Discovery's CEO Isn't Afraid Of Netflix

Netflix (NASDAQ:NFLX) has made a big splash with some of its unscripted series. Marie Kondo is inescapable after Netflix launched a series based on The Life-Changing Magic of Tidying Up. Meanwhile, Queer Eye and Nailed It have attracted broad audiences, with the latter quickly franchising to foreign countries. On Netflix's fourth-quarter earnings call, management said its own unscripted shows accounted for more than half of subscriber view time in the category on its platform.

But the king of reality TV, Discovery (NASDAQ:DISCK), isn't afraid of Netflix's efforts in the category. "This is difficult stuff, and this is what we do for a living," CEO David Zaslav said during the company's fourth-quarter earnings call. With Netflix, subscribers are "paying $10 to $15 for scripted series and scripted movies," he said, adding, "That's what the brand is."

Indeed, unscripted remains a small piece of Netflix's content library, while it's basically the only thing on Discovery's networks. So a consumer who wants to watch a lot of reality TV will choose Discovery over Netflix. But that might not always be the case.

Netflix will keep growing its unscripted library

There are a couple reasons Netflix will continue to grow its unscripted library over the next few years.

First of all, unscripted content is relatively efficient to produce. Discovery's cost of revenue is just 28% of its revenue in the United States, where it's primarily focused on unscripted series. That number climbs to 37% globally, since Discovery pays for more sports content internationally. By comparison, Netflix's cost of revenue last year was 63% of sales.

Netflix could gain some efficiencies in its content expenses by including more unscripted series. And it's already found developing its own series gets more watch time per dollar than licensing series from media companies such as Discovery. "People are watching them in greater numbers, for the same dollars," content chief Ted Sarandos said on Netflix's third-quarter earnings call.

A second reason Netflix will grow its unscripted series library over time is that these series readily translate to international markets. It's fairly easy to take a series like Fastest Car and tailor it for the Japanese market, for example. Netflix's Ultimate Beastmaster was developed with international markets in mind, as it created six versions of the show simultaneously for various countries around the world.

Nearly 60 percent of Netflix subscribers live outside the United States, and roughly five times as many international subscribers sign up each quarter as U.S. subscribers do. Developing series that can work across multiple geographic markets is high on the priority list for Netflix. Unscripted can check that box.

Can Discovery's brands fend off Netflix?

Discovery's focus is on building its brands. People come to Discovery's networks because of the brand affiliation.

Aspiring home chefs know Food Network and the Cooking Channel are going to have content they love. Homeowners will flock to HGTV and DIY Network. And those with a compelling desire to binge on shark knowledge for a week straight know exactly when to turn on Discovery's flagship network for Shark Week.

"We think we're in an environment where we're a real market leader, we're differentiated," Zaslav told investors.

By comparison, Netflix's brand isn't readily associated with home improvement, cooking, lifestyle, automobiles, science, or any of the categories Discovery has built brands around. It's associated with critically acclaimed scripted dramas.

And it's not clear Netflix has any desire to change that. Unscripted series don't drive subscriber signups as much as big-budget dramas. Sarandos even said as much at an investor conference last May.

Netflix is coming for Discovery

As Netflix becomes more ubiquitous and consumers become more aware of unscripted series on the platform, it could cut into time spent with Discovery's properties. That's not because Netflix's content is necessarily better, or better known, than Discovery's, but because it's more readily accessible.

That's exactly what Netflix is hoping to accomplish. In its fourth-quarter letter to shareholders management wrote that it competes with everyone vying for screen time, whether it's Discovery or Fortnite. Netflix wants to be the default for television screen time, no matter what kind of content its subscribers want.

So Discovery might not be able to rely on its brand strength forever.

This article originally appeared in The Motley Fool.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Discovery and Netflix. The Motley Fool has a disclosure policy.