WARNER BROS. DISCOVERY, COMMUNICATIONS, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS Certain statements in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, marketing and operating strategies, integration of acquired businesses, new product and service offerings, financial prospects and anticipated sources and uses of capital. Words such as “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “potential,” “predict,” “project,” “strategy,” “target” and similar terms, and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will” and “would,” among other terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be accomplished. The following is a list of some, but not all, of the factors that could cause actual results or events to differ materially from those anticipated:
•more intense competitive pressure from existing or new competitors in the industries in which we operate;
•reduced spending on domestic and foreign television advertising, due to macroeconomic, industry or consumer behavior trends or unexpected reductions in our number of subscribers;
•uncertainties associated with product and service development and market acceptance, including the development and provision of programming for new television and telecommunications technologies, and the success of our streaming services;
•market demand for foreign first-run and existing content libraries;
•negative publicity or damage to our brands, reputation or talent;
•realizing direct-to-consumer subscriber goals;
•industry trends, including the timing of, and spending on, sports programming, feature film, television and television commercial production;
•the possibility or duration of an industry-wide strike, such as the strikes of the Writers Guild of America (“WGA”) and Screen Actors Guild-American Federation of Television and Radio Artists (“SAG-AFTRA”) in 2023, player lock-outs or other job action affecting a major entertainment industry union, athletes or others involved in the development and production of our sports programming, television programming, feature films and interactive entertainment (e.g., games) who are covered by collective bargaining agreements;
•disagreements with our distributors or other business partners;
•continued consolidation of distribution customers and production studios;
•potential unknown liabilities, adverse consequences or unforeseen increased expenses associated with the WarnerMedia Business or our efforts to integrate the WarnerMedia Business;
•adverse outcomes of legal proceedings or disputes related to our acquisition of the WarnerMedia Business;
•changes in, or failure or inability to comply with, laws and government regulations, including, without limitation, regulations of the Federal Communications Commission and similar authorities internationally and data privacy regulations, and adverse outcomes from regulatory or legal proceedings;
•inherent uncertainties involved in the estimates and assumptions used in the preparation of financial forecasts;
•our level of debt, including the significant indebtedness incurred in connection with the acquisition of the WarnerMedia Business, and our future compliance with debt covenants;
•threatened or actual cyber-attacks and cybersecurity breaches;
•theft of our content and unauthorized duplication, distribution and exhibition of such content; and
•general economic and business conditions, fluctuations in foreign currency exchange rates, global events such as pandemics, and political unrest in the international markets in which we operate.
Forward-looking statements are subject to various risks and uncertainties which change over time, are based on management’s expectations and assumptions at the time the statements are made and are not guarantees of future results.
These risks have the potential to impact the recoverability of the assets recorded on our balance sheets, including goodwill or other intangibles. Management’s expectations and assumptions, and the continued validity of any forward-looking statements we make, cannot be foreseen with certainty and are subject to change due to a broad range of factors affecting the U.S. and global economies and regulatory environments, factors specific to Warner Bros. Discovery and other factors described under Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K, including under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Actual outcomes and results may differ materially from what is expressed in our forward-looking statements and from our historical financial results due to the factors discussed in this section and elsewhere in this Annual Report on Form 10-K or disclosed in our other SEC filings. These forward-looking statements and such risks, uncertainties, and other factors speak only as of the date of this Annual Report on Form 10-K, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.
ITEM 1. Business.
For convenience, the terms “Discovery,”“Warner Bros. Discovery”, “WBD”, the “Company,” “we,” “us” or “our” are used in this Annual Report on Form 10-K to refer to both Warner Bros. Discovery, Communications, Inc. and collectively to Warner Bros. Discovery, Communications, Inc. and one or more of its consolidated subsidiaries, unless the context otherwise requires.
We were formedMerger with the WarnerMedia Business of AT&T
On April 8, 2022 (the “Closing Date”), Discovery, Inc. (“Discovery”) completed its merger (the “Merger”) with the WarnerMedia business (the “WarnerMedia Business”, “WM Business” or “WM”) of AT&T Inc. (“AT&T”) and changed its name to Warner Bros. Discovery, Inc. On April 11, 2022, the Company’s shares started trading on the Nasdaq Global Select Market (“Nasdaq”) under the trading symbol WBD.
The Merger was executed through a Reverse Morris Trust type transaction, under which WM was distributed to AT&T’s shareholders via a pro rata distribution, and immediately thereafter, combined with Discovery. (See Note 3 and Note 4 to the accompanying consolidated financial statements). Prior to the Merger, WarnerMedia Holdings, Inc. (“WMH”) distributed $40.5 billion to AT&T (subject to working capital and other adjustments) in a combination of cash, debt securities, and WM’s retention of certain debt. Discovery transferred purchase consideration of $42.4 billion in equity to AT&T shareholders in the Merger. In August 2022, the Company and AT&T finalized the post-closing working capital settlement process, which resulted in the Company receiving a $1.2 billion payment from AT&T in the third quarter of 2022 in lieu of adjusting the equity issued as consideration in the Merger. AT&T shareholders received shares of WBD Series A common stock (“WBD common stock”) in the Merger representing 71% of the combined Company and the Company’s pre-Merger shareholders continued to own 29% of the combined Company, in each case on a fully diluted basis.
Discovery was deemed to be the accounting acquirer of the WM Business for accounting purposes under U.S. generally accepted accounting principles (“U.S. GAAP”); therefore, Discovery is considered the Company’s predecessor and the historical financial statements of Discovery prior to April 8, 2022, are reflected in this Annual Report on Form 10-K as the Company’s historical financial statements. Accordingly, the financial results of the Company as of and for any periods prior to April 8, 2022 do not include the financial results of the WM Business and current and future results will not be comparable to results prior to the Merger.
Industry Trends
The WGA and SAG-AFTRA went on strike in May and July 2023, respectively, following the expiration of their respective collective bargaining agreements with the Alliance of Motion Picture and Television Producers (“AMPTP”). The WGA strike ended on September 17, 2008 as27, 2023, and a Delaware corporation in connection with Discovery Holding Company (“DHC”)new collective bargaining agreement was ratified on October 9, 2023. The SAG-AFTRA strike ended on November 9, 2023, and Advance/Newhouse Programming Partnership (“Advance/Newhouse”) combining their respective ownership interests in Discovery Communications Holding, LLC (“DCH”)a new collective bargaining agreement was ratified on December 5, 2023.
The strikes had a material impact on the operations and exchanging those interests with and into Discovery (the “Discovery Formation”). As a resultresults of the Company, including a pause on certain theatrical and television productions. Effects included a positive impact on cash flow from operations attributed to delayed production spend, and a negative impact on the results of operations attributed to timing and performance of the 2023 film slate, as well as the Company’s ability to produce, license, and deliver content.
Other headwinds in the industry, such as continued pressures on linear distribution and soft advertising markets in the U.S., have had, and are expected to continue to have, a material impact on the operations and results of the Company, including a negative impact on the results of operations attributed to declines in linear advertising revenue.
We continue to closely monitor the ongoing impact of industry trends to our business; however, the full effects on our operations and results will depend on future developments, which are highly uncertain and cannot be predicted.
Description of Business
Warner Bros. Discovery Formation, DHCis a premier global media and DCH became wholly-owned subsidiariesentertainment company that provides audiences with a differentiated portfolio of content, brands and franchises across television, film, streaming, and gaming. Some of our iconic brands and franchises include Warner Bros. Motion Picture Group, Warner Bros. Television Group, DC, HBO, HBO Max, Max, discovery+, CNN, Discovery with Discovery becomingChannel, HGTV, Food Network, TNT Sports, TBS, TLC, OWN, Warner Bros. Games, Batman, Superman, Wonder Woman, Harry Potter, Looney Tunes, Hanna-Barbera, Game of Thrones, and The Lord of the successor reporting entity to DHC.
OVERVIEWRings.
We are a global IP media company that provideshome to powerful creative engines and one of the largest collections of owned content in the world. WBD has one of the strongest hands in the industry in terms of the completeness and quality of assets and intellectual property across sports, news, lifestyle, and entertainment in virtually every region of the globe and in most languages. We serve audiences and consumers around the world via linearwith content that informs, entertains, and, when at its best, inspires.
Our asset mix positions us to drive a balanced approach to creating long-term value for shareholders. It represents the full entertainment ecosystem, and the ability to serve consumers across the entire spectrum of offerings from domestic and international networks, premium pay-TV, streaming, production and release of feature films and original series, related consumer products and themed experience licensing, and interactive gaming.
We generate revenue from the sale of advertising on our networks and digital platforms (advertising revenue); fees charged to distributors that carry our network brands and programming, including pay-television ("pay-TV"), free-to-air ("FTA"cable, direct-to-home (“DTH”) satellite, telecommunication and broadcast television,digital service providers, as well as through direct-to-consumer (“DTC”) subscription services (distribution revenue); the release of feature films for initial exhibition in theaters, the licensing of feature films and television programs to various television, subscription video on demand (“SVOD”) and other digital markets, distribution platforms, including ad-supported TV Everywhere ("TVE") offerings, subscription-based direct-to-consumer products,of feature films and television programs in the physical and digital home entertainment markets, sales of console games and mobile-first, social media platformsmobile in-game content, sublicensing of sports rights, and over-the-top streaming services. We also enter into content licensing agreements. of intellectual property such as characters and brands (content revenue); and other sources such as studio tours and production services (other revenue).
Segments
As oneof December 31, 2023, we classified our operations in three reportable segments:
•Studios - Our Studios segment primarily consists of the world’s largest pay-TV programmers, we provide originalproduction and purchased contentrelease of feature films for initial exhibition in theaters, production and live eventsinitial licensing of television programs to more than 3 billion cumulative subscribers and viewers worldwide through networks that we wholly or partially own. We distribute customized content in the U.S. and approximately 220 other countries and territories in over 40 languages. Our global portfolio of networks includes prominent nonfiction television brands such as Discovery Channel, our most widely distributed global brand, TLC, Investigation Discovery, Animal Planet, Science and Velocity (known as Turbo outside of the U.S.). Our portfolio includes Eurosport, a leading sports entertainment provider and the Olympic Games (the "Olympics") across Europe,networks/DTC services as well as Discovery Kids, a leading children'sthird parties, distribution of our films and television programs to various third party and internal television and streaming services, distribution through the home entertainment brand in Latin America. We participate in joint ventures including Group Nine Media ("Group Nine")market (physical and digital), a digital media holding company home to top digital brands including NowThis News, The Dodo, Thrillist and Seeker, as well as The Enthusiast Network ("TEN"), a leading digital media company for auto fans which includes our Velocity network and Motor Trend On Demand. We operate a portfolio of additional websites, digital direct-to-consumer products, a production studio and curriculum-based educationrelated consumer products and services.themed experience licensing, and interactive gaming.
•Networks - Our objectives are to invest in high-quality content for our networks and brands to build viewership, optimize distribution revenue, capture advertising sales, and create or reposition branded channels and businesses to sustain long-term growth and occupy a desired content niche with strong consumer appeal. Our strategy is to maximize the distribution, ratings and profit potential of eachNetworks segment primarily consists of our brandeddomestic and international television networks. In addition to growing distribution and advertising revenues for our branded networks, we are extending content distribution across new platforms, including brand-aligned websites, online streaming, mobile devices, video on demand ("VOD") and broadband channels, which provide promotional platforms for our television content and serve as additional outlets for advertising and distribution revenue. Audience ratings are a key driver in generating advertising revenue and creating demand on the part of cable television operators, direct-to-home ("DTH") satellite operators, telecommunication service providers, and other content distributors who deliver our content to their customers.
•DTC - Our content spans genres including survival, exploration, sports, lifestyle, automobiles, general entertainment, heroes, adventure, crime and investigation, health and kids. We have an extensive library of high-definition content and own rights to the majorityDTC segment primarily consists of our contentpremium pay-TV and footage, which enables us to exploit our library to launch brands and services into new markets quickly. Our content can be re-edited and updated in a cost-effective manner to provide topical versions of subject matter that can be utilized around the world on a variety of platforms.streaming services.
Although the Company utilizes certain brands and content globally, we classify our operations in two reportable segments: U.S. Networks, consisting principally of domestic television network brands, and International Networks, consisting primarily of international television network brands. In addition, Education and Other consists principally of curriculum-based product and service offerings and a production studio. Our segment presentation aligns with our management structure and the financial information management has useduses to make strategic anddecisions about operating decisions,matters, such as the allocation of resources and business performance assessments. Financial information for our segments and the geographical areas in which we do business is set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2123 to the consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. Our
Studios
WBD’s Studios business includes the Warner Bros. Motion Picture Group (“WBMPG”), DC Studios, Warner Bros. Television Group (“WBTVG”), Consumer Products, Themed Entertainment and Brand Licensing, DC Comics Publishing, Content Licensing, Home Entertainment, Studio Operations, and Interactive Gaming.
WBMPG is comprised of Warner Bros. Pictures, New Line Cinema, and Warner Bros. Pictures Animation. WBMPG partners with captivating storytellers to create filmed entertainment for a global audience.
DC Studios, tasked with developing properties licensed from DC Comics for film, television and animation, continues the tradition of high-quality storytelling within the DC Universe, while building a sustainable growth business out of the iconic characters.
WBTVG consists of Warner Bros. Television, the Company’s flagship television production unit for live-action scripted programming, as well as Warner Bros. Unscripted Television, which produces unscripted and alternative programming through its four production units – Warner Horizon Unscripted Television, Telepictures, Warner Bros. International Television Production, and Shed Media. WBTVG also includes Warner Bros. Animation, Cartoon Network Studios, and Hanna-Barbera Studios Europe.
Among the Studios segment’s content highlights for 2023 were Barbie, the #1 movie of the year globally based on worldwide gross revenue, Wonka, Aquaman and the Lost Kingdom, and The Nun II on the film side and award-winning TV titles including Abbott Elementary, Ted Lasso, Night Court, Shrinking, Genndy Tartakovsky’s Primal, The Golden Bachelor, and The Voice.
Beyond its production operations, the Studios segment includes various businesses that facilitate consumer interaction with the intellectual property it creates.
Global Consumer Products, Themed Entertainment and Brand Licensing, and world-renowned comic and publishing powerhouse DC Comics, all drive opportunities for consumers to engage with WBD’s leading entertainment brands are described below.and franchises.
Global distribution of most of WBD’s content is handled by Content Sales, which provides content for viewers across streaming, cable, satellite and broadcast networks, local television stations, and airlines. Warner Bros. Home Entertainment oversees the global distribution of content through physical goods (Blu-ray Disc™ and DVD) and digital media in the form of electronic sell-through and video-on-demand via cable, satellite, online, and mobile channels.
The Studios segment also includes Warner Bros. Games, a worldwide publisher, developer, licensor, and distributor of content for the interactive space across all platforms, including console, handheld, mobile, and PC-based gaming for both internal and third-party game titles. Based on the Wizarding World of Harry Potter franchise, Warner Bros. Games launched Hogwarts Legacy in 2023, which became the #1 game of the year globally.
Part of the Worldwide Studio Operations group, Warner Bros. Studio Tour London – The Making of Harry Potter and Warner Bros. Studio Tour Hollywood attract visitors from around the world, giving fans the opportunity to get closer to the entertainment they love. In June of 2023, the Worldwide Studios Operations group opened the Warner Bros. Studio Tour Tokyo – The Making of Harry Potter, a new experience that was the first Warner Bros. Studio Tour to open in Asia.
For the year ended December 31, 2023, content and other revenues were 93%and 7%, respectively, of total revenues for this segment.
ANTICIPATED ACQUISITIONNetworks
Scripps Networks Interactive, Inc. ("Scripps Networks")WBD’s linear network operations include general entertainment, lifestyle, and news networks in the U.S., as well as a host of international media networks and global sports networks.
On February 26, 2018,General entertainment networks in the U.S. Departmentinclude TNT, cable’s #1 entertainment network; TBS, a top-rated destination for television among young adults; and Turner Classic Movies. WBD’s other entertainment networks include OWN, Discovery Channel, Cartoon Network, Adult Swim, and truTV amongmany others.
Leading the lifestyle category are Magnolia Network, comprised of Justice notifieda collection of inspiring original series curated by Chip and Joanna Gaines featuring some of the Company that it has closed its investigation into Discovery's agreement forU.S.’s most talented names in home and design, food, gardening, and the arts; HGTV, with relatable stories, real estate and renovation experts and home transformations; and Food Network, which connects viewers to the power and joy of food. Additional lifestyle networks include Travel Channel, Science Channel, TLC, and Hogar de HGTV amongmany others.
In 2023, CNN, our global news brand, launched CNN Max in the U.S., giving audiences the ability to access a plancombination of merger (the "Merger Agreement") to acquire Scripps Networkson-air CNN content and exclusive programming on WBD’s streaming service, Max.
WBD Sports (rebranded in a cash-and-stock transaction (the "Scripps Networks acquisition"). Scripps NetworksJanuary 2024 as TNT Sports) is a global media company with lifestyle-orientedleader in premium sports content such as home, food, and travel-related programming. The Scripps Networks portfolio of networks includes HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel and Great American Country, and TVN S.A.’s (“TVN”) portfolio of networks outside the United States. Additionally, outside the United States, Scripps Networks participates in UKTV, a joint venture with BBC Worldwide Limited (the “BBC”). The estimated merger consideration for the acquisition totals $12.0 billion, including $8.4 billion of cash and $3.6 billion of our Series C common stock based on our Series C common stock prices as of January 31, 2018. In addition, the Company will assume approximately $2.7 billion of Scripps Networks' net debt. The transaction is expected to close in early 2018.
Scripps Networks shareholders will receive $63.00 per share in cash and a number of shares of Discovery's Series C common stock that is determined in accordance with a formula and subject to a collar based on the volume weighted average price of the Company's Series C common stock. The formula is based on the volume weighted average price of Discovery's Series C common stock over the 15 trading days ending on the third trading day prior to closing (the “Average Discovery Price”). Scripps Networks shareholders will receive 1.2096 shares of Discovery's Series C common stock if the Average Discovery Price is below $22.32, and 0.9408 shares of Discovery's Series C common stock if the Average Discovery Price is above $28.70. The intent of the range was to provide Scripps Networks shareholders with $27.00 of value per share in Discovery Series C common stock; if the Average Discovery Price is greater than or equal to $22.32 but less than or equal to $28.70, Scripps Networks shareholders will receive a proportional number of shares between 1.2096 and 0.9408. If the Average Discovery Price is below $25.51, Discovery has the option to pay additional cash instead of issuing more shares above the 1.0584 conversation ratio required at $25.51. The cash payment is equal to the product of the additional shares required under the collar formula multiplied by the Average Discovery Price; for example, if the Average Discovery Price were $22.32 with a conversion ratio of 1.2096, the Company could offer shares at the 1.0584 ratio and pay for the difference associated with the incremental shares in cash. Outstanding employee equity awards or share-based awards that vest upon the change of control will be acquired with a similar combination of cash and shares of Discovery Series C common stock pursuant to terms specified in the Merger Agreement. Therefore, the merger consideration will fluctuate based upon changes in the share price of Discovery Series C common stock and the number of Scripps Networks common shares, stock options, and other equity-based awards outstanding on the closing date. Discovery will also pay certain transaction costs incurred by Scripps Networks. The post-closing impact of the formula was intended to result in Scripps Networks’ shareholders owning approximately 20% of Discovery’s fully diluted common shares and Discovery’s shareholders owning approximately 80%. The Company will utilize the proceeds of the senior notes offering described below, borrowings under certain term loans (see Note 9 to the accompanying consolidated financial statements) and cash on hand to finance the cash portion of the transaction. The transaction is subject to regulatory approvals and other customary closing conditions.
John C. Malone, Advance/Newhouse and members of the Scripps family entered into voting agreements to vote in favor of the transactions (the “Advance/Newhouse Voting Agreement”) and the stockholders of both Discovery and Scripps Networks approved the transaction on November 17, 2017. In addition, Advance/Newhouse has provided its consent, in its capacity as the holder of Discovery’s outstanding shares of Series A preferred stock, for Discovery to enter into the Merger Agreement and consummate the merger. In connection with this consent, Discovery and Advance/Newhouse entered into an exchange agreement pursuant to which Advance/Newhouse exchanged all of its shares of Series A and Series C preferred stock of Discovery for shares of newly designated Series A-1 and Series C-1 preferred stock of Discovery. The exchange transaction did not change the aggregate number of shares of Discovery’s Series A common stock and Series C common stock that are beneficially owned by Advance/Newhouse or change voting rights or liquidation preferences afforded to Advance/Newhouse. Discovery valued the securities immediately prior to and immediately after the exchange and determined that the exchange increased the fair value of Advance/Newhouse’s preferred stock by $35 million. Discovery does not believe the exchange is considered significant and does not reflect an extinguishment of the previously issued preferred stock for accounting purposes. Accordingly, Discovery has accounted for the exchange of the previously issued preferred stock as a modification, which is measured as the increase in fair value of the preferred stock held by Advance/Newhouse. The impact of the modification has been recorded as a component of selling, general and administrative expense. (See Note 3 and Note 12 to the accompanying consolidated financial statements). All of Discovery's direct costs of the Scripps Networks acquisition will be reflected as a component of selling, general and administrative expense in the consolidated statements of operations.
On September 21, 2017, Discovery Communications, LLC ("DCL") issued a series of senior notes to partially fund the acquisition of Scripps Networks with an aggregate principal amount of $6.8 billion. With the exception of $900 million in senior notes that mature in 2019, the senior notes contain a special mandatory redemption feature requiring the Company to redeem the
notes for a price equal to 101% of the principal amount plus any accrued and unpaid interest on the senior notes in the event that the Scripps Networks acquisition has not closed on or prior to August 30, 2018, or if the Merger Agreement is terminated prior to that date. While the Company expects to complete the acquisition on or before the deadline, unanticipated developments could delay or prevent the acquisition. As such, the Company cannot ensure that it will complete the acquisition by August 30, 2018. (See Note 3 to the accompanying consolidated financial statements).
Global Network Brands
Subscriber statistics set forth in this Annual Report on Form 10-K include both wholly-owned networks and networks operated by equity method investees. Domestic subscriber statistics are based on Nielsen Media Research. International subscriber and viewer statistics are derived from internal data coupled with external sources when available. As used herein, a “subscriber” is a single household that receives the applicable network from its cable television operator, DTH satellite operator, telecommunication service provider, or other television provider, including those who receive our networks from pay-TV providers without charge pursuant to various pricing plans that include free periods and/or free carriage. The term “cumulative subscribers” refers to the sum of the total number of subscribers to each of our networks or content services. By way of example, two households that each receive five of our networks from their pay-TV provider represent two subscribers, but 10 cumulative subscribers. The term "viewer" is a single household that receives the signal from one of our networks using the appropriate receiving equipment without a subscription to a pay-TV provider.
Our global brands are the following:
Discovery Channel reached approximately 91 million subscribersacross multiple platforms, engaging fans in the U.S. and 6 million subscribers throughinternationally. TNT Sports’ U.S. sports rights include the National Basketball Association (“NBA”), Major League Baseball (“MLB”), National Collegiate Athletic Association (“NCAA”), National Hockey League (“NHL”), and United States Soccer Federation (“USSF”). WBD Sports Europe features Eurosport, a licensing arrangement with partnersleading sport destination and the home of the Olympic Games in Canada includedEurope, as well as the Global Cycling Network (“GCN”), and Global Mountain Bike Network (“GMBN”).
TNT Sports’ owned-and-operated platforms include Bleacher Report, Eurosport.com, House of Highlights, HighlightHER, and a full suite of digital and social brands. In 2023, WBD exited its regional sports business (“AT&T SportsNets”) in the U.S. Networks segment as of December 31, 2017. Discovery Channel reached approximately 340 million subscribers in international markets as of December 31, 2017 including the Discovery HD Showcase brand.
Discovery Channel is dedicated to creating the highest quality non-fiction content that informs and entertains its consumers about the world in all its wonder, diversity and amazement. The network offers a signature mix of high-end production values and vivid cinematography across genres including science and technology, exploration, adventure, history and in-depth, behind-the-scenes glimpses at the people, places and organizations that shape and share our world.
Discovery Channel content includes Gold Rush, Naked and Afraid, Deadliest Catch, Fast N' Loud, Street Outlaws, Alaskan Bush People, Manhunt: UNABOMBER, and recently, the return of Cash Cab. Discovery Channel is also home to Shark Week, the network's long-running annual summer TV event.
Target viewers are adults aged 25-54, particularly men.
TLC reached approximately 89 million subscribers in the U.S. as of December 31, 2017, and also reached 9 million subscribers in Canada that are included in the U.S. Networks segment as of December 31, 2017. TLC content reached approximately 375 million subscribers in international markets as of December 31, 2017 including the Home & Health, Real Time and Travel & Living brands.
TLC celebrates remarkable real-life stories without judgment, programming genres that include fascinating families, heartwarming transformations and life's milestone moments.
Content on TLC includes the 90 Day Fiancé franchise, Little People, Big World, Long Island Medium, Outdaughtered and returning in 2018, Trading Spaces.
Target viewers are adults aged 25-54, particularly women.
Animal Planet reached approximately 87 million subscribers in the U.S. and 2 million subscribers through a licensing arrangement with partners in Canada included in the U.S. Networks segment as of December 31, 2017. Animal Planet reached approximately 263 million subscribers in international markets as of December 31, 2017.
Animal Planet immerses viewers in the full range of life in the animal kingdom with rich, deep content via multiple platforms, offering animal lovers access to a centralized, television, digital social and mobile community for immersive, engaging, high-quality entertainment, information and enrichment.
Content on Animal Planet includes River Monsters, Tanked, Pit Bulls & Parolees, The Zoo, Dr. Jeff: Rocky Mountain Vet, Treehouse Masters and Puppy Bowl.
Target viewers are adults aged 25-54.
Investigation Discovery ("ID") reached approximately 84 million subscribers in the U.S. and 1 million subscribers through a licensing arrangement with partners in Canada included in the U.S. Networks segment as of December 31, 2017. ID reached approximately 167 million subscribers in international markets as of December 31, 2017.
ID is a leading mystery and suspense network. From harrowing crimes and salacious scandals to the in-depth investigation and heart-breaking mysteries behind these "real people, real stories," ID challenges our everyday understanding of culture, society and the human condition.
ID content includes the American Murder Mystery franchise, Homicide Hunter: Lt. Joe Kenda, People Magazine Investigates, Deadline: Crime with Tamron Hall and On The Case With Paula Zahn.
Target viewers are adults aged 25-54, particularly women.
Science Channel reached approximately 65 million subscribers in the U.S. and 2 million subscribers through a licensing arrangement with partners in Canada included in the U.S. Networks segment as of December 31, 2017. Science Channel reached approximately 117 million subscribers in international markets as of December 31, 2017.
Science Channel is home to all things science around the clock. Science Channel is the premiere TV, digital and social community for those with a passion for science, space, technology, archeology, and engineering.
Content on Science Channel includes MythBusters, Street Science, Outrageous Acts of Science, What on Earth?, How the Universe Works and How It's Made.
Target viewers are adults aged 25-54.
Velocity reached approximately 73 million subscribers in the U.S. as of December 31, 2017. Velocity reached approximately 114 million subscribers in international markets, where the brand is known as Turbo, as of December 31, 2017.
Velocity engages viewers with a variety of high-octane, action-packed, intelligent thrilling automotive programming. In addition to series and specials exemplifying the very best of the automotive genre, the network broadcasts approximately 100 hours of live event coverage every year.
Content on Velocity includes Wheeler Dealers,Texas Metal, Iron Resurrection and Barrett-Jackson Live.
In 2017, Discovery formed a joint venture ("VTEN") with Velocity and TEN to create a leading automotive digital media company comprised of consumer automotive brands including Motor Trend, Hot Rod, Automobile, and more. Motor Trend On Demand, which is part of the transaction and is being enhanced with Velocity content, represents the Company's first direct-to-consumer opportunity in the U.S. Discovery has a 67.5% ownership interest in the new joint venture. The joint venture is controlled and consolidated by Discovery. (See Note 3 to the accompanying consolidated financial statements.)
Target viewers are adults aged 25-54, particularly men.
U.S. NETWORKS
U.S. Networks generated revenues of $3.4 billion and adjusted operating income before depreciation and amortization ("Adjusted OIBDA") of $2.0 billion during 2017, which represented 50% and 80% of our total consolidated revenues and Adjusted OIBDA, respectively. Our U.S. Networks segment owns and operates 11 national television networks, including fully distributed television networks such as Discovery Channel, TLC and Animal Planet.
U.S. Networks generates revenues from fees charged to distributors of our television networks’ first run content, which include cable, DTH satellite and telecommunication service providers, referred to as affiliate fees; fees from distributors for licensed content and content to equity method investee networks, referred to as other distribution revenue; fees from advertising sold on our television networks and digital products, which includes our GO suite of TVE applications and our virtual reality product, Discovery VR; fees from providing sales representation, network distribution services; and revenue from licensing our brands for consumer products. During 2017, distribution, advertising and other revenues were 47%, 51% and 2%, respectively, of total net revenues for this segment.
Typically, our television networks are aired pursuant to multi-year carriage agreements that provide for the level of carriage that our networks will receive and for annual graduated rate increases. Carriage of our networks depends on package inclusion, such as whether networks are on the more widely distributed, broader packages or lesser-distributed, specialized packages, also referred to as digital tiers. We provide authenticated U.S. TV Everywhere products that are available to certain subscribers and connect viewers through GO applications with live and on-demand access to award-winning shows and series from 10 U.S. networks in the Discovery portfolio: Discovery Channel, TLC, Animal Planet, ID, Science Channel, Velocity, Discovery Family Channel, Destination America, American Heroes Channel ("AHC") and Discovery Life. The Oprah Winfrey Network ("OWN"), a consolidated subsidiary as of November 30, 2017, is currently on the Watch OWN application. During 2017, we achieved incremental increases in U.S. digital platform consumption. We also provide our networks to consumers as part of subscription-based over-the-top services provided by DirectTV Now, Sony Vue and Philo.
Advertising revenue is generated across multiple platforms and is based on the price received for available advertising spots and is dependent upon a number of factors including the number of subscribers to our channels, viewership demographics, the popularity of our programming, our ability to sell commercial time over a portfolio of channels and leverage multiple platforms to connect advertisers to target audiences. In the U.S., advertising time is sold in the upfront and scatter markets. In the upfront market, advertisers buy advertising time for upcoming seasons and, by committing to purchase in advance, lock in the advertising rates they will pay for the upcoming year. Many upfront advertising commitments include options whereby advertisers may reduce purchase commitments. In the scatter market, advertisers buy advertising closer to the time when the commercials will be run, which often results in a pricing premium compared to the upfront rates. The mix of upfront and scatter market advertising time sold is based upon the economic conditions at the time that upfront sales take place, impacting the sell-out levels management is willing
or able to obtain. The demand in the scatter market then impacts the pricing achieved for our remaining advertising inventory. Scatter market pricing can vary from upfront pricing and can be volatile.
In addition to the global networks described in the overview section above, we operate networks internationally. TVN operates a portfolio of free-to-air and pay-TV lifestyle, entertainment, and news networks in Poland.
For the U.S. that utilize the following brands:
OWN reached approximately 76 million subscribers in the U.S. as ofyear ended December 31, 2017.
OWN is the first and only network named for, and inspired by, a single iconic leader. OWN is a leading destination for premium scripted and unscripted programming from today's most innovative storytellers, including award-winning filmmaker Ava DuVernay (Queen Sugar), writers/producers Mara Brock Akil and Salim Akil (Love Is__), and upcoming projects from Academy Award-winning writer Tarell Alvin McCraney and Emmy Award-nominated producer/writer Will Packer.
Target viewers are African-American women aged 25-54.
On November 30, 2017, the Company acquired from Harpo, Inc. ("Harpo") a controlling interest in OWN, increasing Discovery’s ownership stake from 49.50% to 73.99%. OWN is a pay-TV network and website that provides adult lifestyle and entertainment content, which is focused on African Americans. As a result of the transaction on November 30, 2017, the accounting for OWN was changed from an equity method investment to a consolidated subsidiary.
We have a 60% controlling financial interest in Discovery Family and account for it as a consolidated subsidiary. Hasbro, Inc. ("Hasbro") owns the remaining 40% of Discovery Family.
Discovery Family reached approximately 58 million subscribers in the U.S. as of December 31, 2017.
Discovery Family reached approximately 8 million viewers in international markets as of December 31, 2017.
Discovery Family is programmed with a mix of original series, family-friendly movies, and programming from Discovery’s nonfiction library and Hasbro Studios’ popular animation franchises.
Content on Discovery Family includes My Little Pony: Friendship is Magic and Equestria Girls, Zak Storm, Littlest Pet Shop, lifestyle programming and family-friendly movies.
Target viewers are children aged 2-11, family inclusive and adults aged 25-54.
AHC reached approximately 51 million subscribers in the U.S. as of December 31, 2017. AHC also reached approximately 1 million subscribers through a licensing arrangement with partners in Canada included in the U.S. Networks segment as of December 31, 2017.
AHC provides a rare glimpse into major events that shaped our world, visionary leaders and unexpected heroes who made a difference, and the great defenders of our freedom.
Content on AHC includes Gunslingers, Apocalypse WWI and America: Fact vs. Fiction.
Target viewers are adults aged 35-64, particularly men.
Destination America reached approximately 48 million subscribers in the U.S. as of December 31, 2017.
Destination America celebrates the people, places and stories of the United States, showcasing programming about myths, legends, food, adventure, natural history, and iconic landscapes from Alaska to Appalachia.
Content on Destination America includes Ghosts of Shepherdstown, Haunted Towns, Paranormal Lockdown, Mountain Monsters, A Haunting and Ghost Brothers.
Target viewers are adults aged 18-54.
Discovery Life reached approximately 46 million subscribers in the U.S. as of December 31, 2017.
Discovery Life reached approximately 8 million subscribers in international markets as of December 31, 2017.
Discovery Life entertains viewers with gripping, real-life dramas, featuring storytelling that chronicles the human experience from cradle to grave, including forensic mysteries, amazing medical stories, emergency room trauma, baby and pregnancy programming, parenting challenges, and stories of extreme life conditions.
Content on Discovery Life includes Untold Stories of the E.R., Body Bizarre, My Strange Addiction, Emergency 24/7 and Diagnose Me.
Target viewers are adults aged 25-54.
INTERNATIONAL NETWORKS
International Networks generated revenues of $3.3 billion and Adjusted OIBDA of $859 million during 2017, which represented 48% and 34% of our total consolidated revenues and Adjusted OIBDA, respectively. Our International Networks segment principally consists of national and pan-regional television networks and brands that are delivered across multiple distribution platforms. This segment generates revenue from operations in virtually every pay-TV market in the world through an infrastructure that includes operational centers in London, Warsaw, Milan, Singapore and Miami. Global brands include Discovery Channel, Animal Planet, TLC, ID, Science Channel and Turbo (known as Velocity in the U.S.), along with brands exclusive to International Networks, including Eurosport, Discovery Kids, DMAX and Discovery Home & Health. As of December 31, 2017, International Networks operated over 400 unique distribution feeds in over 40 languages with channel feeds customized according to language needs and advertising sales opportunities. International Networks also has FTA networks in Europe and the Middle East and broadcast networks in Denmark, Norway and Sweden, and continues to pursue further international expansion. FTA and broadcast networks generate a significant portion of International Networks' revenue. The penetration and growth rates of television services vary across countries and territories depending on numerous factors including the dominance of different television platforms in local markets. While pay-TV services have greater penetration in certain markets, FTA or broadcast television is dominant in others. International Networks has a large international distribution platform for its 37 networks, with as many as 14 networks distributed in any particular country or territory across approximately 220 countries and territories around the world. International Networks pursues distribution across all television platforms based on the specific dynamics of local markets and relevant commercial agreements.
Effective January 1, 2018, we realigned our International Networks management reporting structure. The table below represents the reporting structures during the periods presented in the consolidated financial statements.
|
| | | | |
Reporting Structure effective January 1, 2018 | | Reporting Structure effective January 1, 2017 | | Reporting Structure effective January 1, 2015 |
Europe, Middle East and Africa ("EMEA"), includes the former CEEMEA, Southern Europe, Nordics and the U.K. Additionally, the grouping includes Australia and New Zealand, previously included as part of Asia-Pacific
| | CEEMEA, expanded to include Belgium, the Netherlands and Luxembourg | | Central and Eastern Europe, Middle East and Africa ("CEEMEA"), included Germany, Switzerland and Austria |
| | Nordics | | Northern Europe included the Nordics, U.K, Netherlands, Belgium and Luxembourg |
| | U.K. | |
| | Southern Europe | | Southern Europe |
Latin America | | Latin America | | Latin America |
Asia-Pacific now excludes Australia and New Zealand | | Asia-Pacific | | Asia-Pacific |
In addition to the global networks described in the overview section above, we operate networks internationally that utilize the following brands:
Eurosport is the leading sports entertainment provider across Europe with the following TV brands: Eurosport 1, Eurosport 2 and Eurosport News, reaching viewers across Europe and Asia, as well as Eurosport Digital, which includes Eurosport Player and Eurosport.com.
Subscribers reached by each brand as of December 31, 2017 were as follows: Eurosport 1: 154 million; Eurosport 2: 82 million; and Eurosport News: 6 million.
Eurosport telecasts live sporting events with both local and pan-regional appeal and its events focus on winter sports, cycling and tennis, including the Tour de France and it is the home of Grand Slam tennis with all four tournaments. Important local sports rights include Bundesliga and MotoGP. In addition, Eurosport has increasingly invested in more exclusive and localized rights to drive local audience and commercial relevance.
We have acquired the exclusive broadcast rights across all media platforms throughout Europe for the four Olympic Games between 2018 and 2024 for €1.3 billion ($1.5 billion as of December 31, 2017). The broadcast rights exclude France for the Olympic Games in 2018 and 2020, and exclude Russia. In addition to FTA broadcasts for the Olympic Games, many of these events are set to air on Eurosport's pay-TV platforms, and every minute of the Olympic Games will be available exclusively on the Eurosport Player, the network’s direct-to-consumer streaming service.
On November 2, 2016, we announced a long-term agreement and joint venture partnership with BAMTech ("MLBAM") a technology services and video streaming company, and subsidiary of Major League Baseball's digital business, that includes the formation of BamTech Europe, a joint venture that will provide digital technology services to a broad set of both sports and entertainment clients across Europe.
As of December 31, 2017, DMAX reached approximately 102 million viewers through FTA networks, according to internal estimates.
DMAX is a men’s factual entertainment channel in Asia and Europe.
Discovery Kids reached approximately 122 million viewers, according to internal estimates, as of December 31, 2017.
Discovery Kids is a leading children's network in Latin America and Asia.
Our International Networks segment also owns and operates the following regional television networks, which reached the following number of subscribers and viewers via pay and FTA or broadcast networks, respectively, as of December 31, 2017:
|
| | | | | |
| | Television Service | | International
Subscribers/Viewers
(millions)
| |
Quest | | FTA | | 66 | |
Dsport | | FTA | | 43 | |
Nordic broadcast networks(a)
| | Broadcast | | 34 | |
Quest Red | | FTA | | 27 | |
Giallo | | FTA | | 25 | |
Frisbee | | FTA | | 25 | |
Focus | | FTA | | 25 | |
K2 | | FTA | | 25 | |
Nove | | FTA | | 25 | |
Discovery HD World | | Pay | | 17 | |
DKISS | | Pay | | 15 | |
Shed | | Pay | | 12 | |
Discovery HD Theater | | Pay | | 11 | |
Discovery History | | Pay | | 10 | |
Discovery Civilization | | Pay | | 8 | |
Discovery World | | Pay | | 6 | |
Discovery en Espanol (U.S.) | | Pay | | 6 | |
Discovery Familia (U.S.) | | Pay | | 6 | |
Discovery Historia | | Pay | | 6 | |
(a) Number of subscribers corresponds to the sum of the subscribers to each of the Nordic broadcast networks in Sweden, Norway, Finland and Denmark subject to retransmission agreements with pay-TV providers. The Nordic broadcast networks include Kanal 5, Kanal 9, and Kanal 11 in Sweden, TV Norge, MAX, FEM and VOX in Norway, TV 5, Kutonen, and Frii in Finland, and Kanal 4, Kanal 5, 6'eren, and Canal 9 in Denmark.
Similar to U.S. Networks, a significant source of revenue for International Networks relates to fees charged to operators who distribute our linear networks. Such operators primarily include cable and DTH satellite service providers, internet protocol television ("IPTV") and over-the-top operators ("OTT"). International television markets vary in their stages of development. Some markets, such as the U.K., are more advanced digital television markets, while others remain in the analog environment with varying degrees of investment from operators to expand channel capacity or convert to digital technologies. Common practice in international markets results in long-term contractual distribution relationships with terms generally shorter than similar customers in the U.S. Distribution revenue for our International Networks segment is largely dependent on the number of subscribers that receive our networks or content, the rates negotiated in the distributor agreements, and the market demand for the content that we provide.
The other significant source of revenue for International Networks relates to advertising sold on our television networks and across other distribution platforms, similar to U.S. Networks. Advertising revenue is dependent upon a number of factors, including the development of pay and FTA television markets, the number of subscribers to and viewers of our channels, viewership demographics, the popularity of our programming, and our ability to sell commercial time over all media platforms. In certain markets, our advertising sales business operates with in-house sales teams, while we rely on external sales representation services in other markets.
During 2017,2023, distribution, advertising, content, and other revenues were 57%54%, 41%39%, 5%, and 2%, respectively, of total net revenues for this segment. While the Company has traditionally operated cable networks, in recent years an increasing portion of the Company's international advertising revenue is generated by FTA or broadcast networks, unlike U.S. Networks. During 2017, FTA or broadcast networks generated 54% of International Networks' advertising revenue
DTC
WBD’s DTC business includes our streaming services, such as Max, HBO Max, and discovery+, and premium pay-TV networks generated 46% of International Networks' advertising revenue.
International Networks' largest cost is content expense for localized programming disseminated via more than 400 unique distribution feeds. While our International Networks segment maximizes the use of programming from U.S. Networks, we also develop local programming that is tailored to individual market preferencesservices, such as HBO. Our streaming services are available on most mobile and license the rights to air films, television series and
sporting events from third parties. International Networks amortizes the cost of capitalized content rights based on the proportion of current estimated revenues relative to the estimated remaining total lifetime revenues, which results in either an accelerated method or a straight-line method over the estimated useful lives of the content of up to five years. Content acquired from U.S. Networks and content developed locally airing on the same network is amortized similarly, as amortization rates vary by network. More than half of International Networks' content is amortized using an accelerated amortization method, while the remainder is amortized on a straight-line basis. The costs for multi-year sports programming arrangements are expensed when the event is broadcast based on the estimated relative value of each component of the arrangement.
While International Networks and U.S. Networks have similarities with respect to the nature of operations, the generation of revenue and the categories of expense, International Networks have a lower segment margin due to lower economies of scale from being in over 220 markets requiring additional cost for localization to satisfy market variations. International Networks also include sports and FTA broadcast channels, which drive higher costs from sports rights and production and investment in broad entertainment programming for broadcast networks.
On June 23, 2016, the U.K. held a referendum in which voters approved an exit from the European Union (“E.U.”), commonly referred to as “Brexit.” After a preliminary phase of negotiations towards the end of 2017, the U.K. government and the E.U. will in 2018 negotiate the main principles of the U.K.’s future relationship with the E.U., as well as a transitional period. Brexit may have an adverse impact on advertising, subscribers, distributors and employees, as described in Item 1A, Risk Factors, below. We continue to monitor the situation and plan for potential effects to our distribution and licensing agreements, unusual foreign currency exchange rate fluctuations, and changes to the legal and regulatory landscape.
EDUCATION AND OTHER
Education and Other generated revenues of $158 million during 2017, which represented 2% of our total consolidated revenues. Education is comprised of curriculum-based product and service offerings and generates revenues primarily from subscriptions charged to K-12 schools for access to an online suite of curriculum-based VOD tools, professional development services, digital textbooks and, to a lesser extent, student assessments and publication of hard copy curriculum-based content. Other is comprised of our wholly-owned production studio, which provides services to our U.S. Networks and International Networks segments at cost.
On February 26, 2018, the Company announced the planned sale of a controlling equity stake in its education business in the first half of 2018, toFrancisco Partners for cash of $120 million. No loss is expected upon sale. The Company will retain an equity interest. Additionally, the Company will have ongoing license agreements which are considered to be at fair value.connected TV devices. As of December 31, 2017, the Company determined that the education business did not meet the held for sale criteria, as defined in GAAP as management2023, we had not committed to a plan to sell the assets.97.7 million DTC subscribers1.
On April 28, 2017, the Company sold Raw and Betty to All3Media. All3MediaHBO is a U.K. based television, film and digital production and distribution company. The Company owns 50% of All3Media and accounts for its investment in All3Media under the equity method of accounting. Raw and Betty were componentsone of the studios operating segment reported with Educationmost respected and Other.
On November 12, 2015, we paid $195 million to acquire 5 million shares, or approximately 3%, of Lions Gate Entertainment Corp. ("Lionsgate"), aninnovative entertainment company involvedbrands in the productionworld, serving iconic, award-winning programming through the HBO linear channels and our DTC streaming service, Max.
In May 2023, WBD launched Max, creating a new destination for HBO Originals, Warner Bros. films, Max Originals, the DC universe, the Wizarding World of moviesHarry Potter, CNN, an expansive offering of kids’ content, and television whichamong the best programming across food, home, reality, lifestyle and documentaries from leading brands like HGTV, Food Network, Discovery Channel, TLC, ID and more. Max initially launched in the U.S. and will roll out in international territories, starting in Latin America and the Caribbean in the first quarter of 2024, with more markets in EMEA and APAC to follow later in the year.
discovery+ is accounted for as an available-for-sale ("AFS") security. During 2016, we determined that the decline in value of our investment in Lionsgate is other-than-temporary in nature and, as such, the cost basis was adjusted to the fair value of the investment as of September 30, 2016. (See Note 4 to the accompanying consolidated financial statements.)
CONTENT DEVELOPMENT
Our content development strategy is designed to increase viewership, maintain innovation and quality leadership, and provide value for our network distributors and advertising customers. Our content is sourced fromWBD’s non-fiction, real-life subscription-based streaming service. discovery+ features a wide range of third-party producers, which include some of the world’s leading nonfiction production companies, as well as independent producersexclusive, original series across popular passion verticals, including lifestyle and wholly-owned production studios.
Our production arrangements fall into three categories: produced, coproducedrelationships; home and licensed. Produced content includes content that we engage third parties or wholly owned production studios to developfood; true crime; paranormal; adventure and produce. We retain editorial control and own most or all of the rights, in exchange for paying all development and production costs. Production of digital-first content such as virtual reality and short-form video is typically done through wholly-owned production studios. Coproduced content refers to program rights on which we have collaborated with third parties to finance and develop either because at times world-wide rights are not available for acquisition or we save costs by collaborating with third parties. Licensed content is comprised of films or
series that have been produced by third parties. Payments for sports rights made in advance of the event are recognized as prepaid content license assets.
International Networks maximizes the use of content from our U.S. Networks. Our non-fiction content tends to be culturally neutral and maintains its relevance for an extended period of time. As a result, a significant amount of our non-fiction content translates well across international borders and is made even more accessible through extensive use of dubbing and subtitles in local languages. Our content can be re-edited and updated in a cost-effective manner to provide topical versions of subject matter that can be utilized around the world. International Networks executes a localization strategy by offering content from U.S. Networks, customized content and localized schedules via our distribution feeds. While our International Networks segment maximizes the use of content from U.S. Networks, we also develop local content that is tailored to individual market preferences and license the rights to air films, television series and sporting events from third-party producers.
Our largest single cost is content expense, which includes content amortization, content impairment and production costs for programming. We amortize the cost of capitalized content rights based on the proportion that the current year's estimated revenues bear to the estimated remaining total lifetime revenues, which normally results in an accelerated amortization method over the estimated useful lives. However, certain networks also utilize a straight-line method of amortization over the estimated useful lives of the content. Content is amortized primarily over periods of three to four years. The costs for multi-year sports programming arrangements are expensed when the event is broadcast based on the estimated relative value of each season in the arrangement. Content assets are reviewed for impairment when impairment indicators are present, such as low viewership or limited expected use. Impairment losses are recorded for content asset carrying value in excess of net realizable value.
REVENUES
We generate revenues principally from fees charged to operators who distribute our network content, which primarily include cable, DTH satellite, telecommunication and digital service providers and advertising sold on our networks and digital products. Other transactions include curriculum-based products and services, affiliate and advertising sales representation services, production of content, content licensesnatural history; science, tech, and the licensingenvironment; and a slate of our brands for consumer products. During 2017,high-quality documentaries.
Max, HBO Max, and discovery+ currently feature both ad-free and ad-lite versions.
For the year ended December 31, 2023, distribution, advertising, and othercontent revenues were 51%are 86%, 44%5%, and 5%9%, respectively, of consolidated revenues. No individual customer represented more than 10% of our total consolidated revenues for 2017, 2016 or 2015.
Distribution
Distribution revenue includes fees charged for the right to view Discovery's 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 linear distribution services for rights to our networks from cable, DTH satellite and telecommunication service providers. 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 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, the number of platforms covered in the distribution agreement, and the market demand for the content that we provide. From time to time, renewals of multi-year carriage agreements include significant initial year one market adjustments to re-set subscriber rates, which then increase at rates lower than the initial increase in the following years. We have provided distributors launch incentives, in the form of cash payments or free periods, to carry our networks.
In the U.S., more than 90% of distribution revenues come from the top 10 distributors, with whom we have agreements that expire at various times from 2018 through 2021. Outside of the U.S., approximately 42% 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 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.
Distribution revenue also includes fees charged for bulk content arrangements and other subscription services for episodic content. These digital distribution revenues are impacted by the quantity, as well as the quality, of the content Discovery provides.
Advertising
Our advertising revenue is generated across multiple platforms and 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. In developing pay-TV markets, we expect advertising revenue growth will result from subscriber growth, our localization strategy, and the shift of advertising spending from broadcast to pay-TV. 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-TV, broadcast, or FTA television environments.
Advertising revenue is dependent upon a number of factors, including the stage of development of television markets, the popularity of FTA 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. 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 through our digital products on a stand-alone basis and as part of advertising packages with our television networks.
Other
We also generate income associated with curriculum-based products and services, the licensing of our brands for consumer products and third-party content sales, and content production from our production studios.this segment.
COMPETITION
Providing content across various distribution platforms is a highly competitive business worldwide. We experience competition for the development and acquisition of content, distribution of our content, sale of commercial time on our networks and viewership. There is competition from other production studios, other television networks, and the internetonline-based content providers for the acquisition of content and creative talent such as writers, producers and directors. In certain instances, internetaddition, the composition of our competitors have been able to acquire content athas evolved with the entrance of new market participants, including companies in adjacent sectors with significant financial, marketing, and other resources, greater efficiencies of scale, fewer regulatory burdens and more competitive prices since content ownership may benefit their business in other ways.pricing. Our ability to produce and acquire popular content is an important competitive factor for the distribution of our content, attracting viewers and the sale of advertising. Our success in securing popular content and creative talent depends on various factors such as the number of competitors providing content that targets the same genre and audience, the distribution of our content, viewership, and the production, marketing and advertising support we provide.
Our networks compete with other television networks, including broadcast, cable and local, for the distribution of our content and fees charged to cable television operators, DTH satellite service providers, and other distributors that carry our content. Our ability to secure distribution agreements is necessary to ensure the retention of our audiences. Our contractual agreements with distributors are renewed or renegotiated from time to time in the ordinary course of business. Growth in the number of networks distributed, consolidation and other market conditions in the cable and satellite distribution industry, and increased popularity of other platforms may adversely affect our ability to obtain and maintain contractual terms for the distribution of our content that are as favorable as those currently in place. The ability to secure distribution agreements is dependent upon the production, acquisition and packaging of original content, viewership, the marketing and advertising support and incentives provided to distributors, the product offering across a series of networks within a region, and the prices charged for carriage.
1Direct-to-Consumer subscriber - We define a “Core DTC Subscription” as:
(i) a retail subscription to discovery+, HBO, HBO Max, Max, or a Premium Sports Product (defined below) for which we have recognized subscription revenue, whether directly or through a third party, from a direct-to-consumer platform; (ii) a wholesale subscription to discovery+, HBO, HBO Max, Max, or a Premium Sports Product for which we have recognized subscription revenue from a fixed-fee arrangement with a third party and where the individual user has activated their subscription; (iii) a wholesale subscription to discovery+, HBO, HBO Max, Max, or a Premium Sports Product for which we have recognized subscription revenue on a per subscriber basis; (iv) a retail or wholesale subscription to an independently-branded, regional product sold on a stand-alone basis that includes discovery+, HBO, HBO Max, Max, and/or a Premium Sports Product, for which we have recognized subscription revenue (as per (i)-(iii) above); and (v) users on free trials who convert to a subscription for which we have recognized subscription revenue within the first seven days of the calendar month immediately following the month in which their free trial expires.
The Company defines a “Premium Sports Product” as a strategically prioritized, sports-focused product sold on a stand-alone basis and made available directly to consumers. The current “independently-branded, regional products” referred to in (iv) above consist of TVN/Player and BluTV. We may refer to the aggregate number of DTC Subscriptions as “subscribers”.
The reported number of “subscribers” included herein and the definition of “DTC Subscription” as used herein excludes: (i) individuals who subscribe to DTC products, other than discovery+, HBO, HBO Max, Max, a Premium Sports Product, and independently-branded, regional products (currently consisting of TVN/Player and BluTV) that may be offered by us or by certain joint venture partners or affiliated parties from time to time; (ii) a limited number of international discovery+ subscribers that are part of non-strategic partnerships or short-term arrangements as may be identified by the Company from time to time; (iii) domestic and international Cinemax subscribers, and international basic HBO subscribers; and (iv) users on free trials except for those users on free trial that convert to a DTC Subscription within the first seven days of the next month as noted above.
Our networks and digital productsstreaming services, which include Max, HBO Max, and discovery+, compete for the sale of advertising with other television networks, including broadcast, cable, local networks, and other content distribution outlets for their target audiences and the sale of advertising. Our success in selling advertising is a function of the size and demographics of our audiences, quantitative and qualitative characteristics of the audience of each network, the perceived quality of the network and of the particular content, the brand appeal of the network and ratings as determined by third-party research companies, prices charged for advertising and overall advertiser demand in the marketplace.
Our education business competesnetworks and streaming services also compete for their target audiences with all forms of content and other providersmedia provided to viewers, including broadcast, cable and local networks, streaming services, pay-per-view and video-on-demand (“VOD”) services, online activities and other forms of curriculum-based products and services to schools. Our production studios compete with other productionnews, information and media companies for talent.entertainment.
INTELLECTUAL PROPERTY
We are one of the world’s leading creators, owners and distributors of intellectual property. Our intellectual property assets include copyrights in content,films, television programs, software, comic books and mobile apps; trademarks in brands, names, logos and logos, websites,characters; patents or patent applications for inventions related to products and services; websites; and licenses of intellectual property rights of various kinds from third parties.
We have made and will continue to make investments in developing technology platforms to support our digital products and streaming services, including Max, HBO Max, and discovery+, and consider these platforms to be intellectual property assets as well.
We are fundamentally a contentglobal media and entertainment company and the protection of our brandscontent and contentbrands is of primary importance. To protect our intellectual property assets, we rely upon a combination of copyright, trademark, patent, unfair competition, trade secret and Internet/internet/domain name statutes and laws, and contract provisions. However, there can be no assurance of the degree to which these measures will be successful. Moreover, effective intellectual property protection may be either unavailable or limited in certain foreign territories. Policing unauthorized use ofterritories, and new legislative or regulatory initiatives could impact our products and services and related intellectual property is difficult and costly. operations.
We seek to limit unauthorized use of our intellectual property through a combination of approaches. However, the steps taken to prevent the infringement of our intellectual property by unauthorized third parties may not work.be effective.Piracy, which encompasses the theft of our signals, and the unauthorized use of our intellectual property in the digital environment, continues to present a threat to revenues from products and services based on our intellectual property.Piracy also includes the unauthorized use of our intellectual property on physical goods. We have a team dedicated to disrupting and curbing piracy and other forms of intellectual property infringement and use external vendors to detect and remove infringements, whether digital in nature or on physical goods. We also engage with intermediaries that facilitate piracy, leverage our membership in a range of industry groups, and initiate enforcement actions, including litigation, to address piracy issues.In general, policing unauthorized use of our products and services and related intellectual property is difficult and costly. Further, new technologies such as generative AI and their impact on our intellectual property rights remain uncertain, and development of the law in this area could impact our ability to protect against infringing uses or result in infringement claims against us.
Third parties may challenge the validity or scope of our intellectual property from time to time, and the success of any such challenges could result in the limitation or loss of intellectual property rights. Irrespective of their validity, such claims may also result in substantial costs and diversion of resources which could have an adverse effect on our operations. In addition, piracy, which encompasses the theft of our signal, and unauthorized use of our content, in the digital environment continues to present a threat to revenues from products and services based on our intellectual property.
REGULATORY MATTERS
Our businesses are subject to and affected by regulations of U.S. federal, state and local government authorities, and our international operations are subject to laws and regulations of the countries and international bodies, such as the E.U., in which we operate. Content networks, such as those owned by us, are regulated in certain limited respects by the Federal Communications Commission (“FCC”) in certain respects if they are, including some regulations that only apply to content networks affiliated with a cable television operator. Other FCC regulations, although imposed on cable television operators and direct broadcast satellite ("DBS"(“DBS”) operators and other distributors, affect content networks indirectly. The rules, regulations, policies and procedures affecting our businesses are constantly subject to change. These descriptions are summary in nature and describe only the most significant regulations we face; they do not purport to describe all present and proposed laws and regulations affecting our businesses.
Program Access
The Communications Act (the “Act”) and the FCC’s program access rules prevent a satellite or cable content vendor in which a cable operator has an “attributable” ownership interest from discriminating against unaffiliated multichannel video programming distributors (“MVPDs”), such as cable and DBS operators, in the rates, terms and conditions for the sale or delivery of content.the vendor’s content networks, on the basis of the non-affiliation. These rules also permit MVPDsthe unaffiliated MVPD to initiate complaintsa complaint to the FCC against the content vendor and content networks if anit believes this rule has been violated.
Program Carriage
The Act and the FCC’s program carriage rules prohibit MVPDs from favoring their affiliated content networks over unaffiliated, similarly situated content networks in the rates, terms and conditions of their carriage agreements in a manner that unreasonably restrains the ability of the unaffiliated content network to compete fairly. These rules permit the unaffiliated content network to initiate a complaint to the FCC against the MVPD claimsif it is unablebelieves these rules have been violated, but court decisions interpreting the regulations have made it difficult for us to obtain rightschallenge a distributor’s decision to decline to carry theone of our content network on nondiscriminatory rates, termsnetworks or conditions. The FCC allowed a previous blanket prohibition on exclusive arrangements with cable operators to expire in October 2012, but will consider case-by-case complaints that exclusive contracts between cable operators and cable-affiliated programmers significantly hinder or prevent an unaffiliated MVPD from providing satellite or cable programming.discriminate against one of our content networks.
“Must-Carry”/Retransmission Consent
The Cable Television Consumer Protection and Competition Act of 1992 (the “Act”) imposes “must-carry” regulations on cable systems, requiring them to carry the signals of most local broadcast television stations in their market.market if they elect mandatory carriage. DBS systems are also subject to their own must-carry rules. The FCC’s implementation of “must-carry” obligations requires cable operators and DBS providers to give broadcasters preferential access to channel space.space and favorable channel positions. This reduces the amount of channel space that is available for carriage of our content networks by cable and DBS operators. The Act also establishedgives certain broadcasters the choice of opting out of must-carry and invoking the right to retransmission consent, which refers to a broadcaster’s right to require MVPDs, such as cable and satellite operators, to obtain the broadcaster'sbroadcaster’s consent before distributing the broadcaster'sbroadcaster’s signal to the MVPDs' subscribers. Broadcasters have traditionally used the resulting leverage from demand for their must-have broadcast content to obtain carriage for their affiliated networks. Increasingly, broadcasters are additionally seekingMVPDs’ subscribers, often at a substantial monetary compensation for granting carriage rights for their must-have broadcast content. Such increased financial demands on distributors reducecost that reduces the content funds available for independent programmers not affiliated with broadcasters, such as us.
Closed CaptioningAccessibility, Children’s Advertising Restrictions, Emergency Alerts and Advertising RestrictionsCALM Act
Certain of our content networks and some of our IP-delivered video content must provide closed-captioning and audio description of content. some of their programming and comply with other regulations designed to make our content more accessible to persons with disabilities. The U.S. Congress, the FCC, and the U.S. Department of Justice periodically consider proposals to implement additional accessibility requirements, and are considering a number of such proposals now, some of which would increase our obligations substantially.Our content and digital productstelevision programming intended primarily for children 12 years of age and under must comply with certain limits on the amount and type of permissible advertising, and commercialscertain regulations extend to our digital products when they are referenced by web address in our television programming. We may not include actual or simulated emergency alert tones or signals in our content. Commercials embedded in our networks’ television content stream also must adhere to certain standards for ensuring that those commercials are not transmitted at louder volumes than our program material. The 21st Century Communications and Video Accessibility Act of 2010 requires us to provide closed captioning on certain IP-delivered video content that we offer.
Obscenity Restrictions
Network distributorsMVPDs are prohibited from transmitting obscene content, and our affiliationdistribution agreements generally require us to refrain from including such content on our networks.
Violent Programming
In 2007, the FCC issued a report on violence in programing that recommended Congress prohibit the availability of violent programming, including cable programming, during hours when children are likely to be watching. Recent events have led to a renewed interest by some members of Congress in the alleged effects of violent programming, which could lead to a renewal of interest in limiting the availability of such programming or prohibiting it.
Regulation of the InternetDigital Products and Services
We operate severala variety of free, advertising-based and subscription-based digital products and websites that we usestreaming services providing news, information and entertainment to distribute information about our programsconsumers in the U.S. and to offer consumers the opportunity to purchase consumerinternational markets via web, mobile and connected TV platforms. In some cases, those products and services. Internet services are nowprovided directly to consumers, and in other cases, they can be used and/or purchased through a third-party distributor, such as Xfinity or Hulu.Our digital products and services are subject to federal and state regulation in the U.S. relating to the privacy and security of personally identifiable userpersonal information andcollected from our users, including laws pertaining to the acquisition of personal information from children under 13, including16. Some examples of these laws include the federal Children'sChildren’s Online Privacy Protection Act and(COPPA), the federal Controlling the Assault of Non-Solicited Pornography and Marketing Act. In addition, a majority of states have enacted laws thatAct, the Video Privacy Protection Act (VPPA), and the California Consumer Privacy Act (“CCPA”). Many additional U.S. state and federal regulations impose data security and securitydata breach obligations.obligations on the Company. These laws and their public and private enforcement are continually evolving, with several comprehensive U.S. state privacy laws that took effect in 2023, or that will take effect in 2024, and many more introduced and expected to pass in the coming year, and novel litigation theories related to privacy advancing in the courts. Additional federal and state laws and regulations apply or may be adopted with respect to the Internet or other on-lineour digital products and services, covering such issues as userdata privacy and security, child safety, data security,oversight of user-generated content, advertising, competition, pricing, content, copyrights and trademarks, access by persons with disabilities, distribution, taxation and characteristics and quality of products and services. In addition, to the extent we offerThe scope of regulation may differ depending on how these products and services are used and/or purchased.In addition, the FCC from time to on-line consumers outside the U.S., thetime considers whether some or all digital services should be considered MVPDs and regulated as such.
Intellectual Property Laws and Regulations
Our intellectual property assets are discussed under “Business – Intellectual Property” above. Our content, whether distributed over broadcast, cable, DBS, wireless, or internet-based services, or through other means, is protected under intellectual property law, including copyright, trademark, patent, unfair competition, and internet/domain name statutes and laws and license agreements. Changes to these laws and regulations of foreign jurisdictions, including, without limitation, consumer protection, privacy, advertising, data retention, intellectual property,could either strengthen or weaken our ability to license and protect our content limitations, may impose additional compliance obligations on us.and combat its theft or misuse.
Foreign Laws and Regulations
The foreign jurisdictions in which our networksproducts and services are offered have, in varying degrees, laws and regulations governing our businesses.businesses, including relating to the production, monetization and distribution of content.By way of example, our digital offerings available to consumers in international jurisdictions are subject to laws and regulations relating to, without limitation, consumer protection, data privacy and security, advertising, competition, intellectual property, and content limitations.
EMPLOYEESSimilar to the U.S., new laws and regulations in international jurisdictions may be adopted with respect to our intellectual property, products and services.In particular, we face increased efforts in international jurisdictions to regulate streaming services, which may constrain our offerings. Further, international laws and regulations around intellectual property could limit our ability to license and protect our content, as well as impose additional burdens on our business.
HUMAN CAPITAL
As of December 31, 2017,2023, we had approximately 7,00035,300 employees, including full-time and part-time employees of our wholly-owned subsidiaries and consolidated ventures.ventures, with 53% located in the U.S. and 47% located outside of the U.S.
We are a talent-driven business, aiming to attract, develop, and motivate top talent throughout our company. To support these objectives, our human resources programs are designed to provide competitive, locally-relevant benefits, performance-based pay, and nonfinancial support and incentives. We also strive to enhance our culture through efforts aimed at making our workplace diverse, engaging and inclusive, and to develop our talent to prepare them for critical roles and leadership positions for the future. We also provide opportunities for our employees to make an impact in their communities through social good initiatives around the world.
Some examples of our human resources programs and initiatives are described below.
Compensation
Our compensation philosophy is to pay for performance, encourage excellence and reward employees who innovate and deliver high-quality results.Our compensation programs are designed to implement our compensation philosophy by:
•paying competitively, across salary grades and geographies;
•applying compensation policies in an internally consistent manner; and
•incentivizing our employees to deliver on our short- and long-term objectives.
Benefits
We provide an array of benefits and programs that support our employees in their personal and professional lives. Highlights include:
•local medical, dental, and vision plans in many countries around the world to support our employees with access to health care, supplementing any state-provided health care;
•on-site wellness centers in our New York, Los Angeles, Atlanta and Chiswick (London) offices, a fully-equipped fitness center in our New York, Los Angeles and Atlanta offices, and access to virtual fitness classes and wellbeing programs;
•family support programs, including on-site childcare in certain offices, childcare locator services, back-up childcare, maternity/paternity leave, adoption assistance and elder care;
•tools and resources to support the mental wellbeing of our employees and their families, including mental health counselors in our on-site wellness centers and a confidential, dedicated line for employees to contact and speak with a counselor in the event they need mental health support;
•products and services to support employees’ financial wellbeing, including life, accident, and disability insurance plans, discount benefits, financial planning tools, a 401(k) savings plan in the U.S. and retirement/pension plans in over 20 countries, with competitive contributions from the Company for employees at all levels;
•offering an employee stock purchase plan, which allows certain employees globally (where legislation permits) an opportunity to buy WBD common stock at a discounted price through convenient after-tax payroll deductions with no commission charges; and
•flexible working arrangements around the globe to enable our employees to better balance work and personal commitments.
Diversity, Equity and Inclusion (“DE&I”)
Our DE&I objective is to promote diversity, remove barriers, and create space for all to share ideas and be heard. DE&I at WBD is overseen by our Chief Global Diversity, Equity & Inclusion Officer. We implement our DE&I initiatives and pipeline programs through our global and regional DE&I team that partners with internal and external stakeholders across our brands, business units and regions. We have established a Business and Creative Council, made up of our most senior leaders, to address and champion DE&I in our corporate and content production businesses. We seek to support our employees through the sponsorship of 16 Business Resource Groups (“BRGs”) globally, comprised of over 40 chapters. BRGs are intended to enable employees with shared pursuits, purpose, identities, and interests to lead, contribute and build community for all.
Learning and Development
Our Global Learning & Development (“L&D”) team provides learning opportunities for employees around the world. The L&D team uses a variety of delivery methods suitable to the content and audience, including live in-person sessions, virtual workshops, webinars, and asynchronous online learning through our global learning management platform. The L&D team also provides tuition reimbursement for eligible courses.
AVAILABLE INFORMATION
All of our filings with the U.S. Securities and Exchange Commission (the “SEC”), including reports on Form 10-K, Form 10-Q and Form 8-K, and all amendments to such filings are available free of charge at the investor relations section of our website, www.discoverycommunications.com,ir.wbd.com, as soon as reasonably practicable after such material is filed with, or furnished to, the SEC. Our annual report, corporate governance guidelines, code of business ethics, audit committee charter, compensation committee charter, and nominating and corporate governance committee charter are also available on our website. In addition, we will provide a printed copy of any of these documents, free of charge, upon written request to: Investor Relations, Warner Bros. Discovery, Communications, Inc., 850 Third230 Park Avenue 8th Floor,South, New York, NY 10022-7225.10003. Additionally, the SEC maintains a website at http://www.sec.gov that contains quarterly, annual and current reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company. The public
We also routinely post on our website news releases, announcements and other statements about our business and results of operations, some of which may also read and copy any materialscontain information that the Company files with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by callingdeemed to be material to investors. Therefore, we encourage investors to monitor our website and review the SEC at 1-800-SEC-0330.
information we post there. The information contained on our website is not part of this Annual Report on Form 10-K and is not incorporated by reference herein.
ITEM 1A. Risk Factors.
Investing in our securities involves risk. In addition to the other information contained in this report,Annual Report on Form 10-K, you should consider the following risk factors before investing in our securities. Additional risks and uncertainties not presently known to us or that we currently believe not to be material may also adversely impact our business, results of operations, financial position and cash flows.
Risks Related to Our Business and Industry
Our businesses operate in highly competitive industries and if we are unable to compete effectively, our business, financial condition and results of operations could suffer.
The media and entertainment industries in which we compete for viewers, distribution and advertising are highly competitive. We face increased competitive pressure for talent, content, audiences, subscribers, service providers, advertising spending and production infrastructure. We compete with a broad range of companies engaged in media, entertainment and communications services, some of whom have interests in multiple media and entertainment businesses that are often vertically integrated, all vying for consumer time, attention and discretionary spending. In addition, the composition of our competitors has evolved with the entrance of new market participants, including companies in adjacent sectors with significant financial, marketing and other resources, greater efficiencies of scale, fewer regulatory burdens and more competitive pricing. Such competitors could also have preferential access to important technologies, customer data or other competitive information. Our competitors may also consolidate or enter into business combinations or alliances that strengthen their competitive positions. Our ability to compete successfully depends on a number of factors, including our ability to consistently acquire and produce high quality content amidst a rapidly evolving competitive landscape. In addition, new technology, including generative artificial intelligence (“AI”), is evolving rapidly and our ability to compete could be adversely affected if our competitors gain an advantage by using such technologies. There can be no assurance that we will be able to compete successfully in the future against existing or new competitors, or that competition in the marketplace will not have an adverse effect on our business, financial condition or results of operations.
Our advertising revenues have been, and may continue to be, adversely impacted by several factors, including the changing landscape of television advertising spending and advertising market conditions.
We derive substantial revenues from the sale of advertising, and a continuing decline in advertising revenues could have a material adverse effect on our business, financial condition or results of operations.
Shifting consumer preferences toward streaming services and other digital products and the increasing number of entertainment choices has beenintensified audience fragmentation and reduced content viewership through traditional linear distribution models. This has changed the landscape of traditional television advertising spending, prompting advertisers to shift their strategies, and ultimately advertising spend, toward streaming services and other digital products to reach target audiences. In addition, a shiftnumber of other streaming services with larger subscriber bases and greater household penetration have recently introduced ad-supported tiers.The increase of digital advertising available in the marketplace, due to both the introduction of ad-supported tiers in competing streaming services and the expansion of free ad-supported television (“FAST”) products, has increased the competition we face for advertising expenditures for both our traditional linear networks and the ad-supported tiers in our streaming services, and also limited our ability to demand higher rates for our linear and digital advertising inventory or even the same rates that we previously charged for our advertising inventory prior to the surge in digital advertising. There can be no assurance that we can successfully navigate the evolving streaming and digital advertising market or that the advertising revenues we generate in that market will replace the declines in advertising revenues generated from our traditional linear business.
The advertising market is also sensitive to general economic conditions and consumer buying patterns. Financial instability or a general decline in economic conditions in the U.S. and other countries where our content is distributed could adversely affect the spending priorities of our advertising partners who might reduce their spending, which could result in a decrease in advertising rates and volume and in our overall advertising revenues. Natural and other disasters, pandemics, acts of terrorism, political uncertainty or hostilities could also lead to a reduction in domestic and international advertising expenditures, which could also have an adverse effect on our advertising revenues.
Our advertising revenues are also dependent on our ability to measure viewership and audience engagement across all platforms and in all geographic regions. Although audience measurement systems have evolved and improved to capture the viewership of programming across multiple platforms, they still do not fully capture all viewership across streaming and other digital platforms and advertisers may not be willing to pay advertising rates based on the viewership that is not being measured. In certain geographic regions, our ability to fully capture viewership information may be limited by local laws and regulations.
As further discussed in other parts of this Item 1a. Risk Factors, our ability to generate advertising revenue is also dependent on our ability to compete in highly competitive, rapidly evolving industries, our ability to respond to changes in consumer behavior and our ability to consistently achieve audience acceptance of our content and brands.
Changes in consumer behavior, as a resultwell as evolving technologies and distribution models, may negatively affect our business, financial condition or results of technological innovationsoperations.
Our success depends on our ability to anticipate and adapt to changes in theconsumer behavior and shifting content consumption patterns. The ways in which viewers consume content, and technology and distribution of content, which may affect our viewership and the profitability of our business in unpredictable ways.
Technology and business models in our industrythe media and entertainment industries, continue to evolve, rapidly. Consumer behavior relatedand new distribution platforms, as well as increased competition from new entrants and emerging technologies, have added to changes inthe complexity of maintaining predictable revenues. Technological advancements have empowered consumers to seek more control over how they consume content distribution and technological innovation affect our economic model and viewership in ways that are not entirely predictable.
Consumers are increasingly viewing content on a time-delayed or on-demand basis from traditional distributors and from connected apps and websites and on a wide variety of screens, such as televisions, tablets, mobile phones and other devices. Additionally, devices that allow users to view television programs on a time-shifted basis and technologies that enable users to fast-forward or skip programming, including commercials, such as DVRs and portable digital devices and systems that enable users to store or make portable copies of content may affecthave affected the attractiveness of our offeringsoptions available to advertisers and could therefore adversely affect our revenues. There is increased demand for short-form, user-generated and interactive content, which have different economicreaching target audiences. This trend has impacted certain traditional distribution models, than our traditional content offerings. Likewise, distributors are offering smaller programming packages known as “skinny bundles,” which are delivered at a lower cost than traditional offerings and sometimes allow consumers to create a customized package of networks, that are gaining popularity among consumers. If our networks are not includeddemonstrated by industry-wide declines in these packages or consumers favor alternative offerings, we may experience a decline in viewership and ultimately the demand for our programming, which could lead to lower distribution and advertising revenues. We have also seencable ratings, declines in subscribers to the traditional cable bundle.bundle, the development of alternative distribution platforms for content, and reduced theatergoing.
Declines in linear television viewership are expected to continue and possibly accelerate, which could adversely affect our advertising and distribution revenues. In 2017, total U.S. Networks portfolioorder to respond to this decline, changing consumer behavior, increasing preferences to watch on demand, and changes in content distribution models in the media and entertainment industries, we have invested in, developed and launched streaming services including Max, HBO Max and discovery+. We have incurred and will likely continue to incur significant costs to develop and market our streaming services, including costs related to international expansion, technological enhancements, and subscriber acquisition. There can be no assurance, however, that consumers and advertisers will embrace our offerings, that subscribers declined 5% while subscriberswill activate or renew a subscription, particularly given the significant number of streaming services in the marketplace, or that our DTC business will be as successful or as profitable as our traditional linear television business.
The film industry has also been impacted by shifting consumer preferences and technological innovation. While restrictions on theatergoing from the COVID-19 pandemic have largely lifted, in some markets, box office performance and movie theater attendance may be slower to rebound to pre-pandemic levels due to, among other things, consumer preferences for consuming movies at home, a vast library of which is available to them through one or more streaming subscriptions, and shorter theatrical release windows. As a response to changing consumer preferences and to return theater attendance towards pre-pandemic levels, film studios such as ours can seek to invest in creating compelling films and seek to promote events in connection with feature films in order to enhance the consumer’s movie theater experience. If the film industry and exhibitors are unable to successfully create and market “event” films and ultimately evolve and enhance the movie theater experience in response to shifting consumer preferences, the profitability, financial condition and results of operations of our fully distributed networks declined 3% for the same period. studios business may be negatively impacted.
Each distribution model has different risks and economic consequences for us, soand the rapid evolution of consumer preferences may have an economic impact that is not completelyultimately predictable. Distribution windowsFurther, technology in the media and entertainment industries continues to evolve rapidly. For example, AI is a new technology for which the advantages and risks associated with its use in such industries are also evolving, potentially affecting revenues from other windows.currently largely uncertain and unregulated. If we cannot ensure thatare not able to access our targeted audience with appealing category-specific content and adapt to new technologies, distribution methods, platforms and content are responsivebusiness models, we may experience a decline in viewership and ultimately a decline in the demand for our programming, which could lead to our target audiences,lower distribution and advertising revenues, materially and adversely affecting our business, could be adversely affected.
Consolidation among cable and satellite providers, both domestically and internationally, could have an adverse effect on our revenue and profitability.
Consolidation among cable and satellite operators has given the largest operators considerable leverage in their relationships with programmers, including us. In the U.S., approximately 90% of our distribution revenues come from the top 10 distributors. For the International Networks segment, approximately 42% of distribution revenue comes from the 10 largest distributors. We currently have agreements in place with the major cable and satellite operators in U.S. Networks and International Networks which expire at various times through 2021. Some of our largest distributors have combined, and as a result, have gained, or may gain, market power, which could affect our ability to maximize the value of our content through those platforms. In addition, many of the countries and territories in which we distribute our networks also have a small number of dominant distributors. Continued consolidation within the industry could reduce the number of distributors to carry our programming, subject our affiliate fee revenue to greater volume discounts, and further increase the negotiating leverage of the cable and satellite television system operators which could have an adverse effect on our financial condition orand results of operations.
The success of our business depends on the acceptance of our entertainment content and brands by our U.S. and foreigninternational viewers, which may be unpredictable and volatile.volatile.
The production and distribution of entertainmenttelevision programs, feature films, sports and news content are inherently risky businesses because the revenue we derive and our ability to distribute our content depend primarily on consumer tastes and preferences that often change in unpredictable ways. The appeal, success and performance of our content with consumers, as well as with third-party licensees and other distribution partners, are critical factors that can affect the revenue that we receive with respect to our content-related business. Our success depends on our ability to consistently create and acquire content that meets the changing preferences of viewers in general, in special interest groups, in specific demographic categories and in various international marketplaces. AsFor example, generally, feature films that perform well upon initial release also have commercial success in subsequent distribution channels. Therefore, the homeunderperformance of a feature film, especially an “event” film, upon its public release can result in lower-than-expected revenues for our business which could limit our ability to create future content. We need to invest substantial amounts in the Olympic Games in Europe until 2024,production or acquisition and marketing of our television programs, feature films, sports and news content before we have been developing and innovating new formslearn whether such content will reach anticipated levels of content in connectionpopularity with consumers. Failing to gain the Olympic Games. Our success with the Olympics depends onlevel of audience acceptance we expect for our content may negatively impact our business, financial condition and results of this content. If viewers do not find our Olympic Games content acceptable, we could see low viewership, which could lead to low distribution and advertising revenues.operations.
The commercial success of our content also depends upon the quality and acceptance of competing content available in the applicable marketplace. For example, as some foreign film and filmmaking industries grow and the availability of popular local content rises, the demand from foreign audiences for American films may decrease, which could negatively impact our revenue. Other factors, including the availability of alternative forms of entertainment and leisure time activities, general economic conditions, piracy, and growing competition for consumer discretionary spendingour ability to develop strong brand awareness may also affect the audience demand for our content. Audience sizes for our media networks are critical factors affecting both the volume and pricing of advertising revenue that we receive, and the extent of distribution and the license fees we receive under agreements with our distributors. Consequently, reduced public acceptance of our entertainmenttelevision programs, feature films, sports and news content or negative publicity regarding individuals or operations associated with our content or brands may decrease our audience share and customer/viewer reach and adversely affect our business, financial condition and results of operations.
AsIf our DTC products fail to attract and retain subscribers, our business, financial condition and results of operations may be adversely impacted.
Our Max, HBO Max and discovery+ offerings are subscription-based streaming services and are among many such services in a company that has operationscrowded and highly competitive landscape. Their success and the success of other subscription-based streaming services we may offer in the United Kingdom,future will be largely dependent on our ability to initially attract, and ultimately retain, subscribers. If we are unable to effectively market our DTC products or if consumers do not perceive the vote bypricing and related features of our DTC products to be of value versus our competitors, we may not be able to attract and retain subscribers. In particular, decreases in consumer discretionary spending in the United Kingdommarkets where our DTC products are offered may reduce our ability to leave the E.U.attract and retain subscribers to our services, which could have an adversea negative impact on our business. Relatedly, a decrease in viewing subscribers on our advertising-supported DTC products could also have a negative impact on the rates we are able to charge advertisers for advertising-supported services. The ability to attract and retain subscribers will also depend in part on our ability to provide compelling content choices that are differentiated from that of our competitors and that are more attractive than other sources of entertainment that consumers could choose in their free time. Furthermore, our ability to provide a quality subscriber experience and our relative service levels, may also impact our ability to attract and retain subscribers. If existing subscribers, including those who receive subscriptions through wireless and broadband bundling arrangements with third parties or through wholesale arrangements with MVPDs, cancel or discontinue their subscriptions for any reason, including as a result of selecting an alternative wireless or broadband plan that does not bundle our products, canceling or discontinuing their MVPD subscription, or due to the availability of competing offerings that are perceived to offer greater value compared to our DTC products, our business may be adversely affected. We would need to add new subscribers both to replace subscribers who cancel or discontinue their subscriptions and to grow our business. If we are unable to attract and retain subscribers and offset the losses of subscribers who cancel or discontinue their subscriptions to our DTC products, our business, financial condition and results of operations could be adversely affected.
Failure to renew, renewal with less favorable terms, or termination of our content licenses and financial position.similar distribution agreements may cause a decline in our revenue.
Because our content and pay-TV networks are licensed to and distributed through third parties, such as traditional television and pay-TV broadcasters (such as cable and satellite operators) and operators of digital platforms, which in turn make such content available, directly and indirectly, to consumers, we are dependent upon the maintenance of such licensing and distribution agreements with such third parties. These agreements generally provide for the scope of licensed rights, including geographic territory, exploitation rights, holdbacks and/or other restrictions, including exclusivity or non-exclusivity, window(s) of exploitation (including first and second pay-TV and free to air broadcast), for the level of carriage our networks will receive, such as channel placement and programming package inclusion (widely distributed, broader programming packages compared to lesser distributed, specialized programming packages), and for payment of a license fee to us based on a number of factors, including the scope of the rights granted, the popularity of the content (as measured in the case of films, for example, by box office performance for certain downstream exploitation) and the date of its first theatrical or pay-TV exhibition.
On June 23, 2016,Our agreements generally have a limited term which varies by territory and distributor, and there can be no assurance that these agreements will be renewed in the U.K. heldfuture or that they will be renewed on terms that are favorable to us. Whether or not a referendumdistributor is willing to renew an agreement on terms that are favorable to us may be dependent upon our decision to make our content available on both our linear networks and our streaming platforms. Failure to renew an agreement prior to its expiration could lead to service blackout, which could in turn affect both our revenues and our reputation with viewers.
While the number of subscribers associated with our networks impacts our ability to generate advertising revenue (as further described elsewhere in this Item 1A), subscription-based revenue also represents a significant portion of our revenue. The license fees and other commercial terms that we receive are dependent, among other factors, on the acceptance and performance of our content with consumers. A reduction in the license fees that we receive or in the number of subscribers for which voters approved an exit fromwe are paid, including as a result of a loss or reduction in carriage for our networks or a reduction in distributor penetration, or as a result of changes in consumer habits, could adversely affect our distribution revenue. Such a loss or reduction in carriage could also decrease the European Union (“E.U.”), commonly referredpotential audience for our programs thereby adversely affecting our advertising revenue. Changes in distribution strategy and variations on traditional theatrical distribution and other licensing models, such as shortening traditional windows, may also drive changes in the license fees that distributors and other downstream licensees in the value chain may be willing to as “Brexit.”pay for content, which may in turn negatively affect our revenue. As a result of the referendum, the British government has begun negotiating the terms of the U.K.’s future relationship with the E.U. The effects of Brexit will depend on any agreements the U.K. makes to retain access to the E.U. markets either during a transitional period or more permanently. The measures could potentially disrupt the markets we serveindustry consolidation, our distributors have become and may cause uscontinue to lose subscribers, distributorsbecome larger, and employees. If the U.K. loses access to the single E.U. market and the global trade deals negotiated by the E.U., it could have a detrimental impact on our U.K. growth. Such a decline could also make
our doing business in Europe more difficult, which could delay and reduce the scope our distribution and licensing agreements. Without access to the single E.U. market, it may be more challenging and costly to obtain intellectual property rights for our content within the U.K. or distribute our services in Europe. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace and replicate. If there are changes to U.K. immigration policy as a result of Brexit, thishave gained or could affectgain additional market power. Such consolidation gives these distributors leverage in negotiating their distribution agreements with us which could subject our employees and their abilityaffiliate fee revenue to move freely between the E.U. member states for work-related matters.
Foreign exchange rate fluctuations may adversely affect our operating results and financial conditions.
We have significant operations in a number of foreign jurisdictions and certain of our operations are conducted and certain of our debt obligations are denominated in foreign currencies. As a result, we have exposure to foreign currency risk as we enter into transactions and make investments denominated in multiple currencies. The value of these currencies fluctuates relative to the U.S. dollar. Our consolidated financial statements are denominated in U.S. dollars, and to prepare those financial statements we must translate the amounts of the assets, liabilities, net sales, other revenues and expenses of our operations outside of the U.S. from local currencies into U.S. dollars using exchange rates for the current period. As we have expanded our international operations, our exposure to exchange rate fluctuations has increased. This increased exposurereduction or discounts, which could have an adverse effect on our reportedfinancial condition.
In addition, content distribution and license agreements are complex and individually negotiated. For example, some of our distribution agreements contain “most favored nation” clauses, which typically provide that if we enter into an agreement with another distributor which contains certain more favorable terms, we must offer some of those terms to our existing distributors. If we were to disagree with one of the counterparties on the interpretation of a content distribution and license agreement, it could damage our relationship with that counterparty as well as materially adversely impact our business, financial condition and results of operationsoperations.
We invest significant resources to acquire and net asset balances. There ismaintain licenses to produce sports programming and there can be no assurance that downward trending currencieswe will reboundcontinue to be successful in our efforts to obtain or that stable currencies will remain unchangedmaintain licenses to recurring sports events or recoup our investment when the content is distributed.
We face significant competition to acquire and maintain licenses to sports programming, which leads to significant expenditure of funds and resources. As a result of an increasing number of market entrants in any period or for any specific market.
Our businesses operate in highly competitive industries.
The entertainment and mediathe programming industries in whichspace, we operate are highly competitive. We compete with other programming networks for distribution, viewers and advertising. We also compete for viewers with other forms of media entertainment, such as home video, movies, periodicals, on-line and mobile activities. In particular, websites and search engines have seen significant advertising growth,upward pressure on programming costs in recent years, particularly in connection with the licensing and acquisition of sports content from third parties. We may also be impacted by such upward pressures driven by increasing investment in programming by competitors. In certain international markets, regulations concerning content quotas or content investment requirements may be a portion of which has moved from traditional cable network and satellite advertisers. Businesses,further factor driving increasing programming costs. In addition, businesses, including ours, that offer multiple services or that may be vertically integrated and offer both video distribution and programming content, may face closer regulatory review from the competition authorities in the countries in which we currently have operations. If our distributors have to pay higher rates to other holders of sports broadcasting rights, it might be difficult for us to negotiate higher rates for the distribution of our networks. Our commerce business competes against a wide range of competitive retailers selling similar products. The ability of our businesses to compete successfully depends on a number of factors, including our ability to consistently supply high quality and popular content, access our niche viewership with appealing category-specific content, adapt to new technologies and distribution platforms and achieve widespread distribution. There can be no assurance that we will be able to compete successfully in the future against existing or new competitors to obtain and/or maintain licenses to recurring sports events, or that increasing competition for programming licenses and regulatory review from competition authorities will not have a material adverse effect on our business, financial condition or results of operations.
Failure to renew, renewal with less favorable terms, or termination of our affiliation agreements may cause a decline in our revenue.
Because our networks are licensed on a wholesale basis to distributors, such as cable and satellite operators, which in turn distribute them to consumers, we are dependent upon the maintenance of affiliation agreements with these operators. These affiliation agreements generally provide for the level of carriage our networks will receive, such as channel placement and programming package inclusion (widely distributed, broader programming packages compared to lesser distributed, specialized programming packages) and for payment of a license fee to us based on the number of subscribers that receive our networks. While the number of subscribers associated with our networks impacts our ability to generate advertising revenue, these per subscriber paymentsThere can also represent a significant portion of our revenue. Our affiliation agreements generally have a limited term which varies by market and distributor, and there can be no assurance that we will recoup our investment in sports programming, including realizing any anticipated benefits of our joint ventures. The impact of these affiliation agreements will be renewedcontracts on our results of operations over the term of the contracts depends on a number of factors, including the strength of advertising markets and subscription levels and rates for programming. Our success with sports programming is highly dependent on consumer acceptance of this content and the size of our viewing audience. If viewers do not find our sports programming content acceptable, we could see low viewership, which could lead to low distribution and advertising revenues and adversely affect our business, financial condition and results of operations.
Our businesses have been, and in the future or renewed on terms that are favorablemay be, subject to us. A reductionlabor disruption.
We and some of our suppliers and business partners retain the services of writers, directors, actors, announcers, athletes, technicians, trade employees and others involved in the license fees that we receive per subscriberdevelopment and production of our television programs, feature films and interactive entertainment (e.g., games) who are covered by collective bargaining agreements. If negotiations to renew expiring collective bargaining agreements are not successful or become unproductive, the affected unions could take, and have taken, actions such as strikes, work slowdowns or work stoppages. Strikes, work slowdowns, work stoppages, or the possibility of such actions, including the 2023 WGA and SAG-AFTRA strikes and potential future strikes by other unions involved in development and production, have resulted in, and could in the numberfuture result in, delays in the production of, subscribers for which we are paid, including as a result of a loss or reduction in carriage for our networks, could adversely affect our distribution revenue. Such a loss or reduction in carriage could also decrease the potential audience for our programs thereby adversely affecting our advertising revenue. In addition, our affiliation agreements are complex and individually negotiated. If we were to disagree with onerelease of, our counterparties ontelevision programs, feature films, and interactive entertainment. For example, the interpretation2023 WGA and SAG-AFTRA strikes caused delays in the production of an affiliation agreement, our relationship with that counterparty could be damagedtelevision programs and feature films and in the release of certain programming. The impact of these strike-related delays and other consequences of these strikes have continued, and are expected to continue to, impact our business could be negatively affected.even after the strikes were ultimately resolved.
Interpretation of some terms of our distribution agreements may have an adverse effect on
If the distribution payments we receive under those agreements.
Some of our distribution agreements contain “most favored nation” clauses. These clauses typically provide that if we enter into an agreement with another distributor which contains certain more favorable terms, we must offer some of those terms to our existing distributors. We have entered into a number of distribution agreements with terms that differ in some respects from those contained in other agreements. While we believe that we have appropriately complied with the most favored nation clauses included in our distribution agreements, these agreements are complexmedia and other parties could reach a different conclusion that, if correct, could have an adverse effect on our financial conditionentertainment industries experience prolonged strikes, work slowdowns or results of operations.
We face cybersecurity and similar risks, which could result in the disclosure of confidential information, disruption of our programming services, damage to our brands and reputation, legal exposure and financial losses.
Our on-line, mobile and app offerings, as well as our internal systems, involve the storage and transmission of proprietary information, and we and our partners rely on various technology systems in connection with the production and distribution of our programming. Our systems may be breached due to employee error, malicious code, hacking and phishing attacks, or otherwise. Additionally, outside parties may attempt to fraudulently induce employees or users to disclose sensitive or confidential information in order to gain access to data. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems often are not recognized until launched against a target,work stoppages, we may be unable to anticipateproduce, distribute or license programming, feature films, and interactive entertainment, which could result in reduced revenue and have a material adverse effect on our business, financial condition and results of operations. For example, the 2023 WGA and SAG-AFTRA strikes had a material impact on the operations and results of the Company. See the discussion under “Business – Industry Trends” that appears above. In addition, the pausing and restarting of certain productions resulted in incremental costs, delayed the completion and release of some of our content (films, television programs, and licensed programs) and could cause an impairment of our investment in film, television programs, or licensed program rights if the incremental costs are significant or we are unable to efficiently complete the production of the film, television show or program or decide to abandon the production.
We may also enter into new collective bargaining agreements or renew collective bargaining agreements on less favorable terms and incur higher costs as a result of prolonged strikes, work slowdowns, or work stoppages. Many of the collective bargaining agreements that cover individuals providing services to the Company are industry-wide agreements, and we may lack practical control over the negotiations and terms of these techniquesagreements. Union or labor disputes or player lock-outs relating to implement adequate preventative measures.certain professional sports leagues may preclude us from producing and telecasting scheduled games or events and could negatively impact our promotional and marketing opportunities. Depending on their duration, union or labor disputes or player lock-outs could have a material adverse effect on our business, financial condition and results of operations.
We have recognized, and could continue to recognize, impairment charges related to goodwill and other intangible assets.
We have a significant amount of goodwill and other intangible assets on our consolidated balance sheet. In accordance with U.S. GAAP, management periodically assesses these assets to determine if they are impaired. Significant negative industry or economic trends, including the continued decline of traditional linear television viewership and linear ad revenues, disruptions to our business, inability to effectively integrate acquired businesses, underperformance of our content, unexpected significant changes or planned changes in use of the assets, including in connection with restructuring initiatives, divestitures and market capitalization declines may impair goodwill and other intangible assets. Any charges relating to such breachimpairments could materially adversely affect our results of operations in the periods recognized.
We rely on platforms owned by our competitors for digital and linear distribution of our content.
We rely on platforms owned by third parties, some of which compete directly with us or unauthorizedhave investments in competing streaming services, to make our content available to our subscribers and viewers. If these third parties do not continue to provide access to our service on their platforms or are unwilling to do so on terms acceptable to us, our business could be adversely affected. If we are not successful in maintaining existing or creating new relationships with these third parties, our ability to retain subscribers and grow our business could be adversely impacted.
Service disruptions or the failure of communications satellites or transmitter facilities we rely upon could adversely impact our business, financial condition and results of operations.
We rely on communications satellites and transmitter facilities and other technical infrastructure, including fiber, to transmit programming to affiliates and other distributors. Shutdowns of communications satellites and transmitter facilities or service disruptions will pose significant risks to our operations. Such disruptions may be caused by power outages, natural disasters, extreme weather, terrorist attacks, war, failures or impairments of communications satellites or on-ground uplinks or downlinks or other technical facilities and services used to transmit programming, failure of service providers to meet contractual requirements, or other similar events. If a communications satellite or other transmission means (e.g., fiber) is not able to transmit our programming, or if any material component thereof fails or becomes inoperable, we may not be able to secure an alternative communications path in a timely manner because, among other factors, there are a limited number of service providers and other means available for the transmission of programming, and any alternatives may require lead time and additional technical resources and infrastructure to implement. If such an event were to occur, there could be a disruption in the delivery of our programming, which could harm our reputation and materially adversely affect our business, financial condition and results of operations.
Risks Related to Our Acquisition and Integration of the WarnerMedia Business
We have incurred and expect to continue to incur significant costs relating to the integration of the WarnerMedia business, and we may not realize the anticipated benefits of the Merger because of difficulties related to integration and other challenges faced by the combined Company.
On April 8, 2022, we completed the Merger in which we acquired the business, operations and activities that constitute the WarnerMedia Business from AT&T. We incurred significant costs following the closing of the Merger, including costs relating to organization restructuring, facility consolidation activities and other contract termination costs, which costs we believe were necessary to realize the anticipated cost synergies from the Merger. Additional unanticipated costs may also be incurred in connection with the continued integration of the legacy business, operations and activities of Discovery prior to the Merger (the “Discovery Business”) and the WarnerMedia Business, including due to the resources required for integration. The amount and timing of any such costs could materially adversely affect our business, financial condition and results of operations.
Prior to the Merger, the Discovery Business and the WarnerMedia Business operated independently, and while we have spent the last 23 months since the closing of the Merger on integration activities, there can be no assurances that our businesses will ultimately be combined in a manner that allows for the achievement of any or all anticipated financial, strategic or other benefits. If we are not able to successfully complete the integration of the Discovery Business and the WarnerMedia Business, the anticipated benefits of the Merger may not be realized fully, if at all, or may take longer than expected to be realized. Our integration efforts could result in a loss of our proprietary information, which may include user data, a disruption of our services or a reduction of the revenues we are able to generate from such services, damage to our brands and reputation, akey employees, loss of confidencecustomers, business disruption or unexpected issues, higher than expected costs and an overall process that takes longer than originally anticipated. Specifically, the following issues, among others, must be addressed in the security of our offerings and services, and significant legal and financial exposure, each of which could potentially have an adverse effect on our business.
Our equity method and cost method investments' financial performance may differ from current estimates.
We have equity investments in several entities and the accounting treatment applied for these investments varies depending on a number of factors, including, but not limitedorder to our percentage ownership and the level of influence or control we have over the relevant entity. Any losses experienced by these entities could adversely impact our results of operations and the value of our investment. In addition, if these entities were to fail and cease operations, we may lose the entire value of our investment and the stream of any shared profits. Some of our ventures may require additional uncommitted funding. We also have significant investments in entities that we have accounted for using the cost method. If these entities experience significant losses or were to fail and cease operations, our investments could be subject to impairment and the loss of a part or all of our investment value.
Risks Related to the Scripps Networks Acquisition
We may not be able to successfully integrate the Scripps Networks business with our own, realize the anticipated benefits of the Scripps Networks acquisition or manage our expanded operations, anyMerger:
•continuing and finalizing the integration of which would adversely affect our results of operations.the Discovery Business and the WarnerMedia Business in the time frame currently anticipated;
We have devoted, and expect to continue to devote, significant management attention and resources to •integrating our organization, procedures, and operations with those of Scripps Networks. Such integration efforts are costly due to the large number of processes, policies, procedures, locations, operations, technologies and systems to be integrated, including purchasing,businesses’ administrative, accounting and finance, sales, service, operations, payroll, pricing, marketinginformation technology infrastructure;
•continuing to align and employee benefits. Integrationexpand the geographic footprint of the DTC products for global customers; and
•resolving potential unknown liabilities, adverse consequences and unforeseen increased expenses could, particularly inassociated with the short term, exceedintegration of the cost synergies we expect to achieve from the elimination of duplicative expensesDiscovery Business and the realization of economies of scale, which could result in significant charges to earnings that we cannot currently quantify. Potential difficulties that we may encounter as partWarnerMedia Business.
Even if the integration is completed successfully, the full benefits of the integration process includeMerger may not be achieved within the following:
our inability to successfully combine our business with Scripps Networks in a manner that permitsanticipated time frame or at all. Further, following the combined company to achieve the full synergies and other benefits anticipated to result from the merger; and
complexities associated with managing the combined businesses, including difficulty addressing possible differences in corporate cultures and management philosophies and the challenge of integrating products, services, complex and different information technology systems, control and compliance processes, technology, networks and other assets of each of the companies in a cohesive manner.
Following the merger,Merger, the size and complexity of the business of the combined company will increaseCompany increased significantly. Our future success depends, in part, upon our ability to continue to manage this expanded business, which willcould pose substantial challenges for management, including challenges related to the management and monitoring of newdiverse, complex operations and associated increased costs and complexity. There can be no assurances that we will be successful or that we will realize the expected synergies and benefits anticipated from the merger.
DCL was not obligated to place in escrow the net proceeds of its senior notes that were issued in September 2017, partially to fund the Scripps Networks acquisition (the “Senior Notes”), and, as a result, we may not be able to redeem the Senior Notes upon a special mandatory redemption.
Under the terms of the Senior Notes, we are obligated to redeem the Senior Notes at a redemption price of 101% of their principal amount plus accrued and unpaid interest if the Scripps acquisition does not close by August 18, 2018 (a “special mandatory redemption”). We were not obligated to place the net proceeds of the offering of the Senior Notes in escrow prior to the completion of the Scripps Networks acquisition or to provide a security interest in those proceeds, and the indenture governing the Senior Notes imposes no other restrictions on our usecosts. All of these proceeds during that time. Accordingly, the source of funds for any redemption of the $500 million principal amount of 2.200% senior notes due 2019, $1.20 billion principal amount of 2.950% senior notes due 2023, $1.70 billion principal amount of 3.950% senior notes due 2028, $1.25 billion principal amount of 5.000% senior notes due
2037 and $1.25 billion principal amount of 5.200% senior notes due 2047 or £400 million principal amount of 2.500% senior notes due 2024 upon a special mandatory redemption would be the proceeds that we have voluntarily retained or other sources of liquidity, including available cash, borrowings, sales of assets or sales of equity. We may not be able to satisfy our obligation to redeem these Senior Notes upon a special mandatory redemption, because we may not have sufficient financial resources to pay the aggregate redemption price on such Senior Notes. Our failure to redeem these Senior Notes as required under the indenture would result in a default under the indenture, whichfactors could result in defaults under our and our subsidiaries’ other debt agreements and have material adverse consequences for us and the holders of the Senior Notes. In addition, our ability to redeem the senior notes for cash may be limited by law or the terms of other agreements relating to our indebtedness outstanding at the time.
General Risks
Theft of our content, including digital copyright theft and other unauthorized exhibitions of our content, may decrease revenue received from our programming andmaterially adversely affect our businesses and profitability.
The successstock price, business, financial condition, results of our business depends in part on our ability to maintain the intellectual property rights to our entertainment content. We are fundamentally a content company, and piracy of our brands, television networks, digital content and other intellectual property has the potential to significantly and adversely affect us. Piracy is particularly prevalent in many parts of the world that lack copyright and other protections similar to existing law in the U.S. It is also made easier by technological advances allowing the conversion of content into digital formats, which facilitates the creation, transmission and sharing of high-quality unauthorized copies. Unauthorized distribution of copyrighted material over the Internet is a threat to copyright owners’ ability to protect and exploit their property. The proliferation of unauthorized use of our content may have an adverse effect on our business and profitability because it reduces the revenue that we potentially could receive from the legitimate sale and distribution of our content. Litigation may be necessary to enforce our intellectual property rights, protect trade secretsoperations or to determine the validity or scope of proprietary rights claimed by others.
We are subject to risks related to our international operations.cash flows.
We have operations through which we distribute programming outsidebeen engaged in legal proceedings and disputes related to the United States. As a result, our business isMerger and could be subject to certain risks inherent in international business, manyadditional legal proceedings and disputes related to the Merger, the outcomes of which are beyond our control. These risks include:
lawsuncertain and policies affecting trade and taxes, including laws and policies relating to the repatriation of funds and withholding taxes, and changes in these laws;
changes in local regulatory requirements, including restrictions on content, imposition of local content quotas and restrictions on foreign ownership;
differing degrees of protection for intellectual property and varying attitudes towards the piracy of intellectual property;
significant fluctuations in foreign currency value;
currency exchange controls;
the instability of foreign economies and governments;
war and acts of terrorism;
anti-corruption laws and regulations such as the Foreign Corrupt Practices Act and the U.K. Bribery Act that impose stringent requirements on how we conduct our foreign operations and changes in these laws and regulations;
foreign privacy and data protection laws and regulation and changes in these laws; and
shifting consumer preferences regarding the viewing of video programming.
Events or developments related to these and other risks associated with international trade could adversely affect our revenues from non-U.S. sources, which could have a material adverse effect onnegatively impact our business, financial condition operating results, liquidity and prospects.
Furthermore, some foreign markets where we and our partners operate may be more adversely affected by current economic conditions than the U.S. We also may incur substantial expense as a result of changes, including the imposition of new restrictions, in the existing economic or political environment in the regions where we do business. Acts of terrorism, hostilities, or financial, political, economic or other uncertainties could lead to a reduction in revenue or loss of investment, which could adversely affect our results of operations.
Global economic conditions may have an adverse effectIn connection with the Merger, multiple putative class action lawsuits relating to the Merger were filed on our business.
Our business is significantly affected by prevailing economic conditions and by disruptions to financial markets. We derive substantial revenues from advertisers, and these expenditures are sensitive to general economic conditions and consumer buying patterns. Financial instability or a general decline in economic conditions inbehalf of stockholders of the U.S. and other countries where our networks are
distributed could adversely affect advertising rates and volume, resulting in a decrease in our advertising revenues.
Decreases in consumer discretionary spending inCompany against the U.S. and other countries where our networks are distributed may affect cable television and other video service subscriptions, in particular with respect to digital service tiers on whichCompany and/or certain of our programming networks are carried. Thisdirectors and executive officers seeking damages and other relief, and we have been engaged in other disputes arising out of definitive agreements entered into in connection with the Merger. Additional lawsuits relating to the Merger, or disputes arising out of definitive agreements entered into in connection with the Merger, could lead to a decreasearise in the numberfuture. The outcomes of subscribers receiving our programming from multi-channel video programming distributors, whichMerger-related lawsuits and disputes are uncertain and could have a negativenegatively and materially impact on our viewing subscribers and affiliation fee revenues. Similarly, a decrease in viewing subscribers would also have a negative impact on the number of viewers actually watching the programs on our programming networks, which could also impact the rates we are able to charge advertisers.
Economic conditions affect a number of aspects of our businesses worldwide and impact the businesses of our partners who purchase advertising on our networks and might reduce their spending on advertising. Economic conditions can also negatively affect the ability of those with whom we do business to satisfy their obligations to us. The general worsening of current global economic conditions could adversely affect our business, financial condition orand results of operations,operations. Even if we ultimately prevail in a lawsuit or dispute, defending against the claim or resolving the dispute could be time-consuming and the worseningcostly and divert our management’s attention and resources away from our business, which could negatively and materially impact our business, financial condition and results of economic conditionsoperations.
Risks Related to Domestic and Foreign Laws and Regulations; Other Risks Related to International Operations
Changes in certain parts of the world, specifically, could impact the expansion and success of our businesses in such areas.
Domesticdomestic and foreign laws and regulations and other risks related to international operations could adversely impact our operation results.business, financial condition and results of operations.
Programming services like ours, and the distributors of our services, including cable operators, satellite operators and other multi-channel video programming distributors, are regulated by U.S. federal laws and regulations issued and administered by various federal agencies, including the FCC, as well as by state and local governments, in ways that affect the daily conduct of our video content business. These obligations and regulations, among other things, require closed captioning of programming for the hearing impaired, require certain content providers to make available audio descriptions of programming for the visually impaired, limit the amount and content of commercial matter that may be shown during programming aimed primarily at an audience of children aged 12 and under, and require the identification of (or the maintenance of lists of) sponsors of political advertising. See the discussion under “Business – Regulatory Matters” that appears above. The U.S. Congress, the FCC, the Federal Trade Commission (“FTC”), U.S. state legislatures, and the courts currently have under consideration, and may adopt or interpret in the future, new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect the operations of our U.S. media properties or modify the terms under which we offer our services and operate.
Similarly,In addition, we distribute programming outside the foreign jurisdictionsU.S. As a result, our business is, and may increasingly be, subject to certain risks inherent in international business, many of which are beyond our networks are offered have, in varying degrees, control. These risks include:
•laws and regulations governing our businesses. Programming businesses are subjectpolicies affecting trade and taxes, including laws and policies relating to regulationthe repatriation of funds and withholding taxes, and changes in these laws;
•local regulatory requirements (and any changes to such requirements), including restrictions on a country-by-country basis. Changes in regulations imposed bycontent, censorship, imposition of local content quotas, local production levies and investment obligations, and restrictions or prohibitions on foreign governments could also adversely affect our business, results of operationsownership, outsourcing, consumer protection, targeted advertising, intellectual property and ability to expand our operations beyond their current scope.related rights, including copyright and rightsholder rights and remuneration;
Financial markets are subject to volatility and disruptions that may affect •our ability to obtain the appropriate licenses and other regulatory approvals we need to distribute content in foreign countries as well as regulatory intervention on how we currently operate, including how we license and distribute content;
•differing degrees of protection for intellectual property and varying attitudes towards the piracy of intellectual property;
•foreign exchange regulations, or increase significant fluctuations in foreign currency value and foreign exchange rates, as further described below in this Item 1A;
•capital, currency exchange and central banking controls;
•the costinstability of financingforeign economies and governments;
•the potential for political, social, or economic unrest, terrorism, hostilities, cyber-attacks or war, including the ongoing conflicts in Europe and the Middle East;
•anti-corruption laws and regulations such as the Foreign Corrupt Practices Act and the U.K. Bribery Act that impose stringent requirements on how we conduct our foreign operations and changes in these laws and regulations;
•sanction laws and regulations such as those administered by the Office of Foreign Assets Control that restrict our dealings with certain sanctioned countries, territories, individuals and entities; these laws and regulations are complex, frequently changing, and increasing in number, and may impose additional prohibitions or compliance obligations on our dealings in certain countries and territories, including sanctions imposed on Russia and certain Ukrainian territories as well as sanctions imposed on China;
•challenges implementing effective controls to monitor business activities across our expanded international operations;
•foreign privacy and data protection laws and regulations and changes in these laws and regulations; and
•shifting consumer preferences regarding the viewing of video programming and consumption of entertainment content overall.
Events or developments related to these and other risks associated with international trade could adversely affect our revenues from non-U.S. sources as well as our costs, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, some foreign markets where we and our partners operate may be more adversely affected by current economic conditions than the U.S. We also may incur substantial expense as a result of changes, including the imposition of new restrictions, in the existing regulatory, economic or political environment in the regions where we do business.
This is of particular concern in Poland, where we own and operate TVN, a portfolio of free-to-air and pay-TV lifestyle, entertainment, and news networks, which faces legislative and regulatory risk. In the past, said risk has manifested itself in draft legislation, now abandoned, which would have precluded non-EEA ownership of Polish national broadcasters, and in delays in renewing broadcast licenses. Such regulatory pressure on TVN and/or similar developments could, directly or indirectly, affect the future operations of our Polish media properties and/or modify the terms under which we offer our services and operate in that market in the future.
The evolving regulatory environment in international markets may also impact strategy, costs and results of operations, including with respect to local programming levies and investment obligations, satisfaction of local content quotas, access to local production incentive schemes, and direct and indirect digital taxes or levies on internet-based programming services.
We are subject to domestic and international privacy and data protection laws, which impact our ability to collect, manage, and use personal information. Our efforts to comply with such laws, which are continually evolving, could impose costly obligations on us and generate additional regulatory and litigation risk.
We are subject to domestic and international laws associated with the acquisition, storage, disclosure, use and protection of personal data, including under the E.U. General Data Protection Regulation, several U.S. federal and state privacy laws, including, but not limited to, the CCPA, and many other international laws and regulations. These laws and regulations are continually evolving and many more U.S. state and federal laws and international laws may pass this year and over the next few years. See the discussion above in “Business – Regulatory Matters”. These evolving privacy, security, and data protection laws may require us to expend significant resources to implement additional data protection measures, and our actual or alleged failure to comply with such laws could result in legal claims, regulatory enforcement actions and significant fines and penalties.
Environmental, social and governance laws and regulations may adversely impact our businesses.
U.S. state and federal regulators, international regulators, investors, consumers and other stakeholders are increasingly focused on environmental, social, and governance considerations. For example, new domestic and international laws and regulations relating to environmental, social and governance matters, including environmental sustainability and climate change, human capital management, and cybersecurity, are under consideration or have been adopted.Many such laws, including new greenhouse gas emission regulations that have already been adopted in the State of California and in the European Union and have been proposed in other jurisdictions, include specific, quantitative disclosures regarding our global operations, both upstream and downstream. These increased disclosure obligations have required and may continue to require us to implement new practices and reporting processes, and have created and may continue to create additional compliance risk.They may also result in increased costs relating to tracking, reporting and compliance.
Additionally, we have adopted several initiatives and programs focused on environmental, social and governance issues, which may not achieve their intended outcomes. If we are unable to meet our other obligations.enterprise objectives, or live up to evolving stakeholder expectations and industry standards for environmental, social and governance issues, or if we are perceived by consumers, stockholders or employees to have not responded appropriately with respect to these issues, our reputation, and therefore our ability to sell our products and services, could be negatively impacted. If, as a result of their assessment of our performance on environmental, social, and governance matters, certain investors are unsatisfied with our actions or progress, they may reconsider their investment in our Company. Providers of debt and equity financing may also consider our performance in these areas and the ratings of external firms (which we have limited ability to influence) in their decisions involving our Company, which could impact our cost of capital and adversely affect our business.
Increased volatilityForeign exchange rate fluctuations may adversely affect our operating results and disruptionsfinancial conditions.
We have significant operations in a number of foreign jurisdictions and certain of our operations are conducted and certain of our debt obligations are denominated in foreign currencies. The value of these foreign currencies fluctuates relative to the U.S. dollar. As a result, we have exposure to foreign currency risk as we enter into transactions and globalmake investments denominated in multiple currencies. Adverse business performance and financial and equity markets may make it more difficult for us to obtain financing for our operations or investments or increase the cost of obtaining financing. Our borrowing costs can be affected by short and long-term debt ratings assigned by independent rating agencies which are based,results from unforeseen changes in significant part, on our performance as measured by credit metrics such as interest coverage and leverage ratios. A low ratingforeign currency exchange rates could increase our cost of borrowing or make it more difficult for us to obtain future financing. Unforeseeable changesfinancing, which could materially adversely affect our operating results and financial conditions. We manage our exposure to foreign currency risk by entering into derivative instruments with counterparty banks, which exposes us to counterparty credit risk.
Our consolidated financial statements are denominated in foreign currencies could negatively impact our resultsU.S. dollars, and to prepare those financial statements we must translate the amounts of operationsthe assets, liabilities, net sales, other revenues and calculations of interest coverage and leverage ratios.
Acquisitions and other strategic transactions present many risks and we may not realize the financial and strategic goals that were contemplated at the time of any transaction.
From time to time we make acquisitions, investments and enter into other strategic transactions, including our planned transaction with Scripps Networks. In connection with such acquisitions and strategic transactions, we may incur unanticipated expenses fail to realize anticipated benefits, have difficulty incorporating the acquired businesses, disrupt relationships with current and new employees, subscribers, affiliates and vendors, incur significant debt, or have to delay or not proceed with announced transactions such as the Scripps Networks transaction. Additionally, regulatory agencies, such as the FCC or DOJ may impose additional restrictions on the operation of our business as a resultoperations outside of our seeking regulatory approvalsthe U.S. from local currencies into U.S. dollars using exchange rates for any significant acquisitions and strategic transactions. The occurrence of any of these eventsthe current period. This exposure to exchange rate fluctuations could have an adverse effect on our business.
Our inability to successfully acquire and integrate other businesses, assets, products or technologies could harm our operating results.
Our success may depend on opportunities to buy other businesses or technologies that could complement, enhance or expand our current business or products or that might otherwise offer us growth opportunities. We have acquired, and have made strategic investments in, a numberreported results of companies (including through joint ventures) in the past, and we expect to make additional acquisitions and strategic investments in the future. Such transactions may result in dilutive issuances of our equity securities, use of our cash resources, and incurrence of debt and amortization expenses related to intangible assets. Any acquisitions and strategic investments that we are able to identify and complete may be accompanied by a number of risks, including:
the difficulty of assimilating the operations and personnelnet asset balances.
Increasing complexity of acquired companies intoglobal tax policy and regulations could increase our operations;
the potential disruption of our ongoing businesstax liability and distraction of management;
the incurrence of additional operating losses and operating expenses of the businesses we acquired or in which we invested;
the difficulty of integrating acquired technology and rights into our services and unanticipated expenses related to such integration;
the failure to successfully further develop an acquired business or technology and any resulting impairment of amounts currently capitalized as intangible assets;
the failure of strategic investments to perform as expected or to meet financial projections;
the potential for patent and trademark infringement and data privacy and security claims against the acquired companies, or companies in which we have invested;
litigation or other claims in connection with acquisitions, acquired companies, or companies in which we have invested;
the impairment or loss of relationships with customers and partners of the companies we acquired or in which we invested or with our customers and partners as a result of the integration of acquired operations;
the impairment of relationships with, or failure to retain, employees of acquired companies or our existing employees as a result of integration of new personnel;
our lack of, or limitations on our, control over the operations of our joint venture companies;
the difficulty of integrating operations, systems, and controls as a result of cultural, regulatory, systems, and operational differences;
in the case of foreign acquisitions and investments, the impact of particular economic, tax, currency, political, legal and regulatory risks associated with specific countries; and
the impact of known potential liabilities or liabilities that may be unknown, including as a result of inadequate internal controls, associated with the companies we acquired or in which we invested.
Our failure to be successful in addressing these risks or other problems encountered in connection with our past or future acquisitions and strategic investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities, and harm our business generally.
The loss of key personnel or talent could disrupt our business and adversely affect our revenue.
Our business depends upon the continued efforts, abilities and expertise of our corporate and divisional executive teams and entertainment personalities. Our success after the Scripps Networks acquisition will depend in part upon our ability to retain key employees. Prior to and following the completion of the merger, current and prospective employees may experience uncertainty about their future roles with Discovery and choose to pursue other opportunities, which could have an adverse effect on Discovery after the transaction. If key employees depart, the integration of Scripps Networks with Discovery may be more difficult and our business following the completion of the merger may be adversely affected. Additionally, we employ or contract with entertainment personalities who may have loyal audiences. These individuals are important to audience endorsement of our programs and other content. There can be no assurance that these individuals will remain with us or retain their current audiences. If we fail to retain key individuals or if our entertainment personalities lose their current audience base, our operations could be adversely affected.
Newly-enacted US tax reform could adversely impact our international business and results of operations.
Recentlyenacted US tax reform could adversely impact our business and results of operations. On December 22, 2017, President Trump signed
We continue to face the 2017 Tax Cutsincreasing complexity of operating a global business, and Jobs Act ("TCJA"), which includes a broad range of tax reform regulations affecting businesses, including corporate tax rates, business deductions, and international tax provisions. Some of the changes, like the new tax on global intangible low-taxed income ("GILTI") or the base erosion and anti-abuse tax ("BEAT"), could have the effect of increasing our effective tax rate, the amount of our consolidated net taxable incomewe are subject to incomeever-changing tax policy and regulations around the world. Many foreign jurisdictions are contemplating additional taxes and our overall tax liability, and could reduce our net income and our earnings per share,and/or levies on over-the-top services, as well as on media advertising. Other changes in tax laws and the interpretations thereof could have a material impact on our consolidated cash flows and liquidity, even if the changes include a reduction in the rate at which corporate taxable income is taxed.tax liability. In addition, many foreign jurisdictions have increased scrutiny and have either changed, or plan to change, their international tax systems due to the determinationOrganisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting recommendations. These recommendations include, among other things, profit reallocation rules and a 15% global minimum corporate income tax rate. Certain countries in which we operate have adopted legislation, and other countries are expected to introduce legislation, to implement these recommendations. The application of this legislation is evolving, and we continue to assess the potential impact on our worldwide provisionfuture tax liability.
Additional complexity has also arisen with respect to state aid; i.e., state resources used to provide recipients an advantage on a selective basis that has or could distort competition and affect trade between European member states. In recent years the European Commission has increased their scrutiny of state aid and has deviated from historical E.U. state aid practices. We receive material amounts of financial incentives for income taxes and current and deferred tax assets and liabilities requires judgment and estimation. Our income taxes could also be materially adversely affected by earnings being lower than anticipatedconducting our content production activities in various jurisdictions that offer such incentives. If the E.U. were to restrict our ability to receive these incentives, such restrictions could have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, by changes in the valuationa material impact on our results of our deferred tax assets and liabilities, or by changes in worldwide tax laws, regulations, or accounting principles.
operations.
Risks Related to Our DebtFinancial, Capital and Corporate Structure
Forecasting our financial results requires us to make judgements and estimates which may differ materially from actual results.
Given the dynamic nature of our business, the current uncertain economic climate and the inherent limitations in predicting the future, forecasts of our revenues, adjusted earnings before interest, taxes, depreciation, and amortization (as defined in Note 23 to the accompanying consolidated financial statements, “Adjusted EBITDA”), free cash flow and subscriber growth, and other financial and operating data, may differ materially from actual results, including as a result of events outside of our control and other risks and uncertainties described herein. Such discrepancies could cause a decline in the trading price of our common stock.
We have a significant amount of debt and may incur significant amounts of additional debt, which could adversely affect our financial health and our ability to react to changes in our business.business and our ability to incur debt, and the use of our funds could be limited by the restrictive covenants in the agreements governing our revolving credit facility and senior notes.
AsOur consolidated indebtedness as of December 31, 2017, we had approximately $14.8 billion2023 was $41,889 million, of consolidated debt, including capital leases. Our substantial level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay when due the principal of, interest on, or other amounts associated with our indebtedness.which $1,780 million is current. In addition, we have the ability to draw down our $2.5on a $6.0 billion revolving credit facility in the ordinary course, which would have the effect of further increasing our indebtedness.debt to the extent drawn. We are also permitted, subject to certain restrictions under our existing indebtedness,debt agreements, to obtain additional long-term debt and working capital lines of credit to meet future financing needs. This would have the effect of further increasing our total leverage.leverage ratio.
Our substantial leverage could have significant negative consequences on our financial condition and results of operations, including:
impairing our ability to meet one or more of the financial ratio covenants contained in our debtloan agreements or to generate cash sufficient to pay interest or principal, which could result in an acceleration of some or all of our outstanding debt in the event that an uncured default occurs;
increasing our vulnerability to general adverse economic and market conditions;
limiting our ability to obtain additional debt or equity financing;
requiring the dedication of a substantial portion of our cash flow from operations to service our debt, thereby reducing the amount of cash flow available for other purposes;
requiring us to sell debt or equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations;
limiting our flexibility in planning for, or reacting to, changes in our business and the markets in which we compete; and
placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources.
Our ability to incur debt and the use of our funds could be limited by the restrictive covenants in the loan agreement for our revolving credit facility.
The loan agreement for our revolving credit facility containscontain restrictive covenants, as well as requirements to comply with certain leverage ratio and other financial maintenance tests. These covenants and requirements could limit our ability to take various actions, including incurring additional debt, guaranteeing indebtedness and engaging in various types of transactions, including mergers, acquisitions and sales of assets. These covenants could place us at a disadvantage comparedassets, or to sometake advantage of our competitors, who may have fewer restrictive covenants and may not be required to operate under these restrictions. Further, these covenantsother opportunities, which could have an adverse effect on our business by business.
In addition, as a result of our significant indebtedness, our corporate or debt-specific credit rating could be downgraded, which may increase our borrowing costs or subject us to even more restrictive covenants when we incur new debt in the future, which could reduce profitability and diminish operational flexibility.
If we are unable to effectively reduce and sustain our leverage ratio, it could have significant negative consequences on our financial condition and results of operations, including:
•impairing our ability to meet one or more of the financial ratio covenants contained in our revolving credit facility or to generate cash sufficient to pay the interest or principal, which could result in an acceleration of some or all of our outstanding debt in the event that an uncured default occurs;
•increasing our vulnerability to adverse economic and market conditions;
•limiting our ability to take advantageobtain additional debt or equity financing;
•requiring the dedication of financing,a substantial portion of our cash flow from operations to service our debt, thereby reducing the amount of cash flow available for other purposes such as capital expenditures, investments, share repurchases, and mergers and acquisitionsacquisitions;
•requiring us to sell debt or other opportunities.equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations;
Risks Related•limiting our flexibility in planning for, or reacting to, Corporate Structurechanges in our business and the markets in which we compete; and
As•placing us at a holding company, wepossible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources.
We could be unable to obtain cash in amounts sufficient to meet our financial obligations or other commitments.
Our ability to meet our financial obligations and other contractual commitments will depend upon our ability to access cash. We are a holding company, and our sources of cash include our available cash balances, net cash from the operating activities of our subsidiaries, any dividends and interest we may receive from our investments, availability under our credit facilityfacilities or any credit facilities that we may obtain in the future and proceeds from any asset sales we may undertake in the future. The ability of our operating subsidiaries, including WarnerMedia Holdings, Inc., Scripps Networks Interactive, Inc., and Discovery Communications, LLC to pay dividends or to make other payments or advances to us will depend on their individual operating results and any statutory, regulatory or contractual restrictions, including restrictions under our credit facility,facilities, to which they may be or may become subject. Under the TCJA,2017 Tax Cuts and Jobs Act, we arewere subject to U.S. taxes for the deemed repatriation of certain cash balances held by foreign corporations. However, we intentThe Company intends to continue to permanently reinvest these funds outside of the U.S., and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.
Certain of our businesses are conducted through joint ventures or partnerships with one or more third parties, in which we share ownership, management and profits of the business operation to varying degrees.
Certain of our businesses are conducted through joint ventures or partnerships with one or more third parties, where we have varying degrees of ownership and influence. From time to time, we may disagree with our joint venture partners on the strategy or management of a joint venture business but may be constrained in our ability to make decisions unilaterally as a result of legal or contractual obligations to our joint venture partners, which could adversely affect our business, financial condition and results of operations. In addition, we believe our relationship with our third-party partners is an important factor in the success of any joint venture or partnership. If a partner changes, our relationship may be adversely affected and we may not realize the anticipated benefits from such joint venture or partnership.
We have directors in commonthat are also related persons of Advance/Newhouse Programming Partnership (“Advance/Newhouse”) and that overlap with those of Liberty Media Corporation (“Liberty Media”), Liberty Global plc (“Liberty Global”), Qurate Retail Group f/k/a Liberty Interactive Corporation (“Liberty Interactive”Qurate Retail”) and, Liberty Broadband Corporation ("(“Liberty Broadband"Broadband”), and Liberty Latin America Ltd (“LLA”), which may lead to conflicting interests for those directors or result in the diversion of business opportunities or other potential conflicts.
Advance/Newhouse owns shares representing approximately 8% of our outstanding common stock. Our board of directors includes Steven A. Miron, the Chief Executive Officer of Advance/Newhouse and Steven O. Newhouse, Co-President of Advance Publications, Inc., which holds interests in Advance/Newhouse and Charter Communications, Inc. (“Charter”). Pursuant to a consent agreement entered into between Advance/Newhouse and the Company in connection with the Merger, the Company designated Mr. Miron and Mr. Newhouse to our board of directors with terms ending in 2025. Mr. Miron is also a member of the board of directors of Charter, of which Liberty Broadband and Advance Publications, Inc. own equity interests.
In addition, Dr. John C. Malone, chairman of Liberty Media, Liberty Global Liberty Interactive and Liberty Broadband and member of the board of directors of Qurate Retail, serves on our board of directors. Our board of directors also currently includes one other person who is currently a member of the board of directors of Liberty Global, and a member of the board of directors of LLA. The respective parent companies of Advance/Newhouse and of Liberty Media, Liberty Global, Qurate Retail, Liberty Broadband, and LLA (together, the "Liberty Entities"“Liberty Entities”) own interests in
various U.S. and international media, communications and entertainment companies, such as Charter, Communications, Inc. ("Charter"), that have subsidiaries that own or operate domestic or foreign content services that may compete with the content services we offer. We have no rights in respect of U.S. or international content opportunities developed by or presented to the subsidiaries of any Liberty Entities, and the pursuit of these opportunities by such subsidiaries may adversely affect our interests and those of our stockholders. Because we and the Liberty Entities have overlapping directors, the pursuit of business opportunities may serve to intensify the conflicts of interest or appearance of conflicts of interest faced by the respective management teams. Our charter provides that none of our directors or officers will be liable to us or any of our subsidiaries for breach of any fiduciary duty by reason of the fact that such individual directs a corporate opportunity to another person or entity (including any Liberty Entities), for which such individual serves as a director or officer, or does not refer or communicate information regarding such corporate opportunity to us or any of our subsidiaries, unless (x) such opportunity was expressly offered to such individual solely in his or her capacity as a director or officer of us or any of our subsidiaries and (y) such opportunity relates to a line of business in which we or any of our subsidiaries is then directly engaged.
We have directors that are also related persons of Advance/Newhouse and that overlap with those of the Liberty Entities, which may lead to conflicting interests for those tasked with the fiduciary duties of our board.
Our eleven-person board of directors includes three designees of Advance/Newhouse, including Robert J. Miron, who was the Chairman of Advance/Newhouse until December 31, 2010, and Steven A. Miron, the Chief Executive Officer of Advance/Newhouse. In addition, our board of directors includes two persons who are currently members of the board of directors of Liberty Media, three persons who are currently members of the board of directors of Liberty Global, one person who is currently a member of the board of directors of Liberty Interactive, two persons who are currently members of the board of directors of Liberty Broadband and two persons who are currently members of the board of directors of Charter, of which Liberty Broadband owns an equity interest. John C. Malone is the Chairman of the boards of all of the Liberty Entities and is a member of the board of directors of Charter. The parent company of Advance/Newhouse and the Liberty Entities own interests in a range of media, communications and entertainment businesses.
Advance/Newhouse will elect three directors annually for so long as it owns a specified minimum amount of our Series A-1 convertible preferred stock. The Advance/Newhouse Series A-1 convertible preferred stock, which votes with our common stock on all matters other than the election of directors, represents approximately 24% of the voting power of our outstanding shares. The Series A-1 convertible preferred stock also grants Advance/Newhouse consent rights over a range of our corporate actions, including fundamental changes to our business, the issuance of additional capital stock, mergers and business combinations and certain acquisitions and dispositions.
None of the Liberty Entities own any interest in us. Mr.Dr. Malone beneficially owns stockowns: shares of Liberty Media representing approximately 47%48% of the aggregate voting power of its outstanding stock, owns shares representing approximately 26%30% of the aggregate voting power of Liberty Global, shares representing approximately 39%6% of the aggregate voting power of Liberty Interactive,Qurate Retail, shares representing approximately 46%48% of the aggregate voting power of Liberty Broadband and shares representing approximately 21% of the aggregate voting power (otherless than with respect to the election of the common stock directors)1% of our outstanding stock. Mr. Malone controls approximately 28% of our aggregate voting power relating to the election of our eight common stock directors, assuming that the preferred stock owned by Advance/Newhouse has not been converted into shares of our common stock. Our other directors who are also directors of the Liberty Entities ownhold stock and stock incentives ofstock-based compensation in the Liberty Entities and ownhold our stock and stock incentives.stock-based compensation.
These ownership interests and/or business positions could create conflicts of interest or appear to create, potentialthe appearance of conflicts of interest when these individuals are faced with decisions that could have different implications for us, Advance/Newhouse and/or the Liberty Entities. For example, there may be the potential for a conflict of interest when we, on the one hand, or Advance/Newhouse and/or one or more of the Liberty Entities, on the other hand, consider acquisitions and other corporate opportunities that may be suitable for the other.
The members of our board of directors have fiduciary duties to us and our stockholders. Likewise, those persons who serve in similar capacities at Advance/Newhouse or a Liberty Entity have fiduciary duties to those companies. Therefore, such persons may have conflicts of interest or the appearance of conflicts of interest with respect to matters involving or affecting both respective companies, and there can be no assurance that the terms of any transactions will be as favorable to us or our subsidiaries as would be the case in the absence of a conflict of interest.
It may be difficult for a third party to acquire us, even if such acquisition would be beneficial to our stockholders.
CertainIn connection with the Merger, we agreed with AT&T that for a two-year period following the Merger, we would not, among other things and subject to certain exceptions, enter into any transaction or series of transactions as a result of which one or more persons would acquire an amount of stock of our Company that, when combined with certain other changes in ownership of our stock (including the Merger), would equal or exceed 45% of the outstanding stock of our Company. Further, certain provisions of our charter and bylaws may discourage, delay or prevent a change in control that a stockholder may consider favorable. These provisions include the following:
authorizing a capital structure with multiple series of common stock: a Series B that entitles the holders to ten votes per share, a Series A-1 that entitles the holders to one vote per share and a Series C that, except as otherwise required by applicable law, entitles the holders to no voting rights;
•authorizing the Series A-1 convertibleissuance of “blank check” preferred stock with special voting rights,without stockholder approval, which prohibits us from taking anycould be issued by our board of the following actions, among others, without the prior approval of the holders of a majority of the outstanding shares of such stock:
increasingdirectors to increase the number of members of the Board of Directors above ten;outstanding shares and thwart a takeover attempt;
making any material amendment to our charter or by-laws;
engaging in a merger, consolidation or other business combination with any other entity; and
appointing or removing our Chairman of the Board or our Chief Executive Officer;
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�� | authorizing the issuance of “blank check” preferred stock, which could be issued by our Board of Directors to increase the number of outstanding shares and thwart a takeover attempt; |
•classifying our common stockboard of directors with staggered three-year terms and having threeuntil the election of directors elected by the holdersat our 2025 annual meeting of the Series A convertible preferred stock,stockholders, which may lengthen the time required to gain control of our Boardboard of Directors;directors;
•limiting who may call special meetings of stockholders;
•prohibiting stockholder action by written consent, (subject to certain exceptions), thereby requiring stockholder action to be taken at a meeting of the stockholders;
•establishing advance notice requirements for nominations of candidates for election to our Boardboard of Directorsdirectors or for proposing matters that can be acted upon by stockholders at stockholder meetings;
requiring stockholder approval by holders of at least 80% of our voting power or the approval by at least 75% of our Board of Directors with respect to certain extraordinary matters, such as a merger or consolidation, a sale of all or substantially all of our assets or an amendment to our charter;
requiring the consent of the holders of at least 75% of the outstanding Series B common stock (voting as a separate class) to certain share distributions and other corporate actions in which the voting power of the Series B common stock would be diluted by, for example, issuing shares having multiple votes per share as a dividend to holders of Series A common stock; and
•the existence of authorized and unissued stock which would allow our Boardboard of Directorsdirectors to issue shares to persons friendly to current management, thereby protecting the continuity of our management, or which could be used to dilute the stock ownership of persons seeking to obtain control of us.
WeIn addition, under our charter, we have also adoptednot opted out of the protections of Section 203 of the Delaware General Corporation Law (the “DGCL”), and we are therefore governed by Section 203. Accordingly, it is expected that Section 203 will have an anti-takeover effect with respect to transactions that our board of directors does not approve in advance and that Section 203 may discourage takeover attempts that might result in a shareholder rights plan in orderpremium over the market price of WBD capital stock.
These provisions are intended to encourage anyone seeking to acquire usprotect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Boardboard of Directors priordirectors and by providing our board of directors with more time to attempting a takeover. Whileassess any acquisition proposal. These provisions are not intended to make us immune from takeovers. As noted above, these provisions apply even if the planoffer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our board of directors determines is designed to guard against coercive or unfair tactics to gain control of us, the plan may have the effect of making more difficult or delaying any attempts by others to obtain control of us.
Holders of any single series ofnot in our common stock may not have any remedies if any action by our directors or officers has an adverse effect on only that series of common stock.
Principles of Delaware lawbest interests and the provisions of our charter may protect decisions of our Board of Directors that have a disparate impact upon holders of any single series of our common stock. Under Delaware law, the Board of Directors has a duty to act with due care and in the best interests of all of our stockholders, including the holders of all series ofstockholders. Accordingly, if our common stock. Principles of Delaware law established in cases involving differing treatment of multiple classes or series of stock provide that a board of directors owes an equal duty to all common stockholders regardless of class or seriesdetermines that a potential business combination transaction is not in our best interests and does not have separate or additional duties to any group of stockholders. As a result, in some circumstances, our directors may be required to make a decision that is adverse to the holders of one series of common stock. Under the principles of Delaware law referred to above, stockholders may not be able to challenge these decisions if our Board of Directors is disinterested and adequately informed with respect to these decisions and acts in good faith and in the honest belief that it is acting in the best interests of allour stockholders, but certain stockholders believe that such a transaction would be beneficial to us and our stockholders, such stockholders may elect to sell their shares in WBD and the market price of our stockholders.WBD common stock could decrease.
If Advance/Newhouse were to sell its shares following the exercise of its registration rights, it may cause a significant decline in our stock price, even if our business is doing well.
Advance/Newhouse hasand Advance Newhouse Partnership (“ANP”) have been granted registration rights covering all of the shares of common stock issuable upon conversionnow held or hereafter acquired by them. Subject to certain limitations and restrictions, including customary “blackout periods”, Advance/Newhouse and ANP have the right to assign any or all of the convertible preferred stocktheir registration rights to their affiliates and successors, as well as a specified family foundation. The shares held by Advance/Newhouse. Advance/Newhouse’s Series A-1 convertible preferred stock is currently convertible into nine shareNewhouse and ANP are registered for resale pursuant to our registration statement on Form S-3 filed April 22, 2022. Any future exercise of our Series A common stock and Advance/Newhouse’s Series C-1 convertible preferred stock is convertible into 19.3648 shares of our Series C common stock, subject to certain anti-dilution adjustments. The registration rights which are immediately exercisable, are transferable with theor sale or transfer by Advance/Newhouse of blocks of shares representing 10% or more of the preferred stock it holds. The exercise of the registration rights, and subsequent sale of
possibly large amounts of our common stock in the public market could materially and adversely affect the market price of our common stock.
General Risks
We face cybersecurity and Advance/Newhouse each have significant voting power with respect to corporate matters considered by our stockholders.
For corporate matters other thansimilar risks, which could result in the electiondisclosure of directors, Mr. Malone and Advance/Newhouse each beneficially own sharesconfidential information, disruption of our stock representing approximately 21%programming services, damage to our brands and 24%, respectively,reputation, legal exposure and financial losses.
We and our partners rely on various technology systems in connection with the production, distribution and broadcast of our programming, and our online, mobile and app offerings, as well as our internal systems, involve the storage and transmission of personal and proprietary information. In the ordinary course of our business, cyber criminals and other malicious actors consistently target us and our service providers. Our systems and our service providers’ systems have been breached in the past due to cybersecurity attacks. These systems may continue to be breached in the future due to employee error or misconduct, system vulnerabilities, malicious code, hacking and phishing attacks, or otherwise. The risk of cyberattacks may continue to increase as technologies evolve and cyber criminals conduct their attacks using more sophisticated methods, including those which use AI. The risk of cyberattacks has also increased and is expected to continue to increase in connection with geopolitical events and dynamics, including ongoing conflicts in Europe and the Middle East and tensions with Russia, China, North Korea, Iran and other states. State-sponsored parties or their supporters may launch retaliatory cyberattacks, and may attempt to cause supply chain disruptions, or carry out other geopolitically motivated retaliatory actions that may adversely disrupt or degrade our operations and may result in data compromise. Cybersecurity threats originate from a wide variety of sources/malicious actors, including, but not limited to, persons who constitute an insider threat, who are involved with organized crime, or who may be linked to terrorist organizations or hostile foreign governments. Those same parties may also attempt to fraudulently induce employees, customers, or other users of our systems to disclose sensitive information in order to gain access to our data systems or that of our service providers, customers or clients through social engineering, phishing, mobile phone malware, account takeovers, SIM card swapping, or similar methods.
We have implemented processes, strategies and incident response plans designed to identify, assess and manage cyber risks and information security vulnerabilities (as further described in Item 1C. Cybersecurity). However, our procedures may not be sufficient to adequately mitigate the negative impacts of a cyber breach or adverse event. If our or our service providers’ information security systems or data are compromised, such compromises could result in a disruption of services or a reduction of the aggregate voting power representedrevenues we are able to generate from such services, damage to our brands and reputation, a loss of confidence in the security of our offerings and services, and significant legal, regulatory and financial exposure, each of which could potentially have an adverse effect on our business.
Theft of our intellectual property and unauthorized duplication, distribution and exhibitions of our intellectual property may decrease revenues and adversely affect our business, financial condition, and results of operations.
The success of our business depends in part on effective and deterrent laws efficiently implemented by law enforcement to enable our outstanding stock. With respectability to maintain and enforce the intellectual property rights underlying our content and brands. We are a global media and entertainment company, and piracy or other infringement of our intellectual property (including digital content, feature films, television programming, gaming, and other content), brands and other intellectual property has the potential to materially adversely affect us. Piracy is particularly prevalent in parts of the world that do not effectively enforce intellectual property rights and laws. Even in territories like the U.S. that have stronger intellectual property laws, legal frameworks that are unresponsive to modern realities, combined with the lack of effective technological prevention and enforcement measures, may impede our enforcement efforts. Our enforcement activities depend in part on third parties, including technology and platform providers, whose cooperation and effectiveness cannot be assured to any degree. In addition, technological advances that allow the almost instantaneous unauthorized copying and downloading of content into digital formats without any degradation of quality from the original facilitate the rapid creation, transmission, and sharing of high-quality unauthorized copies. This is also true for broadcast signals, which can be retransmitted without any degradation of quality from the original via unauthorized services. Unauthorized distribution of copyrighted material over the internet is a threat to copyright owners’ ability to maintain the exclusive control over their copyrighted material and thus the value of their property. The proliferation of unauthorized use of our content may have a material adverse effect on our business and profitability. For example, it may reduce the revenue that we potentially could receive from the legitimate sale and distribution of our content. We may also need to spend significant amounts of money on improvement of technological platform security and enforcement activities, including litigation, to protect our intellectual property rights. Further, new technologies such as generative AI and their impact on our intellectual property rights remain uncertain, and development of the law in this area could impact our ability to protect against infringing uses or result in infringement claims against us.
Any impairment of our intellectual property rights, including due to changes in U.S. or foreign laws, the absence of effective legal protections or enforcement measures, or the inability to negotiate license or distribution agreements with third parties, could materially adversely impact our business, financial condition, and results of operations. As a global company, we are subject to laws in the U.S. and abroad, as well as trade agreements which may limit our ability to exploit our intellectual property. For example, in certain countries, including China, laws and regulations limit the number of foreign films exhibited in such countries in a calendar year.
From time to time, third parties may also challenge the validity or scope of our intellectual property and may assert infringement claims against us, and the success of any such challenges could result in the limitation or loss of intellectual property rights. Irrespective of their validity, such claims may result in substantial costs and diversion of resources which could have an adverse effect on our operations.
Our success depends on attracting, developing, motivating and retaining key employees and creative talent within our business. Significant shortfalls in recruitment or retention, or failure to adequately motivate or compensate employees or creative talent, could adversely affect our ability to compete and achieve our strategic goals.
Attracting, developing, motivating and retaining talented employees are essential to the electionsuccessful delivery of directors, Mr. Malone controls approximately 28%our products and services and success in the marketplace. Our business depends upon the continued efforts, abilities and expertise of our corporate and divisional executive teams and entertainment personalities, and the aggregate voting power relatingability to attract and retain these talented employees and personalities is critical in the electiondevelopment and delivery of products and services, which is an integral component of our growth strategy. Competition for employees and personalities can be intense and if we are unable to successfully integrate, motivate and reward our current employees, we may not be able to retain them. If we are unable to retain these employees or attract new employees in the eight common stock directors (assumingfuture, our ability to effectively compete with our competitors and to grow our business could be materially adversely affected. Additionally, following the Merger, we have undertaken a number of restructuring and transformation initiatives, including headcount reduction. This headcount reduction and other restructuring initiatives could disrupt our operations, adversely impact employee morale and our reputation as an employer, which could make it more difficult for us to retain existing employees and hire new employees in the future, distract management and harm our business overall.
In addition, we employ or contract with talent who may have loyal audiences. These individuals are important to audience endorsement of our programs and other content. There can be no assurance that these individuals will remain with us or retain their current audiences. If we fail to retain or attract key individuals or if our talent loses their current audience base or suffer negative publicity, our business, financial condition and results of operations could be materially adversely affected.
Global economic conditions and other global events may have an adverse effect on our business.
Our business is significantly affected by prevailing economic conditions and levels of consumer discretionary spending. A downturn in global economic conditions may negatively affect our current and potential customers, particularly advertisers whose expenditures are sensitive to general economic conditions, vendors and others with whom we do business and their ability to satisfy their obligations to us. In addition, inflationary conditions or an increase in price levels generally increases our content production costs and other costs of doing business, which could negatively affect our profitability. Further, a high interest rate environment, whether arising out of a policy response to inflationary conditions or otherwise, increases the convertible preferred stock ownedcosts of our securitization portfolio, which may also negatively affect our results of operations.
Decreases in consumer discretionary spending in the U.S. and other countries where our content is distributed may cause a decrease in cable television subscriptions, subscriptions to our DTC products, or movie theater attendance to view our feature films, among others, all of which may negatively affect our revenues and results of operations.
In addition, our business and operations has been, and in the future could be, disrupted or impacted by Advance/Newhouse (the “A/N Preferred Stock”) has not been converted into sharesother global events, including political, social, or economic unrest, terrorism, hostilities, natural disasters such as earthquakes, or pandemics. For example, the COVID-19 pandemic had numerous effects on our business including a decrease in advertising revenues, a postponement of significant live events, and reduced movie theater attendance. Other global events in the future could disrupt our business and operations in unpredictable ways.
The market price of our common stock). stock has been highly volatile and may continue to be volatile due, in part, to circumstances beyond our control.
The A/N Preferred Stock carries with it the right to designate three preferred stock directors tomarket price of our board (subject to certain conditions), but does not carry voting rights with respect to the election of the eight common stock directors. Also,has fluctuated, and may continue to fluctuate, due to many factors, some of which may be beyond our control. These factors include, without limitation:
•actual or anticipated variations in our financial and operating results;
•changes in our estimates, guidance or business plans;
•variations between our actual results and expectations of securities analysts, or changes in financial estimates and recommendations by securities analysts;
•market sentiment about our industry in general or our business in particular, including our level of debt, our leverage ratio, and our ability to effectively compete in the categories and industries in which we operate;
•the activities, operating results or stock price of our competitors, or other industry participants;
•spending on domestic and foreign television and digital advertising;
•the announcement or completion of significant transactions by us or a competitor;
•overall general market fluctuations and other events affecting the stock market generally; and
•the economic and political conditions in the U.S. and internationally, as well as other factors described in this Item 1A.
Some of these factors may adversely impact the price of our common stock, regardless of our operating performance. Further, volatility in the price of our common stock may negatively impact our business, including by limiting our financing options for acquisitions and other business expansion.
Strategic transactions and acquisitions present many risks and we may not realize the financial and strategic goals that were contemplated at the time of any transaction.
From time to time we may enter into strategic transactions, make investments or make acquisitions, such as the Merger. Our success may depend on opportunities to buy other businesses or technologies that could complement, enhance or expand our current business or products or that might otherwise offer us growth opportunities. Such transactions may result in dilutive issuances of our equity securities, use of our cash resources, and incurrence of significant debt and amortization expenses related to intangible assets. We may also incur unanticipated expenses, fail to realize anticipated benefits, have difficulty integrating the acquired businesses, disrupt relationships with current and new employees, subscribers, affiliates and vendors, or have to delay or not proceed with announced transactions.
Additionally, regulatory agencies, such as the FCC or U.S. Department of Justice, may impose additional restrictions on the operation of our business as a result of our seeking regulatory approvals for any strategic transactions and significant acquisitions. The occurrence of any of these events could have an adverse effect on our business.
Our participation in multiemployer defined benefit pension plans could subject us to liabilities that could adversely affect our business, financial condition and results of operations.
We contribute to various multiemployer defined benefit pension plans (the “multiemployer plans”) under the terms of collective bargaining agreements that cover certain of our union-represented employees which could subject us to liabilities in certain circumstances. The amount of funds we may be obligated to contribute to multiemployer plans in the A/N Preferred Stock, Advance/Newhouse has special voting rightsfuture cannot be estimated, as these amounts are based on future levels of work of the union-represented employees covered by the multiemployer plans, investment returns and the funding status of such plans. As of December 31, 2023, we were an employer that provided more than 5% of total contributions to certain enumerated matters,of the multiemployer plans in which we participate. If we choose to stop participating or substantially reduce participation in certain of these plans, we may be subject to a withdrawal liability. In addition, actions taken by any other participating employer that lead to a deterioration of the financial health of a multiemployer plan may result in the unfunded obligations of the multiemployer plan being borne by its remaining participating employers, including material amendmentsus. To the extent a multiemployer plan is underfunded or in endangered, seriously endangered or critical status, additional required contributions and benefit reductions may apply. We currently contribute to multiemployer plans that are underfunded, and, as such, under federal law we may be subject to substantial liabilities in the event of a complete or partial withdrawal from, or a voluntary or involuntary withdrawal from, or termination of, such plans. There can be no assurance that we will not be subject to liabilities in the future due to the restated charter and bylaws, fundamental changesforegoing or other circumstances that may arise in connection with these plans or that we can adequately mitigate these costs, any of which could materially adversely affect our business, mergersfinancial condition and otherresults of operations.
Our business, combinations, certain acquisitionsfinancial condition and dispositions and future issuancesresults of capital stock. Although there is no stockholder agreement, voting agreement or any similar arrangement between Mr. Malone and Advance/Newhouse,operations may be negatively impacted by virtue of their respective holdings, Mr. Malone and Advance/Newhouse each have significant influence over the outcome of uncertainties related to litigation.
From time to time, we may be involved in a number of legal claims, regulatory investigations, litigation actions (asserted individually and/or on behalf of a class), and arbitration proceedings. We may be subject to a number of lawsuits both in the U.S. and in foreign countries, including, at any corporate transactionparticular time, claims relating to antitrust, intellectual property, employment, wage and hour, consumer privacy, regulatory and tax proceedings, contractual and commercial disputes, and the production, distribution, and licensing of our content. We may also spend substantial resources complying with various government standards, which may entail related investigations and litigation. We may incur significant expenses defending such suits or other matter submittedgovernment charges and may be required to pay amounts or otherwise change our stockholders.operations in ways that could materially adversely affect our business, financial condition and results of operations. This could result in an increase in our cost for defense or settlement of claims or indemnification obligations if we were to be found liable in excess of our historical experience. Even if we believe a claim is without merit, and/or we ultimately prevail, defending against the claim could be time-consuming and costly and divert our management’s attention and resources away from our business.
In addition, our insurance may not be adequate to protect us from all significant expenses related to pending and future claims and our current levels of insurance may not be available in the future at commercially reasonable prices. Any of these factors could adversely affect our business, financial condition and results of operations.
ITEM 1B. Unresolved Staff Comments.
None.
ITEM 1C. Cybersecurity.
We have a cybersecurity program to assess and manage risks to the confidentiality, integrity, and availability of our data, networks and technology assets across WBD. Our Chief Information Security Officer (“CISO”) is responsible for cybersecurity risk oversight and oversees a global organization whose responsibilities include proactively managing and monitoring information and content security, cybersecurity risk, and processes to enable secure and resilient access to, and use of, WBD products and services. Since the closing of the Merger in 2022, we have continued to strengthen and enhance our cybersecurity program and integrate it into our overall risk management processes.
Risk Management and Strategy
We have a cybersecurity risk management strategy for safeguarding our digital assets that includes both technical and non-technical cybersecurity controls. Our multi-layered technical defense involves a series of protective measures across various levels of our technology environment. This includes fortifying our network perimeter through intrusion detection and prevention systems, securing individual devices with antivirus solutions and endpoint detection, implementing network security measures, and ensuring the resilience of applications. In addition to these technical security solutions, we also leverage non-technical methods, such as promoting a cybersecurity-conscious culture throughout WBD which includes mandatory annual cybersecurity training for all employees, a regular cadence of cybersecurity messaging to our employees, and frequent phishing simulations. Further, we engage independent third parties to conduct annual internal and external penetration testing and independent assessments of our cybersecurity risk management practices using the National Institute of Standards and Technology’s cybersecurity framework and other leading industry practices as guidelines. We also engage an independent third party to conduct a biennial cybersecurity maturity assessment to evaluate the maturity of our entire cybersecurity program.
We also invest in cybersecurity incident detection and response. Our Cybersecurity Operations Center provides continuous threat monitoring and anomaly detection that is intended to prevent or minimize damage from a cybersecurity attack. We have a Cybersecurity Incident Response Plan that establishes procedures, roles, responsibilities, and communication protocols for WBD executive management and technical staff in the event of a cybersecurity incident. We test the efficacy of the Cybersecurity Incident Response Plan and assess our response capabilities by conducting annual tabletop exercises that simulate cybersecurity threat scenarios.
We have ongoing processes to identify and assess cybersecurity risks associated with current and prospective third-party service providers. These processes include a vendor cybersecurity compliance assessment at the time of onboarding, contract renewal and/or as needed in the event of a cybersecurity incident affecting such third-party vendor. In addition, we require our providers to meet appropriate security requirements, controls and responsibilities and notify us in the event of a cybersecurity incident that impacts us.
We have established cybersecurity information sharing and collaboration practices with both government agencies and industry partners, which we believe enhances our overall cybersecurity resilience.
Governance
We have established a cybersecurity governance structure to engage appropriate stakeholders. Our CISO is informed about and monitors our prevention, detection, mitigation and remediation efforts related to cyber threats through regular communication and reporting from our information security team. Our Chief Financial Officer, our Chief Legal Officer, our Chief Audit and Risk Officer and our Chief Information Officer also have input and involvement in our cybersecurity program. Our Board of Directors has an active role, as a whole and at the committee level, in overseeing the Company’s overall risk management, including cybersecurity risks. Our Board of Directors has delegated responsibility for cybersecurity and information technology risks to our Audit Committee and is regularly informed about such risks through committee reports and other presentations. Our Audit Committee regularly reviews and discusses our cybersecurity risks and is updated by our CISO on how we identify, assess and mitigate those risks. Our Audit Committee receives quarterly updates from our CISO on our cybersecurity risk posture, the status of projects to strengthen and enhance our cybersecurity program, the evolving threat landscape, and cybersecurity incident reports and learnings. The Audit Committee also periodically devotes additional meeting time, as needed, to in-depth discussions on a particularly relevant cybersecurity topic or to education on developments in the realm of cybersecurity. In addition to the quarterly incident reports, cybersecurity incidents meeting pre-determined criteria are reported to the Audit Committee outside of regularly scheduled quarterly updates and to WBD executive management as needed. See Item 1A, “Risk Factors” for details on the risks from cybersecurity threats that we face.
Our CISO has over 30 years of expertise in global digital and information security, cybersecurity risk management, data privacy and compliance across diverse industries including media and entertainment, biotechnology, pharmaceuticals, financial services, and government defense sectors and holds multiple industry-recognized certifications including, among others, a Certificate of Cybersecurity Oversight from the National Association of Corporate Directors and a Certified Information Systems Security Professional certification.
ITEM 2. Properties.
We ownThe Company’s headquarters are located in New York City at 230 Park Ave. South. The Company owns and leaseleases approximately 2.2723 million square feet of building space for the conduct of our businesses at 84 locations throughout the world. In the U.S. alone, we ownoffices; studios; technical, production and lease approximately 597,000warehouse spaces; and 840,000 square feet of building space, respectively, at 22 locations. Principalother properties in numerous locations in the U.S. include: (i) a headquarters located at One Discovery Place, Silver Spring, Maryland, where approximately 543,000 square feet is usedand around the world for certain executive and corporate offices and general office space by our U.S. Networks and Education and Other segments, (ii) general office space at 850 Third Avenue, New York, New York, where approximately 190,000 square feet is primarily used for sales by our U.S. Networks segment and certain executive offices, (iii) general office space facility located at 8045 Kennett Street, Silver Spring, Maryland, where approximately 149,000 square feet is primarily used by our U.S. Networks segment, (iv) general office space located at 10100 Santa Monica Boulevard, Los Angeles, California, where approximately 64,000 square feet is primarily used by our U.S. Networks segment, (v) general office space at 6505 Blue Lagoon Drive, Miami, Florida, where approximately 91,000 square feet is primarily used by our International Networks segment, and (vi) an origination facility at 45580 Terminal Drive, Sterling, Virginia, where approximately 54,000 square feet of space is used to manage the distribution of domestic network television content by our U.S. Networks segment.
We also lease over 833,000 square feet of building space at 62 locations outside of the U.S., including the U.K., France, Denmark, Italy, Singapore & Poland. Included in the non-US office figures are approximately 138,000 square feet of building space used for office, production and post-production for Eurosport.
its businesses. Each property is considered to be in good condition, adequate for its purpose, and suitably utilized according to the individual nature and requirements of the relevant operations. Our policy is to improve and replace propertyoperations housed within. The following table sets forth information as considered appropriate to meet the needs of the individual operation.
On January 9, 2018, we issued a press release announcing a new real estate strategy with plans to relocate the Company's global headquarters from Silver Spring, Maryland to New York City in 2019. As of December 31,
2017, we did not meet2023 with respect to the
held for sale classification criteria, as defined in the U.S. generally accepted accounting principles ("GAAP"), as it is uncertain that the sale of the Silver Spring property will be completed within the next twelve months.Company’s principal properties: | | | | | | | | | | | | | | | | | | | | |
| Location | | Principal Use | | Approximate
Square Footage | | Type of Ownership; Expiration Date of Lease |
Burbank, CA
4000 Warner Blvd. | | Studios | | 2,600,000 | | | Owned. |
New York, NY
30 Hudson Yards | | Studios, Networks, DTC, and Corporate | | 1,500,000 | | | Leased; expires in 2034. |
Leavesden, UK
Warner Drive (Studios); Studio Tour Drive (Studio Tour); 5 and 6 Hercules Way (Leavesden Park) | | Studios | | 1,300,000 | | | Owned. |
Atlanta, GA
1050 Techwood Drive | | Studios, Networks, DTC, and Corporate | | 1,170,000 | | | Owned. |
Atlanta, GA
One CNN Center | | Studios, Networks, and Corporate | | 1,150,000 | | | Leased; expires in 2024. |
Burbank, CA
3000 West Alameda Avenue | | Studios | | 860,000 | | | Owned. |
Burbank, CA
100 and 200 South California Street | | Studios and Corporate | | 811,000 | | | Leased; Tower 1 expires in 2037 and Tower 2 expires in 2039. |
Santiago, Chile
Pedro Montt 2354 | | Studios and Networks | | 610,000 | | | Owned. |
Tokyo, Japan
1-1625-1, Kasuga-cho, Nerima-ku | | Studios | | 527,000 | | | Leased; expires in 2052. |
Atlanta, GA
3755 Atlanta Industrial Pkwy. | | Studios | | 409,000 | | | Leased; expires in 2024. |
New York, NY
230 Park Ave. South | | Headquarters, Studios, Networks, DTC, and Corporate | | 360,000 | | | Leased; expires in 2037. |
Warsaw, Poland
Wiertnicza 166 | | Studios, Networks, DTC, and Corporate | | 247,000 | | | Owned. |
Culver City, CA
8900 Venice Boulevard | | Networks and DTC | | 244,000 | | | Leased; expires in 2036. |
Cardington, Bedfordshire, UK
Cardington Airfield, Shed 1 | | Studios | | 220,000 | | | Leased; expires in 2027. |
Radlett, UK
Ventura Park, Old Parkbury Lane | | Studios | | 198,000 | | | Leased; expires in 2028 and 2034. |
Atlanta, GA
3700 Atlanta Industrial Pkwy. | | Studios | | 177,000 | | | Leased; expires in 2024. |
Krakow, Poland
Plk. Dadka 2 | | Studios and Networks | | 151,000 | | | Leased; expires in 2026. |
London, England
98 Theobalds Road | | Networks, DTC, and Corporate | | 135,000 | | | Leased; expires in 2034. |
| | | | | | | | | | | | | | | | | | | | |
| Location | | Principal Use | | Approximate
Square Footage | | Type of Ownership; Expiration Date of Lease |
Buenos Aires, Argentina
599 and 533 Defensa Street | | Studios, Networks, DTC, and Corporate | | 129,000 | | | Owned. |
London, UK
160 Old Street | | Studios, Networks, DTC, and Corporate | | 116,000 | | | Leased; expires in 2034. |
London, UK
Chiswick Park, Bldg. 2 | | Studios, Networks, DTC, and Corporate | | 115,000 | | | Leased; expires in 2034. |
Seattle, WA
1099 Stewart Street | | DTC | | 112,000 | | | Leased; expires in 2025. |
Washington, DC
820 First Street | | Studios and Networks | | 109,000 | | | Leased; expires in 2031. |
Richmond, Canada
13480 Crestwood Place | | Studios | | 108,000 | | | Leased; expires in 2030. |
Hyderabad, India
Block A, International Tech Park | | Corporate | | 89,000 | | | Leased; expires in 2028. |
Paris, France
L’Amiral, ZAC Forum Seine | | Networks, DTC, and Corporate | | 81,000 | | | Leased; expires in 2031. |
Auckland, New Zealand
2 and 3 Flower Street | | Studios, Networks, DTC, and Corporate | | 57,000 | | | Leased; expires in 2025. |
Sterling, VA
45580 Terminal Drive | | Studios, Networks, DTC, and Corporate | | 54,000 | | | Owned. |
Silver Spring, MD
8403 Colesville Road | | Networks and Corporate | | 47,000 | | | Leased; expires in 2030. |
| | | | | | |
| Many of the listed locations are occupied by multiple segments; the most critical (or the principal) occupiers are listed here. |
ITEM 3. Legal Proceedings.
TheFrom time to time, in the normal course of its operations, the Company is partysubject to various lawsuitslitigation matters and claims, including claims related to employees, stockholders, vendors, other business partners, government regulations, or intellectual property, as well as disputes and matters involving counterparties to contractual agreements, such as disputes arising out of definitive agreements entered into in connection with the ordinary course of business.Merger. However, a determination as to the amount of the accrual required for such contingencies is highly subjective and requires judgmentsjudgment about future events. The Company may not currently be able to estimate the reasonably possible loss or range of loss for such matters until developments in such matters have provided sufficient information to support an assessment of such loss. In the absence of sufficient information to support an assessment of the reasonably possible loss or range of loss, no accrual for such contingencies is made and no loss or range of loss is disclosed. Although the outcome of these matters cannot be predicted with certainty and the impact of the final resolution of these matters on the Company'sCompany’s results of operations in a particular subsequent reporting period is not known, management does not currently believe that the resolution of these matters will have a material adverse effect on ourthe Company’s future consolidated financial position, future results of operations, or liquidity.cash flows.
OnBetween September 20, 2017, a putative23, 2022 and October 24, 2022, two purported class action lawsuit captioned Inzlicht-Spreilawsuits (Collinsville Police Pension Board v. Scripps Networks Interactive,Discovery, Inc., et al. (Case, Case No. 3:17-cv-00420), which we refer to as the “Inzlicht-Sprei action”, was filed in the United States District Court for the Eastern District of Tennessee. A putative class action lawsuit captioned Berg1:22-cv-08171; Todorovski v. Scripps Networks Interactive,Discovery, Inc., et al. (Case, Case No. 2:17-cv-848), which we refer to as the “Berg action”, and a lawsuit captioned Wagner v. Scripps Networks Interactive, et al. (Case No. 2:17-cv-859), which we refer to as the “Wagner action,”1:22-cv-09125) were filed in the United States District Court for the Southern District of Ohio on September 27, 2017New York. The complaints named Warner Bros. Discovery, Inc., Discovery, Inc., David Zaslav, and September 29, 2017, respectively. We refer to the Inzlicht-Sprei action, Berg action and Wagner action collectivelyGunnar Wiedenfels as the “actions.”defendants. The actionscomplaints generally alleged that the defendants filed a materially incompletemade false and misleading Form S-4statements in SEC filings and in certain public statements relating to the Merger, in violation of Sections 14(a)11, 12(a)(2), and 20(a)15 of the ExchangeSecurities Act of 1933, as amended, and SEC Rule 14a-9. On October 12, 2017, the plaintiff in the Inzlicht-Sprei action filed a notice of voluntary dismissal without prejudice.sought damages and other relief. On November 21, 2017,4, 2022, the court consolidated the Collinsville and Todorovski complaints under case number 1:22-CV-8171, and on December 12, 2022, the court appointed lead plaintiffs in bothand lead counsel. On February 15, 2023, the Berg actionlead plaintiffs filed an amended complaint adding Advance/Newhouse Partnership, Advance/Newhouse Programming Partnership, Steven A. Miron, Robert J. Miron, and Steven O. Newhouse as defendants. The amended complaint asserted violations of Sections 11, 12(a)(2), and 15 of the Wagner action filed noticesSecurities Act of voluntary dismissal.1933, as amended, and sought damages and other relief. On February 5, 2024, the court dismissed the amended complaint with prejudice.
ITEM 4. Mine Safety Disclosures.
Not applicable.
Executive Officers of Warner Bros. Discovery, Communications, Inc.
Pursuant to General Instruction G(3) to Form 10-K,As of February 23, 2024, the information regarding ourfollowing individuals are the executive officers required by Item 401(b) of Regulation S-K is hereby included in Part I of this report. The following table sets forth the nameCompany.
David M. Zaslav, President, Chief Executive Officer, and date of birth of eacha director
Age: 64
Executive Officer since 2007
Mr. Zaslav has served as our President and Chief Executive Officer and a member of our board of directors since the closing of the Merger on April 8, 2022. Prior to the closing, Mr. Zaslav served as Discovery’s President and Chief Executive Officer from January 2007 until April 2022 and a common stock director of Discovery from September 2008 until April 2022.
Gunnar Wiedenfels, Chief Financial Officer
Age: 46
Executive Officer since 2017
Mr. Wiedenfels has served as our Chief Financial Officer since the closing of the Merger on April 8, 2022. Prior to the closing, Mr. Wiedenfels served as Discovery, Inc.’s Chief Financial Officer from April 2017 until April 2022.
Bruce L. Campbell, Chief Revenue and Strategy Officer
Age: 56
Executive Officer since 2008
Mr. Campbell has served as our Chief Revenue and Strategy Officer since the closing of the Merger on April 8, 2022. Prior to the closing, he served as Discovery’s Chief Development, Distribution and Legal Officer. Mr. Campbell has served in several senior executive officersroles at Discovery, including as Chief Distribution Officer from October 2015 to April 2022, Chief Development Officer from August 2010 to April 2022, General Counsel from December 2010 to April 2017, Digital Media Officer from August 2014 to October 2015 and President, Digital Media & Corporate Development from March 2007 to August 2010.
Lori Locke, Chief Accounting Officer
Age: 60
Executive Officer since 2019
Ms. Locke has served as our Chief Accounting Officer since the office held by such officerclosing of the Merger on April 8, 2022. Prior to the closing, Ms. Locke served as Discovery’s Chief Accounting Officer from June 2019 to April 2022. Prior to joining Discovery, Ms. Locke served as Vice President, Corporate Controller and Principal Accounting Officer for Gannett Co., Inc., a media company, from June 2015 to May 2019.
Jean-Briac Perrette, CEO and President, Global Streaming and Games
Age: 52
Executive Officer since 2014
Mr. Perrette has served as our CEO and President of Global Streaming and Games since the closing of the Merger on April 8, 2022. Prior to the closing, he served as President and CEO of Discovery International (formerly referred to as Discovery Networks International) from June 2016 until April 2022, and served as President of Discovery Networks International from March 2014 to June 2016. Prior to that, Mr. Perrette served as Discovery’s Chief Digital Officer from October 2011 to February 28, 2018.2014.
Adria Alpert Romm, Chief People and Culture Officer
Age: 68
Executive Officer since 2008
Ms. Romm has served as our Chief People and Culture Officer since the closing of the Merger on April 8, 2022. Prior to the closing, Ms. Romm served as Discovery’s Chief People and Culture Officer from April 2019 to April 2022. Prior to that, Ms. Romm served as Discovery’s Chief Human Resources and Diversity Officer from March 2014 to March 2019 and Discovery’s Senior Executive Vice President of Human Resources from March 2007 to February 2014.
|
| | |
Name | | Position |
David M. ZaslavSavalle C. Sims, Chief Legal Officer
Age: 53 Executive Officer since 2017 Ms. Sims has served as our Chief Legal Officer since October 2023 and was previously Executive Vice President and General Counsel from the closing of the Merger on April 8, 2022 to October 2023. Prior to the closing, Ms. Sims served as Discovery’s Executive Vice President and General Counsel from April 2017 until April 2022. Prior to that, Ms. Sims served as Discovery’s Executive Vice President and Deputy General Counsel from December 2014 to April 2017 and Discovery’s Senior Vice President, Litigation and Intellectual Property from August 2011 to December 2014. Gerhard Zeiler, President, International Age: 68 Executive Officer since 2022 Mr. Zeiler has served as our President, International since the closing of the Merger on April 8, 2022. Prior to the closing, Mr. Zeiler served as President of WarnerMedia International from August 2020 to April 2022 and prior to that, Chief Revenue Officer of WarnerMedia from March 2019 to August 2020. Mr. Zeiler was President of Turner Broadcasting System International from May 2012 to February 2019. Born January 15, 1960
| | President, Chief Executive Officer and a common stock director. Mr. Zaslav has served as our President and Chief Executive Officer since January 2007 and a common stock director since September 2008. Mr. Zaslav served as President, Cable & Domestic Television and New Media Distribution of NBC Universal, Inc. ("NBC"), a media and entertainment company, from May 2006 to December 2006. Mr. Zaslav served as Executive Vice President of NBC, and President of NBC Cable, a division of NBC, from October 1999 to May 2006. Mr. Zaslav is a member of the board of Sirius XM Radio Inc., Grupo Televisa S.A.B and LionsGate Entertainment Corp. |
Gunnar Wiedenfels
Born September 6, 1977
| | Chief Financial Officer. Mr. Wiedenfels has served as our Chief Financial Officer since April 2017. Prior to joining Discovery, Mr. Wiedenfels served as Chief Financial Officer of ProSiebenSat.1 Media SE ("ProSieben") starting in 2015. Prior to that, he served as ProSieben's Deputy Chief Financial Officer from 2014 to 2015 and served as Chief Group Controller from 2013 to 2015. Previously, he served as ProSieben's Deputy Group Controller, responsible for group-wide budget planning, budget controlling, and management reporting and as Chief Financial Officer, National, where he had commercial responsibility for the group's German-speaking free TV segment. Before this, he worked as a management consultant and engagement manager at McKinsey & Company. |
Jean-Briac Perrette Born April 30, 1971 | | President and CEO of Discovery Networks International. Mr. Perrette became CEO of Discovery Networks International in June 2016 and President of Discovery Networks International in March 2014. Prior to that, Mr. Perrette served as our Chief Digital Officer from October 2011 to February 2014. Mr. Perrette served in a number of roles at NBC Universal from March 2000 to October 2011, with the last being President of Digital and Affiliate Distribution. |
Adria Alpert Romm
Born March 2, 1955
| | Chief Human Resources and Global Diversity Officer. Ms. Romm has served as our Chief Human Resources and Global Diversity Officer since March 2014. Prior to that, Ms. Romm has served as our Senior Executive Vice President of Human Resources from March 2007 to February 2014. Ms. Romm served as Senior Vice President of Human Resources of NBC from 2004 to 2007. Prior to 2004, Ms. Romm served as a Vice President in Human Resources for the NBC TV network and NBC staff functions.
|
Bruce L. Campbell
Born November 26, 1967
| | Chief Development, Distribution & Legal Officer. Mr. Campbell became our Chief Distribution Officer in October 2015, Chief Development Officer in August 2010 and our General Counsel in December 2010. Mr. Campbell served as Digital Media Officer from August 2014 through October 2015. Prior to that, Mr. Campbell served as our President, Digital Media & Corporate Development from March 2007 through August 2010. Mr. Campbell also served as our corporate secretary from December 2010 to February 2012. Mr. Campbell served as Executive Vice President, Business Development of NBC from December 2005 to March 2007, and Senior Vice President, Business Development of NBC from January 2003 to November 2005.
|
David Leavy
Born December 24, 1969
| | Chief Corporate Operations and Communications Officer. Mr. Leavy became Chief Corporate Operations and Communications Officer in March 2016. Prior to that, Mr. Leavy served as our Chief Communications Officer and Senior Executive Vice President, Corporate Marketing and Business Operations from August 2015 to March 2016. From December 2011 to August 2015, Mr. Leavy served as our Chief Communications Officer and Senior Executive Vice President, Corporate Marketing and Affairs. Prior to that, Mr. Leavy served as our Executive Vice President, Communications and Corporate Affairs and has served in a number of other roles at Discovery since joining in March 2000.
|
Savalle C. Sims Born May 21, 1970 | | Executive Vice President and General Counsel. Ms. Sims became Executive Vice President and General Counsel in April 2017. Ms. Sims served as our Executive Vice President and Deputy General Counsel from December 2014 to April 2017. Prior to that, Ms. Sims served as our Senior Vice President, Litigation and Intellectual Property from August 2011 through December 2014. Prior to joining Discovery, Ms. Sims was a partner at the law firm of Arent Fox LLP. |
Kurt T. Wehner
Born June 30, 1962
| | Executive Vice President and Chief Accounting Officer. Mr. Wehner joined the Company in September 2011 and has served as our Executive Vice President, Chief Accounting Officer since November 2012. Mr. Wehner was an Audit Partner at KPMG LLP from 2000 to 2011. |
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our Series AWBD common stock Series B common stock and Series C common stock areis listed and traded on The NASDAQ Global Select Market (“NASDAQ”)Nasdaq under the symbols “DISCA,” “DISCB” and “DISCK,” respectively. The following table sets forth, for the periods indicated, the range of high and low sales prices per share of our Series A common stock, Series B common stock and Series C common stock as reported on Yahoo! Finance (finance.yahoo.com)symbol “WBD”.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Series A Common Stock | | Series B Common Stock | | Series C Common Stock |
| | | High | | Low | | High | | Low | | High | | Low |
| 2017 | | | | | | | | | | | | |
| Fourth quarter | | $ | 23.73 |
| | $ | 16.28 |
| | $ | 26.80 |
| | $ | 20.00 |
| | $ | 22.47 |
| | $ | 15.27 |
|
| Third quarter | | $ | 27.18 |
| | $ | 20.80 |
| | $ | 27.90 |
| | $ | 22.00 |
| | $ | 26.21 |
| | $ | 19.62 |
|
| Second quarter | | $ | 29.40 |
| | $ | 25.11 |
| | $ | 29.55 |
| | $ | 25.45 |
| | $ | 28.90 |
| | $ | 24.39 |
|
| First quarter | | $ | 29.62 |
| | $ | 26.34 |
| | $ | 29.65 |
| | $ | 27.55 |
| | $ | 28.87 |
| | $ | 25.76 |
|
| 2016 | | | | | | | | | | | | |
| Fourth quarter | | $ | 29.55 |
| | $ | 25.01 |
| | $ | 30.50 |
| | $ | 26.00 |
| | $ | 28.66 |
| | $ | 24.20 |
|
| Third quarter | | $ | 26.97 |
| | $ | 24.27 |
| | $ | 28.00 |
| | $ | 25.21 |
| | $ | 26.31 |
| | $ | 23.44 |
|
| Second quarter | | $ | 29.31 |
| | $ | 23.73 |
| | $ | 29.34 |
| | $ | 24.15 |
| | $ | 28.48 |
| | $ | 22.54 |
|
| First quarter | | $ | 29.42 |
| | $ | 24.33 |
| | $ | 29.34 |
| | $ | 24.30 |
| | $ | 28.00 |
| | $ | 23.81 |
|
As of February 21, 2018,8, 2024, there were approximately 1,308, 75 and 1,414 689,822record holders of our Series AWBD common stock, Series B common stock and Series C common stock, respectively. These amounts dostock. This amount does not include the number of shareholders whose shares are held of record by banks, brokerage houses or other institutions, but includeincludes each such institution as one shareholder.
We have not paid any cash dividends on our Series A common stock, Series B common stock or Series CWBD common stock and we have no present intention to do so. Payment of cash dividends, if any, will be determined by our Boardboard of Directorsdirectors after consideration of our earnings, financial condition and other relevant factors such as our credit facility'sfacility’s restrictions on our ability to declare dividends in certain situations.
Purchases of Equity Securities
The following table presents information about our repurchases of common stock that were made through open market transactions during the three months ended December 31, 2017 (in millions, except per share amounts).
|
| | | | | | | | | | | | | | |
Period | | Total Number
of Series C Shares
Purchased | | Average
Price
Paid per
Share: Series C (a)
| | Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs(b)(c)
| | Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans or Programs(a)(b)
|
October 1, 2017 - October 31, 2017 | | — |
| | $ | — |
| | — |
| | $ | — |
|
November 1, 2017 - November 30, 2017 | | — |
| | $ | — |
| | — |
| | $ | — |
|
December 1, 2017 - December 31, 2017 | | — |
| | $ | — |
| | — |
| | $ | — |
|
Total | | — |
| |
|
| | — |
| | $ | — |
|
(a) The amounts do not give effect to any fees, commissions or other costs associated with repurchases of shares.
(b) Under the stock repurchase program, management was authorized to purchase shares of the Company's common stock from time to time through open market purchases or privately negotiated transactions at prevailing prices or pursuant to one or more accelerated stock repurchase agreements or other derivative arrangements as permitted by securities laws and other legal requirements, and subject to stock price, business and market conditions and other factors. The Company's authorization under the program expired on October 8, 2017 and we have not repurchased any shares of common stock since then. We historically have funded and in the future may fund stock repurchases through a combination of cash on hand and cash generated by operations and the issuance of debt. In the future, if further authorization is provided, we may also choose to fund stock repurchases through borrowings under our revolving credit facility or future financing transactions. There were no repurchases of our Series A and B common stock during 2017 and no repurchases of Series C common stock during the three months ended December 31, 2017. The Company first announced its stock repurchase program on August 3, 2010.
(c) We entered into an agreement with Advance/Newhouse to repurchase, on a quarterly basis, a number of shares of Series C-1 convertible preferred stock convertible into a number of shares of Series C common stock. We did not convert any any shares of Series C-1 convertible preferred stock during the three months ended December 31, 2017. There are no planned repurchases of Series C-1 convertible preferred stock for the first quarter of 2018 as there were no repurchases of Series A or Series C common stock during the three months ended December 31, 2017.
Stock Performance Graph
The following graph sets forth theshows a comparison of cumulative total shareholder return, calculated on oura dividend-reinvested basis, for (a) WBD common stock (which began trading on April 11, 2022) and Discovery Series A common stock, Series B convertible common stock, and Series C common stock as compared with the cumulative total return of the companies listed in(which ceased trading on April 8, 2022), (b) the Standard and Poor’sPoor's 500 Stock Index (“S&P 500 Index”), and a peer group of companies comprised of CBS Corporation Class B common stock, Scripps Network Interactive, Inc., Time Warner, Inc., Twenty-First Century Fox, Inc. Class A common stock (News Corporation Class A Common Stock prior to June 2013), Viacom, Inc. Class B common stock(c) the Standard & Poor’s 500 Media and The Walt Disney Company.Entertainment Industry Group Index (“S&P 500 Media & Entertainment Index”) for the five years ended December 31, 2023. The graph assumes $100 originallywas invested on December 31, 2012 in each of ourDiscovery Series A common stock, Series B convertible common stock, and Series C common stock, the S&P 500 Index, and the stock of our peer group companies, including reinvestment of dividends, for the years endedS&P 500 Media & Entertainment Index on December 31, 2013, 2014, 2015, 20162018, and 2017.that $100 was invested in WBD common stock on April 11, 2022, the date on which it began trading. Note that historic stock price performance is not necessarily indicative of future stock price performance.
Note: Peer group indices use beginning of period market capitalization weighting. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31,
2012 | | December 31,
2013 | | December 31,
2014 | | December 31,
2015 | | December 31,
2016 | | December 31, 2017 |
| DISCA | | $ | 100.00 |
| | $ | 139.42 |
| | $ | 106.23 |
| | $ | 82.27 |
| | $ | 84.53 |
| | $ | 69.01 |
|
| DISCB | | $ | 100.00 |
| | $ | 144.61 |
| | $ | 116.45 |
| | $ | 85.03 |
| | $ | 91.70 |
| | $ | 78.01 |
|
| DISCK | | $ | 100.00 |
| | $ | 143.35 |
| | $ | 115.28 |
| | $ | 86.22 |
| | $ | 91.56 |
| | $ | 72.38 |
|
| S&P 500 | | $ | 100.00 |
| | $ | 129.60 |
| | $ | 144.36 |
| | $ | 143.31 |
| | $ | 156.98 |
| | $ | 187.47 |
|
| Peer Group | | $ | 100.00 |
| | $ | 163.16 |
| | $ | 186.87 |
| | $ | 180.10 |
| | $ | 200.65 |
| | $ | 208.79 |
|
Note: Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2024.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, | | April 11, | | December 31, |
| | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | 2022 | | 2023 |
| WBD | | | | | | | | | | $ | 100.00 | | | $ | 38.26 | | | $ | 45.92 | |
| DISCA | | $ | 100.00 | | | $ | 132.34 | | | $ | 121.63 | | | $ | 95.15 | | | $ | 98.75 | | | $ | — | | | $ | — | |
| DISCB | | $ | 100.00 | | | $ | 108.24 | | | $ | 96.72 | | | $ | 88.81 | | | $ | 72.99 | | | $ | — | | | $ | — | |
| DISCK | | $ | 100.00 | | | $ | 132.11 | | | $ | 113.48 | | | $ | 99.22 | | | $ | 105.81 | | | $ | — | | | $ | — | |
| S&P 500 | | $ | 100.00 | | | $ | 131.49 | | | $ | 155.68 | | | $ | 200.37 | | | $ | 186.24 | | | $ | 164.08 | | | $ | 207.21 | |
| S&P 500 Media & Entertainment Index | | $ | 100.00 | | | $ | 134.15 | | | $ | 176.47 | | | $ | 224.01 | | | $ | 184.31 | | | $ | 125.65 | | | $ | 208.66 | |
| | | | | | | | | | | | | | |
Equity Compensation Plan Information
Information regarding securities authorized for issuance under equity compensation plans will be set forth in our definitive Proxy Statement for our 2018 Annual Meeting of Stockholders under the caption “Securities Authorized for Issuance Under Equity Compensation Plans,” which is incorporated herein by reference.
ITEM 6. Selected Financial Data.[Reserved].
The table set forth below presents our selected financial information for each of the past five years (in millions, except per share amounts). The selected statement of operations information for each of the three years ended December 31, 2017 and the selected balance sheet information as of December 31, 2017 and 2016 have been derived from and should be read in conjunction with the information in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the audited consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data,” and other financial information included elsewhere in this Annual Report on Form 10-K. The selected statement of operations information for each of the two years ended December 31, 2014 and 2013 and the selected balance sheet information as of December 31, 2015, 2014 and 2013 have been derived from financial statements not included in this Annual Report on Form 10-K.
|
| | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Selected Statement of Operations Information: | | | | | | | | | | |
| Revenues | | $ | 6,873 |
| | $ | 6,497 |
| | $ | 6,394 |
| | $ | 6,265 |
| | $ | 5,535 |
|
| Operating income | | 713 |
| | 2,058 |
| | 1,985 |
| | 2,061 |
| | 1,975 |
|
| Net (loss) income | | (313 | ) | | 1,218 |
| | 1,048 |
| | 1,137 |
| | 1,077 |
|
| Net (loss) income available to Discovery Communications, Inc. | | (337 | ) | | 1,194 |
| | 1,034 |
| | 1,139 |
| | 1,075 |
|
| Basic (loss) earnings per share available to Discovery Communications, Inc. Series A, B and C common stockholders: | | | | | | | | | | |
| Net (loss) income | | (0.59 | ) | | 1.97 |
| | 1.59 |
| | 1.67 |
| | 1.50 |
|
| Diluted (loss) earnings per share available to Discovery Communications, Inc. Series A, B and C common stockholders: | | | | | | | | | | |
| Net (loss) income | | (0.59 | ) | | 1.96 |
| | 1.58 |
| | 1.66 |
| | 1.49 |
|
| Weighted average shares outstanding: | | | | | | | | | | |
Basic
| | 384 |
| | 401 |
| | 432 |
| | 454 |
| | 484 |
|
Diluted
| | 576 |
| | 610 |
| | 656 |
| | 687 |
| | 722 |
|
| Selected Balance Sheet Information: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 7,309 |
| | $ | 300 |
| | $ | 390 |
| | $ | 367 |
| | $ | 408 |
|
| Total assets | | 22,555 |
| | 15,672 |
| | 15,803 |
| | 15,709 |
| | 14,693 |
|
| Deferred income taxes | | 319 |
| | 467 |
| | 495 |
| | 518 |
| | 579 |
|
| Long-term debt: | |
|
| |
|
| | | | | | |
| Current portion | | 30 |
| | 82 |
| | 119 |
| | 1,107 |
| | 17 |
|
| Long-term portion | | 14,755 |
| | 7,841 |
| | 7,616 |
| | 6,002 |
| | 6,437 |
|
| Total liabilities | | 17,532 |
| | 10,262 |
| | 10,111 |
| | 9,358 |
| | 8,460 |
|
| Redeemable noncontrolling interests | | 413 |
| | 243 |
| | 241 |
| | 747 |
| | 36 |
|
| Equity attributable to Discovery Communications, Inc. | | 4,610 |
| | 5,167 |
| | 5,451 |
| | 5,602 |
| | 6,196 |
|
| Total equity | | $ | 4,610 |
| | $ | 5,167 |
| | $ | 5,451 |
| | $ | 5,604 |
| | $ | 6,197 |
|
(Loss) income per share amounts may not sum since each is calculated independently.
As of December 31, 2017, the Company recognized a goodwill impairment charge totaling $1.3 billion for its European reporting unit. (See Note 8 to the accompanying consolidated financial statements.) On November 30, 2017, the Company acquired a controlling interest in OWN from Harpo, increasing Discovery’s ownership stake from 49.50% to 73.99%. Discovery paid $70 million in cash and recognized a gain of $33 million to account for the difference between the carrying value and the fair value of the previously held 49.50% equity interest. On September 25, 2017, the Company acquired a 67.5% controlling interest in VTEN, a new joint venture with GoldenTree, in exchange for its contribution of the Velocity network.On April 28, 2017, the Company sold Raw and Betty to All3Media and recorded a loss of $4 million upon disposition. (See Note 3 to the accompanying consolidated financial statements.) For the year ended December 31, 2017, the Company has incurred transaction and integration costs for the Scripps Networks acquisition of $79 million, including the $35 million charge associated with the modification of Advance/Newhouse's preferred stock. (See Note 12 to the accompanying consolidated financial statements.) In conjunction with the Scripps Networks acquisition, the Company executed a number of new derivative instruments which were settled during September 2017 resulting in a $98 million and $12 million loss in connection with interest rate and foreign exchange contracts, respectively. (See Note 10 to the accompanying consolidated financial statements.)
On September 30, 2016, the Company recorded an other-than-temporary impairment of $62 million related to its investment in Lionsgate. On December 2, 2016, the Company acquired a minority interest and formed a new joint venture, Group Nine Media, Inc. ("Group Nine Media"), in exchange for contributions of $100 million and the Company's digital network businesses Seeker and SourceFed, resulting in a gain of $50 million upon deconsolidation of the businesses ("Group Nine Transaction"). As of December 31, 2017, the Company owns a 42% minority interest in Group Nine Media with a carrying value of $212 million. (See Note 4 to the accompanying consolidated financial statements.)
On October 7, 2015, the Company recorded a loss of $5 million upon the deconsolidation of its Russian business following its contribution to a joint venture with a Russian media company, National Media Group. As part of the transaction, Discovery obtained a 20% ownership interest in the New Russian Business, which is accounted for under the equity method of accounting. On June 30, 2015, Discovery sold its radio businesses in Northern Europe to Bauer Media Group for total consideration, net of cash disposed of €72 million ($80 million). The cumulative gain on the disposal is $1 million. Based on the final resolution and receipt of contingent consideration payable, Discovery recorded a pre-tax gain of $13 million for the year ended December 31, 2016. The Company had previously recorded a $12 million loss including estimated contingent consideration as disclosed for the year ended December 31, 2015. (See Note 3 to the accompanying consolidated financial statements.)
On September 23, 2014, we acquired an additional 10% ownership interest in Discovery Family. The purchase increased our ownership interest from 50% to 60%. As a result, the accounting for Discovery Family was changed from an equity method investment to a consolidated subsidiary. (See Note 3 to the accompanying consolidated financial statements.) On May 30, 2014, the Company acquired a controlling interest in Eurosport International by increasing Discovery’s ownership stake from 20% to 51%. As a result, as of that date, the accounting for Eurosport was changed from an equity method investment to a consolidated subsidiary. On March 31, 2015, the Company acquired a controlling interest in Eurosport France increasing Discovery's ownership stake by 31% upon the resolution of certain regulatory matters and began accounting for Eurosport France as a consolidated subsidiary. On October 1, 2015, the Company acquired the remaining 49% of Eurosport for €491 million ($548 million) upon TF1's exercise of its right to put. (See Note 11 to the accompanying consolidated financial statements.)
On April 9, 2013, we acquired the television and radio operations of SBS Nordic. The acquisition has been included in our operating results since the acquisition date. The radio operations of SBS Nordic were subsequently sold on June 30, 2015. (See Note 3 to the accompanying consolidated financial statements.)
Balance sheet amounts for prior years have been adjusted to reclassify debt issuance costs from other noncurrent assets to noncurrent portion of debt in accordance with ASU 2015-03 adopted in 2014. Amounts reclassified were $44 million and $45 million for 2014 and 2013, respectively.
The Company retrospectively adopted ASU 2015-17 guidance effective January 1, 2017. This guidance requires deferred tax assets and deferred tax liabilities to be presented as non-current assets and liabilities, respectively. Balance sheet amounts reclassified were $86 million, $61 million, $261 million and $241million for 2016, 2015, 2014 and 2013, respectively. (See Note 2 to the accompanying consolidated financial statements.)
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s discussion and analysis of financial condition and results of operations is a supplement to and should be read in conjunction with the accompanying consolidated financial statements and related notes. This section provides additional information regarding our businesses, current developments, results of operations, cash flows, financial condition, contractual commitments, and critical accounting policies.policies, and estimates that require significant judgment and thus have the most significant potential impact on our consolidated financial statements. This discussion and analysis is intended to better allow investors to view the company from management’s perspective.
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statementsThis section provides an analysis of our financial results for the fiscal year ended December 31, 2023 compared to the fiscal year ended December 31, 2022. A discussion of our results of operations and liquidity for the fiscal year ended December 31, 2022 compared to the fiscal year ended December 31, 2021 can be found under Item 7 in thisour Annual Report on Form 10-K constitute forward-looking statements withinfor the meaningfiscal year ended December 31, 2022, filed on February 24, 2022, which is available free of charge on the Private Securities Litigation Reform Act of 1995, including statements regarding our business, marketing and operating strategies, integration of acquired businesses, new service offerings, financial prospects, anticipated sources and uses of capitalSEC’s website at www.sec.gov and our proposed acquisition of Scripps Networks. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes,” and terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be accomplished.Investor Relations website at ir.wbd.com. The following is a list of some, but not all, of the factors that could cause actual results or events to differ materially from those anticipated: changes in the distribution and viewing of television programming, including the expanded deployment of personal video recorders, subscription video on demand (“SVOD”), internet protocol television, mobile personal devices and personal tablets and their impact on television advertising revenue; continued consolidation of distribution customers and production studios; a failure to secure affiliate agreements or renewal of such agreements on less favorable terms; rapid technological changes; the inability of advertisers or affiliates to remit payment to us in a timely manner or at all; general economic and business conditions; industry trends, including the timing of, and spending on, feature film, television and television commercial production; spending on domestic and foreign television advertising; disagreements with our distributors or other business partners over contract interpretation; fluctuations in foreign currency exchange rates and political unrest and regulatory changes in international markets, from events including Brexit; market demand for foreign first-run and existing content libraries; the regulatory and competitive environment of the industries in which we, and the entities in which we have interests, operate; uncertainties inherent in the development of new business lines and business strategies; uncertainties regarding the financial performance of our equity method investees; our ability to complete, integrate and obtain the anticipated benefits and synergies from our proposed business combinations and acquisitions, including our proposed acquisition of Scripps Networks, on a timely basis or at all; uncertainties associated with product and service development and market acceptance, including the development and provision of programming for new television and telecommunications technologies; future financial performance, including availability, terms, and deployment of capital; the ability of suppliers and vendors to deliver products, equipment, software, and services; our ability to achieve the efficiencies, savings and other benefits anticipated from our cost-reduction initiative; the outcome of any pending or threatened litigation; availability of qualified personnel; the possibility or duration of an industry-wide strike or other job action affecting a major entertainment industry union; changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission and adverse outcomes from regulatory proceedings; changes in income taxes due to regulatory changes, such as U.S. tax reform, or changes in our corporate structure; changes in the nature of key strategic relationships with partners, distributors and equity method investee partners; competitor responses to our products and services and the products and services of the entities in which we have interests; threatened terrorist attacks and military action; our significant level of debt; reduced access to capital markets or significant increases in costs to borrow; and a reduction of advertising revenue associated with unexpected reductions in the number of subscribers. These risks have the potential to impact the recoverability of the assets recordedinformation contained on our balance sheets, including goodwill or other intangibles. For additional risk factors, refer to Item 1A, “Risk Factors.” These forward-looking statements and such risks, uncertainties, and other factors speak only as of the datewebsite is not part of this Annual Report on Form 10-K and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.not incorporated by reference herein.
BUSINESS OVERVIEW
We areOn April 8, 2022, Discovery, a global media company that provides content across multiple distribution platforms, including pay-TV, FTAlinear, free-to-air, and broadcast television, authenticated GO applications, digital distribution arrangements, and content licensing agreements. Ourarrangements, and DTC subscription products, completed its Merger with the WM Business of AT&T and changed its name from “Discovery, Inc.” to “Warner Bros. Discovery, Inc.” On April 11, 2022, our shares started trading on Nasdaq under the trading symbol WBD. (See Note 3 and Note 4 to the accompanying consolidated financial statements.)
Warner Bros. Discovery is a premier global media and entertainment company that provides audiences with a differentiated portfolio of networks includes prominentcontent, brands and franchises across television, film, streaming, and gaming. Some of our iconic brands such asand franchises include Warner Bros. Motion Picture Group, Warner Bros. Television Group, DC, HBO, HBO Max, Max, discovery+, CNN, Discovery Channel, our most widely distributed global brand,HGTV, Food Network, TNT Sports, TBS, TLC, Animal Planet, ID, Velocity (known as Turbo outsideOWN, Warner Bros. Games, Batman, Superman, Wonder Woman, Harry Potter, Looney Tunes, Hanna-Barbera, Game of Thrones, and The Lord of the U.S.) and Eurosport,Rings. For a leading sports entertainment pay-TV programmer across Europe and Asia. We also develop and sell curriculum-based education products and services and operate production studios.
Our objectives are to invest in content for our networks to build viewership, optimize distribution revenue, capture advertising sales, and create or reposition branded channels and businesses that can sustain long-term growth and occupy a desired content niche with strong consumer appeal. Our strategy is to maximize the distribution, ratings and profit potential of eachdiscussion of our branded networks. global portfolio see our business overview set forth in Item 1, “Business” in this Annual Report on Form 10-K.
In additionconnection with the Merger, we have announced and taken actions to growing distributionimplement projects to achieve cost synergies for the Company. We finalized the framework supporting our ongoing restructuring and advertising revenues for our branded networks, we are extendingtransformation initiatives during the year ended December 31, 2022, which includes, among other things, strategic content distribution across new platforms, including brand-aligned websites, on-line streaming, mobile devices, VOD and broadband channels, which provide promotional platforms for our television content and serve as additional outlets for advertising and distribution revenue. Audience ratings are a key driver in generating advertising revenue and creating demand on the part of cable television operators, DTH satellite operators, telecommunication service providers,programming assessments, organization restructuring, facility consolidation activities, and other content distributors,contract termination costs. We expect that deliverwe will incur approximately $4.1 - $5.3 billion in pre-tax restructuring charges, of which we have incurred $4.2 billion as of December 31, 2023. Of the total expected pre-tax restructuring charges, we expect total cash expenditures to be $1.0 - $1.5 billion. We incurred $0.5 billion of pre-tax restructuring charges during the year ended December 31, 2023 related to this plan. While our contentrestructuring efforts are ongoing, the restructuring program is expected to their customers.be substantially completed by the end of 2024.
Our content spans genres including survival, exploration, sports, lifestyle, general entertainment, heroes, adventure, crime and investigation, health and kids. We have an extensive libraryAs of high-definition content and own rights to much of our content and footage, which enables us to exploit our library to launch brands and services into new markets quickly. Our content can be re-edited and updated in a cost-effective manner to provide topical versions of subject matter that can be utilized around the world on a variety of platforms.
Although the Company utilizes certain brands and content globally,December 31, 2023, we classifyclassified our operations in twothree reportable segments: U.S.
•Studios - Our Studios segment primarily consists of the production and release of feature films for initial exhibition in theaters, production and initial licensing of television programs to our networks/DTC services as well as third parties, distribution of our films and television programs to various third party and internal television and streaming services, distribution through the home entertainment market (physical and digital), related consumer products and themed experience licensing, and interactive gaming.
•Networks - Our Networks consisting principallysegment primarily consists of our domestic television network brands, and International Networks, consisting primarily of international television network brands. networks.
•DTC - Our DTC segment primarily consists of our premium pay-TV and streaming services.
Our segment presentation was aligned with our management structure and the financial information management uses to make decisions about operating matters, such as the allocation of resources and business performance assessments.
For further discussion of financial information for our Company, segments and the geographical areas in which we do business, and our content development activities, and revenues, see our business overview set forth in Item 1, "Business" in this Annual Report on Form 10-K.
RESULTS OF OPERATIONS – 2017 vs. 2016
Consolidated Results of Operations – 2017 vs. 2016
Our consolidated results of operations for 2017 and 2016 were as follows (in millions).
|
| | | | | | | | | | | |
| | | Year Ended December 31, | | |
| | | 2017 | | 2016 | | % Change |
| Revenues: | | | | | | |
| Distribution | | $ | 3,474 |
| | $ | 3,213 |
| | 8 | % |
| Advertising | | 3,073 |
| | 2,970 |
| | 3 | % |
| Other | | 326 |
| | 314 |
| | 4 | % |
| Total revenues | | 6,873 |
| | 6,497 |
| | 6 | % |
| Costs of revenues, excluding depreciation and amortization | | 2,656 |
| | 2,432 |
| | 9 | % |
| Selling, general and administrative | | 1,768 |
| | 1,690 |
| | 5 | % |
| Impairment of goodwill | | 1,327 |
| | — |
| | NM |
|
| Depreciation and amortization | | 330 |
| | 322 |
| | 2 | % |
| Restructuring and other charges | | 75 |
| | 58 |
| | 29 | % |
| Loss (gain) on disposition | | 4 |
| | (63 | ) | | NM |
|
| Total costs and expenses | | 6,160 |
| | 4,439 |
| | 39 | % |
| Operating income | | 713 |
| | 2,058 |
| | (65 | )% |
| Interest expense | | (475 | ) | | (353 | ) | | 35 | % |
| Loss on extinguishment of debt | | (54 | ) | | — |
| | NM |
|
| Loss from equity method investees, net | | (211 | ) | | (38 | ) | | NM |
|
| Other (expense) income, net | | (110 | ) | | 4 |
| | NM |
|
| (Loss) income before income taxes | | (137 | ) | | 1,671 |
| | NM |
|
| Income tax expense | | (176 | ) | | (453 | ) | | (61 | )% |
| Net (loss) income | | (313 | ) | | 1,218 |
| | NM |
|
| Net income attributable to noncontrolling interests | | — |
| | (1 | ) | | NM |
|
| Net income attributable to redeemable noncontrolling interests | | (24 | ) | | (23 | ) | | 4 | % |
| Net (loss) income available to Discovery Communications, Inc. | | $ | (337 | ) | | $ | 1,194 |
| | NM |
|
NM - Not meaningful
Revenues
Distribution revenue consists principally of fees from affiliates for distributing our linear networks, supplemented by revenue earned from SVOD content licensing and other emerging forms of digital distribution. Distribution revenue increased 8%. Excluding the impact of foreign currency fluctuations, distribution revenue increased 7%. U.S. Networks distribution revenue increases were driven by increases in affiliate fee rates and increases in SVOD revenue partially offset by a decline in affiliate subscribers. Total U.S. Networks portfolio subscribers declined 5% for the year ended December 31, 2017, while subscribers to our fully distributed networks declined 3% for the same period. International Networks' distribution revenue increase was mostly due to increases in contractual rates in Europe following further investment in sports content, and to a lesser extent increases in Latin America due to increases in rates offset by decreases in subscribers. Contributions from other distribution revenues also contributed slightly to growth. Other distribution revenues were comprised of content deliveries under licensing agreements. These increases were partially offset by decreases in contractual rates in Asia.
Advertising revenue is dependent upon a number of factors, including the stage of development of television markets, the number of subscribers to our channels, viewership demographics, the popularity of our content, our ability to sell commercial time over a group of channels, market demand, the mix of sales of commercial time between the upfront and scatter markets, and economic conditions. These factors impact the pricing and volume of our advertising inventory. Advertising revenue increased 3% in 2017 compared to 2016. The increase for our U.S. Networks was primarily due to pricing increases and continued monetization of our GO platform, partially offset by lower audience delivery due to continued linear distribution audience universe declines. International Networks' increases were primarily due to increased volume across key markets in Europe, particularly Southern Europe and Germany, and Latin America. The increase was partially offset by declines in ad sales due to lower pricing and volume in Asia.
Other revenue increased 4% compared with the prior year, primarily due to the formation and consolidation of the VTEN joint venture during the third quarter of the current year. (See Note 3 to the accompanying consolidated financial statements.)
Costs of Revenues
Costs of revenues increased 9%. Excluding the impact of foreign currency fluctuations, OWN and TEN acquisitions and the Group Nine Transaction, costs of revenues increased 7% for the year ended December 31, 2017. The increase was primarily attributable to increased spending on content at our International Networks segment, particularly sports rights and associated production costs. Content amortization was $1.9 billion and $1.7 billion for the years ended December 31, 2017 and December 31, 2016, respectively.
Selling, General and Administrative
Selling, general and administrative expenses consist principally of employee costs, marketing costs, research costs, occupancy and back office support fees. Selling, general and administrative expenses increased 5%. Excluding the impact of foreign currency fluctuations, OWN and TEN acquisitions, selling, general and administrative expenses increased 3% for the year ended December 31, 2017. The increase was primarily due to transaction costs for the Scripps Networks acquisition and integration costs of $79 million, including the $35 million charge associated with the modification of Advance/Newhouse's preferred stock. (See Note 12 to the accompanying consolidated financial statements.)
Impairment of Goodwill
Goodwill impairment expense of $1.3 billion was recognized during the year ended December 31, 2017. (See Note 8 to the accompanying consolidated financial statements.)
Depreciation and Amortization
Depreciation and amortization expense includes depreciation of fixed assets and amortization of finite-lived intangible assets. Depreciation and amortization was consistent for the year ended December 31, 2017, compared with the prior period as capital spending has remained consistent over the periods.
Restructuring and Other Charges
Restructuring and other charges increased $17 million. The increase was primarily due to higher personnel-related termination costs for voluntary and involuntary severance actions. (See Note 15 to the accompanying consolidated financial statements.)
Loss (Gain) on Disposition
The change in loss (gain) on disposition was $67 million. We recorded a $4 million loss for the year ended December 31, 2017 due to the sale of the Raw and Betty production studios on April 28, 2017, compared with a gain of $63 million for the year ended December 31, 2016. The gain on disposition recorded for the year ended December 31, 2016 is comprised of the $50 million gain for the deconsolidation of our digital networks business Seeker and SourceFed Studios in connection with the Group Nine Transaction and the $13 million gain due to the disposition of our radio businesses in the Nordics. (See Note 3 to the accompanying consolidated financial statements.)
Interest Expense
Interest expense increased $122 million for the year ended December 31, 2017primarily due to costs incurred for the unsecured bridge loan commitment as well as interest accrued on the senior notes issued on September 21, 2017 for the financing of the anticipated Scripps Networks acquisition. (See Note 9 to the accompanying consolidated financial statements.)
Loss on Extinguishment of Debt
On March 13, 2017, we issued new senior notes in an aggregate principal amount of $650 million and used the proceeds to fund the repurchase of $600 million of combined aggregate principal amount of our then-outstanding senior notes through a cash tender offer that closed on March 13, 2017. As a result, we recognized a $54 million loss on extinguishment of debt, which included $50 million for premiums to par value, $2 million of non-cash write-offs of unamortized deferred financing costs, $1 million for the write-off of the original issue discount of the existing senior notes and $1 million accrued for other third-party fees. (See Note 9 to the accompanying consolidated financial statements.)
Loss from Equity Investees, net
Losses from our equity method investees increased $173 million primarily due to losses from investments in limited liability companies that sponsor renewable energy projects related to solar energy, partially offset by increases in earnings at OWN and decreases in losses at All3Media. (See Note 4 to the accompanying consolidated financial statements.)
Other (Expense) Income, Net
The table below presents the details of other expense, net (in millions).
|
| | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 |
| Foreign currency (losses) gains, net | | $ | (83 | ) | | $ | 75 |
|
| Losses on derivative instruments | | (82 | ) | | (12 | ) |
| Remeasurement gain on previously held equity interest | | 33 |
| | — |
|
| Interest income | | 21 |
| | — |
|
| Other-than-temporary impairment of AFS investments | | — |
| | (62 | ) |
| Other income, net | | 1 |
| | 3 |
|
Total other (expense) income, net
| | $ | (110 | ) | | $ | 4 |
|
Other expense increased $114 million in 2017. We recorded foreign currency losses during 2017 compared to foreign currency gains during 2016, mostly due to exchange rate changes on the U.S. dollar compared with the British pound that impacted foreign currency monetary assets. Increases in losses from derivative instruments primarily resulted from losses of $98 million on interest rate contracts used to economically hedge the pricing for the issuance of a portion of the dollar-denominated senior notes, which were settled on September 21, 2017. The interest rate contracts did not receive hedging designation. The losses were partially offset by various other items, including a gain of $17 million on previously settled interest rate contracts for which the hedged issuance of debt is considered remote following the issuance of the senior notes on September 21, 2017. (See Note 9“Business” and Note 1023 to the accompanying consolidated financial statements.) On November 30, 2017, the Company acquired from Harpo a controlling interest in OWN. We recognized a remeasurement gain to account for the difference between the carrying value and the fair value of previously held 49.50% equity interest. (See Note 3 to the accompanying consolidated financial statements.)
Income Taxes
The following table reconciles the Company's effective income tax rate to the U.S. federal statutory income tax rate.
|
| | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 |
| U.S. federal statutory income tax rate | | 35 | % | | 35 | % |
| State and local income taxes, net of federal tax benefit | | (18 | )% | | (2 | )% |
| Effect of foreign operations | | 25 | % | | (1 | )% |
| Domestic production activity deductions | | 39 | % | | (4 | )% |
| Change in uncertain tax positions | | (44 | )% | | — | % |
| Goodwill impairment | | (334 | )% | | — | % |
| Renewable energy investments tax credits | | 142 | % | | (1 | )% |
Preferred stock modification
| | (9 | )% | | — | % |
| Impact of Tax Reform Act | | 32 | % | | — | % |
| Other, net | | 4 | % | | — | % |
| Effective income tax rate | | (128 | )% | | 27 | % |
Income tax expense was $176 million and $453 million and our effective tax rate was (128)% and 27% for 2017 and 2016, respectively. During 2017, the decrease in the effective tax rate was primarily attributable to the impact of non-cash goodwill impairment charges that are non-deductible for tax purposes. Thereafter, the decrease in the effective tax rate was primarily due to investment tax credits that we receive related to our renewable energy investments, and to a lesser extent, the domestic production activity deduction benefit, the allocation and taxation of income among multiple foreign and domestic jurisdictions, and the impact of the 2017 Tax Act (see Note 16 to the accompanying consolidating financial statements). The benefits were partially offset by an increase in reserves for uncertain tax positions in 2017. In 2016, we favorably resolved multi-year state tax positions that resulted in a reduction of reserves related to uncertain tax positions that did not recur in 2017.
Segment Results of Operations – 2017 vs. 2016
We evaluate the operating performance of our operating segments based on financial measures such as revenues and Adjusted OIBDA. Adjusted OIBDA is defined as operating income excluding: (i) mark-to-market share-based compensation, (ii) depreciation and amortization, (iii) restructuring and other charges, (iv) certain impairment charges, (v) gains and losses on business and asset dispositions, and (vi) certain inter-segment eliminations related to production studios. Additionally, beginning with the quarter ended September 30, 2017, Adjusted OIBDA also excludes material incremental third-party transaction costs directly related to the Scripps Networks acquisition and planned integration. We use this measure to assess the operating results and performance of our segments, perform analytical comparisons, identify strategies to improve performance, and allocate resources to each segment. We believe Adjusted OIBDA is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses. We exclude mark-to-market share-based compensation, restructuring and other charges, certain impairment charges, gains and losses on business and asset dispositions and Scripps Networks acquisition and integration costs from the calculation of Adjusted OIBDA due to their impact on comparability between periods. We also exclude the depreciation of fixed assets and amortization of intangible assets and deferred launch incentives as these amounts do not represent cash payments in the current reporting period. Certain corporate expenses and inter-segment eliminations related to production studios are excluded from segment results to enable executive management to evaluate segment performance based upon the decisions of segment executives. As of January 1, 2017, the Company no longer excludes amortization of deferred launch incentives in calculating total Adjusted OIBDA as this expense is not material. For the year ended December 31, 2016, deferred launch incentives of $13 million were not reflected as an adjustment to the calculation of total Adjusted OIBDA in order to conform to the current presentation.
Adjusted OIBDA should be considered in addition to, but not a substitute for, operating income, net (loss) income and other measures of financial performance reported in accordance with U.S. generally accepted accounting principles (“GAAP”).
Additional financial information for our segments and geographical areas in which we do business is discussed in Note 21 to the accompanying consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
The table below presents the calculation of total Adjusted OIBDA (in millions).
The ex-FX change represents the percentage change on a period-over-period basis adjusted for foreign currency impacts. The ex-FX change is calculated as the difference between the current year amounts translated at a baseline rate, which is a spot rate for each of our currencies determined early in the fiscal year as part of our forecasting process (the “2016“2023 Baseline Rate”), and the prior year amounts translated at the same 20162023 Baseline Rate. In addition, consistent with the assumption of a constant currency environment, our ex-FX results exclude the impact of our foreign currency hedging activities, as well as realized and unrealized foreign currency transaction gains and losses. The impact of foreign currency on the comparability of our results is reflected in the tables below (in millions). Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies.
