10-K 1 disca-2013123110k.htm 10-K DISCA-2013.12.31 10K



 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-K
 

ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission File Number: 001-34177
 
 
Discovery Communications, Inc.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
35-2333914
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
One Discovery Place
Silver Spring, Maryland
 
20910
(Address of principal executive offices)
 
(Zip Code)
(240) 662-2000
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Name of Each Exchange on Which Registered
Series A Common Stock, par value $0.01 per share
 
The NASDAQ Global Select Market
Series B Common Stock, par value $0.01 per share
 
The NASDAQ Global Select Market
Series C Common Stock, par value $0.01 per share
 
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
 





Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
 
 
 
 
 
 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The aggregate market value of voting and non-voting common stock held by non-affiliates of the Registrant computed by reference to the last sales price of such stock, as of the last business day of the Registrant’s most recently completed second fiscal quarter, which was June 30, 2013, was approximately $17 billion.
Total number of shares outstanding of each class of the Registrant’s common stock as of February 6, 2014 was:
 
Series A Common Stock, par value $0.01 per share
146,932,515

Series B Common Stock, par value $0.01 per share
6,545,033

Series C Common Stock, par value $0.01 per share
80,635,628

 
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required in Item 10 through Item 14 of Part III of this Annual Report on Form 10-K is incorporated herein by reference to the Registrant’s definitive Proxy Statement for its 2014 Annual Meeting of Stockholders, which shall be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, within 120 days of the Registrant’s fiscal year end.


DISCOVERY COMMUNICATIONS, INC.
FORM 10-K
TABLE OF CONTENTS


 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I
ITEM 1. Business.
For convenience, the terms “Discovery,” “DCI,” the “Company,” “we,” “us” or “our” are used in this Annual Report on Form 10-K to refer to both Discovery Communications, Inc. and collectively to Discovery Communications, Inc. and one or more of its consolidated subsidiaries, unless the context otherwise requires.
OVERVIEW
We are a global media company that provides content across multiple distribution platforms, including digital distribution arrangements, throughout the world. We were formed on September 17, 2008, as a Delaware corporation in connection with Discovery Holding Company ("DHC") and Advance/Newhouse Programming Partnership combining their respective ownership interests in Discovery Communications Holding, LLC ("DCH") and exchanging those interests with and into Discovery (the "Discovery Formation"). As a result of the Discovery Formation, DHC and DCH became wholly-owned subsidiaries of Discovery, with Discovery becoming the successor reporting entity to DHC. As one of the world’s largest nonfiction media companies, we provide original and purchased content to more than 2.2 billion cumulative viewers worldwide through networks that we wholly or partially own. We distribute customized content in the U.S. and over 220 other countries and territories in over 40 languages. Our global portfolio of networks includes prominent television brands such as Discovery Channel, one of the first nonfiction networks and our most widely distributed global brand, TLC and Animal Planet. We also have a diversified portfolio of websites and develop and sell curriculum-based education products and services.
Our objectives are to invest in content for our networks to build viewership, optimize distribution revenue, capture advertising sales, and create or reposition additional 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 each of our branded networks. In addition to growing distribution and advertising revenue for our branded networks, we are extending content distribution across new platforms, including brand-aligned websites, on-line 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.
Our content spans genres including science, exploration, survival, natural history, technology, docu-series, anthropology, heroes, paleontology, history, space, archeology, health and wellness, engineering, adventure, lifestyles, crime and investigation, civilizations, current events and kids. We have an extensive library of content and own all or most rights to the majority 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. Substantially all of our content is produced in high definition (“HD”) format.
We classify our operations in three segments: U.S. Networks, consisting principally of domestic television networks and websites; International Networks, consisting primarily of international television networks and websites; and Education, consisting principally of curriculum-based product and service offerings. Financial information for our segments and 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 22 to the consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
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 television providers without charge pursuant to various pricing plans that include free periods and/or free carriage. The term "viewer" is a single household that receives the signal to one of our networks using the appropriate receiving equipment without a subscription to a pay television provider. The term “cumulative viewers” refers to the collective sum of the total number of subscribers and viewers to each of our networks or content services. By way of example, two households that each receive five of our networks from their pay television provider represent two subscribers, but 10 cumulative subscribers.

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U.S. NETWORKS
U.S. Networks generated revenues of $3.0 billion during 2013, which represented 53% of our total consolidated revenues. Our U.S. Networks segment principally consists of national television networks. Our U.S. Networks segment wholly owns and operates nine national television networks, including fully distributed television networks such as Discovery Channel, TLC and Animal Planet. Discovery Channel, TLC and Animal Planet collectively generated 70% of U.S. Networks’ total revenue. In addition, this segment holds equity method interests in OWN and The Hub Network.
U.S. Networks generates revenues from fees charged to distributors of our television networks’ content, which include cable, DTH satellite and telecommunication service providers, referred to as affiliate fees; fees from digital distributors, which relate to bulk content distribution agreements; and from advertising sold on our television networks and websites. U.S. Networks also generates income by providing sales representation and network distribution services to equity method investee networks and licensing our brands for consumer products.
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 if applicable, for annual graduated rate increases. Carriage of our networks depends on channel placement and 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.
Advertising revenue 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, and our ability to sell commercial time over a group of channels. 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. A portion of many upfront advertising commitments include options whereby advertisers may reduce purchase commitments. In the scatter market, advertisers buy advertising 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 a number of factors, such as pricing, demand for advertising time and economic conditions.
 
Discovery Channel reached approximately 98 million subscribers in the U.S. as of December 31, 2013. Discovery Channel also reached 8 million subscribers through a licensing arrangement with partners in Canada as of December 31, 2013, according to internal data.
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. The network offers a signature mix of compelling 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.
Content on Discovery Channel includes Gold Rush, Naked and Afraid, Deadliest Catch, Amish Mafia and Moonshiners. Discovery Channel is also home to specials and mini-series, including Skywire Live with Nik Wallenda.
Target viewers are adults ages 25-54, particularly men.
Discovery Channel is simulcast in HD.

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TLC reached approximately 97 million subscribers in the U.S. as of December 31, 2013. TLC also reached approximately 7 million subscribers in Canada as of December 31, 2013, according to internal data.
TLC celebrates extraordinary people and relatable life moments through innovative nonfiction programming. A top 10 cable network in key female demographics, TLC has built successful consumer brands around series including, Cake Boss, and has transformed Fridays into "Bride-Day" with a lineup of wedding-themed programming anchored by the Say Yes To The Dress franchise. Other content on TLC includes Here Comes Honey Boo, Boo, Breaking Amish, Long Island Medium and Sister Wives.
Target viewers are adults ages 18-54, particularly women.
TLC is simulcast in HD.

 
Animal Planet reached approximately 96 million subscribers in the U.S. as of December 31, 2013. Animal Planet also reached 2 million subscribers through a licensing arrangement with partners in Canada as of December 31, 2013, according to internal data.
Animal Planet immerses viewers in the full range of life in the animal kingdom with rich, deep content via multiple platforms and offers animal lovers and pet owners access to a centralized online, television and mobile community for immersive, engaging, high-quality entertainment, information and enrichment.
Content on Animal Planet includes Puppy Bowl, River Monsters, Treehouse Masters, Gator Boys and Finding Bigfoot. 2013 was Animal Planet's most-watched year in network history in prime and total day delivery.
Target viewers are adults ages 25-54.
Animal Planet is simulcast in HD.

Investigation Discovery ("ID") reached approximately 84 million subscribers in the U.S. as of December 31, 2013. ID also reached 1 million subscribers through a licensing arrangement with partners in Canada as of December 31, 2013, according to internal data.
ID is a leading mystery-and-suspense network on television and America's favorite "guilty pleasure." From harrowing crimes and salacious scandals to the in-depth investigation and heart-breaking mysteries that result, ID challenges our everyday understanding of culture, society and the human condition.
Content on ID includes Redrum, Deadline: Crime with Tamron Hall, On The Case With Paula Zahn, Injustice Files, Homicide Hunter: Lt. Joe Kenda and Wives With Knives.
Target viewers are adults ages 25-54, particularly women.
ID is simulcast in HD.

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Science Channel reached approximately 76 million subscribers in the U.S. as of December 31, 2013. Science Channel also reached 2 million subscribers through a licensing arrangement with partners in Canada as of December 31, 2013, according to internal data.
Science Channel is home for the thought provocateur and features programming willing to go beyond imagination to explore the unknown. Guided by curiosity, Science Channel looks at innovation in mysterious new worlds as well as in our own backyards.
Content on Science Channel includes Through the Wormhole with Morgan Freeman, Oddities, NASA's Unexplained Files and How It's Made.
Target viewers are adults ages 25-54.
Science Channel is simulcast in HD.

Military Channel reached approximately 62 million subscribers in the U.S. as of December 31, 2013. Military Channel also reached approximately 1 million subscribers in Canada as of December 31, 2013, according to internal data. Military Channel will officially change its name to the American Heroes Channel ("AHC"), on March 3, 2014.
AHC will tell timeless stories in which a challenge appears - be it a situation or a villain - and a hero arises. AHC will provide a rare glimpse into major events that shaped our world, visionary leaders and unexpected heroes who made a difference, and the great defenders of freedom.
AHC will feature the most iconic programming from Military Channel, including Air Aces, The Brokaw Files and epic WWII documentaries like Pearl Harbor: Declassified as well as new series and specials, including Against the Odds, Raw War and Codes and Conspiracies.
Target viewers are men ages 35-64.

Destination America reached approximately 59 million subscribers in the U.S. as of December 31, 2013.
Destination America celebrates the people, places and stories of the United States, and emblazons television screens with the grit and tenacity, honesty, work ethic, humor and adventurousness that characterize our nation.
Content on Destination America includes Mountain Monsters, A Haunting, Railroad Alaska and Buying the Bayou.
Target viewers are adults ages 18-54.
Destination America is simulcast in HD.

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Velocity reached approximately 56 million subscribers in the U.S. as of December 31, 2013.
Velocity engages viewers with a variety of high-octane, intelligent programming that is always action-packed and captures the best of the human experience. In addition to series and specials exemplifying the finest of the automotive, sports and leisure, adventure and travel genres, the network broadcasts hundreds of hours of live events coverage every year.
Content on Velocity includes Wheeler Dealers, Chasing Classic Cars, Overhaulin' and Inside West Coast Customs.
Target viewers are adults ages 25-54, particularly men.


Discovery Fit & Health reached approximately 48 million subscribers in the U.S. as of December 31, 2013.
Discovery Fit & Health 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 Fit & Health includes I Didn't Know I was Pregnant, Untold Stories of the E.R., Secret Sex Lives: Swingers and Bizarre E.R.
Target viewers are adults ages 25-54.

Our U.S. Networks segment owns interests in the following television networks that are operated by equity method investees:
OWN: Oprah Winfrey Network ("OWN") reached approximately 83 million subscribers in the U.S. as of December 31, 2013.
OWN is the first and only network named for, and inspired by, a single iconic leader. Oprah Winfrey's heart and creative instincts inform the brand and the magnetism of the channel. Ms. Winfrey provides leadership in programming and attracts superstar talent to join her in primetime, building a global community of like-minded viewers and leading that community to connect on social media and beyond.
Content on OWN includes Tyler Perry's original series: The Haves and Have Nots and Love Thy Neighbor, as well as Oprah's Next Chapter, Iyanla Fix My Life, Welcome to Sweetie Pies and Life With La Toya.
Target viewers are adults 25-54, particularly women.
OWN is simulcast in HD.

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The Hub Network reached approximately 72 million subscribers in the U.S. as of December 31, 2013.
The Hub Network provides enriching, cool, relevant, family-friendly entertainment experiences that children and parents can enjoy together, including animated and live-action series, as well as specials, game shows, and family-favorite movies.
Content on The Hub Network includes The Aquabats! Super Show!, The Haunting Hour: The Series, SheZow, Goosebumps and My Little Pony Friendship is Magic.
Target viewers are children ages 2-11 and families.
The Hub Network is simulcast in HD.

3net reached approximately 40 million households in the U.S. as of December 31, 2013.
3net is the nation's first and only fully programmed, 24/7 3D network, bringing viewers the highest quality and most immersive in-home 3D viewing experience possible.
Content on 3net includes Dream Defenders, Storm Surfers, Into the Deep and NASCAR.
Target viewers are adults 25-54.
INTERNATIONAL NETWORKS
International Networks generated revenues of $2.5 billion during 2013, which represented 45% of our total consolidated revenues. Our International Networks segment principally consists of national and pan-regional television networks. This segment generates revenue from operations in virtually every pay television market in the world through an infrastructure that includes operational centers in London, Singapore and Miami. Discovery Channel, Animal Planet, TLC, ID and Science Channel lead the International Networks’ portfolio of television networks. International Networks has a large international distribution platform for its networks with as many as 15 networks in more than 220 countries and territories around the world. At December 31, 2013, International Networks operated over 240 unique distribution feeds in over 40 languages with channel feeds customized according to language needs and advertising sales opportunities. International Networks also has free-to-air networks in Europe and the Middle East, broadcast networks in the Nordics and continues to pursue further international expansion.

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Our International Networks segment owns and operates the following television networks, which reached the following number of subscribers via pay television services as of December 31, 2013:
 
Global Networks
 
International
Subscribers
(millions)
 
Regional Networks
 
International
Subscribers
(millions)
Discovery Channel
 
271
 
Discovery Kids
 
76
Animal Planet
 
200
 
SBS Nordic(a)
 
28
TLC, Real Time and Travel & Living
 
162
 
DMAX(b)
 
16
Discovery Science
 
81
 
Discovery History
 
14
Investigation Discovery
 
74
 
Shed
 
12
Discovery Home & Health
 
64
 
Discovery en Espanol (U.S.)
 
5
Turbo
 
52
 
Discovery Familia (U.S.)
 
4
Discovery World
 
23
 
GXT
 
4
 
 
 
 
 
(a) Number of subscribers corresponds to the collective sum of the total number of subscribers to each of the SBS Nordic broadcast networks in Sweden, Norway, and Denmark subject to retransmission agreements with pay television providers.
(b) Number of subscribers corresponds to DMAX pay television networks in the U.K., Austria, Switzerland and Ireland.

Our International Networks segment also owns and operates free-to-air television networks which reached 285 million cumulative viewers in Europe and the Middle East as of December 31, 2013. Our free-to-air networks include DMAX, Fatafeat, Quest, Real Time, Giallo, Frisbee, Focus and K2.
Similar to U.S. Networks, the primary sources of revenue for International Networks are fees charged to operators who distribute our networks, which primarily include cable and DTH satellite service providers, and advertising sold on our television networks. 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 some markets results in long-term contractual distribution relationships, while customers in other markets renew contracts annually. 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 agreements, and the market demand for the content that we provide.
Advertising revenue is dependent upon a number of factors including the development of pay and free-to-air 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 a group of channels. In certain markets, our advertising sales business operates with in-house sales teams, while we rely on external sales representation services in other markets. In developing television markets, we expect that advertising revenue growth will result from continued subscriber and viewership growth, our localization strategy, and the shift of advertising spending from traditional analog networks to channels in the multi-channel environment. In relatively mature markets, such as Western Europe, growth in advertising revenue will come from increasing viewership and pricing of advertising on our existing television networks and the launching of new services, both organic and through acquisitions. During 2013, distribution, advertising and other revenues were 50%, 47% and 3%, respectively, of total net revenues for this segment.
On January 21, 2014, we entered into an agreement with TF1 to acquire a controlling interest in Eurosport International ("Eurosport"), a leading pan-European sports media platform, by increasing our ownership stake from 20% to 51% for cash of approximately €253 million ($343 million) subject to working capital adjustments. Due to regulatory constraints the acquisition initially excludes Eurosport France, a subsidiary of Eurosport. We will retain a 20% equity interest in Eurosport France and a commitment to acquire another 31% ownership interest beginning 2015, contingent upon resolution of all regulatory matters. The flagship Eurosport network focuses on regionally popular sports such as tennis, skiing, cycling and motor sports and reaches 133 million homes across 54 countries in 20 languages. Eurosport’s brands and platforms also include Eurosport HD (high definition simulcast), Eurosport 2, Eurosport 2 HD (high definition simulcast), Eurosport Asia-Pacific, and Eurosportnews. The acquisition is intended to increase the growth of Eurosport and enhance our pay television offerings in Europe. TF1 will have the right to put the entirety of its remaining 49% non-controlling interest to us for approximately two and a half years after completion of this acquisition. The put has a floor value equal to the fair value at the acquisition date if exercised in the 90 day period beginning on July 1, 2015 and is subsequently priced at fair value if exercised in the 90 day period beginning on July 1, 2016. We expect the acquisition to close in the second quarter of 2014 subject to obtaining necessary regulatory approvals.


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On December 28, 2012, we acquired Switchover Media, a group of five Italian television channels with children's and entertainment programming. (See Note 3 to the accompanying consolidated financial statements.)
On January 10, 2013, we purchased an additional 30% ownership interest in Discovery Japan, which was previously a 50% owned equity method investee. As a result, we now have a controlling financial interest in Discovery Japan and account for it as a consolidated subsidiary. We recognized a $92 million gain upon consolidation for the difference in the carrying value and the fair value of the previously held equity interest. (See Note 3 to the accompanying consolidated financial statements.)
On April 9, 2013, we acquired the general entertainment television and radio business operations ("SBS Nordic") of Prosiebensat.1 Media AG for cash of approximately €1.4 billion ($1.8 billion), including closing purchase price adjustments. (See Note 3 to the accompanying consolidated financial statements.)
EDUCATION
Education generated revenues of $114 million during 2013, which represented 2% of our total consolidated revenues. Education is comprised of curriculum-based product and service offerings. This segment 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 hardcopy curriculum-based content. Our education business also participates in global brand and content licensing and engages in partnerships with leading non-profits, corporations, foundations and trade associations.
On November 1, 2013, we acquired an education business in the U.K. that will complement our existing service offerings and expand our operations internationally. (See Note 3 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 from wholly-owned production companies and a wide range of third-party producers, which include some of the world’s leading nonfiction production companies as well as independent producers. Our production arrangements fall into three categories: produced, coproduced and licensed. Produced content includes content that we engage third parties to develop and produce, while we retain editorial control and own most or all of the rights, in exchange for paying all development and production costs. Coproduced content refers to program rights on which we have collaborated with third parties to finance and develop 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.
International Networks maximizes the use of content from our U.S. Networks. Much of our content tends to be culturally neutral and maintains its relevance for an extended period of time. As a result, a significant amount of our 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. We also develop local content that is tailored to individual market preferences, which is typically produced through third-party production companies. 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 impairments and production costs. 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. Certain networks utilize a straight-line method of amortization over the estimated useful lives of the content.
REVENUES
We generate revenues principally from: (i) fees charged to operators who distribute our network content, which primarily include cable, DTH satellite, telecommunication and digital service providers, (ii) advertising sold on our networks and websites, and (iii) other transactions, including curriculum-based products and services, affiliate and advertising sales representation services, content licenses and the licensing of our brands for consumer products. During 2013, distribution, advertising, and other revenues were 46%, 49% and 5%, respectively, of consolidated revenues. No individual customer represented more than 10% of our total consolidated revenues for 2013, 2012 or 2011.

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Distribution
Distribution revenue includes fees charged for the right to view Discovery 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 affiliate fees charged to cable, DTH satellite and telecommunication service providers for distribution rights to our television networks. 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 channel placement and 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, and the market demand for the content that we provide. We have provided distributors launch incentives, in the form of cash payments or free periods, to carry our networks.
Distribution revenue also includes fees charged for bulk content arrangements and other subscription services for episodic content. Digital distribution agreements are impacted by the quantity, as well as the quality, of the content Discovery provides.
In the U.S., approximately 90% of distribution revenues come from the top 10 distributors, with whom we have agreements that expire at various times from 2014 through 2020. Outside of the U.S., approximately 50% 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, notably the U.K., 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.
Advertising
Our advertising revenue 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. Advertising revenue is dependent upon a number of factors, including the stage of development of television markets, the popularity of free-to-air 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. In developing pay television markets, we expect advertising revenue growth will result from subscriber growth, our localization strategy, and the shift of advertising spending from broadcast to pay television. 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 television, broadcast, or free-to-air television environments.
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 on our websites on a stand-alone basis and as part of advertising packages with our television networks.
Other
We also generate income associated with providing affiliate and advertising sales representation and network services for equity method investee networks, curriculum-based products and services and the licensing of our brands for consumer products.
COMPETITION
Television network content is a highly competitive business worldwide. We experience competition for the development and acquisition of content, distribution of our content, selling of commercial time on our networks and viewership. Our networks compete with studios, television networks, and the internet for the acquisition of content and creative talent such as writers, producers and directors. Our ability to produce and acquire popular content is an important competitive factor for the distribution of our networks, attracting viewers and the sale of advertising. Our success in securing popular content and creative talent depends

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on various factors such as the number of competitors providing content that targets the same genre and audience, the distribution of our networks, 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 network 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.
Our networks and websites compete for the sale of advertising with other television networks, including broadcast, cable and local networks, online and mobile outlets, radio content and print media. 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 networks and websites also compete for their target audiences with all forms of content and other media provided to viewers, including broadcast, cable and local networks, pay-per-view and VOD services, DVDs, online activities and other forms of news, information and entertainment.
Our education business competes with other providers of curriculum-based products and services to schools.
INTELLECTUAL PROPERTY
Our intellectual property assets include copyrights in television content, trademarks in brands, names and logos, websites, and licenses of intellectual property rights from third parties.
We are fundamentally a content company and the protection of our brands and content is of primary importance. To protect our intellectual property assets, we rely upon a combination of copyright, trademark, unfair competition, trade secret and 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 of our products and services and related intellectual property is difficult and costly. 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.
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 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 European Union, in which we operate. Content networks, such as those owned by us, are regulated by the Federal Communications Commission (“FCC”) in certain respects if they are affiliated with a cable television operator. Other FCC regulations, although imposed on cable television operators and direct broadcast satellite ("DBS") operators, 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 do not purport to describe all present and proposed laws and regulations affecting our businesses.
Program Access
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. These rules also permit MVPDs to initiate complaints to the FCC against content networks if an MVPD claims it is unable to obtain rights to carry the content network on nondiscriminatory rates, terms or conditions. The FCC allowed a previous blanket prohibition on exclusive

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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.
“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. 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. This reduces the amount of channel space that is available for carriage of our networks by cable and DBS operators. The Act also established retransmission consent, which refers to a broadcaster’s right to require consent from MVPDs, such as cable and satellite operators, before distributing its signal to their 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 seeking substantial monetary compensation for granting carriage rights for their must-have broadcast content. Such increased financial demands on distributors reduce the content funds available for independent programmers not affiliated with broadcasters, such as us.
Closed Captioning and Advertising Restrictions
Certain of our networks must provide closed-captioning of content. Our content and websites intended primarily for children 12 years of age and under must comply with certain limits on advertising, and commercials embedded in our networks’ content stream 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 distributors are prohibited from transmitting obscene content, and our affiliation 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 Internet
We operate several websites which we use to distribute information about our programs and to offer consumers the opportunity to purchase consumer products and services. Internet services are now subject to regulation in the U.S. relating to the privacy and security of personally identifiable user information and acquisition of personal information from children under 13, including the federal Children's Online Privacy Protection Act and the federal Controlling the Assault of Non-Solicited Pornography and Marketing Act. In addition, a majority of states have enacted laws that impose data security and security breach obligations. Additional federal and state laws and regulations may be adopted with respect to the Internet or other on-line services, covering such issues as user privacy, child safety, data security, advertising, 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 offer products and services to on-line consumers outside the U.S., the laws and regulations of foreign jurisdictions, including, without limitation, consumer protection, privacy, advertising, data retention, intellectual property, and content limitations, may impose additional compliance obligations on us.
EMPLOYEES
As of December 31, 2013, we had approximately 5,700 employees, including full-time and part-time employees of our wholly-owned subsidiaries and consolidated ventures.
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, as soon as reasonably practical 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

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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 at: Investor Relations, Discovery Communications, Inc., 850 Third Avenue, 8th Floor, New York, NY 10022-7225. 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, you should consider the following risk factors before investing in our securities.
Our success is dependent upon U.S. and foreign audience acceptance of our entertainment content, which is difficult to predict.
The production and distribution of entertainment 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. 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. The commercial success of our content also depends upon the quality and acceptance of competing content available in the applicable marketplace. At the same time, certain of our consolidated and equity method investee networks are new. There is no assurance of audience acceptance of the programming available on these new brands. Other factors, including the availability of alternative forms of entertainment and leisure time activities, general economic conditions, piracy, and growing competition for consumer discretionary spending may also affect the audience 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 entertainment content may decrease our audience share and adversely affect our results of operations.
Changes in consumer behavior resulting from new technologies and distribution platforms may impact the performance of our businesses.
Our business is focused on television, and we face emerging competition from other providers of digital media, some of which have greater financial, marketing and other resources than we do. In particular, content offered over the Internet has become more prevalent as the speed and quality of broadband networks have improved. Providers such as Hulu, Netflix, Apple TV, Amazon, Google TV and Intel, as well as gaming and other consoles such as Microsoft's Xbox and Xbox One, Sony's PS3 and PS4, Nintendo's Wii and Roku, are aggressively establishing themselves as alternative providers of video services. These services and the growing availability of online content, coupled with an expanding market for mobile devices and tablets that allow users to view content on an on-demand basis and Internet-connected televisions, may impact our traditional distribution methods for our services and content. 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, have caused changes in consumer behavior that may affect the attractiveness of our offerings to advertisers and could therefore adversely affect our revenues. If we cannot ensure that our distribution methods and content are responsive to our target audiences, our business could be adversely affected.
We operate in increasingly competitive industries.
The entertainment and media programming industries in which 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 and on-line and mobile activities. In particular, websites and search engines have seen significant advertising growth, a portion of which is derived from traditional cable network and satellite advertisers. In addition, there has been consolidation in the media industry and our competitors include market participants with interests in multiple media businesses which are often vertically integrated. Our on-line businesses compete for users and advertising in the broad and diverse market of free Internet-delivered services. Our commerce business competes against a wide range of competitive retailers selling similar products. Our curriculum-based video business competes with other providers of education products to schools. If our distributors have to pay higher rates to holders of sports broadcasting rights, it might be difficult for us to negotiate higher rates for distribution of our networks. Our ability 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, or that increasing competition will not have a material adverse effect on our business, financial condition or results of operations.

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Further consolidation among cable and satellite providers could adversely affect 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. We currently have agreements in place with the major U.S. cable and satellite operators which expire at various times beginning in 2014 through 2020. 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 further reduce the number of distributors available to carry our content and increase the negotiating leverage of our distributors which could adversely affect our revenue.
The loss of our affiliation agreements, or renewals with less advantageous terms, could cause our revenue to decline.
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 payments 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 these affiliation agreements will be renewed in the future, or renewed on terms that are favorable to us. A reduction in the license fees that we receive per subscriber or in the number 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 one of our counterparties on the interpretation of an affiliation agreement, our relationship with that counterparty could be damaged and our business could be negatively affected.
Some terms of our agreements with distributors could be interpreted in a manner that could adversely affect distribution revenue payable to us 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 complex and other parties could reach a different conclusion that, if correct, could have an adverse effect on our financial condition or results of operations.
We may pursue acquisitions and other strategic transactions to complement or expand our business that may not be successful and we may lose up to the entire value of our investment in these acquisitions and transactions.
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 may not be able to complete any transactions and these transactions, if executed, pose significant risks and could have a negative effect on our operations. Any transactions that we are able to identify and complete may involve a number of risks, including:
the diversion of our management’s attention from our existing business to integrate the operations and personnel of the acquired or combined business or equity method investee;
possible adverse effects on our operating results during the integration process;
a high degree of risk involved in these transactions, which could become substantial over time, and higher exposure to significant financial losses if the underlying ventures are not successful; and
our possible inability to achieve the intended objectives of the transaction.
In addition, we may not be able to integrate, operate, maintain and manage our newly acquired operations or employees successfully or profitably. We may not be able to maintain uniform standards, controls, procedures and policies, and this may lead to operational inefficiencies. The integration of the SBS Nordic business, following the completion of that acquisition, and other recently acquired businesses and assets, including Eurosport, Discovery Japan and Switchover Media, may not be successful, may divert management attention and could have an adverse effect on our results of operations.
New acquisitions, equity method investments and other transactions may require the commitment of significant capital that would otherwise be directed to investments in our existing businesses or be distributed to shareholders.

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The financial performance of our equity method investments may differ from current estimates.
We have equity investments in certain entities and the accounting treatment applied for these investments varies depending on a number of factors, including, but not limited to, our percentage ownership and whether we have any influence or control 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 are recently launched networks, which may require significant funding before achieving profitability.
Our business could be adversely affected by any worsening of economic conditions.
We derive substantial revenues from the sale of advertising on our networks. Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions, as well as budgeting and buying patterns. A deterioration in the current economic conditions may adversely affect the economic prospects of advertisers and could alter current or prospective advertisers’ spending priorities. A decrease in advertising expenditures would have an adverse effect on our business. A decline in economic conditions usually impacts consumer discretionary spending. A reduction in consumer spending may impact pay television subscriptions, particularly to the more expensive digital service tiers, which could lead to a decrease in our distribution fees and may reduce the rates we can charge for advertising.
Our substantial leverage and debt service obligations may adversely affect us.
As of December 31, 2013, we had approximately $6.5 billion 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. In addition, we have the ability to draw down our revolving credit facility in the ordinary course, which would have the effect of increasing our indebtedness. We are also permitted, subject to certain restrictions under our existing indebtedness, to obtain additional long-term debt and working capital lines of credit to meet future financing needs. This would have the effect of increasing our total leverage.
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 debt 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.
The loss of key 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. 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.
Restrictive covenants in the loan agreement for our revolving credit facility could adversely affect our business by limiting our flexibility.
The loan agreement for our revolving credit facility contains restrictive covenants, as well as requirements to comply with certain leverage 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

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mergers, acquisitions and sales of assets. These covenants could place us at a disadvantage compared to some of our competitors, who may have fewer restrictive covenants and may not be required to operate under these restrictions. Further, these covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, mergers and acquisitions or other opportunities.
We are a holding company and could be unable in the future to obtain cash in amounts sufficient to service our financial obligations or meet our 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 facility 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 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, to which they may be or may become subject. We are required to accrue and pay U.S. taxes for repatriation of certain cash balances held by foreign corporations. However, we intend 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.
Risks associated with our international operations could harm our financial condition.
Our networks are offered worldwide, and we are focused on expanding our international operations in key markets, some of which are emerging markets. Inherent economic risks of doing business in international markets include, among other things, changes in the economic environment, exchange controls, tariffs and other trade barriers, longer payment cycles, foreign taxation, corruption, and increased risk of political instability in some markets. As we continue to expand the provision of our products and services to international markets, these risks and uncertainties may harm our 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 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.
Fluctuations in foreign exchange rates could have an adverse effect on our results of operations.
We have significant operations in a number of foreign jurisdictions and certain of our operations are conducted in foreign currencies. The value of these currencies fluctuates relative to the U.S. dollar. As a result, we are exposed to exchange rate fluctuations, which could have an adverse effect on our results of operations in a given period or in specific markets.
Financial market conditions may impede access to or increase the cost of financing our operations and investments.
The ongoing changes in U.S. and global financial and equity markets, including market disruptions and tightening of the credit markets, may make it more difficult for us to obtain financing for our operations or investments or increase the cost of obtaining financing. In addition, our borrowing costs can be affected by short and long-term debt ratings assigned by independent rating agencies which are based, in significant part, on our performance as measured by credit metrics such as interest coverage and leverage ratios. A low rating could increase our cost of borrowing or make it more difficult for us to obtain future financing.
Our business is subject to risks of adverse laws and regulations, both domestic and foreign.
Programming services like ours, and the distributors of our services, including cable operators, satellite operators and other multichannel video programming distributors, are highly 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. See the discussion under “Business – Regulatory Matters” above. The U.S. Congress, the FCC and the courts currently have under consideration, and may adopt 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. For example, any changes to the laws and regulations that govern the services or signals that are carried by cable television operators or our other distributors may result in less capacity for other content services, such as our networks, which could adversely affect our revenue.
Similarly, the foreign jurisdictions in which our networks are offered have, in varying degrees, laws and regulations governing our businesses. Programming businesses are subject to regulation on a country-by-country basis. Changes in regulations imposed by foreign governments could also adversely affect our business, results of operations and ability to expand our operations beyond their current scope.

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Piracy of our entertainment content, including digital piracy, may decrease revenue received from our entertainment content and adversely affect our business and profitability.
The success 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.
Our directors overlap with those of Liberty Media Corporation (“Liberty Media”), Liberty Global plc (“Liberty Global”), Liberty Interactive Corporation (“Liberty Interactive”) and certain related persons of Advance/Newhouse, which may lead to conflicting interests.
Our eleven-person 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 and two persons who are currently members of the board of directors of Liberty Interactive, all of which include John C. Malone as Chairman of the boards of those companies. In addition, our 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. The Liberty entities and the parent company of Advance/Newhouse own interests in a range of media, communications and entertainment businesses. None of the Liberty entities owns any interest in us. Dr. Malone beneficially owns stock of Liberty Media representing approximately 47% of the aggregate voting power of its outstanding stock, owns shares representing approximately 27% of the aggregate voting power of Liberty Global, shares representing approximately 35% of the aggregate voting power of Liberty Interactive, and shares representing approximately 22% of the aggregate voting power (other than with respect to the election of the common stock directors) of our outstanding stock. Dr. Malone controls approximately 29% 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 directors who are also directors of the Liberty entities own Liberty Media, Liberty Global and/or Liberty Interactive stock and stock incentives and own our stock and stock incentives.
Advance/Newhouse will elect three directors annually for so long as it owns a specified minimum amount of our Series A convertible preferred stock. The Advance/Newhouse Series A convertible preferred stock, which votes with our common stock on all matters other than the election of directors, represents approximately 25% of the voting power of our outstanding shares. The Series A 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.
These ownership interests and/or business positions could create, or appear to create, potential conflicts of interest when these individuals are faced with decisions that could have different implications for us, the Liberty entities, and/or Advance/Newhouse. For example, there may be the potential for a conflict of interest when we, on the one hand, or a Liberty entity, and/or Advance/Newhouse, on the other hand, look at 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 Liberty Media, Liberty Global, Liberty Interactive or Advance/Newhouse 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.
Our overlapping directors with Liberty Media, Liberty Global and Liberty Interactive may result in the diversion of business opportunities and other potential conflicts.
Liberty Media, Liberty Global and Liberty Interactive own interests in various U.S. and international companies 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 Liberty Media, Liberty Global and Liberty Interactive, and the pursuit of these opportunities by such subsidiaries may adversely affect our interests and those of our stockholders. Because we and these 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

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breach of any fiduciary duty by reason of the fact that such individual directs a corporate opportunity to another person or entity (including Liberty Media, Liberty Global or Liberty Interactive), 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.
The personal educational media, lifelong learning, and travel and automotive industry investments by John S. Hendricks, a common stock director and our Founder, may conflict with or compete with our business activities.
Our Founder, John S. Hendricks, manages his non-Discovery, personal business investments through Hendricks Investment Holdings LLC (“HIH”), a Delaware limited liability company of which he is the sole owner and member. HIH owns a travel club and travel-related properties including a resort in Gateway, Colorado and has created a learning academy for guests that includes on-line and advanced media offerings in the area of informal and lifelong learning. Certain video productions and offerings of this academy may compete with our educational media offerings. We and the academy may enter into a business arrangement for the offering of our video products for sale by the academy and/or for the joint-production of new educational media products or co-production agreements for content to be aired on our networks, such as the Curiosity series. In addition, from time to time, HIH or its subsidiaries may enter into transactions with us or our subsidiaries. For example, through HIH, Mr. Hendricks owns a number of business interests in the automotive field, some of which are involved in content offered by us, in particular on our Velocity network. There can be no assurance that the terms of any such 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 doing so may be beneficial to our stockholders.
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 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 convertible preferred stock with special voting rights, which prohibits us from taking any of the following actions, among others, without the prior approval of the holders of a majority of the outstanding shares of such stock:
increasing the number of members of the Board of Directors above 11;
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;
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 stock directors with staggered three-year terms and having three directors elected by the holders of the Series A convertible preferred stock, which may lengthen the time required to gain control of our Board of 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 Board of Directors 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

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the existence of authorized and unissued stock which would allow our Board of Directors 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.
We have also adopted a shareholder rights plan in order to encourage anyone seeking to acquire us to negotiate with our Board of Directors prior to attempting a takeover. While the plan 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 of 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 law 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 of 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 series 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 all of our stockholders.
The exercise by Advance/Newhouse of its registration rights may cause our stock price to decline significantly, even if our business is doing well.
Advance/Newhouse has been granted registration rights covering all of the shares of common stock issuable upon conversion of the convertible preferred stock held by Advance/Newhouse. Advance/Newhouse’s preferred stock is currently convertible into shares of our Series A and Series C common stock on a 1-for-1 basis, subject to certain anti-dilution adjustments. The registration rights, which are immediately exercisable, are transferable with the 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.
John C. Malone and Advance/Newhouse each have significant voting power with respect to corporate matters considered by our stockholders.
For corporate matters other than the election of directors, Dr. Malone and Advance/Newhouse each beneficially own shares of our stock representing approximately 22% and 25%, respectively, of the aggregate voting power represented by our outstanding stock. With respect to the election of directors, Dr. Malone controls approximately 29% of the aggregate voting power relating to the election of the eight common stock directors (assuming that the convertible preferred stock owned by Advance/Newhouse (the “A/N Preferred Stock”) has not been converted into shares of our common stock). The A/N Preferred Stock carries with it the right to designate three preferred stock directors to our board (subject to certain conditions), but does not vote with respect to the election of the eight common stock directors. Also, under the terms of the A/N Preferred Stock, Advance/Newhouse has special voting rights as to certain enumerated matters, including material amendments to the restated charter and bylaws, fundamental changes in our business, mergers and other business combinations, certain acquisitions and dispositions and future issuances of capital stock. Although there is no stockholder agreement, voting agreement or any similar arrangement between Dr. Malone and Advance/Newhouse, by virtue of their respective holdings, Dr. Malone and Advance/Newhouse each have significant influence over the outcome of any corporate transaction or other matter submitted to our stockholders.
ITEM 1B. Unresolved Staff Comments.
None.
ITEM 2. Properties.

We own and lease approximately 1.7 million square feet of building space for the conduct of our businesses at 65 locations throughout the world. In the U.S. alone, we own and lease approximately 597,000 and 564,000 square feet of building space, respectively, at 13 locations. Principal locations in the U.S. include: (i) our world headquarters located at One Discovery Place, Silver Spring, Maryland, where approximately 543,000 square feet is used for executive offices and general office space by our U.S. Networks, International Networks and Education segments, (ii) general office space at 850 Third Avenue, New York, New

21




York, where approximately 179,000 square feet is primarily used for sales by our U.S. Networks segment and executive offices, (iii) general office space and a production and post-production facility located at 8045 Kennett Street, Silver Spring, Maryland, where approximately 149,000 square feet is primarily used by our U.S. Networks segment and (iv) general office space at 6505 Blue Lagoon Drive, Miami, Florida, where approximately 91,000 square feet is primarily used by our International Networks segment.

We also lease over 511,000 square feet of building space at 52 locations outside of the U.S., including the U.K., where approximately 127,000 square feet is primarily used by our International Networks for general office space and distribution of network television content in Europe.

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 property as considered appropriate to meet the needs of the individual operation.
ITEM 3. Legal Proceedings.
We experience routine litigation in the normal course of our business. We believe that none of the pending litigation will have a material adverse effect on our consolidated financial condition, future results of operations, or liquidity.
ITEM 4. Mine Safety Disclosures.
Not applicable.

22




Executive Officers of Discovery Communications, Inc.
Pursuant to General Instruction G(3) to Form 10-K, the information regarding our 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 name and date of birth of each of our executive officers and the office held by such officer as of February 20, 2014.  
 
 
 
Name
  
Position
 
 
John S. Hendricks
Born March 29, 1952
  
Chairman and a common stock director. Mr. Hendricks is our Founder and has served as Chairman of Discovery since September 1982. Mr. Hendricks served as our Chief Executive Officer from September 1982 to June 2004; and our Interim Chief Executive Officer from December 2006 to January 2007.
 
 
David M. Zaslav
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. 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 was a director of TiVo Inc. from 2000 to 2010.
 
 
Andrew Warren
Born September 8, 1966
  
Senior Executive Vice President, Chief Financial Officer. Mr. Warren has served as our Senior Executive Vice President, Chief Financial Officer since March 2012. Mr. Warren served as Chief Financial Officer of Liz Claiborne, Inc. (now Fifth & Pacific Companies Inc.) a designer, marketer and retail supplier of premium lifestyle fashion brands, from 2007 to 2012.
Mark G. Hollinger
Born August 26, 1959
  
President and Chief Executive Officer of Discovery Networks International. Mr. Hollinger became President and Chief Executive Officer of Discovery Networks International in December 2009. Prior to that, Mr. Hollinger served as our Chief Operating Officer and Senior Executive Vice President, Corporate Operations from January 2008 through December 2009; and as our Senior Executive Vice President, Corporate Operations from January 2003 through December 2009. Mr. Hollinger served as our General Counsel from 1996 to January 2008, and as President of our Global Businesses and Operations from February 2007 to January 2008.
 
 
Adria Alpert Romm
Born March 2, 1955
  
Senior Executive Vice President, Human Resources. Ms. Romm has served as our Senior Executive Vice President of Human Resources since March 2007. 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
  
Senior Executive Vice President, Chief Development Officer and General Counsel. Mr. Campbell became Chief Development Officer in August 2010 and our General Counsel in December 2010. 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.
 
 
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.




23




PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our Series A common stock, Series B common stock and Series C common stock are listed and traded on The NASDAQ Global Select Market (“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 NASDAQ.
 
 
 
Series A
Common Stock
 
Series B
Common Stock
 
Series C
Common Stock
 
 
High
 
Low
 
High
 
Low
 
High
 
Low
2013
 
 
 
 
 
 
 
 
 
 
 
 
Fourth quarter
 
$
90.46

 
$
77.93

 
$
89.65

 
$
78.54

 
$
83.86

 
$
71.89

Third quarter
 
$
85.49

 
$
76.92

 
$
85.42

 
$
77.55

 
$
78.12

 
$
70.26

Second quarter
 
$
81.03

 
$
73.57

 
$
81.23

 
$
73.30

 
$
73.48

 
$
65.24

First quarter
 
$
79.53

 
$
65.48

 
$
79.29

 
$
65.13

 
$
70.60

 
$
60.16

2012
 
 
 
 
 
 
 
 
 
 
 
 
Fourth quarter
 
$
63.61

 
$
55.18

 
$
63.59

 
$
55.11

 
$
58.87

 
$
51.28

Third quarter
 
$
59.90

 
$
49.10

 
$
60.00

 
$
49.82

 
$
56.04

 
$
45.27

Second quarter
 
$
55.13

 
$
48.37

 
$
55.08

 
$
48.55

 
$
50.45

 
$
44.05

First quarter
 
$
50.60

 
$
40.87

 
$
51.79

 
$
41.25

 
$
46.88

 
$
37.14

As of February 6, 2014, there were approximately 1,891, 105 and 2,004 record holders of our Series A common stock, Series B common stock and Series C common stock, respectively. These amounts do not include the number of shareholders whose shares are held of record by banks, brokerage houses or other institutions, but include each institution as one shareholder.
We have not paid any cash dividends on our Series A common stock, Series B common stock or Series C common stock, and we have no present intention to do so. Payment of cash dividends, if any, will be determined by our Board of Directors after consideration of our earnings, financial condition and other relevant factors such as our credit facility'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, 2013 (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
(a)
 
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the  Plans or Programs(a)(b)
October 1, 2013 - October 31, 2013
 
1.5

 
$
75.44

 
1.5

 
$
691

November 1, 2013 - November 30, 2013
 
1.5

 
$
79.52

 
1.5

 
$
572

December 1, 2013 - December 31, 2013
 
1.3

 
$
79.30

 
1.3

 
$
470

Total
 
4.3

 


 
4.3

 
$
470

 
 
 
 
 
 
(a) The amounts do not give effect to any fees, commissions or other costs associated with repurchases of shares.
(b) As of December 31, 2013, the total amount authorized under the stock repurchase program was $4.0 billion and we had remaining authorization of $470 million for future repurchases under our common stock repurchase program, which will expire on December 11, 2014. On February 3, 2014, our Board of Directors approved an additional $1.5 billion under the stock repurchase program, which will expire on February 3, 2016. Under the stock repurchase program, management is authorized to purchase shares of the Company's

24




common stock from time to time through open market purchases or privately negotiated transactions at prevailing prices as permitted by securities laws and other legal requirements, and subject to stock price, business and market conditions and other factors. We have been funding and expect to continue to fund stock repurchases through a combination of cash on hand and cash generated by operations. In the future, we may also choose to fund our stock repurchase program under our revolving credit facility or future financing transactions. There were no repurchases of our Series A and B common stock during the three months ended December 31, 2013. The Company first announced its stock repurchase program on August 3, 2010.
Stock Performance Graph
The following graph sets forth the cumulative total shareholder return on our Series A common stock, Series B common stock and Series C common stock as compared with the cumulative total return of the companies listed in the Standard and Poor’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 and The Walt Disney Company. The graph assumes $100 originally invested on December 31, 2008 in each of our Series A common stock, Series B 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 ended December 31, 2009, 2010, 2011, 2012 and 2013.
.
 
 
December 31, 
2008
 
December 31, 
2009
 
December 31, 
2010
 
December 31, 
2011
 
December 31, 
2012
 
December 31, 
2013
DISCA
 
$
100.00

 
$
216.60

 
$
294.49

 
$
289.34

 
$
448.31

 
$
638.56

DISCB
 
$
100.00

 
$
207.32

 
$
287.71

 
$
277.03

 
$
416.52

 
$
602.08

DISCK
 
$
100.00

 
$
198.06

 
$
274.01

 
$
281.55

 
$
436.89

 
$
626.29

S&P 500
 
$
100.00

 
$
123.45

 
$
139.23

 
$
139.23

 
$
157.90

 
$
204.63

Peer Group
 
$
100.00

 
$
151.63

 
$
181.00

 
$
208.91

 
$
286.74

 
$
454.87

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 2014 Annual Meeting of Stockholders under the caption “Securities Authorized for Issuance Under Equity Compensation Plans,” which is incorporated herein by reference.

25




ITEM 6. Selected Financial Data.
The table set forth below presents our selected financial information for each of the past five years. The selected statement of operations information for each of the three years ended December 31, 2013 and the selected balance sheet information as of December 31, 2013 and 2012 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, 2010 and 2009 and the selected balance sheet information as of December 31, 2011, 2010 and 2009 have been derived from financial statements not included in this Annual Report on Form 10-K.

26




 
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
(in millions, except per share amounts)
Selected Statement of Operations Information:
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
5,535

 
$
4,487

 
$
4,168

 
$
3,706

 
$
3,387

Costs of revenues, excluding depreciation and amortization
 
1,689

 
1,218

 
1,176

 
1,013

 
984

Operating income
 
1,998

 
1,855

 
1,803

 
1,377

 
1,274

Income from continuing operations, net of taxes
 
1,077

 
956

 
1,136

 
659

 
570

(Loss) income from discontinued operations, net of taxes
 

 
(11
)
 
(3
)
 
10

 
(6
)
Net income
 
1,077

 
945

 
1,133

 
669

 
564

Net income attributable to noncontrolling interests
 
(1
)
 
(2
)
 
(1
)
 
(16
)
 
(15
)
Net income attributable to redeemable noncontrolling interests
 
(1
)
 

 

 

 

Net income available to Discovery Communications, Inc.
 
1,075

 
943

 
1,132

 
653

 
549

Redeemable noncontrolling interest adjustments to redemption value
 
(2
)
 

 

 

 

Stock dividends to preferred interests
 

 

 

 
(1
)
 
(8
)
Net income available to Discovery Communications, Inc. stockholders
 
1,073

 
943

 
1,132

 
652

 
541

Basic earnings per share available to Discovery Communications, Inc. stockholders:

 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
3.01

 
$
2.54

 
$
2.83

 
$
1.51

 
$
1.29

Discontinued operations
 
$

 
$
(0.03
)
 
$
(0.01
)
 
$
0.02

 
$
(0.01
)
Net Income
 
$
3.01

 
$
2.51

 
$
2.82

 
$
1.53

 
$
1.28

Diluted earnings per share available to Discovery Communications, Inc. stockholders:

 
 
 
 
 
 
 
 
 
 
Continuing operations

 
$
2.97

 
$
2.51

 
$
2.80

 
$
1.50

 
$
1.29

Discontinued operations
 
$

 
$
(0.03
)
 
$
(0.01
)
 
$
0.02

 
$
(0.01
)
Net income
 
$
2.97

 
$
2.48

 
$
2.80

 
$
1.52

 
$
1.27

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
357

 
376

 
401

 
425

 
423

Diluted
 
361

 
380

 
405

 
429

 
425

Selected Balance Sheet Information:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
408

 
$
1,201

 
$
1,048

 
$
466

 
$
623

Goodwill
 
7,341

 
6,399

 
6,291

 
6,434

 
6,433

Total assets
 
14,979

 
12,930

 
11,913

 
11,019

 
10,952

Long-term debt:
 
 
 
 
 
 
 
 
 
 
Current portion
 
17

 
31

 
26

 
20

 
38

Long-term portion
 
6,482

 
5,212

 
4,219

 
3,598

 
3,457

Total liabilities
 
8,746

 
6,637

 
5,394

 
4,786

 
4,683

Redeemable noncontrolling interests
 
36

 

 

 

 
49

Equity attributable to Discovery Communications, Inc.
 
6,196

 
6,291

 
6,517

 
6,225

 
6,197

Equity attributable to noncontrolling interests
 
1

 
2

 
2

 
8

 
23

Total equity
 
$
6,197

 
$
6,293

 
$
6,519

 
$
6,233

 
$
6,220

 
Income per share amounts may not sum since each is calculated independently.
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. (See Note 3 to the accompanying consolidated financial statements.)

27




On September 17, 2012, we sold our postproduction audio business, whose results of operations have been reclassified to discontinued operations for all periods presented. (See Note 3 to the accompanying consolidated financial statements.)
Our results of operations for 2011 include a $112 million income tax benefit related to foreign tax credits and a $129 million gain on the disposition of the Discovery Health network as a contribution to OWN upon the launch of the network. As we continue to be involved in the operations of OWN subsequent to its launch, the results of operations of the Discovery Health network have not been presented as discontinued operations. Therefore, our results of operations for 2010 and 2009 include the gross revenues and expenses of the Discovery Health network. For periods subsequent to January 1, 2011, our results of operations include only our proportionate share of OWN’s net operating results under the equity method of accounting. (See Note 4 to the accompanying consolidated financial statements.)
Our results of operations for 2010 include a $136 million loss on the extinguishment of debt.
On September 1, 2010, we sold our Antenna Audio business for net proceeds of $24 million in cash, which resulted in a $9 million gain, net of taxes. The operating results of Antenna Audio have been reported as discontinued operations for all periods presented.
On May 22, 2009, we sold a 50% interest in the U.S. Discovery Kids network to Hasbro and formed The Hub Network. We recognized a pretax gain of $252 million in connection with this transaction. As we continue to be involved in the operations of the joint venture subsequent to its formation, the results of operations of the U.S. Discovery Kids network have not been presented as discontinued operations. Therefore, our results of operations for January 1, 2009 through May 22, 2009 include the gross revenues and expenses of the U.S. Discovery Kids network. For periods subsequent to May 22, 2009, our results of operations include only our proportionate share of the U.S. Discovery Kids network net operating results under the equity method of accounting. (See Note 4 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, recent developments, results of operations, cash flows, financial condition, contractual commitments and critical accounting policies.
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 service offerings, financial prospects, and anticipated sources and uses of capital. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes,” and words 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. 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: 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 over contract interpretation; 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; continued consolidation of broadband distribution and production companies; uncertainties inherent in the development of new business lines and business strategies; uncertainties regarding the financial performance of our equity method investees; integration of acquired businesses; uncertainties associated with product and service development and market acceptance, including the development and provision of programming for new television and telecommunications technologies; changes in the distribution and viewing of television programming, including the expanded deployment of personal video recorders, video on demand (“VOD”), internet protocol television, mobile personal devices and personal tablets and their impact on television advertising revenue; rapid technological changes; future financial performance, including availability, terms, and deployment of capital; fluctuations in foreign currency exchange rates and political unrest in international markets; the ability of suppliers and vendors to deliver products, equipment, software, and services; 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 or changes in

28




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; reduced access to capital markets or significant increases in costs to borrow; a failure to secure affiliate agreements or renewal of such agreements on less favorable terms; and a reduction of advertising revenue associated with unexpected reductions in the number of subscribers. 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 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.
BUSINESS OVERVIEW
We are a global media company that provides programming across multiple distribution platforms, including digital distribution arrangements, throughout the world. We generate revenues principally from: (i) fees charged to operators who distribute our network content, which primarily include cable, DTH satellite, telecommunications and digital service providers, (ii) advertising sold on our networks and websites, and (iii) other transactions, including curriculum-based products and services, affiliate and advertising sales representation services, content licenses and the licensing of our brands for consumer products. Our objectives are to invest in content for our networks to build viewership, maximize distribution revenue, capture advertising sales and create or reposition additional branded channels and businesses that can sustain long-term growth and occupy a desired programming niche with strong consumer appeal. Our content is designed to target key audience demographics and the popularity of our programming creates demand on the part of advertisers and distributors. We classify our operations in three segments: U.S. Networks, consisting principally of domestic television networks and websites; International Networks, consisting primarily of international television networks and websites; and Education, consisting principally of curriculum-based product and service offerings. For further discussion of our Company, segments in which we do business, content development activities and revenues, see our business overview set forth in Item 1, “Business” in this Annual Report on Form 10-K.

29




RESULTS OF OPERATIONS – 2013 vs. 2012
Items Impacting Comparability
On April 9, 2013, we acquired SBS Nordic. During the year ended December 31, 2012, we acquired Switchover Media and a television station in Dubai. We included the operations of each of these acquisitions ("Newly Acquired Businesses") in our consolidated financial statements as of each of their respective acquisition dates. As a result, Newly Acquired Businesses have impacted the comparability of our results of operations between 2013 and 2012. Accordingly, to assist the reader in understanding the changes in our results of operations, the following tables present the calculation of comparative adjusted operating income before depreciation and amortization ("Adjusted OIBDA") excluding the Newly Acquired Businesses, as reported within our consolidated financial statements and International Networks segment for the year ended December 31, 2013 (in millions). The comparability of the results of the U.S. Networks segment was not impacted by these acquisitions. Discovery Japan was not included in the definition of Newly Acquired Businesses, because we previously owned a 50% equity interest and its consolidation on January 10, 2013, did not materially impact the comparability of operations, except as otherwise noted in management's discussion and analysis of results of operations. (See Note 3 to the accompanying consolidated financial statements.) Adjusted OIBDA is defined and a reconciliation to operating income is presented below in the "Segment Results of Operations" section.
Consolidated
Year Ended December 31,
 
 
 
2013
 
2013
 
2013
 
2012
 
 
 
Total Company As Reported
 
Newly
Acquired
Businesses
 
Total Company Ex-
Acquisitions
 
Total Company As Reported
 
% Change Ex-Acquisitions
Revenues:
 
 
 
 
 
 
 
 
 
   Distribution
$
2,536

 
$
133

 
$
2,403

 
$
2,206

 
9
%
   Advertising
2,739

 
455

 
2,284

 
2,037

 
12
%
   Other
260

 
15

 
245

 
244

 
%
Total Revenues
$
5,535

 
$
603

 
$
4,932

 
$
4,487

 
10
%
 
 
 
 
 
 
 
 
 
 
Adjusted OIBDA
$
2,425

 
$
135

 
$
2,290

 
$
2,095

 
9
%
International Networks
Year Ended December 31,
 
 
 
2013
 
2013
 
2013
 
2012
 
 
 
International Networks As Reported
 
Newly
Acquired
Businesses
 
International Networks Ex-
Acquisitions
 
International
Networks
As Reported
 
% Change Ex-Acquisitions
Revenues:
 
 
 
 
 
 
 
 
 
   Distribution
$
1,242

 
$
133

 
$
1,109

 
$
984

 
13
 %
   Advertising
1,162

 
455

 
707

 
580

 
22
 %
   Other
70

 
15

 
55

 
73

 
(25
)%
Total Revenues
$
2,474

 
$
603

 
$
1,871

 
$
1,637

 
14
 %
 
 
 
 
 
 
 
 
 
 
Adjusted OIBDA
$
976

 
$
135

 
$
841

 
$
721

 
17
 %


30




Consolidated Results of Operations – 2013 vs. 2012
Our consolidated results of operations for 2013 and 2012 were as follows (in millions).
 
 
Year Ended December 31,
 
 
 
 
2013
 
2012
 
% Change
Revenues:
 
 
 
 
 
 
Distribution
 
$
2,536

 
$
2,206

 
15
 %
Advertising
 
2,739

 
2,037

 
34
 %
Other
 
260

 
244

 
7
 %
Total revenues
 
5,535

 
4,487

 
23
 %
Costs of revenues, excluding depreciation and amortization
 
1,689

 
1,218

 
39
 %
Selling, general and administrative
 
1,575

 
1,291

 
22
 %
Depreciation and amortization
 
276

 
117

 
NM

Restructuring and impairment charges
 
16

 
6

 
NM

Gain on disposition
 
(19
)
 

 
NM

Total costs and expenses
 
3,537

 
2,632

 
34
 %
Operating income
 
1,998

 
1,855

 
8
 %
Interest expense
 
(306
)
 
(248
)
 
23
 %
Income (losses) from equity method investees, net
 
18

 
(86
)
 
NM

Other income (expense), net
 
26

 
(3
)
 
NM

Income from continuing operations before income taxes
 
1,736

 
1,518

 
14
 %
Provision for income taxes
 
(659
)
 
(562
)
 
17
 %
Income from continuing operations, net of taxes
 
1,077

 
956

 
13
 %
Loss from discontinued operations, net of taxes
 

 
(11
)
 
(100
)%
Net income
 
1,077

 
945

 
14
 %
Net income attributable to noncontrolling interests
 
(1
)
 
(2
)
 
(50
)%
Net income attributable to redeemable noncontrolling interests
 
(1
)
 

 
NM

Net income available to Discovery Communications, Inc.
 
$
1,075

 
$
943

 
14
 %
NM - Not meaningful
Revenues
Distribution revenue includes affiliate fees and digital distribution revenue and is largely dependent on the rates negotiated in our distribution agreements, the number of subscribers that receive our networks or content, and the market demand for the content that we provide. Excluding the impact of foreign currency fluctuations and Newly Acquired Businesses, consolidated distribution revenue increased 10%, or $220 million, as a result of increases of $72 million at our U.S. Networks segment and $148 million at our International Networks segment. The increase in distribution revenue at U.S. Networks, excluding the impact of digital distribution revenue was 5%. Digital distribution revenue, which is earned under agreements to license selected library titles, is recognized when the content has been delivered and is available for use by the customer. Digital distribution revenue is therefore prone to quarterly fluctuations based on the timing and volume of content deliveries. The increases in our International Networks' distribution revenue, excluding the impact of foreign currency and Newly Acquired Businesses, were attributable in equivalent amounts to the consolidation of Discovery Japan and revenue growth in Latin America due to increases in subscribers and rates.

31




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, and the mix of sales of commercial time between the upfront and scatter markets, which is based upon a number of factors, such as pricing, demand for advertising time and economic conditions. Excluding the impact of foreign currency fluctuations and Newly Acquired Businesses, consolidated advertising revenue increased 13%, or $258 million, as a result of increases of $120 million at our U.S. Networks segment and $138 million at our International Networks segment. For our U.S. Networks segment, the increases were due to improved pricing and advertiser demand in equivalent amounts. For our International Networks segment, most of the increase was in Western Europe due to higher ratings and pricing on our free-to-air networks, and to a lesser extent, improved ratings and pricing in Latin America.
Excluding the impacts of foreign currency fluctuations and Newly Acquired Businesses, other revenue was consistent with the prior year due to an increase of $12 million at our U.S. Networks segment, offset by a decrease at our International Networks segment primarily attributable to the consolidation of Discovery Japan.
Costs of Revenues
Excluding the impacts of foreign currency fluctuations and Newly Acquired Businesses, costs of revenues increased 13%, or $156 million. The increase was a result of increases of $83 million at our U.S. Networks segment and $73 million at our International Networks segment. The increases in costs of revenues were mostly due to increases in content expense, which is consistent with our commitment to content development. The remaining increase was due to various other items, such as sales commissions, which are correlated to the increase in revenues.
Selling, General and Administrative
Selling, general and administrative expenses consist principally of employee costs, marketing costs, research costs, occupancy and back office support fees. Excluding the impact of foreign currency fluctuations and Newly Acquired Businesses, selling, general and administrative expenses increased 13%, or $169 million. The increase in selling, general and administrative expenses was primarily due to increased personnel costs, including equity based compensation expense, marketing expenses, and to a lesser extent, increases in other selling, general and administrative costs. The increase in equity based compensation expense was largely driven by the increase in our share price.
Depreciation and Amortization
Depreciation and amortization expense includes depreciation of fixed assets and amortization of finite-lived intangible assets. Depreciation and amortization expense increased $159 million. The increase was due to the amortization of intangible assets related to business combinations during 2013. (See Note 3 to the accompanying consolidated financial statements.)
Restructuring Charges
Restructuring charges increased $10 million in 2013. The increase is mostly due to restructuring the Company's existing operations in the Nordic region following the acquisition of SBS Nordic. (See Note 16 to the accompanying consolidated financial statements.)
Interest Expense
Interest expense increased $58 million due to an increase in outstanding debt.
Losses from Equity Investees, Net
Losses from our equity method investees decreased $104 million in 2013, due primarily to improved operating results at OWN. Additionally, OWN incurred significant content impairment and restructuring charges in 2012 for which no similar expense was incurred in 2013.







32




Other Income (Expense), Net
Other income (expense), net, increased $29 million. During 2013, we purchased an additional 30% ownership interest in Discovery Japan, which was previously a 50% owned equity method investee. We recognized a $92 million remeasurement gain upon consolidation to account for the difference between the carrying value and the fair value of the 50% previously held equity interest. (See Note 3 to the accompanying financial statements.) This increase was partially offset by losses on derivative instruments of $62 million in 2013. The losses on derivative contracts resulted from foreign exchange strategies implemented to hedge the purchase of SBS Nordic (see Note 3 to the accompanying consolidated financial statements), which was denominated in Euro and closed on April 9, 2013. Although effective from an economic perspective, this hedging strategy did not qualify for hedge accounting treatment because the forecasted transaction was a business combination. There was a $2 million loss on derivative instruments in 2012.
Provision for Income Taxes
Our provisions for income taxes on income from continuing operations were $659 million and $562 million and the effective tax rates were 38% and 37% for 2013 and 2012, respectively. The net 1% increase in the effective tax rate was primarily due to the effect of foreign operations, which increased 3% from 2012 due to the tax effect of inter-company transactions subject to foreign income tax rates that vary compared with U.S. rates. Changes in the tax law regarding the domestic production activity deduction in 2013 and other tax differences resulted in an additional 2% increase in the effective tax rate. These increases were partially offset by decreases in the tax rate due to changes in apportionment for state income taxes of 2% and the $92 million remeasurement gain on previously held equity interest of 2% which is not taxable in the current year because the Company intends to defer indefinitely the realization of this gain for tax purposes. We also increased our unrecognized tax benefits reserve in 2013 due to uncertainties regarding the valuation of certain assets, and, to a lesser extent, in approximately equivalent amounts, the taxation of income among multiple jurisdictions and provisions related to uncertainties regarding tax incentives and credits. (See Note 17 to the accompanying consolidated financial statements.)
Segment Results of Operations – 2013 vs. 2012
We evaluate the operating performance of our segments based on financial measures such as revenues and Adjusted OIBDA. Adjusted OIBDA is defined as revenues less costs of revenues and selling, general and administrative expenses excluding: (i) mark-to-market equity-based compensation, (ii) depreciation and amortization, (iii) amortization of deferred launch incentives, (iv) exit and restructuring charges, (v) certain impairment charges, and (vi) gains (losses) on business and asset dispositions. 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 equity-based compensation, exit and restructuring charges, certain impairment charges, and gains and losses on business and asset dispositions from the calculation of Adjusted OIBDA due to their volatility. 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. Adjusted OIBDA should be considered in addition to, but not a substitute for, operating income, net income and other measures of financial performance reported in accordance with U.S. generally accepted accounting principles (“GAAP”).
Additionally, certain corporate expenses are excluded from segment results to enable executive management to evaluate segment performance based upon the decisions of segment executives. Additional financial information for our segments and geographical areas in which we do business is discussed in Note 22 to the accompanying consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.







33




The table below presents the calculation of total Adjusted OIBDA (in millions).

 
 
Year Ended December 31,
 
 
 
 
2013
 
2012
 
% Change
Revenues:
 
 
 
 
 
 
U.S. Networks
 
$
2,952

 
$
2,748

 
7
 %
International Networks
 
2,474

 
1,637

 
51
 %
Education
 
114

 
105

 
9
 %
Corporate and inter-segment eliminations
 
(5
)
 
(3
)
 
67
 %
Total revenues
 
5,535

 
4,487

 
23
 %
Costs of revenues, excluding depreciation and amortization
 
(1,689
)
 
(1,218
)
 
39
 %
Selling, general and administrative(a)
 
(1,439
)
 
(1,194
)
 
21
 %
Add: Amortization of deferred launch incentives(b)
 
18

 
20

 
(10
)%
Adjusted OIBDA
 
$
2,425

 
$
2,095

 
16
 %
 
 
 
 
 
(a) Selling, general and administrative expenses exclude mark-to-market equity-based compensation.
(b) Amortization of deferred launch incentives are included as a reduction of distribution revenue for reporting in accordance with GAAP but are excluded from Adjusted OIBDA.
The table below presents our Adjusted OIBDA by segment, with a reconciliation of total Adjusted OIBDA to consolidated operating income (in millions).
 
 
Year Ended December 31,
 
 
 
 
2013
 
2012
 
% Change
Adjusted OIBDA:
 
 
 
 
 
 
U.S. Networks
 
$
1,708

 
$
1,622

 
5
 %
International Networks
 
976

 
721

 
35
 %
Education
 
27

 
27

 
 %
Corporate and inter-segment eliminations
 
(286
)
 
(275
)
 
4
 %
Total Adjusted OIBDA
 
2,425

 
2,095

 
16
 %
Amortization of deferred launch incentives
 
(18
)
 
(20
)
 
(10
)%
Mark-to-market equity-based compensation
 
(136
)
 
(97
)
 
40
 %
Depreciation and amortization
 
(276
)
 
(117
)
 
NM

Restructuring and impairment charges
 
(16
)
 
(6
)
 
NM

Gain on disposition
 
19

 

 
NM

Operating income
 
$
1,998

 
$
1,855

 
8
 %

34




U.S. Networks
The table below presents, for our U.S. Networks segment, revenues by type, certain operating expenses, contra revenue amounts, Adjusted OIBDA and a reconciliation of Adjusted OIBDA to operating income (in millions).
 
 
Year Ended December 31,
 
 
 
 
2013
 
2012
 
% Change
Revenues:
 
 
 
 
 
 
Distribution
 
$
1,294

 
$
1,222

 
6
 %
Advertising
 
1,576

 
1,456

 
8
 %
Other
 
82

 
70

 
17
 %
Total revenues
 
2,952

 
2,748

 
7
 %
Costs of revenues, excluding depreciation and amortization
 
(771
)
 
(688
)
 
12
 %
Selling, general and administrative
 
(480
)
 
(447
)
 
7
 %
Add: Amortization of deferred launch incentives
 
7

 
9

 
(22
)%
Adjusted OIBDA
 
1,708

 
1,622

 
5
 %
Amortization of deferred launch incentives
 
(7
)
 
(9
)
 
(22
)%
Depreciation and amortization
 
(11
)
 
(13
)
 
(15
)%
Restructuring and impairment charges
 
(4
)
 
(3
)
 
33
 %
Gains on dispositions
 
19

 

 
NM

Operating income
 
$
1,705

 
$
1,597

 
7
 %
Revenues
Distribution revenue increased $72 million. The increase in distribution revenue, excluding the impact of digital distribution revenue, was 5%. The increase in distribution revenue, excluding digital distribution revenue, was primarily due to annual contractual rate increases on existing contracts. There was also a slight increase in the number of paying subscribers, principally for our networks carried on the digital tier. The subscriber base for the U.S. pay television distribution market has flattened over recent periods. Digital distribution revenue, which is earned under agreements to license selected library titles, is recognized when the content has been delivered and is available for use by the customer. Digital distribution revenue is therefore prone to quarterly fluctuations based on the timing and volume of content deliveries. Digital distribution revenue contributed 1% of the increase in total distribution revenue.
Advertising revenue increased $120 million. The increase was equally attributable to increases in advertiser demand and pricing.
Other revenue increased $12 million. The increase was mostly attributable to increases in sales of branded merchandise, and to a lesser extent, increases in content production contracts, content downloads, and digital advertising.
Costs of Revenues
Costs of revenues increased $83 million. The increase was primarily attributable to an increase in content expense, which is consistent with our commitment to content development, and, to a lesser extent, sales commissions associated with increasing advertising revenues.
Selling, General and Administrative
Selling, general and administrative expenses increased $33 million. The increase was mostly attributable to increased personnel expenses, and, to a lesser extent, increased marketing costs.
Adjusted OIBDA
Adjusted OIBDA increased $86 million. Revenue for 2013 increased due to improved pricing and advertiser demand, and contractual rate increases with our distributors. These increases were partially offset by higher costs of revenues and selling, general and administrative expenses.

35




International Networks
The following table presents, for our International Networks segment, revenues by type, certain operating expenses, contra revenue amounts, Adjusted OIBDA, and a reconciliation of Adjusted OIBDA to operating income (in millions).
 
 
Year Ended December 31,
 
 
 
 
2013
 
2012
 
% Change
Revenues:
 
 
 
 
 
 
Distribution
 
$
1,242

 
$
984

 
26
 %
Advertising
 
1,162

 
580

 
100
 %
Other
 
70

 
73

 
(4
)%
Total revenues
 
2,474

 
1,637

 
51
 %
Costs of revenues, excluding depreciation and amortization
 
(887
)
 
(499
)
 
78
 %
Selling, general and administrative
 
(622
)
 
(428
)
 
45
 %
Add: Amortization of deferred launch incentives
 
11

 
11

 
 %
Adjusted OIBDA
 
976

 
721

 
35
 %
Amortization of deferred launch incentives
 
(11
)
 
(11
)
 
 %
Depreciation and amortization
 
(205
)
 
(47
)
 
NM

Restructuring and impairment charges
 
(11
)
 
(1
)
 
NM

Operating income
 
$
749

 
$
662

 
13
 %
Revenues
Excluding the impact of foreign currency fluctuations and Newly Acquired Businesses, distribution revenue increased 15%, or $148 million. The increase was attributable in equivalent amounts to revenue growth in Latin America and the consolidation of Discovery Japan. The growth in Latin America was due to increases in subscribers and affiliate rates, which is consistent with the continued development of the pay television market in that region.
Excluding the impact of foreign currency fluctuations and Newly Acquired Businesses, advertising revenue increased 23%, or $138 million. Most of the increase was due to improved ratings and pricing on our free-to-air networks in Western Europe and, to a lesser extent, our pay television networks in Latin America.
Excluding the impact of foreign currency fluctuations and Newly Acquired Businesses, other revenue decreased 23%, or $17 million. The decrease was attributable to the consolidation of Discovery Japan. Service fee revenue from Discovery Japan was eliminated following the consolidation of Discovery Japan on January 10, 2013. (See Note 3 to the accompanying consolidated financial statements.)
Costs of Revenues
Excluding the impact of foreign currency fluctuations and Newly Acquired Businesses, costs of revenues increased 14%, or $73 million. The increase was mostly attributable to increased content expense and, to a lesser extent, increases in sales commissions and various other costs. The increase in costs of revenues supports the growth in distribution and advertising revenues.
Selling, General and Administrative
Excluding the impact of foreign currency fluctuations and Newly Acquired Businesses, selling, general and administrative expenses increased 18%, or $79 million. The increase was mostly attributable to increased personnel costs due to a transition of certain activities from regional hubs to various international locations, and to a lesser extent, increased marketing expenses and the consolidation of Discovery Japan.

36




Adjusted OIBDA
Excluding the impact of foreign currency fluctuations and Newly Acquired Businesses, Adjusted OIBDA increased 16%, or $117 million. The increase was due to increases in advertising revenue on our free-to-air networks in Western Europe, distribution revenue growth in Latin America, and the consolidation of Discovery Japan, in equivalent amounts, partially offset by higher costs of revenues and selling, general and administrative expenses.
Education
The following table presents, for our Education segment revenues, certain operating expenses, Adjusted OIBDA, and a reconciliation of Adjusted OIBDA to operating income (in millions).
 
 
Year Ended December 31,
 
 
 
 
2013
 
2012
 
% Change
Revenues
 
$
114

 
$
105

 
9
 %
Costs of revenues, excluding depreciation and amortization
 
(33
)
 
(31
)
 
6
 %
Selling, general and administrative
 
(54
)
 
(47
)
 
15
 %
Adjusted OIBDA
 
27

 
27

 
 %
Depreciation and amortization
 
(3
)
 
(2
)
 
50
 %
Operating income
 
$
24

 
$
25

 
(4
)%
Adjusted OIBDA was consistent with the prior year due to increases in revenues and the effect of the operating results of a business combination, offset by increased personnel costs incurred to develop new products.
Corporate and Inter-segment Eliminations
The following table presents, for our unallocated corporate amounts, revenues, certain operating expenses, Adjusted OIBDA, and a reconciliation of Adjusted OIBDA to operating loss (in millions).
 
 
Year Ended December 31,
 
 
 
 
2013
 
2012
 
% Change
Revenues
 
$
(5
)
 
$
(3
)
 
67
 %
Costs of revenues, excluding depreciation and amortization
 
2

 

 
NM

Selling, general and administrative
 
(283
)
 
(272
)
 
4
 %
Adjusted OIBDA
 
(286
)
 
(275
)
 
4
 %
Mark-to-market equity-based compensation
 
(136
)
 
(97
)
 
40
 %
Depreciation and amortization
 
(57
)
 
(55
)
 
4
 %
Restructuring and impairment charges
 
(1
)
 
(2
)
 
(50
)%
Operating loss
 
$
(480
)
 
$
(429
)
 
12
 %
Corporate operations primarily consist of executive management, administrative support services and substantially all of our equity-based compensation. Corporate expenses are excluded from segment results to evaluate business segment performance based upon decisions made directly by business segment executives.
Adjusted OIBDA decreased $11 million primarily due to increases in personnel costs, and to a lesser extent, various other selling, general and administrative expenses.
RESULTS OF OPERATIONS – 2012 vs. 2011
Discontinued Operations
On September 17, 2012, we sold our postproduction audio business, whose results of operations have been reclassified to discontinued operations for all periods presented (see Note 3 to the accompanying consolidated financial statements). The postproduction audio business was an operating segment combined with Education as a reportable segment.

37




Consolidated Results of Operations – 2012 vs. 2011
Our consolidated results of operations for 2012 and 2011 were as follows (in millions).
 
 
Year Ended December 31,
 
 
 
 
2012
 
2011
 
% Change
Revenues:
 
 
 
 
 
 
Distribution
 
$
2,206

 
$
2,070

 
7
 %
Advertising
 
2,037

 
1,852

 
10
 %
Other
 
244

 
246

 
(1
)%
Total revenues
 
4,487

 
4,168

 
8
 %
Costs of revenues, excluding depreciation and amortization
 
1,218

 
1,176

 
4
 %
Selling, general and administrative
 
1,291

 
1,171

 
10
 %
Depreciation and amortization
 
117

 
117

 
 %
Restructuring and impairment charges
 
6

 
30

 
(80
)%
Gain on disposition
 

 
(129
)
 
(100
)%
Total costs and expenses
 
2,632

 
2,365

 
11
 %
Operating income
 
1,855

 
1,803

 
3
 %
Interest expense, net
 
(248
)
 
(208
)
 
19
 %
Losses from equity investees, net
 
(86
)
 
(35
)
 
NM

Other (expense) income, net
 
(3
)
 
3

 
NM

Income from continuing operations before income taxes
 
1,518

 
1,563

 
(3
)%
Provision for income taxes
 
(562
)
 
(427
)
 
32
 %
Income from continuing operations, net of taxes
 
956

 
1,136

 
(16
)%
Loss from discontinued operations, net of taxes
 
(11
)
 
(3
)
 
NM

Net income
 
945

 
1,133

 
(17
)%
Net income attributable to noncontrolling interests
 
(2
)
 
(1
)
 
100
 %
Net income available to Discovery Communications, Inc.
 
$
943

 
$
1,132

 
(17
)%

NM - Not meaningful
Revenues
Distribution revenue includes affiliate fees and digital distribution revenue and is largely dependent on the rates negotiated in our distribution agreements, the number of subscribers that receive our networks or content, and the market demand for the content that we provide. Excluding the impact of foreign currency fluctuations, distribution revenues increased 9%, or $177 million as a result of increases of $42 million at our U.S. Networks segment and $135 million at our International Networks segment. The increase in distribution revenue at U.S. Networks, excluding the impact of digital distribution revenue was 5%, due to contractual rate increases. Digital distribution revenue, which is earned under agreements to license selected library titles, is recognized when the content has been delivered and is available for use by the customer. Digital distribution revenue is therefore prone to quarterly fluctuations based on the timing and volume of content deliveries. The increases in the International Networks' distribution revenue, excluding the impact of foreign currency, were attributable to growth of pay television subscribers, and decreased amortization of deferred launch incentives.
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, and the mix of sales of commercial time between the upfront and scatter markets, which is based upon a number of factors, such as pricing, demand for advertising time and economic conditions. Excluding the impact of foreign currency fluctuations, advertising revenues increased 12%, or $212 million, as a result of increases of $119 million at our U.S. Networks segment and $93 million at our International Networks segment. The increases were primarily due to increases in pricing at U.S. and international networks, along with growth of our international free-to-air networks.
Other revenue was consistent with the prior year. We changed the classification of service charges to certain of our equity method investees from other revenue to selling, general, and administrative expenses beginning January 1, 2012. This change was

38




offset by additional revenue from a production company acquired during the fourth quarter of 2011 and higher revenue from the Education segment. Changes in foreign currency exchange rates did not significantly impact other revenues.
Costs of Revenues
Costs of revenues, which consist primarily of content expense, distribution costs, and sales commissions, excluding the impact of foreign currency fluctuations, increased 4%, or $51 million. The increase in costs of revenues was mostly related to higher content amortization, and to a lesser extent, higher distribution and production costs partially offset by lower content impairments.
Selling, General and Administrative
Selling, general and administrative expenses, which principally comprise employee costs, marketing costs, research costs, occupancy, and back office support fees, excluding the impact of foreign currency fluctuations, increased 12%, or $141 million. The increase in selling, general and administrative expenses was primarily due to higher personnel costs and equity-based compensation expense, and to a lesser extent, higher transaction costs, offset by a change in the classification of service charges to certain of our equity method investees from other revenue to selling, general, and administrative expenses beginning January 1, 2012. Equity-based compensation expense increased $55 million due to an increase in the value of outstanding cash-settled unit awards.
Depreciation and Amortization
Depreciation and amortization expense, which includes depreciation of fixed assets and amortization of finite-lived intangible assets, was consistent with the prior year.
Restructuring and Impairment Charges
In 2012 and 2011, we recorded restructuring charges of $6 million and $10 million, respectively. (See Note 16 to the accompanying consolidated financial statements.) In 2011, we also recorded a $20 million goodwill impairment charge (See Note 9 to the accompanying consolidated financial statements.)
Gain on Disposition
In connection with the contribution of the Discovery Health network to OWN on January 1, 2011, we recorded a pretax gain of $129 million, which represents the fair value of the investment retained less the book basis of contributed assets. (See Note 4 to the accompanying consolidated financial statements.)
Interest Expense, Net
Interest expense increased $40 million due to an increase in outstanding debt.
Losses from Equity Investees, Net
Losses from equity investees, net increased $51 million. During the three months ended March 31, 2012, accumulated losses at OWN exceeded the equity contribution to OWN, and we began to record 100% of OWN’s incremental net losses. We recognized 50% of OWN’s net losses throughout 2011. (See Note 4 to the accompanying consolidated financial statements.)
Other (Expense) Income, Net
Other (expense) income, net decreased $6 million, mostly due to an increase in losses on our derivative instruments.
Provision for Income Taxes
For 2012 and 2011, our provisions for income taxes were $562 million and $427 million and the effective tax rates were 37% and 27%, respectively. Discovery's effective tax rate for 2012 increased 10% compared to 2011. The increase was principally due to the recognition of the $112 million net benefit for foreign tax credits in 2011 as a result of a reorganization for which no similar benefit was recognized in 2012 and state income taxes due to changes in apportionment. The increase in the unrecognized tax benefits reserve in 2012 was attributable, in approximately equal proportion, to provisions related to uncertainties regarding the valuation of certain assets, uncertainties regarding the eligibility for, and application of the rules surrounding, certain tax incentives and credits, and uncertainties regarding allocation and taxation of income among multiple jurisdictions. (See Note 17 to the accompanying consolidated financial statements.)

39




Loss from Discontinued Operations, Net of Taxes
Loss from discontinued operations in 2012 relates to the sale of our postproduction audio business in 2012. Loss from discontinued operations in 2011 relates to activities connected with businesses classified as discontinued operations in previous years in addition to the postproduction audio business.
Segment Results of Operations – 2012 vs. 2011
The table below presents the calculation of total Adjusted OIBDA (in millions).

 
 
Year Ended December 31,
 
 
 
 
2012
 
2011
 
% Change
Revenues:
 
 
 
 
 
 
U.S. Networks
 
$
2,748

 
$
2,619

 
5
 %
International Networks
 
1,637

 
1,455

 
13
 %
Education
 
105

 
95

 
11
 %
Corporate and inter-segment eliminations
 
(3
)
 
(1
)
 
NM

Total revenues
 
4,487

 
4,168

 
8
 %
Costs of revenues, excluding depreciation and amortization
 
(1,218
)
 
(1,176
)
 
4
 %
Selling, general and administrative(a)
 
(1,194
)
 
(1,128
)
 
6
 %
Add: Amortization of deferred launch incentives(b)
 
20

 
52

 
(62
)%
Adjusted OIBDA
 
$
2,095

 
$
1,916

 
9
 %
 
 
 
 
 
(a) Selling, general and administrative expenses exclude mark-to-market equity-based compensation, restructuring charges and gains (losses) on dispositions.
(b) Amortization of deferred launch incentives are included as a reduction of distribution revenue for reporting in accordance with GAAP but are excluded from Adjusted OIBDA.
The table below presents our Adjusted OIBDA by segment, with a reconciliation of total Adjusted OIBDA to consolidated operating income (in millions).

 
 
Year Ended December 31,
 
 
 
 
2012
 
2011
 
% Change
Adjusted OIBDA:
 
 
 
 
 
 
U.S. Networks
 
$
1,622

 
$
1,495

 
8
 %
International Networks
 
721

 
645

 
12
 %
Education
 
27

 
25

 
8
 %
Corporate and inter-segment eliminations
 
(275
)
 
(249
)
 
10
 %
Total Adjusted OIBDA
 
2,095

 
1,916

 
9
 %
Amortization of deferred launch incentives
 
(20
)
 
(52
)
 
(62
)%
Mark-to-market equity-based compensation
 
(97
)
 
(43
)
 
NM

Depreciation and amortization
 
(117
)
 
(117
)
 
 %
Restructuring and impairment charges
 
(6
)
 
(30
)
 
(80
)%
Gain on disposition
 

 
129

 
(100
)%
Operating income
 
$
1,855

 
$
1,803

 
3
 %

40




U.S. Networks
The following table presents, for our U.S. Networks segment, revenues by type, certain operating expenses, contra revenue amounts, Adjusted OIBDA, and a reconciliation of Adjusted OIBDA to operating income (in millions).
 
 
Year Ended December 31,
 
 
 
 
2012
 
2011
 
% Change
Revenues:
 
 
 
 
 
 
Distribution
 
$
1,222

 
$
1,180

 
4
 %
Advertising
 
1,456

 
1,337

 
9
 %
Other
 
70

 
102

 
(31
)%
Total revenues
 
2,748

 
2,619

 
5
 %
Costs of revenues, excluding depreciation and amortization
 
(688
)
 
(689
)
 
 %
Selling, general and administrative
 
(447
)
 
(445
)
 
 %
Add: Amortization of deferred launch incentives
 
9

 
10

 
(10
)%
Adjusted OIBDA
 
1,622

 
1,495

 
8
 %
Amortization of deferred launch incentives
 
(9
)
 
(10
)
 
(10
)%
Depreciation and amortization
 
(13
)