India is one of Discovery's key priority markets along with Latin America where there is tremendous scope for pay-TV growth.

Bullish about digitisation in India, Discovery has plans to expand its portfolio of channels. The latest addition in the menu: Discovery Kids from the second quarter of this calendar year.

In an interview with Indiantelevision.com's Ashwin Pinto, Discovery Networks International president, CEO Mark Hollinger talks about the company's growth markets and its expansion plans in India.

Excerpts:

How important is India as a growth market for Discovery?
India is the biggest growth market for us. It is among the top 10 markets globally for us. The combination of the government being very open to international channels, the digitisation process and the great fit between the Discovery brand and the culture of India makes this country a high priority market for us.

Discovery has launched in many genres. When are you launching the children’s channel?
We will launch Discovery Kids in the second quarter of this calendar year. The content will be global. We are also looking at local content. As networks grow, we have tended to have locally produced content in the mix. Discovery Kids in Latin America produces some of its own content. In India too time there will be global as well as local content as we go along.

Is the timing right given that the kids genre is struggling?
We tend to be long term investors. When we launched a new channel in Spain, people thought that we were crazy as unemployment rate is as as 22 per cent in that country. But we saw that there was an opportunity for us and we went ahead and launched.

So whether a market is up or down at any point of time doesn't matter; there is space for a more education-focussed network like ours. And India, moreover, highly values education. The digitisation process is beginning and is a good opportunity for us. We are not worried about the kids genre business at all.

Will the education component be your differentiating element?
Yes! The other kids channels are similar. We are not Scooby Doo. We are about how you do things, when do you do, why you do. It is inquisitive in nature. Education is an important part of society. But at the same time we are not naive to think that it is just going to be education that people will tune into; it has to be entertaining as well. This was the very genesis of Discovery when John Hendricks first started it.

The channel will have a healthy dose of entertainment and also satisfy the curiosity of viewers in an entertaining way. The good news is that India is a young country. There are millions of kids below the age of 14 and so the market is big.

The challenge here is that niche channels have to rely excessively on ad revenue. By when do you see subscription starting to contribute in a serious manner?
That is a big question in terms of the impact of digitisation on the affiliate revenue stream. If you look at the international portfolio, our channels are weighted towards affiliate. 70 per cent of revenue outside the US is affiliate.

When we start in a market, there is a 100 per cent affiliate revenue and then we move towards advertising. India obviously is an ad sales market. But it is hard to sit here and say what the affiliate revenue stream is going to be. We can hope that digitisation will affect carriage fees and other things.

For the digitisation process to succeed in terms of cut off dates being achieved, what needs to happen?
For the cable operators, it is going to be a giant challenge. If you think just about the logistics it is going to be a huge task - acquiring enough set top boxes, distributing them, getting people to understand what is going on and creating the customer service capability.

Forget about fancy things like DVRs. Just to get the infrastructure in place is an enormous challenge. Luckily for us, we can watch it from afar. But once it is in place, then there is an opportunity and sort of a challenge for programmers to take advantage of digitisation. We have done it successfully in other markets.

Do you think that the 30 June deadline will be met for the metros?
We met some MSOs recently and they are pretty much prepared for it. Moreover, a set top box is not such a novel thing now. There are 25-30 million STBs already in DTH homes. I don’t think that the deadline is a challenge. It will be managed.

How will digitisation change OneAlliance’s relationship with MSOs?
This relationship will become stronger. When change happens, there is bound to be some chaos. There will be disturbance and that is the time when if you are part of a strong bouquet, you can navigate through things.

We have a great team on the ground and great brands. When The OneAlliance was started, there was no digitalisation in India, no DTH. Now that there is DTH, the OneAlliance has only become stronger.

Will you now make a concerted effort at marketing yourself to Indian consumers so that they choose you?
This is already happening. On DTH more and more people choose us and the digital ratings of our channels are high. We offer quality content that people globally pay for. In India there is sensational television on other channels that target eyeballs at any cost. But as we move towards a digital environment, we are better prepared with quality content.

Discovery is in several languages in India. Could you talk about the importance of localisation?
It is important from a content point of view, from a feed structure point of view and from a language point of view. Discovery is in five languages. We are evaluating other language launch possibilities. Some of the other players have possibly gone a little bit overboard, but we have found that local language results in higher viewership in that region.

More players are entering the infotainment and lifestyle space in India. Will this cause fragmentation?
There is fragmentation of viewership happening. We are, however, in a better position to survive audience fragmentation than the other companies.

Discovery spends $1 billion towards programming. Are content investments going to be affected by the global downturn?
No! The content that we invest in is evergreen. Moreover, we can ammortise investments across 210 markets due to the nature of our products. A show will have at least a four-year life. This allows for a longer timeline in terms of investing in shows.

Which are the main focus areas for Discovery?
India clearly is one focus market. Latin America is also a big priority market for us; there is pay television growth to be had from there. In Brazil pay television was hampered, but now ownership has changed and pay-TV penetration is growing substantially. Poland and Russia are also big growth markets for us.

What is the big challenge you face this year?
It differs from market to market. In the US pay TV has a 90 per cent penetration rate. The pay TV growth there will not happen in terms of penetration. So you will see the impact of OTT and if there is enough of an upside to counterbalance any cord cutting, that may happen. Again it is hard to know if Netflix and Amazon will continue to be successful the way they have been. This is not an issue in other markets.

I would say that the big challenges are the impact generally of broadband or free platforms like DTT on pay television. Can pay TV penetration continue to grow? In some countries, there are regulatory issues. Some markets like Brazil have become more protectionist as of late in terms of local Brazilian content and local channels being required on packages. The availability of alternative platforms is both a big challenge and a big opportunity.

There has been a certain amount of operational restructuring within Discovery like the removal of the COO position. Is the basic aim to be more cost effective?
I would say that the changes were more on the US side of the business rather than on the international scene. The international business has remained largely intact in terms of its structure. The changes were made not due to cost reasons. We have an active CEO in David Zaslav. He likes to have as few layers as possible between people who run the US business and himself. The aim is to have a better handle on the business as opposed to saving money.

Last year you split Europe into two business units. What prompted this move?
We used to have what I think was a bit of an odd structure. The UK is an entirely separate business. Then all of Europe, Middle East and Africa are another kind of business. UK has a lot in common with the other western European markets – slow pay TV penetration and DTT kind of opportunities.

Then you have Central, Eastern Europe and the Middle East and Africa which are much more growth markets. There is still expansion to be done. These are more entrepreneurial markets. So we split along the lines of Western Europe as one unit and then Central, Eastern Europe, Middle East and Africa as another unit. We did not add a region. The international business still has four regions. We just restructured Europe to grow Western Europe and put common markets together.

Could you talk about Discovery's strategy to penetrate new markets like Colombia?
What we tend to do with new markets is to go in first and establish distribution. So we opened new offices in Central and Eastern Europe. We opened a sizeable office in Moscow. We opened other offices in places like Kiev, Almaty and Sofia.

There is an opportunity in Colombia and it is our fourth biggest market in Latin America. We earlier only used a local representative for ad sales. We opened an office there for the primary purpose of ad sales while offices in Europe were opened for affiliate purposes.

In Spain you are free to air. Are you expanding your free to air portfolio?
This expansion has been a Western European phenomenon. In Spain pay TV has been at 30 per cent penetration for the last decade. It hasn’t grown.

So now in Germany, Spain and in the UK, we have launched free to air channels. They complement the pay business and are not intended to replace it. They have allowed us to grow at a time when the overall Western Europe pay TV business is not growing. This is harder to do in other markets as there is not a big enough digital terrestrial platform or there are ownership restrictions.

In Korea you did a partnership with CMB. Why?
Korea is a difficult market to get into and almost impossible without a local partner. Tom (Discovery Asia Pacific MD) did an enormous amount of legwork. He spent a lot of time in Korea. It is a strong economy and very well penetrated from a pay television point of view and from a broadband point of view. So it has always been an important market for us to get into. We had to pick the right partner and have the right kind of structure in place.

How did the JV with Oprah Winfrey for a channel come about?
Everybody knew that Oprah would be ending her show and moving to a new business. People in the media industry wondered what that business would be. David Zaslav sold her the idea that her brand and the Discovery brand’s missions were very well suited for each other.

That is how it happened. We have ambitions for the channel in terms of finding markets internationally for it. Tom is a proponent for markets in the Asia Pacific where he feels that the channel will fare well. Oprah created a lot of buzz when she came down to India. This has also been the case in Australia and in other markets around the region. But we first want it to be well established in the US.

Discovery bought Betty in the UK, its first such acquisition of a production company. Are you looking at more such acquisitions?
It is not yet part of Discovery's grand strategy to get into production. But we will see whether owning production is a strong addition to our business model or not. But I will not say that we are actively looking at other companies. We will wait and see how the Betty acquisition plays out.