Memo to Discovery: Don’t Drop Oprah

by Jonathan Berr | March 22, 2012 10:41 am

Discovery Communications (NASDAQ:DISCA[1]) has spent more than $300 million bankrolling OWN, The Oprah Winfrey Network. Though the money has not been well spent, the company shouldn’t throw in the towel on the struggling network quite yet.

The Silver Spring, Md.-based company set unrealistic expectations for OWN, which launched in January 2011, that the channel immediately would attract a huge audience and be profitable from the get-go. Not even Winfrey, one of the most powerful women in the world, could meet such a standard. She recently had to lay off staff to keep OWN afloat.

Discovery and Winfrey underestimated the challenges that they faced in setting up a TV network at a time when media audiences have never been more fractured. Winfrey wasn’t immune to this trend, either. Although Winfrey’s final broadcast TV show attracted a record audience[2] of 16.4 million, ratings for The Oprah Winfrey Show were on the decline for years. In 2009, the Associated Press[3] noted “Winfrey is still the queen of daytime television, but the aura of invincibility is gone.”

For now, Wall Street isn’t worried about OWN being a drag on Discovery’s stock, which has surged more than 17% this year. Discovery has a market cap of more than $12 billion and has a huge lineup of channels. including TLC, the Hub and Animal Planet. Bankrolling OWN is not a big deal, and the channel still has lots of upside. Even so, Discovery did a terrible job managing investors’ expectations for the network.

Last year, Discovery announced[4] that OWN was going to make money in 2011 on an EBITDA basis, about a year or two ahead of schedule. That was an idiotic statement to make. Investors would have understood if OWN (a joint venture between Winfrey and Discovery) wasn’t profitable because it takes a few years for most businesses to make money if they ever do.

Cable channels are no exception. In an interview with InvestorPlace, SNL/Kagan analyst Derek Baine estimates that OWN lost $112 million in 2011 and expects the network to lose even more than that this year.

“What went wrong is that they started promoting (OWN) too soon,” he said. “You were basically driving viewers to a network that wasn’t fully baked yet.”

In other words, Discovery was promoting Oprah’s network without Oprah — whose talk show on Disney‘s (NYSE:DIS[5]) ABC network didn’t end until May 2011 — five months after her channel debuted. According to Baine, Discovery might insist that Winfrey, whose net worth is around $2.7 billion, invest her own money into the venture. That only seems fair considering the media company has spent $100 million more than it originally planned. Winfrey, however, is a savvy enough businesswoman to take the risk even though OWN’s ratings trail Lifetime, WE and Oxygen — channels also aimed at women.

“Going to cable is a very different animal,” said Shari Anne Brill, president of a media strategy consulting firm. “She is now on a digital tier. Many of her viewers can’t afford that level of cable service.”

The network’s problems are easily fixable by smart programming decisions. For instance, “Oprah’s Next Chapter” drew 3.5 million viewers — triple the viewership of anything else shown on OWN — when it broadcast an interview with the daughter of the late Whitney Houston. The Hollywood Reporter[6] noted that one show featuring self-help guru Tony Robbins “drew barely 500,000 viewers.” The lesson here is a simple one: Show more celebrities.

“When she is there, the numbers are big,” says Bill Carroll of Katz Media Group in an interview. “When she isn’t, they are not as big.”

Oprah also has nurtured a slew of talk show hosts who became big stars, such as Gayle King, Dr. Phil McGraw, Rachael Ray and Dr. Mehmet Oz. There is every reason to expect that she could replicate this success. And that’s why both Discovery and Winfrey need to be more patient.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

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