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Discovery's CEO Watch

New leader must deal with ratings and international 10/27/2006 08:00:00 PM Eastern

Sometime in the next few weeks, the owners of Discovery Communications
Inc. (DCI) expect to finalize their choice of a new chief executive, replacing
outgoing President/CEO Judith McHale.

The new executive—only the third in the company's 20-year life—will
doubtlessly offer glowing praise of Discovery's legacy in the cable business,
the strength of its brand among viewers around the world, and the glowing
future of all the company's networks in a digital world.

However, the new boss of this $12 billion enterprise will have to cope
with some big challenges. DCI's core U.S. networks—Discovery Channel and
TLC—are showing ratings gains, but they're far from fully recovered from
their two-year Nielsen power slide. Many of the company's 10 smaller networks
are adrift. The soft ad market means that even strong ratings gains may
generate just modest advertising growth.

While DCI has launched an ambitious—and expensive—broadband venture
aimed at schools and students, the company's networks have no clear strategy to
cope with the shift of viewers' eyes from television sets to PC screens.

A change of ownership?

And the new president could easily wind up working for a different owner
in short order. The largest shareholder—John Malone's Discovery
Holding—would love to roll up the interests of partners Cox Communications
and Advance Newhouse, each of which owns 25%.

Since Malone spun off Discovery Holding two years ago from his Liberty
Media into a separate public company, the new stock has stalled. That's partly
because Malone owns 50% of DCI yet doesn't control it. Cox and Newhouse each
have veto power over major decisions and will want to be paid—handsomely—to
yield control.

Any new president will be thankful that DCI's problems never escalated
to the point of financial crisis. The network suffered more of a crunch, a
slowdown in growth rather than a sea of red ink.

Chairman/founder John Hendricks is confident that the
company—particularly its flagship Discovery Channel—is on track. "We had to
make a course correction," he says. "We're not entirely back, but we will
be."

Discovery's headhunters started with a list of 75 possible replacements
for McHale, who was CEO for just two years but president/COO for nine years
before that. It was primarily a wish list (Viacom's ex-CEO Tom Freston, the $85
million man? Sorry, but no.)

The board has narrowed it down to fewer than 12 serious contenders. Two
are insiders—Discovery Networks U.S. President Billy Campbell and Senior
Executive VP of Operations Mark Hollinger. Hendricks and board members would
not comment about who might still be in the race.

Network owners speak volumes about their priorities in the type of
executive they pick. Rainbow Media, for example, clearly saw ad sales as its
weakness when tapping ex-Court TV Executive VP of Advertising Charlie Collier
to run AMC. Troubled Hallmark Channel parent Crown Media needs an extensive
overhaul and hired ex-Court TV CEO Henry Schleiff, a lawyer with a broad
background in cable, syndication and production.

DCI's owners are thinking broadly. Industry executives involved in the
hunt say that, while the most obvious problems have been at Discovery Channel
and TLC, board members do not believe they need a programming specialist. The
job is much bigger.

For example, the new president will have to wrestle with DCI's
international operation, which should account for about a third of the
company's $2.9 billion revenue this year. The company is counting on
international profits to offset the maturity of the U.S. cable-network sector.

Even so, the division probably requires pruning, not so much
international editions of Discovery but foreign lifestyle offshoots, such as
Discovery Home & Health and Discovery Travel & Living.

The future of the company's long-sluggish Discovery Channel Stores
division is up in the air, despite the shutdown of 20 stores over the past two
years.

"Discovery cult"

The most important criterion will be the new executive's ability to
marshal the troops. DCI's Silver Spring, Md., headquarters is a greenhouse of a
peculiar culture in television. Because of Discovery Channel's science and
education roots, many workers—particularly long-time employees—are driven
by the idea not that they're doing good television but that they're doing good.

Many current and former executives refer to it as the "Discovery
cult"—sometimes in a good way, sometimes not.

"The new president needs understanding of the converged world and strong
leadership," says one executive familiar with the recruiting. "Programming
expertise is just a bonus."

That could be bad news for any programming executive who wants the job,
including Campbell. His primary background before Discovery was in program
development, including stints at Miramax TV, CBS and Warner Bros.

Into the breach

In the meantime, DCI employees won't be too upset if the board takes its
time replacing McHale, because Hendricks has stepped into the breach. After
leaving day-to-day operations to McHale and others, he is back, involved in
many more meetings much lower down the line, including those regarding budgets
for some individual networks.

"John is really engaged," says one Discovery executive.

But Hendricks—long considered a big thinker even by pioneers like
Malone—is worried primarily about the TV picture ahead. His big concern is
viewers' new power to choose. Whether through TiVos, video-on-demand (VOD) or
Web video, consumers no longer have to channel-surf and settle for "whatever"
television.

"The era of what I refer to as 'channel chow' is over," Hendricks
says.

Cable networks won't be able to get away with putting on just a couple
of high-quality shows at a time. They need to offer more of that programming to
cable operators' VOD systems, which risks cannibalizing ad revenues on their
main core channels.

Says Hendricks, "It has huge implications for our industry."

E-mail comments to
jhiggins@reedbusiness.com

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