DISCOVERY COMMUNICATIONS, INC. (Exact Name of Registrant As Specified in Its Charter)
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2011 ANNUAL REPORT As long as there’s a world, we’ll explore it. DISCOVERY COMMUNICATIONS 2011 ANNUAL REPORT As long as there are stories, we’ll share them. DISCOVERY COMMUNICATIONS 2011 ANNUAL REPORT As long as there is curiosity, we’ll ignite it. DISCOVERY COMMUNICATIONS 2011 ANNUAL REPORT DISCOVERY COMMUNICATIONS Discovery Communications is dedicated to satisfying curiosity and making a difference in people’s lives by providing the highest quality content, services and products that entertain, engage and enlighten. 2011 ANNUAL REPORT DEAR SHAREHOLDERS, For Discovery Communications, 2011 represented another year of solid growth and progress in executing our strategy of investing ‘on the screen’ to strengthen the company’s content and brands, and bring the thrill of discovery to viewers around the world. Th is past year, Discovery once again delivered double-digit revenue and AOIBDA growth, marking the fourth consecutive year of double-digit earnings growth since becoming a public company in 2008. With a backdrop of global uncertainty, rapid technological change and increased competition, Discovery’s ability to grow consistently over that time period underscores the sturdiness of our business model, the power and universal appeal of our nonfi ction content, and the opportunity present across the global distribution platform the company has built over the last 27 years. While Discovery’s 2011 results did benefi t from a continued strong global advertising market, they also, more importantly, refl ected an ability to take advantage of favorable conditions and an industry-leading infrastructure through a continued focus on creating high-quality programming and leveraging it around the globe and across a growing number of digital and consumer platforms. Additionally, this past year, organic growth, combined with a strong balance sheet and free cash fl ow, enabled the company to return nearly $1 billion of capital to shareholders. Going forward, we will continue to return capital to shareholders, but the priority remains reinvesting in our brands and businesses, and exploring opportunities that will allow us to further leverage our existing infrastructure or expand into complementary businesses. THE WORLD’S #1 NONFICTION MEDIA COMPANY DISCOVERY COMMUNICATIONS EXPANDING GLOBAL DEMAND FOR CONTENT Overall, around the world, demand for high-quality content has never been higher and there has never been a better time to be in the content business. Consumers in mature markets are watching more television than ever before, emerging markets are experiencing increasing growth in pay-TV penetration, and new technologies are opening up additional distribution channels for both new and library programming. Th is is particularly advantageous for Discovery, because of our unmatched global platforms that include 14 networks in the U.S. and between 2 and 13 channels in more than 200 countries around the world, and the fact that we own nearly all of our content. Dinosaur Revolution DISCOVERY NETWORKS INTERNATIONAL In all, this past year, Discovery invested more than $850 million in new content, which propelled success around the world. At the company’s U.S. networks, this investment drove a delivery increase of 3% year-over-year among the key persons 25-54 demographic, while non-Discovery cable was fl at and broadcast networks were down. Internationally, as well, viewership was up 14% in 2011 versus the previous year across all regions, led by fast-growing markets including Brazil and Mexico in Latin America, as well as historically 2011 ANNUAL REPORT under-penetrated markets such as Hungary and Russia in Central and Eastern Europe, and India in the Asia-Pacifi c region. Beyond traditional pay-TV platforms, Discovery’s expanded deal with Netfl ix, which was announced in the third quarter of 2011, is a good example of the opportunities that new technologies and distributors are presenting. Th rough this deal, Discovery was able to generate signifi cant value from library content, while retaining fl exibility with regard to other distributors. Discovery has always been platform agnostic with regard to distributing our content and we will continue to explore additional opportunities that provide good economics, fl exibility in windowing our programming and a strong brand environment, and where the trust and loyalty we have established with our audience is maintained. At the same time, we will be careful to ensure we receive an appropriate return on our programming investment and protect the value that our content provides to existing partners and the integrity of our traditional distribution platforms, which remain the core of our business. DISCOVERY COMMUNICATIONS STRENGTHENING U.S. FLAGSHIP NETWORKS Discovery Channel is the most widely distributed network in the world and the largest contributor of the company’s overall revenues and cash fl ow. More than 50% of the content on Discovery Channel in the U.S. is used in some capacity around the globe, which makes the continued strength and freshness of Discovery Channel’s domestic content pipeline a top priority. Over the past few years, Discovery’s viewership has been primarily led by tried and true hits Dirty Jobs, MythBusters, Man vs. Wild and Deadliest Catch. And, while the sustained success of these shows speaks to the durability of the network’s content, the company also has been focused on developing new tent-pole series to engage audiences and drive viewership growth. In 2011, Discovery Channel added to its stable of hits with several returning series delivering signifi cant ratings gains versus a year ago. Th ese included Flying Wild Alaska, Sons of Guns and, most notably, Gold Rush, which saw viewership up 35% versus its fi rst season and was the #1 show in all of television on Friday nights. Additionally, we leveraged the larger audiences on these returning series to introduce several new series, including Moonshiners, which helped drive fourth quarter viewership at Discovery Channel up 17%. With this momentum, combined with a bigger stable of returning hits, a strong slate of upcoming 2011 ANNUAL REPORT new series and several blue-chip specials including Frozen Planet, the successor to Planet Earth, Discovery Channel is well positioned for continued success in 2012. At our other fully distributed U.S. networks, TLC delivered another strong year in 2011, delivering its highest viewership among women 25-54 in seven years. Th e network also continued to successfully add to its roster of established hits like Cake Boss and Say Yes to the Dress, with the premiere of fi rst-year series Long Island Medium, as well as returning series Sister Wives and Next Great Baker, each of which grew viewership signifi cantly in its second season. Pit Boss ANIMAL PLANET Finally, Animal Planet also developed several new hits this past year to complement the continuing success of River Monsters, Whale Wars and Pit Boss. As a result, the network enters 2012 with a deeper stable than ever before, including Finding Bigfoot, which had the second-best season debut in Animal Planet history. DISCOVERY COMMUNICATIONS BUILDING NEXT-GENERATION U.S. BRANDS Investing in our emerging U.S. networks and maximizing the value of these platforms also continued to be a priority in 2011. During the year, the company continued to invest in newer brands, as well as rebranding and launching additional networks to take advantage of opportunities in the marketplace. By far the biggest success in this area continues to be Investigation Discovery, which was the fastest growing network in pay-TV in 2011 for the second consecutive year. Led by popular series such as On the Case with Paula Zahn, Stalked and Stolen Voices, Buried Secrets, ID’s viewership was up 40% in its key demographics in 2011 versus 2010, and it was also the #1 channel in all of television for the amount of time that viewers stay tuned in, making it an even more attractive platform for advertisers. Discovery’s other homegrown emerging networks also had solid years in 2011. SCIENCE had its best year ever among all key demographics in both primetime and total day, with hits including Th rough the Wormhole with Morgan Freeman. Th e network has delivered 13 consecutive quarters of year-over-year growth in primetime among 25–54-year-old viewers. Similarly, Military Channel had its best year ever in primetime in 2011 among its key demographics. 2011 ANNUAL REPORT In 2011, we continued our strategy of rebranding existing platforms to take advantage of ‘white space’ in the marketplace. In January, FitTV was rebranded as Discovery Fit & Health to leverage the popularity of the Discovery Health library and lead the health category. Th e network is up double-digits in all key demographic since the launch. And, in October, we successfully rebranded HD Th eater as Velocity, targeting the underserved affl uent male demographic. Velocity delivered double-digit gains in all key demographics during its fi rst full quarter in both primetime and total day versus the previous year. Chasing Classic Cars VELOCITY DISCOVERY COMMUNICATIONS LEVERAGING U.S. JOINT VENTURE PARTNERSHIPS At the company’s U.S. joint ventures, Th e Hub, a partnership with Hasbro, Inc., continued to grow. Since its launch in October 2010, 85% of kids 2-11 have sampled Th e Hub and the network has drawn over 19 million unique viewers. Th e network also has increased the number of advertisers by 20% and is well positioned for continued growth. In February 2011, we successfully debuted 3net, the fi rst 24/7 general entertainment 3D network in the U.S., in partnership with Sony and IMAX. Since its launch, 3net has built the largest library of original 3D television content in the world and the experience Discovery and its partners have gained in producing 3D content is unmatched and will provide great value as 3D television penetration increases and demand grows for 3D content from distributors around the world.