Distribution
Distribution revenue includes fees charged for the right to view Discovery network
branded content made available to customers through a variety of distribution
platforms and viewing devices. The largest component of distribution revenue
is comprised of affiliate fees charged to cable, DTH satellite and telecommunication
service providers for distribution rights to our television networks. We have
contracts with distributors representing most cable and satellite service providers
around the world, including the largest operators in the U.S. and major international
distributors. Typically, our television networks are aired pursuant to multi-year
carriage agreements that provide for the level of carriage that Discovery’s
networks will receive, and, if applicable, for scheduled graduated annual rate
increases. Carriage of our networks depends upon channel placement and package
inclusion, such as whether networks are on the more widely distributed, broader
packages or lesser-distributed, specialized packages. Distribution revenues
are largely dependent on the rates negotiated in the agreements, the number
of subscribers that receive our networks or content, and the market demand for
the content that we provide. We have provided distributors launch incentives,
in the form of cash payments or free periods, to carry our networks.
Distribution revenue also includes fees charged for bulk content arrangements
and other subscription services for episodic content. Digital distribution agreements
are impacted by the quantity, as well as the quality, of the content Discovery
provides.
In the U.S., approximately 90% of distribution revenues come from the top 10
distributors, with whom we have agreements that expire at various times from
2014 through 2020. Outside of the U.S., approximately 50% of distribution revenue
comes from the top 10 distributors. Distribution fees are typically collected
ratably throughout the year. International television markets vary in their
stages of development. Some, notably the U.K., are more advanced digital multi-channel
television markets, while others operate in the analog environment with varying
degrees of investment from distributors in expanding channel capacity or converting
to digital.
Advertising
Our advertising revenue consists of consumer advertising, which is sold primarily
on a national basis in the U.S. and on a pan-regional or local-language feed
basis outside the U.S. Advertising contracts generally have a term of one year
or less.
In the U.S., we sell advertising time in the upfront and scatter markets. In
the upfront market, advertisers buy advertising time for the upcoming season
and by purchasing in advance often receive discounted rates. In the scatter
market, advertisers buy advertising time close to the time when the commercials
will be run and often pay a premium. The mix between the upfront and scatter
markets is based upon a number of factors, such as pricing, demand for advertising
time and economic conditions. Outside the U.S., advertisers typically buy advertising
closer to the time when the commercials will be run. Advertising revenue is
dependent upon a number of factors, including the stage of development of television
markets, the popularity of free-to-air television, the number of subscribers
to our channels, viewership demographics, the popularity of our content and
our ability to sell commercial time over a group of channels. In developing
pay television markets, we expect advertising revenue growth will result from
subscriber growth, our localization strategy, and the shift of advertising spending
from broadcast to pay television. In mature markets, such as the U.S. and Western
Europe, high proportions of market penetration and distribution are unlikely
to drive rapid revenue growth. Instead, growth in advertising sales comes from
increasing viewership and pricing and launching new services, either in pay
television, broadcast, or free-to-air television environments.
Revenue from advertising is subject to seasonality, market-based variations
and general economic conditions. Advertising revenue is typically highest in
the second and fourth quarters. In some cases, advertising sales are subject
to ratings guarantees that require us to provide additional advertising time
if the guaranteed audience levels are not achieved.
We also generate revenue from the sale of advertising on our websites on a stand-alone
basis and as part of advertising packages with our television networks.
