Discovery Inc. Bets Big on Golf

You might think Discovery Inc.‘s (NASDAQ: DISCA) (NASDAQ: DISCK) (NASDAQ: DISCB) stations primarily feature nature videos and celebrity cooks, but did you know it’s actually becoming a player on the international sports scene? While known for its namesake Discovery Channel and documentary brands such as The Learning Channel, HGTV, and the Food Network, Discovery has actually been in the sports business since 2012, when it first acquired a minority stake in European sports channel Eurosport. Discovery was apparently pleased enough with the channel’s progress to buy 100% of Eurosport in July 2015, and that year, Eurosport won the exclusive rights to broadcast the Olympics in Europe from 2018-2022.

Discovery now wants to take its sports offerings up a notch, announcing a long-term, worldwide, multiplatform contract with the PGA Tour for rights outside the U.S. The companies also plan to develop an over-the-top (OTT) PGA Tour direct-to-consumer offering for golf fans everywhere.

I believe this could be bigger news than the market thinks.

Image source: Getty Images.

What’s the deal?

There are a few very interesting aspects to this deal. One, it’s for 12 years, a rather long period to secure exclusive rights for anything. Discovery will pay the PGA $2 billion over that time, including $50 million in 2019-2020 and $100 million in 2021, with the payments “ramping up” through 2030, according to the company. Discovery will spend $20 million to $30 million building out and marketing the new platform in the first few years, with the company projecting “minimal start-up losses in the early years as we build and scale the global product and then positive cash flows over the total life of the deal.”

The PGA Tour is the leading golf tour in the world, with five subtours: the Champions Tour (seniors), the tour, the McKenzie Tour in Canada, as well as PGA Latin America and PGA China. However, the PGA is really the big leagues of golf, with 47 of the top 50 players in the world. Interestingly, half of those top 50 golfers come from outside the U.S., which makes Discovery’s gambit so intriguing.

The PGA will still produce all its content, but the tour seems to have concluded that Discovery, already the largest international media company, had the local language and market expertise to accelerate the PGA’s growth overseas. Perhaps the PGA saw how Discovery succeeded with the 2018 Winter Olympics, delivering the first 100% OTT Olympics offering across Europe, which, combined with “regular” distribution in 40 European markets, led to record viewership of the 2018 winter games.

Streaming is the future

Discovery is planning to build a worldwide over-the-top streaming PGA Tour offering that viewers will be able to watch over the internet. During a conference call with analysts, executives said the service would be ready Jan. 1, and Discovery CEO David Zaslav claimed it could potentially reach tens of millions of fans. Jay Monahan, commissioner of the PGA Tour, said of the OTT service:

It’s going to be an important part of how we seek to come into every single market, to be able to grow our fan base … We want to be with the best partners in the best position to give us the maximum exposure distribution for our stars, our competitions, and not just to our core fans, but we want to celebrate this game and bring people that don’t yet know they’re fans into our sport, and that’s a big contributing factor to what Discovery brings because of their depth of audience of profile.

What would be on the service besides regular PGA Tour coverage? Zaslav said, “I think the big additive here as we go forward is we want our players from those home countries to have a greater voice and to be able to tell their story … what they’re eating, how they’re training, the ups, the downs, the life cycle of a season, which has incredible highs and lows, but really to be able to follow that player more intimately than we currently can today.”

Sounds like a plan

I happen to think this could be a big deal. From my experience, people who are into golf are really into golf, and a comprehensive platform that allows big golf fans to follow minor players and early rounds or to peer into the diet and practice routines of players could definitely find an audience. Given that a set of clubs can cost hundreds of dollars, not to mention balls, greens fees, or even country club memberships, I’m guessing avid golfers are likely more willing than others to shell out, say, $4.99 a month (the current cost of the ESPN+ app) for a must-have golf app you can watch 24/7.

If you take only the low end of Zaslav’s rough estimates of 10 million eventual subscribers at an estimate of $4.99 per month, that could be a great business, earning $600 million per year, leaving plenty of room to cover the eventual $100 million-plus license fee, marketing expense, and additional Discovery-produced content. And remember, that’s only OTT — Discovery will still also be able to sell to regular platforms, collecting both affiliate fees and advertising revenue as well.

For reference, Discovery projects $2.3 billion in combined free cash flow this year. So, a few hundred million dollars per year could boost free cash flow 10% or more, should my (admittedly rough) estimates come close to panning out.

Discovery bears watching

Of course, the market didn’t immediately agree, likely nervous about the $2 billion commitment and forecasts for modest losses over the first few years.

Still, I think this may be a long-term positive, and value investors should definitely be looking at Discovery at this moment of disruption and opportunity in the media business.

10 stocks we like better than Discovery Inc.
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and Discovery Inc. wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of June 4, 2018

Billy Duberstein owns shares of Discovery Inc. His clients may own shares in some of the companies mentioned. The Motley Fool owns shares of and recommends Discovery Communications. The Motley Fool has a disclosure policy.

You May Also Like

About the Author: Over 50 Finance