Photo: Corbis

Discovery TV channel was one of the pioneers of the Russian pay TV market and became the first to not only adapt to the new legislation, but, as its management assures, even received additional benefits from this.

Amendments to the Law “On Mass Media” adopted a year ago have prohibited foreigners from owning more than 20% of the founder of any Russian media outlet since 2016. Therefore, in the remaining four months, a whole series of transactions should take place on the media market: numerous companies with foreign participation need to rebuild their business in accordance with Russian legislation.

If we consider only the television segment of the media market, then one of the largest transactions should be the change of owners in the television holding STS Media, the largest shareholder of which is now the Swedish Modern Times Group: YuTV of Alisher Usmanov and Ivan Tavrin claims 75% of the holding’s operating business.

YuTV also operates the Disney TV channel together with the American Walt Disney Co: in July, Tavrin established the New Media Holding company, which may participate in the restructuring of this business.

In July, the Fox family of TV channels also adapted to the new legislative requirements: National Geographic, Nat Geo Wild, Fox, Babby TV, Fox Live. Now the founder of these channels is no longer the structure of the American Fox International Channels, but companies that are part of the Russian Telko Media group, the official distributor of Fox in Russia.

Cases of media companies leaving have also been recorded: NBC Universal refused to distribute TV channels in Russia in the spring, and in July AMC Network (TV channels CBS Drama, JimJam, etc.) announced the closure of its office.

But the American Discovery Communications is not going to leave: it has agreed on a partnership with the National Media Group (NMG), which was previously closely associated with Yuri Kovalchuk’s Rossiya Bank (see references). At the end of August, the parties announced the creation of a joint venture in which NMG will receive 80%. It will handle all of Discovery’s business in Russia - manage the Russian-language versions of the Discovery Channel, Animal Planet, Eurosport, etc.

In the segment of thematic TV, distributed through cable networks and satellite, NMG has not yet been represented. NMG, for its part, will contribute an on-air license to the joint venture, which will allow the Discovery family TV channels to once again earn money from advertising, says Olga Paskina, CEO of Discovery Communications in North-Eastern Europe.

In an interview with RBC, Paskina explained why NMG was chosen as a partner and why the company should not lose the Russian market.

“We are complimentary to each other”

— The first thought that comes to mind after the news about your alliance with NMG: the American Discovery Communications was forced to share its business with a respected Russian company. Is it so? Who found whom?

— In fact, for us, a partnership with a strong local player is a logical step in our further strategic development, as a whole, of the entire company at the global level. If you look at Discovery's entire business, in many markets we work in partnership with local players, for example in Japan, China, Canada, the USA. Wherever we understand that such a partnership opens up access to new markets and niches and strengthens business, we follow this path.

If we talk about Russia, even if there were no amendments to the law on media, based on market conditions and its active consolidation in recent years, Discovery, in my opinion, would make sense to create a partnership with a strong local player. We considered different options for cooperation and settled on NMG.

Discovery is a leader in the thematic pay TV market, and only a merger with the media market leader can strengthen the business. In addition to NMG, in recent years, media assets have consolidated around Gazprom-Media and VGTRK, but both players are quite strongly represented in the field of pay TV. And with NMG we are complimentary to each other. This is what makes our union interesting. We are strengthening them in a segment in which they are not present today. We, in turn, get access to local expertise, which allows us to develop further.

— Do other countries also rely on large local players?

— Almost everywhere we team up with leaders. Only in this case will opportunities open up for development in related segments, including in the field of content, broadcast TV and digital directions.

— Why do you think that NMG is a strong partner? The name is loud, sonorous, there are many assets, but the key ones are REN TV and Channel Five. They can hardly be called first-tier channels. In addition, REN TV continues to lose viewers this year.

— NMG also owns 25% of Channel One. And “First” is undoubtedly the market leader. In addition, NMG is now focused on content production and is building its own cluster in this area. [Back in 2013, NMG acquired 50% of the production studio Art Pictures Vision of Fyodor Bondarchuk and Dmitry Rudovsky, and now an entire production group is being created on its basis.] In Russia, this is the youngest, but at the same time dynamically developing holding, one of the three leaders.

— How is the deal legally structured? Now there is Discovery Communications LLC, which acts as the founder of TV channels and for which their broadcast licenses are issued. This company is controlled by Discovery Holdings LLC, whose owners are already Discovery Communications. Is a new legal entity being created or will NMG receive a stake in some existing company?

— The partnership was created on the basis of an already existing legal structure. NMG receives a stake in Discovery Holdings LLC, which, in turn, will own one hundred percent Discovery Communications LLC. And this will be an exchange, since NMG, for its part, also contributed an asset - the NMG Design company, which owns a license for on-air analogue television broadcasting. It will be extended to the Discovery family of channels, which will allow us to once again earn money from advertising.

— Is this a no-cash deal?

— We do not disclose the commercial terms of the transaction.

— In fact, the value of Discovery’s entire Russian business is equal to the cost of this broadcast license.

- It’s incorrect to talk like that. There are many factors that influence the cost of an affiliate contribution.

— How will the management of the joint company be organized? Will NMG have the majority of votes?

— The company’s board of directors will include two representatives from NMG and two from Discovery Communications. The fifth member of the board of directors is the general director. It is approved by both shareholders.

— Whose side are you on as CEO?

— I will work in the interests of both shareholders. My main goal is to grow the business, maximize profits and make both NMG and Discovery happy.

“First of all, Discovery is not political.”

— Explain why Discovery Communications clings to the Russian market so much? Why is he so attractive? In its reporting, the company admits that business in Russia accounts for no more than 2% of total revenue. Based on the results of 2014, this is about $125 million. The country is unpredictable: last summer they suddenly banned all advertising on pay TV, which caused serious damage to your business, and in the fall they introduced restrictions for foreign owners. What will happen if Discovery simply leaves Russia? Is it really impossible to compensate for this 2% elsewhere?

— Discovery always builds long-term planning horizons. Russia is the world's fourth-largest pay TV market in terms of the number of subscribers. Pay TV penetration is 67%, so there is potential for further growth. And not only are we the fourth market after China, India and the USA, but we are also a growing market, unlike, for example, the USA, where the pay TV market is falling, or European countries, where the market is practically not growing.

Russia has great potential for ARPU [average revenue per subscriber] growth. In the USA it is about $93, in the UK - $57, and in our country at the current exchange rate it is about $4. Therefore, it is extremely important for Discovery to be present on the Russian market. The company was, in fact, the first to come to Russia with thematic channels, the first to make local versions, the first to sell advertising on pay TV. Therefore, for Discovery, Russia is a territory with already 17 years of experience and great potential in the future. The company has a lot to lose.

— Can we then say that this current 2% of revenue is evidence that the company is not yet effectively monetizing its audience in Russia?

— The company grew very actively and launched more and more new brands. And for example, on the second channel, TLC, after Discovery Channel, we started selling advertising relatively recently, in 2011. On the ID Xtra channel (and this is now one of our main brands), we did not even have time to start advertising sales. So we have huge potential to monetize our brands.

— Your alliance with NMG indicates that this holding is clean and transparent from the point of view of its owners. It turns out that NMG is not directly connected with Rossiya Bank and Yuri Kovalchuk personally, who have been under US sanctions for more than a year?

— We approached the issue of owners with particular scrupulousness. More than one consultant worked with us to check the ownership structure of NMG. Today, more than 50% of NMGs are controlled by beneficiaries who are not on the SDN lists [the list of Specially Designated Nationals, that is, citizens and companies against whom the US Treasury has imposed sanctions]. More than 50% belong to the structures of [chairman of the board of directors of Severstal Alexey] Mordashov and Surgutneftegaz. We made sure that from a legal point of view there are no obstacles to completing the transaction.

— Isn’t the headquarters afraid that the partnership might still be perceived negatively in America?

— Firstly, Discovery is outside of politics. Secondly, the decision to enter into a partnership was made taking into account a thorough analysis of both commercial terms and legal due diligence.

— In this joint venture, what will be the distribution of profits - according to shares?

- This is a commercial transaction beneficial to both parties. I can only say that the company will distribute dividends in proportion to shares. In addition, Discovery Communications will continue to receive royalties for content based on the applicable license agreement.

— Still, one cannot escape the feeling that suddenly, only thanks to amendments to the law on the media, a bag of money fell on NMG.

— (Laughs.) No, I wouldn’t say that. This partnership allows us to not only comply with media law, but also with advertising law. The partnership provides an opportunity to bring back advertising that we don't have today. Therefore, this is an absolutely mutually beneficial transaction. Thanks to NMG, we increase revenue through advertising revenue.

— At the end of 2014, what was the ratio of subscription fees and advertising revenues in Discovery’s Russian revenue?

— I don’t comment.

— But if NMG provides you with such an opportunity and you, among other things, create a partnership for this purpose, then, therefore, this was a significant part of the income.

— We are creating a partnership to strengthen the company’s position in the Russian market. Advertising revenue is part of the income.

— There have been no advertisements on Russian-language versions of foreign TV channels for eight months. Total TV ad spending fell 22% in the first half of the year. What will force advertisers who have cut their budgets to spend money on thematic TV again?

— I think that our partnership will help support the advertising market. Why? Discovery has always built strong television brands with highly targeted audiences. Therefore, the channels Discovery Channel, TLC, Animal Planet were in high demand among advertisers. The advertising market on thematic channels practically disappeared in 2015, falling, according to AKAR, by more than 50%. Thus, returning to the advertising market, we are strengthening it by giving advertisers the opportunity to contact the in-demand audience in the form of an additional package offer.

For the full interview, see www.rbc.ru

"Discovery has something to lose"