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

Hi, everyone. Back. It's Michael Nathanson. I am joined by Robert Fishman from MoffettNathanson, and our guest, David Zaslav. David, this is our eighth year of doing this. You've done this every year. I cannot thank you enough. I know you give me grief once a while, but really, we appreciate this, and we really value this time and talking. So thanks for being with us.

Happy to do it. Really, I think you're really one of the smartest analysts out there. I said that even when you didn't like my company for many years. But it's great to see you, and thanks for you and your team and for putting this together.

Okay. Thanks. So let's go to this big picture question. We've had this conversation in the past 6 months or so. Can you explain to folks why the pivot to discovery+ is accretive for you and not as dilutive to your economics on the linear side as the market may think?

Okay. Thanks, Michael. We're really in a unique spot. I've been saying for a long time that we get less value. We're about 20% of the viewership, but we get like 7% or 8% of the revenue from distributors in the U.S. And that's -- that puts us at somewhere in the $3 to $3.5 range that we make on a cable subscriber. And then we may get like another $3 to $3.50 in advertising. So we're somewhere in that range in terms of what do we make per subscriber per month. And the -- what we have that's unusual is most -- many of our competitors get -- did a lot better than we did with their -- with the distributors. They're getting $8. They're getting $12. They're getting $10. And when you add in the advertising, they have a hurdle rate effectively. For us, if we're making $7, we're making our ARPU as the same or better as what we make on a cable sub. And with our AdLite product, we're dramatically higher than that, 30%, 40% higher because the advertising, the length of view of active viewers is somewhere in over 3 hours. The demo is really great. And it's about 50-50 between cable subscribers and non-cable subs. And there's a huge demand with a very high CPM that's going against that. So we have our no ad product at $7, and we have our AdLite product that's generating 1 double-digit. So when we average it all together, we actually -- if we lost 1 million subs and picked up 1 million, all we need to do is pick up 650,000 subs in order to be making more money. So what was a deficit for us in that we always felt like we were underpriced with our content. And the fact that we felt like we're getting paid less on an advertising side, which I've always said, because the broadcasters are getting over a $60 CPM and we've been averaging in the $20s. That now when you look at our new platform, we're making maybe more than we're making on our cable subs. I don't know whether it's $7 million or $8 million or $9 million versu $1 million, $100,000, but the point is, it's a positive equation for us. And so -- and the additional thing that we're seeing is when we sell a subscriber, on discovery+ or on our AVOD products, that whole idea that the broadcaster gets $63 of $64 and we get less, we're in complete parity in that environment. They're buying a demographic, and we're getting paid on everybody that's spending time with us. So the fact that people are spending more time on d+ than most of the products that we have 50% of people that haven't been -- that aren't on cable that are hard to reach. And the fact that for others, maybe they're already getting $60. So if they get very high fee on their digital product, that's kind of parity. We're getting -- it's almost like we get -- it's like a double dip for us. We're getting a lot more because we're not -- so as we work on getting paid more on the cable side and getting paid more CPM, which we're doing, we get this benefit on the other side, where, from an ARPU perspective, it's 1 of the reasons why we're investing a lot in discovery+ is the fact that we do better. And in the case of outside the U.S., it's even more dramatic. You go to markets. We talked about on our earnings call, Italy, that's 20% penetrated or Germany that is 33% penetrated or the U.K. that's 50% penetrated. We were -- in pay-TV. We were only reaching in those markets, like Italy only 20% of the people, Germany, 33%. And in those markets, we get paid much less than the -- our ARPU is dramatically lower than the $7. We get paid much less than $3 or $3.50 in general. And so the -- we can go out and charge $3 or $4. We could reach 70%, 80%, 50% of an audience that has never been able to see all of our great content, and we end up making a multiple of what we make if they had bought -- if they had been looking at us on Sky Italia in Italy or Sky Deutschland. And so net-net, I think we have a real opportunity to scale. And then the question is, can we be as big as this one or that one, how fast? But the difference with us is that even at a number that's dramatically lower -- and we believe that we have a very broad opportunity. We're going to be rolling out around the world. We're doing very nicely, as you saw with our numbers. But that this is very good business for us.

Okay. So David, we know it's early. You're only 4 months into this, but just curious if you can share with us maybe 2 or 3 surprises that have gotten way better than your initial expectations going into this on discovery+?

Look, we've been in this business of direct-to-consumer for 4, 5 years already with Eurosport Player and Dplay. It's not an easy business. And we've learned an awful lot about what are people willing to pay for. Also, what people are willing to pay for, if some of it is on TV, like with the Eurosport Player where maybe the Federer match is on Eurosport. But then if you want to see Nadal and others, you pay. And so -- and we made a lot of mistakes. This is all very new to us. What is consumer behavior, when do they want to pay? How do they churn? What are they looking for? Do they stay and pay if they -- when a sports season ends or when a series ends? At -- as we look at our entertainment product in Europe, when we look at our sports product. I would say the #1 thing that we -- of our strategy going in is that a broad spectrum product is much more stable and much more appealing than the narrow niche product. And we had gone in thinking that we're going to do a lot of narrow niches that will be very big. Everybody that loves tennis, everybody that loves coking, everybody -- those could be profitable businesses for us. But we -- but after putting those together in some markets and seeing how do we do, we did better. So that was an early read. That's why we did the discovery+ product the way that we did, and that's why we're rolling it out the where we are around the world. But the -- probably the big surprises are how low the churn is in the U.S., which is very significantly below what we thought it would be, how we modeled it and much different than our peers. I think 2 is that our library is loved. That we don't get to show off your library on a linear channel because, by definition, you're scheduling. And you have some TV everywhere. But never before, we've been able to put our full library out there. And 95% of it, people are watching. They go back and they want to watch all the seasons of Deadliest Catch. They want to go back and see MythBusters with their kids and they love Bobby Flay and watch them all day or Diners and Dives or Oprah. On Sunday morning, watch a couple of SuperSouls. And so 95% of our library is being consumed. And that was a surprise to us. And maybe the final thing is that the number of hours that people are spending on. So I think overall, low churn, very high usage and boy, do people like the library. And for us, we've been in -- it's 30 years. And we've kind of been shocked at some of the things that people go back and spend a whole bunch of time on, on discovery+.

So David, as you mentioned, the take-up has been better than we first thought. Our initial projection you guys have exceeded. How do you maintain that momentum and engagement as the U.S. starts to open up, right? So how do you think the next 6 to 9 months look? And what are you going to do about making it as sticky going forward?

Well, look, I'll break it in 2 pieces. We have a differentiated strategy here in the U.S., I talked about it, with the most reasonable SVOD service. With clearly all of our research, people understand it, we're really different. And so here in the U.S., I mean we have Verizon, Hans and the Verizon team, who are really -- have been absolutely terrific to work with. And it's somebody else promoting us and supporting us, and we're out there supporting them. So I think we're well served here in the U.S., but we need more firepower. So going on X1 and having Comcast drive it, having Amazon drive it as well. And doing more and more cable deals, which we're in discussions with and more platform deals where -- I call them like fishing boats. We got a great product. But we got -- at the end of the week, we're like, "Okay, what did you catch? What did you catch?" And the more people we got out there, that are enhancing their product by saying I'm going to give you access to discovery+, that's fish that we wouldn't have otherwise caught, and it's a win-win. Outside the U.S. is where I think our story is less understood. We make much more money going direct-to-consumer. And we reach people that have never been able to reach us. And the opportunity there, we think, could be really meaningful. I mean, I'll give you an example. There are some markets where there's 20% or 25% paid penetration. And then we've just taken the same content that we have and gone free. We buy a broadcast network and just put it on it. And then we become the #1, 2 or 3 network in that country for women because it's new to them. They've never seen it before. So we're in the business of packaging our content and reoffering it. This idea that we can offer for $3 and make a lot of money or $4 or $2 in some markets, we're $0.99 in some markets in Asia and saying, we have this library as big as Netflix. And with every person that we get into business with we make more money on. So 1 of the things that we'll see -- you'll see is the growth is going to come from us rolling out our local language, local sports, local entertainment strategy reaching audiences that have never had access to them before around the world as well as the same group, people that have broadcast or cable in Europe, but want to have ad-free or want to have the whole library. But we need to invest in really good tech in order to make it work. And we need to invest in the product in order to make it work. And so we've got to get great -- we've got a great free cash flow momentum here at this company. The fact that we were able to invest $400 million in the first quarter and still have a couple of hundred million dollars in free cash flow. So I think you're going to see the growth from us lighting up new markets. You're going to see growth from more partners here in the U.S. that will be driving us and more partners outside the U.S. Our view is we absolutely can't do this alone, no matter how great we are. Having Vodafone -- this is the 1 deal they're doing -- that they've done this kind to really drive us. You get Vodafone and you get discovery+ and they get a piece, being on Flex with Prime, being on X1 with Prime. We really view that as we don't want to be in just in the direct-to-consumer business. Ultimately, we want to have 150 fishing boats out there, 250 fishing boats. What's going on in Sweden? We've got 5 people selling us in Sweden and we're selling ourselves in Sweden. And I think we have a marketing advantage because we're 1 of the few companies that has some real channel territory and viewership both in terms of free-to-air and cable in almost every market in the world. And we could then -- we have audiences that love us. We can then say like here in the U.S., 50% of the people are people that love Discovery, or love Oprah, or love HG. That's true around the world. So I think that's unique for us.

So you mentioned playing this balance, right? So we're curious, how do you balance where you're putting the new content? So keeping discovery+ special and unique with new original content, but also keeping the linear viewers happy and enticing them to go back to their own old ways of watching.

Right. Well, look, I think it's a -- we're learning and we're trying a balance and seeing -- we don't have all the answers. We just have started. But there's certainly a -- there's a whole category of content that we wouldn't be doing for our channels. Like we did -- this weekend, we launched with great reviews, Queen of Meth. It's a documentary about Tom Arnold's sister and operating out of the Midwest and what her life is like. Very good reviews across the board, a lot of social media buzz. That's -- if we put that on 1 of our networks, people would say exactly what is that doing here? What channel would it go on? Clearly, documentaries are doing extremely well. They're very efficient for us. And people are looking to us as a place to get documentaries which fits really well with our overall real-life strategy. There's more edgier content. We can do a 90 Day content, some spin-offs of 90 Day that are a little edgier, that you wouldn't normally see on basic cable. And we're also -- we're looking at doing a lot of things exclusive, like Chip and Jo, the Gaines, you only get them on discovery+. I'll -- a whole -- a lot of our BBC relationship you'll only get. So we're seeing what people love on discovery+. We're seeing what people love on our channels. And we're getting a much better idea of how to super serve or nourish both audiences.

David, your first question to me about the upside in the model was about better CPMs on discovery+. What's driving that, that it's higher than linear, even your GO products? And how sustainable is that as maybe more impressions hit the market? So anything kind of why is it a better product for monetization?

Actually, we should do better as we get bigger because we can offer more scale and we're finding now that we're doing better as we scale. One is we have a lot of non-cable viewers. We have a lot of people that cut the cord. And the demographics are quite good on both GO and discovery+ for -- particularly discovery+ in terms of 50% being -- about being non-cable. And again, we get paid if the person is 56. We get paid if the person is 12, which is true for everyone. But we're getting a 50% discount on our CPMs broadly, which we're making real headroom with on -- in the U.S. on traditional. But then when we go there, when we get the same as CBS as a product that's -- we get the exact same as them, we get the exact same as Disney, give or take. I mean, we have a different sales team. But we're not at a disadvantage there.

Right. And your point is that broadcast has always gotten a premium because it was a reach vehicle, and it was -- it's been in the market longer, right? So it was always a benchmark for you and was sold as reach. And your point is you're not -- you're basically even in this new world with broadcast?

Right. And we're fighting to the -- and our argument is, look, we believe we're the core to any bundle. Like what would the -- what would basic cable be if it didn't have us? A lot of people go, "Oh, you know, I don't know about the cable operators, what's going to happen." We just did a great Hulu deal, like really great for us, I think, really great for them, they think. What would happen if you turned on Hulu one day and you didn't have Food and HG and Discovery and TLC, the #1 network in Prime for women. What would happen if you didn't have that 90? Would that be basic cable? And then they're launching OWN. So this whole idea of you're not going to be -- we talked about earlier Dexter being on. Dexter and I structured a new deal. This is all since we launched discovery+. But I think it's because when you think of basic cable, what is it? News, sports and us. If you took -- and those are the 3 things in all of our research. What are people coming to basic cable for? They can get -- a lot of the other networks have a lot of different things on it. But ultimately, the high-value is the Discovery nets which are like core networks to go to have a lot of original, massive amount of original content, a lot of characters and brands that people love. They watch Food all day. There's a big demographic that watches Food and HG and different demographic that watches HG and different demographic that watch ID. All 3 of them have the same length of view or more than FOX News. And so there's a way that people watch our networks, but in the aggregate, that viewership, news, sports, Discovery. And so we feel pretty good about where we are, and we're continuing to invest in the bundle. I think Rutledge was on earlier talking about how the bundle -- he sees the bundle continuing. There's no question that there's some decline and there's some decline in viewership. But CPM is way up. We can talk about that. And we have a lot of fresh content coming. We did do a lot of original content during the pandemic, mostly on networks like food and cooking and DIY, but it was harder to do stuff for Discovery. And it was harder to do stuff like a Fixer Upper and content for ID that is more of a traditional TV where people needed to be together and at a pace. And so we have more content coming. We're investing more now in linear than we ever had. And then we're investing a lot in discovery+ because we like what we see.

So you mentioned the expanded partnerships with Amazon and Xfinity before. Just curious have you seen any change in how many subscribers are coming direct to discovery+ versus your partnerships since some of those expanded partnerships have launched?

I don't want to get into the detail because we just came out and gave you what our numbers were and we gave you what we thought our run-rate was. I would just say we're -- we think we're doing just fine. We're happy with how we're doing.

Okay. So David, let me take it internationally. You said it's a real point of difference. We agree. When we upgraded the stock, we pointed to international as an opportunity. A lot of our clients thought we were nuts, right? Could you walk us through the gating factors to getting the product launched globally? What do you have to get done, maybe even a timetable for some key markets? So help us understand what the pathway looks like for the rest of this year internationally?

Okay. We feel like -- next up, we've got kind of 2 work streams. One is that the Olympics is coming. So we've been working -- our engineering team, which is now 300 people, and probably needs to be 5 -- 450. Because of the pandemic, we were hiring -- Avi Saxena was hiring a lot of people on -- through Zoom, very effective. It helped us meet our deadline of early January for our discovery+ product, which launched flawlessly with great reviews and great app ratings. But what we're looking at right now is we're using the Olympics as a force mechanism. But we needed to be a great experience. And so we haven't been rushing it. We will be ready for the Olympics, where we think we're going to have a very positive reaction. If you remember, we added 0.5 million subs in like a few days. Last time, it was a very different experience. Behaviorally, people were calling up going, how do I get this? What do you mean download? What do I need? And so we -- and we're putting a lot more content on there. We're also looking at launching in Canada, Brazil and the Philippines. It will be 18 months before we get a much broader rollout. But we don't want to rush it. We want to make sure -- we've made that mistake before. We rolled out the player, but it doesn't quite ready, and then it didn't get great reviews and then -- or ratings and we're working on fixing it. And then we have to get back someone that loves tennis but didn't love the experience. And so discovery+ was a great examiner for us. Great app ratings, people love it. They like to hang out. It's best-in-class product. That's what we got to be doing.

So staying with international, you guys have thrown out a $400 million serviceable, addressable market for discovery+ outside of the U.S. And so we're just kind of curious if you could shed any light on how many of those subscribers -- potential subscribers have access to your linear networks today, back to your earlier point on the lower penetration, and how meaningful the mobile opportunity is within that as well?

Yes. It's tough to say, but it's -- an awful lot of that number never had access to us before. So it's hard for me to give you an exact number. It's something that maybe we can look into for our next call -- earnings call. We can maybe break that out. But it's a huge opportunity set for us. And on the mobile side, look, that's a whole new game. And as you look at Asia, where we -- even though we got there early, it was just really, really difficult. And now we have a product that we could make available on mobile devices. The number is massive. When you think of the number in terms of what's it like if you can get somebody who can get access to you through mobile. And so we're just beginning to execute on that opportunity. Just 1 point. I think that we have worked really hard. We've seen ourselves for the last 5 years as a global IP company. We bought Scripps because we saw that their content wasn't deployed outside the U.S. They owned all their formats. They owned -- that they're working with amazing talent that's pretty well-known around the world. And that we were really buying a library, talent, story, shows. We were buying IP. I think at the beginning, people saw it, "Oh, you're buying a legacy cable business." We weren't. We saw it as buying a massive IP library and buying content that we could take around the world, develop around the world, launch in language very cheaply around the world, and that's worked out very well for us. And as we look at the -- at how we've grown outside the U.S., the female demo for us has been the massive driver, and that's why us taking not just the TLC content and the IP, but food, cooking, HG and producing a lot of that content locally for very inexpensive prices and then having the wallpaper be this 25-year library that nobody has ever seen in those markets. And so that's sort of how we've been -- that's how we've seen it. That's how we see ourselves as having a unique advantage, local content in-language all around the world.

And how would you answer that question for Eurosport? So how did -- if we look back at Eurosport versus Scripps, what did Eurosport give you? And where is the opportunity there to maybe push it further?

Well, 1 is unlike the sports rights deals here in the U.S., with Eurosport, we have more flexibility, not full flexibility, but a lot more flexibility to put content on Dplus. So for instance, like if you went to Sweden now, the [ ofsvenskin ] -- we have the Swedish football league there. So all of it. So it's like owning the NFL in the U.S., but the only way to get it is on discovery+. And so we have the ability for some really powerful IP or maybe it's some of the tennis in France. Maybe it's the handball, a ski jumping. We have tried with almost all of our deals to get flexibility. We don't have it everywhere with all product. But to get flexibility as to where do we -- where can we put it and the ability to use it to drive subscribers and asset value. And we found that owning something that has real longevity, that if you have something that runs for a short period of time, maybe they churn out. But if it's all the cycling, then even if you're a super cycling fan, you're going to stay at least for the cycling, or if you're super football fan, you're going to stay at least for all the football. And then by adding in all the other sports and our entertainment and non-fiction, we're seeing that, that helps with the churn. That become -- that's our whole kind of spectrum product. But like on the Olympics -- last time -- the IOC requires that we put a lot of content on free-to-air in each country. So let's say, it's 65% of the content, ballpark, has to be on broadcast and the other third doesn't. The last time we put almost the entire 1/3 or our 3 Eurosport channels in every country. In some cases, we added 1 just the Eurosport channels to carry all the extra sports content, particularly in the summer. This time, we're doing a lot less. And if you want to get the entire Olympics, you got to get it on Dplus. And then we can take sports, boxing. The only place to get boxing is Dplus, I'm making this up, diving. The only place to get diving, the only place to get ping pong. There's so much content. It will be the home of a lot of sports. And so I think that differentiates us. Whereas here in the U.S., they're beginning to do it. You see with the NFL, they are maybe going to move 1 game here and there. We have an ability to move a season of some sports or a real scale of some sports. And that's why that's another kind of unique advantage that we have. And on the sports side, 1 of the things that I think the NFL deal does. Yes, there's some rights on the NFL to do a couple of games here and there. But I think the big sports deals that were just signed really helped the bundle -- helped solidify the bundle. If you really love sport, you still need to get the bundle to see it. You need free-to-air and you need the bundle. And so the news, sports, Discovery. We want the bundle to remain healthy.

So given your great visibility around the world, we're just kind of curious if you can compare how the U.S. reopening is looking compared to some of the other regions? And clearly, people -- the different regions are in different places with regard to reopening right now. So any experience that you can provide us in terms of what you're seeing around the world on that front?

I think it's a bit of a tale of 2 cities. There's a lot of challenges, a lot of hiccups in Europe and Latin America. In many ways, some fall-back of the pandemic that we didn't see here, in some cases, is still raging in some markets. Having said that, science is going to be the big winner in this thing. The idea that we're going to look back and say, how did they do this? I mean, that we had this terrible pandemic and that we ended up with multiple vaccines. That if you take it, you -- almost nobody ends up in the hospital with severe illness. So I think the way the U.S. has handled it, particularly in the last several months, it's pretty compelling. A big difference between -- now Europe is trying to model after us. Latin America is trying to model after us. It's quite an accomplishment of government that they were able to get that done. Having said that, every region is up on the advertising side. This is not looking like it did last time when a country says, "Okay, we've got to put some big limits on again." Advertisers aren't calling us up going, "Well, we're pulling back money." We're up in every region. You're going to see a very big number, which we guided to already in terms of international, where you're going to see, as we said, better than double digit. Things are going very well, very nicely for us here in the U.S., and that's despite the fact that share is down. We're still seeing real growth because we're seeing CPMs that are 40%, 50% above upfront on scatter. And outside the U.S., we're seeing -- you're going to see crazy numbers. But when you look at us versus '19, which is how we look at ourselves, you'll see that our distribution is trending now better than '19. And our advertising is getting close to '19. And there probably is some impact of what's going on in Latin America and Europe, that then they don't have their act together in Asia the way we do, some more consumer in Asia. On the other hand, the advertising feels really strong. But -- so delivery is down for us, and you can see it. But our share isn't down. Outside the U.S., our share is actually up. And we think we're going to start doing better because we have a lot of original -- a lot more original content. We will kind of caught with less than we normally have, and a lot more stuff is going to be coming up on some or key networks in the U.S. and around the world. But our share is up.

Can we stick with advertising and just viewership and specifically to the U.S. We know, again, it's still early, but have you seen any noticeable impact from discovery+ on your linear network viewership? Or has it been largely incremental? And if you want to touch on the whole Nielsen noise as part of what's going on with the ratings right now as part of that answer?

Well, look, on Nielsen, what can I say? Poor us, us being the industry -- poor us we've got -- you have Google and Facebook. You have these technology companies that know exactly who's watching. They know exactly who they are, what they're buying, what they want to read, what they want to do. And we're dealing with this antiquated system of measurement that the advertisers love because they can rely on something that fundamentally undercounts all of us. And as great as our industry is, we haven't been able to get Nielsen to get their acting up. And so -- and there's a series of end runs that are going to happen. It's not rational. There's such great measurement capability now between the boxes and the funk, the idea that were -- they come to the industry and they are like, "Hey, we've got all of last year wrong." I mean that was the -- I'm like, "What?" Yes. All last year, we did that wrong but don't worry. it could be double digit, but we think it maybe less than that. Now we think it's not going to be as bad as we thought. It's not going to be as screwed up as we thought. It's just -- it's bad for the industry. It's good for the advertisers because they don't have -- there isn't full clarity. If there was full clarity, we'd all be making a lot more money. More and more, we're doing our own research to show where it is. And this is going to change. It's going to change because you can't have a 2020 media business with sophisticated media companies operating on multiple platforms and a dog and pony show here from Nielsen, trying to figure out, I'll catch up in a couple of years. It's just -- it's really unfortunate. And we thought that maybe they were going to get their act together. And then we find out that they think they undercounted for a year. And how do we get that money back?

Let me ask you...

We can talk more about Nielsen if you want.

We don't cover it. But if we did, I know where we would stand and where you'd stand. Let me ask a couple on affiliate fees. You've heard this also from the beginning. The development of discovery+ hurts your negotiation positions with distributors. The theory is you can go dark on Discovery and be happily found -- your contents found over the top. So why do you think this isn't the case? Why is that thesis that this strategy is bad for your core...

It makes no behavioral -- consumer behavioral sense. You -- these are great companies that have aggregated viewers and somebody wakes up. Mary wakes up in Duluth, Montana, and she's a Comcast subscriber or she's a Cox subscriber or she's a DIRECTV subscriber. She wakes up. She's, "Oh, here's how people watch TV. They have their 6 favorite channels. And maybe 200, but they've got their 6 favorite." And for most women in America, we're 4 or 5 of their favorite channels. We're at least 3. And the way people do it is they put on the TV and they go, "Oh, let me see what's going on in the Food Network, channel 29. Let's see what's going on in HG, Channel 37." We do it intuitively without knowing it. We know what our top 5 or 6 channels are for 85 million or 90 million people. So now you're paying $110. You're paying it to -- you're paying Comcast, Hulu, whoever. And you've got -- you're paying $100 or $120. You go, "Okay, we just finished breakfast. Let me put on Food on Prime channel 29." It's not there. Let me -- Food is not there. There must be a mistake. Is HG there? Oh, that's not there. That must be a mistake. ID, which I love. I want to watch 90 Days, not there. And then the distributor is going to say, "No worries. You can pay me the $120, and you don't have that anymore, and you can go buy that for $5." Well, the average customer is going to say, "What are you kidding me? I'm paying you as a distributor. You're fantastic. You give me a great product. You have 18 channels that I love, and they're not there. Now I have to figure out how to get that. And then I got to figure out how to integrate it onto my devices and my" -- and the average American just knows Food is on channel 29. And so this idea that it's easily moved, I think that the reaction of customers would be extremely negative. And we hope so, because our job is to create great content for the basic cable bundle. And most distributors, unlike what the narrative is, we're probably the most loved of everyone because they have the best deal. We're not happy about this, but thinking about $3 or $3.50 and they make $1.50 or $2 selling us. They're getting to 20% of their audience for $1. So then they compare that with what other people are charging, and they say, "Wait a minute, I want to create" -- someone's going to -- Mary is going to channel 29 and Food is not there. And -- but -- and I'm going to get a phone call going where are my 18 channels that I like. And tell me again what am I saving if I -- what's this about? So I think that's why we got the Hulu deal done successfully and effectively. And that's why we were able to get the deal done with Dexter. And that's why last year, we were able to get multiple renewals, while everybody knew what we were doing with increases, with no drops. And look, what Comcast is doing now, we expect that in the long term, almost everybody in Europe is offering us and then making some money by offering us to their broadband subscribers. And I think Verizon has been -- and Comcast are very clever. Why would Amazon and Roku be the channel stores. Those channel stores are going to have massive value. And you look at how Roku is trading. What's to stop really bright, super effective media companies like Charter and Comcast, and Pat Esser's Cox or AT&T, DIRECTV or Charlie is already probably the best-of-class at doing this. What's -- why see the position of the channel store? In some ways, cable has been the most entrepreneurial of all the businesses at cable. And what they did was broadband -- should broadband really have been for cable or should have really been the phone guys. Who were the big companies that had the biggest checks and the biggest balance sheet and can borrow money at the cheapest? And so if you said there's going to be -- who is going to get that? Who's going to get broadband and broadband phone? Is it going to be the phone guys that's going to wire the entire country? Or is it going to be the cable entrepreneurs that are going to do it? With the cable entrepreneurs, they got the better of that hand because of entrepreneurial drive and the ability to recognize investing capital for good return if you can get a significant market share. I think the cable guys in the U.S. now waking up, going, wait a minute, this channel store stuff is a good business. Prime is very clever. He has all those broadband subscribers, and he could be the 1 that sells them discovery+ and a lot of other products. And he makes money on each 1 of those incremental to the broadband. That could be a very big business for all of those great entrepreneurs. So I think you're going to see -- Sky is already doing it. Sky is doing it right now, and that's Comcast. They're probably -- they are the most effective at doing it. And in the U.K., they have a very compelling market share. You want to be direct-to-consumer in the U.K. You got to make Sky your best friend. It's not Amazon. It's not Roku. It's Sky. And so I think more and more, you're going to see that there's great alignment.

Yes. It's kind of shocking editorialized that these companies do not figure out that there was a business in being a gatekeeper.

But they are right now, and that's the discussions we're having. And I think they're ready to play. I think the leader in that is Comcast quite -- in a way that I think is going to be very effective for them.

Okay. Let me ask you 1 more and then I'll go back to Robert. You mentioned the new NFL deal and how it's good for the bundle. I was actually surprised, I still am, that CBS and NBC are taking the NFL and putting on their over-the-top channels at a low price. Do you think that gives you an opportunity, perhaps? Do you think that could possibly maybe slow down the growth of their affiliate fees, and maybe create some more excess surplus for Discovery to kind of get your fair share? So I wonder what was your take on that strategy. What the impact is?

I think it's hard to tell. There was a lot of money paid for the NFL. Roger Goodell and Kraft I think were masterful. They have the top of the pyramid IP, and they were able to run the table very effectively. Those companies now have a very high cost base. I think, in general, that's helpful to me because our cost base is not that high. And the NFL was just -- it's extremely valuable, but it's extremely expensive. And the idea that it's going to be part of the basic bundle, I think, helps us because we don't have to write a check for it, but the fact that you need to bundle in order to see a lot of the NFL will keep the bundle stronger.

So staying on that topic, if we can, why we think Discovery is different? And you clearly talked about this a lot is because of that different type of content and you competing in a completely different world than the scripted content and the NFL content in the U.S. specifically. So just curious, now that you have discovery+ as this additional window, how does that help you spread out in terms of the amortization of this spend even better and make it that much more efficient from a content spending standpoint?

Yes. First, remember, we're really like 2 companies. Outside the U.S., we're -- in Europe, we're the largest sports company. In many markets, we're doing broad entertainment. So if you went to Sweden and got discovery+, you'd be watching the football, the tennis, you'd be watching a lot of the entertainment product. Same thing with -- in Poland, you'd be seeing news, sports and entertainment. So in Europe, we're different. In Latin America, we're different in that we have a very strong kids business. But here in the U.S., we really are differentiated. And a lot of it is our cost -- differentiated in cost of content as well, where our average cost of content is $300 to $400. It gives us a chance to branch out with some other content, like as I mentioned. We can now do some great documentaries and we have great place to promote it on our existing platform, and it goes well with what we have. We also have a lot of talent that wanted to do a lot more work. And a lot of that content -- it's hard to put Guy Fieri, to give him another 2 or 3 series. He is a very prolific guy. But now we're like, "Okay, Guy, that sounds good. That can go on discovery+. There's a lot of people that love you and they could see that series there." So I just think it gives us more flexibility, and they're also -- we haven't even started to play yet or really learn yet exactly how to window content. Some will never go from 1 to the other. Others will go from 1 to another. And I think that we will learn more with -- we want -- don't want to -- we need to keep the value of discovery+ strong but do we diminish the value that if some of the content on there gets a second window? And what does that window need to be in order to have the premium value maintained, and not have people think, well, why do I need to pay? I can just wait. So we're going to learn all about that. But -- and it's exciting, and it's exciting for us to see. And we can see literally every day who's watching? How much time they're spending on it? What was the churn last night. We launched these 3 series. What was the effect? How many more subs came in versus the 3 days before. So it's an exciting time for us. We're a global IP company. I think we're differentiated. That's the biggest advantage we have. We're differentiated in the U.S. And outside the U.S., we're differentiated by having local content, and in some cases, local sport or local kid. So I think that's been our strength. And I think that's ultimately going to get us, we believe, to long-term sustainable growth. And the more we see that this is working, the more we're going to invest. And we think that return with the kind of churn that we're seeing and users we're seeing will be quite effective for the company and shareholders.

So can I take you back to last year? And now it was really hard to see because of all the investment you're doing this year. But last year, the thesis was, look, we found -- although our margins are really high, so more efficiencies from working from home and from kind of a new normal. You talk a bit about what's happened to core margins. I know it's all blurred together, but have you really been able to capitalize on changes in process and changes in kind of development? And anything you can tell us about core now that it's blurred in with all the spending being done on?

Well, first, we're not managing really for margin. We're managing for growth. We see ourselves as a long-term sustainable growth company, a global IP company that had -- that can, as I've said many times, go above the globe and have a differentiated offering that's of real value and compelling. But 1 more time being precise, what was the exact...

Well, how much have core improved because of the change in...

Okay. So we have -- with certain channels, we figured out how to produce certain content for dramatically less money. So the ability to shoot in someone's kitchen on a cooking show or a food show or at someone's backyard on a DIY, the ability to have it feel a little bit more authentic because we're not sending a crew. There's some real efficiency there. On the other hand, some of the content that we're producing for discovery+ needs to be much higher production value in a lot of areas. So I think we were advantaged by having a strain of content that we now know we can produce for less money. But we also have a lot of content that we think we need to deliver at a premium. And when someone goes to discovery+, they need to very clearly see there's a lot of series here that look different and are different from what you would see on cable. So we're going to continue to redefine the expenses and how we spend it. I do think that it's -- there's an average down by the efficiencies that we learned and there's probably an early average up on what we're producing for discovery+. We're not. We're trying to figure out exactly what we need to do in order to create the kind of subscriber interest and to maintain the low churn that we have where it is. And that's a work in progress. We're just -- we're really on the front end of that.

So if you take that and go back to 2019, with the $3 billion of cash flow that you alluded to before, we're curious how do you think about getting back to longer-term cash flow generation after all these investments in discovery+?

Well, look, 1 thing is we're a very healthy company that's generating a lot of free cash flow and can absorb all these investments very easily and still generate -- we did it in the first quarter. It was our -- that will be our biggest spend quarter. You'll see that things will come down. It's not going to go -- come down overly dramatically, but it's coming down. And so we'll continue to have great free cash flow. When you look at us versus our peers, if you just look at us versus us, you'll be able to see that if we're not generating the free cash flow, it's because we're investing in these products that we think is going to have an ability because rather than generate free cash flow, we think we're going to get much better growth by getting faster deployment of these products that have ARPUs as good or better than cable and scaling in a way that reinforces this idea that we're a global IP company.

David, given that the cost of debt is cheap, given that you've got no near-term financing, given that your stock is probably not valuing the opportunity of D2C, why not prioritize buybacks more at this point of where you are? Given the investment we know about excess cash, why isn't all the buyback starting soon?

Look, we obviously think that our stock is undervalued right now. But we also look at these ARPUs 30%, 40% above outside the U.S. in markets where we're doing very nicely and making a lot more money per subscriber. This is a great investment for this company. I'm here for the long term. The idea is how do we turn Discovery into sustainable, long-term growth company. And every dollar that we're spending, that we're getting good return on and that we're building an asset that's generating long-term value is, from our perspective, a more efficient and effective dollar than buying even a stock that we think is undervalued.

Okay. Let me do, in our short time we have, some questions from the room. Let me throw a couple at you. 2 questions from 1 person. If linear advertising ratings decline, how do you manage through that? So how do you manage on the linear ratings decline side? How can that...

What's the first part of the question?

If we still have the decline -- linear still declines, David, the way it's doing, how do you guys manage through that? So...

Okay. Two -- a few things. One is we have a lot of control of our costs. We're spending more money on our content this year than we did last year for our linear networks. That's 1 of the things that's a good headline for the distributors that we're talking to because a lot of our peers are actually spending less and asking for more money. So we have an ability to control our cost of content in ways that others can't. Look, we have an advertising market right now that's very strong. I can't predict that, that's going to continue, but it's basically -- I remember when broadcast was declining in the '90s and I'd be up talking to Welch and the GE Board, and they would say -- they would show this chart of ratings going down and revenue going up. And they're like, "That can't continue. There's just no chance that, that can continue." And as Jack and I would talk later over the years, 2000, 2005, 2010, 2015. He would say it's craziest thing ever. The viewership share is going down. The economics are going up. It must be that the best way to sell product or a hell of a value is that -- is buying television, is that what people see on a device or on television has a very strong motivation to them introducing a product or selling a product. So now we're in this moment. I can't tell you that, that's going to happen. But right now, viewership is down, but you're going to see our advertising is meaningfully up. And the fact that the advertising market is doing that offset is that -- and I know this because I'm talking to advertisers all the time and agencies. There's less and less opportunity to buy. And so there's a scarcity. And the price -- that's what's driving 50% above the upfront. Plus, not a lot of people on a product like we do with Dplus that people spending over 3 hours on and has a 50% non-cable audience. So I think that as long as the advertising market stays relatively strong, it doesn't need to be this strong. You're going to be surprised that basic -- that, that balance between the 2. But that's the 1 thing that we can't predict. What we're doing is we're working to build the goal of the Dplus environment as quickly as we can because we can predict that, that's going to be a hell of a product for advertisers, where we get paid on everybody, where our demo is really strong or our ARPU is good.

Okay. Let me ask 2 more before you go. One is, have you guys...

Just 1 thing. Last quarter, international advertising was up 8%. The pandemic hadn't really hit during that period. That was real -- and I'm not sure we got the credit for that. We grew share in a meaningful way. More people spent more time with our channels around the world, in language than ever before. Our share way up. And even in -- and in that quarter, we were up 8%. You'll see a massive number this quarter because it would be against the pandemic environment. But as I said, we're getting close to 19%, which I think is a real -- the market is strong, but it's not as strong outside the U.S. because they still do have some pandemic challenge.

Okay. A client wanted to know, have you guys shared yet what geographies in Europe will get Olympics on either discovery+ or Eurosport? Has that been disclosed of which...

We haven't given the exact detail, but it will be available across all of Europe on a subscription platform. And we're driving to have as many as possible receive it on discovery+. And some for reasons that are engineering, technology related will receive it on Eurosport Player. Eurosport Player will be packaged together with discovery+ and we'll put out a schedule on that soon to be -- to have more clarity.

Okay. Last question from someone who is a cable fan. How do you respond to distributors' worries that you're using your linear channel very effectively to drive people to discovery+, right? Like it's hard not to watch Discovery and get a lot of promotions. So what's the retort to the distributor out there who's saying, look, you're helping yourself to the detriment of our core business?

Yes. Well, 1 is we've cut down significantly. It was an initial burst. We have all these super fans. We want to let them know our awareness has really gotten quite -- it needs to get out more, but the awareness within the cable world is very good. If you look at our channels now, you see much less of the clutter you did -- I wouldn't say clutter. You'll see a lot less promotion than you did before. We also want the experience just like the distributors of some of them watching Food or Discovery or HG to be as positive as possible. They were asking us, what is it? We want to see more commercials. We want to know what it is. We want to know why we want to buy it. And a lot of them have seen what it is. And so we're now promoting in other areas. We also -- it took us a while to figure out where the -- a lot of the spend in the first quarter was not as efficient as we would like, but that's expected. We're promoting everywhere. You saw us on all the sports. You saw us on all the news networks. You saw us promoting on A&E and Lifestyle because we have content from them. And...

I saw you on Montauk Highway actually, too.

And now we started to see what our effective return is. And so we're going to be a lot more efficient, which is helping that number come down. And it also allows us to reduce on our platform, which I think is friendly to both the distributor add to our viewers.

Okay. Cool. Robert, let me have you close up. David, thank you on my side.

Thank you, David, for all your time and sharing your insights. We appreciate it.

Okay. Thank you, guys, so much.

Thank you. Be well. See you, David. Thank you.