John Hendricks, the founder of the Discovery Channel (DISCA/B/K), wrote a book on his life story. Here are my key takeaways from the book.
Starting Discovery must have been some scary ****
Hendricks took out a mortgage on his home and racked up credit card debt to finance his startup. At one point, Discovery was teetering on the brink of bankruptcy and was kept afloat with a loan from an employee.
If things had turned out a little differently, Hendricks would have lost his house. He would’ve been up to his eyeballs in debt and would have needed to find a way to feed his wife and his kids.
Cable channel economics
Paraphrasing loosely here…
Cable channels benefit from scale. They have to reach a threshold (a certain number of households) before they can be profitable. Before that point, they lose money during the startup phase. In the early days of the cable industry, there were many partnerships and joint ventures. For example, a cable company could agree to carry a channel in exchange for an equity stake. This helped finance fledgling channels so that they could survive long enough to reach their critical mass.
The first mover in any particular content niche has a huge advantage against competitors. Whichever channel dominates a niche first tends to stay there. An incumbent channel will often negotiate exclusive rights for the best content. This makes it impossible for competing channels to acquire the best content in that niche (until the exclusivity periods end).
Private equity investors wanted Discovery to forgo long-term projects (e.g. develop new channels) because they would depress earnings in the short-term. They wanted Discovery to report good earnings as they were selling off their shares.
My takeaway from this is that private equity is silly. They did not want Discovery to invest capital at good rates of return, which is basically passing up on easy money.
My thoughts on the book
The book gives some insight into running a cable channel. I don’t get the sense that Hendricks is a masterful capital allocator, though it seems he had an incredible board of directors that helped Discovery make good capital allocation decisions. For investors, this book is only mildly useful.
*Disclosure: No position in DISCA/B/K.