like this, a lot of people also like this. And then as David said, we also will be rolling out shortly after launch, an ability to sort of essentially curate your own channel and create a sort of playlist, a video playlist, if you will, for what you like because we also know that this is one thing that is unique about our content is that linear. As much as people understand linear viewership is in decline, at the end of the day, people still love, as David referred to earlier, turning on our channels and watching it because they get super served, the stuff that they love. And so people will be able to do that in a kind of quasi linear fashion, playlist fashion and curate it and the recommendation engine can surface stuff that they love, and they can watch it for as long as they want.

And that's how we got our tag 1 stream what you love.

And with that, let's go to the next question. Kannan Venkateshwar, please.

Just a couple from me. I mean, first is on the deals that you have with Verizon and other wholesale carriers globally. During the promotional period when Sky offers this for free or when Verizon essentially bundles it with their unlimited plans, is the structure of pricing from your perspective, different from when the promotion runs out? In other words, the net ARPU that you realize in the first year, will it be very different from what you see potentially in the future years? And secondly, on the advertising front, the ARPU that you flagged, going to the $4 per sub, that actually seems pretty ambitious relative to what others like CDS, for instance, have laid out for all access. So just wanted to get some context around how much of that is pricing? And how much of that is volume?

Yes. Let me maybe start there right away. I think, as I said initially in my presentation, this needs to be seen against the backdrop of the incredible value of our content brands from an advertising perspective. We're enjoying a lot of interest. And as you would imagine, we've also pitched this product in the last upfront, and we're in active discussions with a lot of advertisers. We've seen our launch partners, et cetera. I think we're bringing something to the table here that's incredibly valuable. And again, from the perspective of the mechanics of these $4, it's a lower ad load, much less clutter from a consumer perspective but a much more engaging and in parts interactive experience, which allows us to get 3x and more the CPMs that we're getting in linear. That's why...

And one of the other elements there is there's a number of advertisers that we saw this in the upfront where we played much tougher because our share was up, and our viewership was stronger and we had so much original content. But there are a lot of advertisers that they need to be in home, they need to be in food and cooking. They're not just buying great impressions and great length of view. But if you're a Home Depot or a Lowe's, you need to be -- there are a lot of businesses that have made businesses by primarily promoting themselves on home or food or on Motor Trend. So this isn't true for all of our channels. But for DIY at home and for a number of them, we have the unique advantage of having advertisers that feel they need to be, and they build their business on being that.

And on your question on our distribution deals, again, we can't go into any of the details of those deals, but a couple of points to lay out. Number one, what's super important for us is access to data, of course. So that's a big prerequisite for all of these deals. Number two, on the pricing side, I just want to point out, we're getting paid by our partners for this product, both in the promotional period and obviously, then by the consumer afterwards. And I think as a general statement, without going into the details of individual deals here, you should always assume that we're striking deals that would lead to a slightly lower ARPU for that promotional period because the partner obviously needs to be compensated in a way. But if you look at that from a -- through the lens of our financial model, again, as I laid out earlier, we're saving subscriber acquisition costs, and we're getting a lot more scale. So from that perspective, we're trading off a little bit of a top line potential for -- on a per sub basis for a larger and more accelerated subscriber base growth and a better margin profile.

But we're also getting paid in the case of a lot of these partnerships, for instance here in the U.S., we need to charge a certain amount of money. Otherwise, we can't -- we would go back to our major distributors in the U.S., and they would say, okay, I get that rate. So we're getting paid real value for every subscriber. So when somebody is offering it to all their subscribers for free, we're getting paid for every subscriber that gets it.

Let's see if we can get a few more in. John Janedis, please next.

Great, 2 quick ones for me. One is, Gunnar, when you talk about the 3 expense buckets and the fixed versus variable components, I assume content's by far the largest, but can you help us think about order of magnitude between content, tech and marketing in the first couple of years? And then maybe a related advertising question or CPM question. Last month, you guys talked a bit about relative CPMs versus broadcast. When you talk about the CPM premium today, how does the 3x price premium to linear compare to other competing offerings? And what differentiates the OneGraph product from what else is in the marketplace today?

Let me start with the model. You're absolutely right. Content is by far the largest category. And number two, based on our models, would be marketing. But again, that's the one that might be a lot more or a lot less depending on pace and success of our rollout. And again, the technology is material, but has already -- a lot of it has already been expensed because we have been at this for a while. In terms of the OneGraph product, it's hard for me to compare that with other products in the market because we just don't know. What we do know is that there's a ton of demand. What people want is unduplicated cross-platform reach. And our OneGraph product uses the -- with a live-link technology to match data that we have with other datasets and that way, identify individuals across platforms. What's really important here is that for the first time with discovery+, we're able to get access to first-party consumer data at scale, which will help us increase our match rate so we can use this, the OneGraph product, in a much more effective way and therefore, get much better results for our advertisers and obviously, the ability to charge higher prices. So again, this is -- a part of it is theory, but part of it is practice because we're in discussions with advertisers, we've got very, very fruitful discussions, we're getting a lot of input. And again, Jon Steinlauf has been in the market domestically here in this year's upfront and has been selling against this product, and we're seeing a lot of very excited interest.

The only other thing I'd add on the OneGraph product, Gunnar, as you said, is I think it's the combination of the technology and the data that allow true sort of cross-platform solution for advertisers, but also allowed them to have much better attribution and ROI metrics on the back-end for their own measurements. The combination of that plus the endemic ownership of categories and our customer groups that are uniquely identifiable by the fact that they're home renovation watchers or food watchers, that powerful combination of those 2 is really what drives not only the uniqueness of the technology, but that with our audience demographic and profile of our brands is where we see a lot of power and a lot of value for advertisers and marketers.

Great. Thanks, JB. Okay. Let's go to, I guess, our last question. Mike Morris, please.

A couple of questions. First, you've been able to offset some of these incremental investments you've made over the past couple of years with some efficiency savings. I know some has been related to integrating Scripps. But as you look forward, how do you think about any additional opportunities for savings with your more traditional businesses as somewhat of an offset to the investments you're making in these next-gen products? And then second, my question is really about why you would anticipate that a bundled subscriber would also sign up for discovery+ as you kind of anticipate in some cases? And so I understand there's going to be additional programming, but it does feel like the majority of the product and the effectiveness of the product is available on the GO apps. So do you anticipate any change to the GO apps that makes discovery+ more clearly stand out? Or is there sort of an inherent conflict there in bolstering that product to the proper level of investment if there's more opportunity, better financial opportunity if you kind of migrate those subscribers to discovery+?

Thanks, Mike. The traditional product and the GO product is -- think of it as effectively a live product. The entire library is not there. You can't go back and look at the last 5 seasons of -- or go back and watch Myth Busters or see the last couple of seasons of Gold Rush. So whether you're watching the traditional -- the live channel or GO, it's essentially a live service. And so one, we have our entire library; two, we have 50 originals, very high quality original products, where we have the entire natural history library, the BBC. We've added in a big documentary section. So it's nonfiction, general entertainment, documentaries, but it's going to be a pretty compelling environment for someone that likes food. Some of it may -- it's more than just not -- than being able to see with our commercials. There's going to be a lot more there, and they're going to be able to binge. And as JB said, create their own show lists. And they could be watching -- they can do the food HG show list, they could do the natural history list, the crime list and create their own channels. And so it may be that there's a family that has it, but there's 2 kids that are saying, I don't know why you -- it looks great on -- in the living room, but I get to just -- I don't have to watch what they schedule. I can schedule anything I want. And when I watch -- we're going to have all kinds of binge lists. So really -- it really feels like an SVOD service versus a live service. So I'm going to pass to Gunnar on the cost savings. But one point that I wanted to make is this crazy experiment that we've all gone through because of the pandemic has revealed a lot to all of us. It's revealed about a lot about ourselves. I mean, we were able to build this whole product and -- both technically and produce 1,000 -- more than 1,000 hours of original content, tons of content just for discovery+, all virtually from home. And so we've gotten a lot more efficient. We've been able to produce content for a lot less money. We also learned that in some cases, we used to have 14 people in a control room. Now, because of necessity, we needed to do it with nobody. And before we would have a whole team that would build a -- for us to have a video conference. Now we do it ourselves, and we hit a button. There's 100 examples of that. And so we, like everybody else, every other major company, have a reveal from this experiment, which is we could be much more efficient in areas that we thought we were incredibly efficient. We could do things a lot differently that could allow us to be much more productive. We can -- people can work differently. We need a lot less real estate because people want to work from home maybe 2 days a week. So we could save a huge -- our real estate footprint, we think, is going to go down, I don't know, 35%, 40%. Not everybody is going to have a desk anymore. People don't want it. They want to work from home 1 or 2 days a week. We already have virtual offices in Europe, and they like those better than coming into an office than going to there -- so there's all kinds of costs that we've learned from this grand experiment. We've been very careful during this pandemic because of the challenges that everyone is facing. But coming out of this, we have very concrete plans of restructuring the company in ways that provide more effectiveness, more efficiency, how do we spend more money on growth, how do we spend less money and more and more money towards -- this is our future. This is the most important product since I've gotten here. And if we can achieve this goal, hand-in-hand with Verizon, hand-in-hand with Sky, together with the big mobile and broadband distributors across Europe and Latin America, ourselves, working with Amazon, working with Roku. If we could take this great IP package that we have and that we've pulled together and all this original and get above the globe to real scale, we're a very different company. And that's what we think we are, and that's what we're going to work to do. And we're going to affect a lot of cost savings in order to make that happen.

Yes. No. And listen, I mean, you're right. We were -- going back to early 2018 when we closed the Scripps acquisition, we're well over $1 billion now in terms of cost savings. And clearly, as I said, that's not the pace that I'm looking at here, but I'm very confident that we're going to continue the low to mid-single-digit efficiency gains quarter after quarter here. And I mean, I will say this, I mean, I've done a lot of cost work in my career. I've never seen...

Some years in McKinsey.

Yes. So I've never seen anything like the Discovery team. I mean, from a CFO perspective, it almost feels like kicking in an open door sometimes. The entire company is fully rallying behind this transformation, everybody is so excited about us coming out with this product here today and everybody understands. We need to work hard every day. People are coming in on weekends, and people are looking for opportunities, and there's so much stuff that we still have on the list. Some ideas that came up initially, but we put on the back burner, some initiatives that required system changes and sort of longer-term technology projects to be in place to now be able to go after the savings opportunities. Again, the entire company is very focused on making this transition work, and there's a lot more to come.

JB, why don't we -- why don't you address this issue outside the U.S. because it's an important one that somebody goes ahead and they're watching our free-to-air channels, and they also have cable or they have cable. What is attractive about our product and why would some of those people or members of those families -- is it sports? Is it the library? Is it more local original? Just from a European, Latin America, Asia perspective.

Yes. Well, I think speaking it from fact and then the track record that we have, we alluded to this point earlier in the conversation where of the 5.2 million subscribers, the majority, obviously, come from what will be the discovery+ rebranded and relaunched product. And the bulk of those subs have been acquired essentially on pre-premier windows, earlier windows than broadcast. No ads in some cases, mobility and access -- better access on all devices in other cases. And some elements of -- yes, no advertising. And so the sort of core of it -- and that's before even going into investing in more original content, more goodness, more product feature sets, like the playlists and things like that, to make the experience significantly better. And so that's the success we've seen off of what I'd call kind of table stakes elements. And so we think when you add on to that then an incredible lineup of original content off shoots of franchises that are known and proven and loved franchises on air that will be saying, if you want more of this, go to discovery+ for those super fans who can't get enough and doing more originals on discovery+. The exclusive licensing of BBC content, the home of -- you get all your favorite nonfiction content one place in the U.S. with all the A&E lifetime history content. For us, it's not a -- to us, it's not an either/or. And by the way, you get all that for the price of barely a venti latte a month. The value is unbelievable. And so for us, it's not about -- clearly very appealing to the noncable households, but even for the cable households, as an add-on product for the super fans and people who love our brands, we don't see that as a big stretch.

Okay. So thank you for sitting through our presentation. We really appreciate it. We've worked real hard for a long time. We're super excited about bringing discovery+ to you. I think you could see that with the creative, the brand work, all of our talent, is behind it. They're excited about us embracing the future. Our Board is fully supportive and couldn't be more excited about this step forward. We've been waiting to take this step with our global IP. And I've been saying for a long time, we're going above the globe. Well, that's what discovery+ is. And we love the affirmation of Verizon. We love their energy, their excitement. We love their research for how we're going to nourish their audience and how much they're going to love it. We love the support of these distributors. And we appreciate all your good questions, and we're looking forward to this journey. It's going to be in some ways new, but in many ways, we've had a lot more experience than anybody else in this market. We've been doing this for many years. And the good news is that we've learned a lot. We've learned from what hasn't worked, we've learned from what -- from a lot of green shoots. And we've had some things that have worked really well in some markets. And so we and the team sitting around last night talking about this, we've learned a lot. We've taken everything we've learned to create the product that we think the viewers themselves have led us to, this aggregated product that will fully nourish them. That's missing in the market. We're 1 of 1. And we're going to be pushing this. Hopefully, it's going to be rolling down hill. And if it gets -- we're going to push it and make sure that it accelerates, and we're really going to keep you posted every quarter. And thank you for your time, and you'll be seeing -- starting tonight, you'll be seeing a lot of discovery+ everywhere in America. It's already -- we're already all over the U.K. and soon, it will be something that people recognize and understand everywhere in the world. So thank you so much for your time.

Thank you.

Thank you.