Craig Felenstein David M. Zaslav - Chief Executive Officer, President, Director and Member of Executive Committee Andrew C.

Warren - Chief Financial Officer and Senior Executive Vice President

Jessica Reif Cohen - BofA Merrill Lynch, Research Division Douglas D. Mitchelson - Deutsche Bank AG, Research Division Todd Juenger - Sanford C.

Bernstein & Co., LLC., Research Division David Bank - RBC Capital Markets, LLC, Research Division Benjamin Swinburne - Morgan Stanley, Research Division Richard Greenfield - BTIG, LLC, Research Division John Janedis - UBS Investment Bank, Research Division Anthony J. DiClemente - Barclays Capital, Research Division Caroline C.

Anastasi - JP Morgan Chase & Co, Research Division Alan S. Gould - Evercore Partners Inc., Research Division Barton E.

Crockett - Lazard Capital Markets LLC, Research Division

Thank you, operator, and good morning, everyone. Welcome to Discovery Communications Second Quarter 2012 Earnings Call.

Joining me today is David Zaslav, our President and Chief Executive Officer; and Andy Warren, our Chief Financial Officer. Hopefully, you have all received the earnings release.

But if not, feel free to access it on our website at www.discoverycommunications.com. On today's call, we will begin with some opening comments from David and Andy.

After which, we will open the call up to your questions. [Operator Instructions] Before we start, I would like to remind you that comments today regarding the company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements are made based on management's current knowledge and assumptions about future events, and they involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them.

For additional information on important factors that could affect these expectations, please see our Form 10-K for the year ended December 31, 2011, and our subsequent filings made with the U.S. Securities and Exchange Commission.

And with that, I'll turn the call over to David.

Thanks, Craig. Good morning, everyone, and thank you for joining us.

Discovery delivered another strong quarter during Q2, as the strategic initiatives we have been driving across the company over the last several years are generating significant financial growth. At the same time, we are continuing to capitalize on the growth of pay-TV globally and a macro ad environment that remains healthy throughout the vast majority of the 200-plus countries we operate in.

Discovery's consistent focus on investing in our global platform, building new brands and leveraging additional growth opportunities... [Technical Difficulty]

Good morning, everyone. Thank you for joining us for Discovery Communications 2013 Second Quarter Earnings Call.

Joining me today is David Zaslav, our President and Chief Executive Officer; and Andy Warren, our Chief Financial Officer. You should have received our earnings release.

But if not, feel free to access it on our website at www.discoverycommunications.com. On today's call, we will begin with some opening comments from David and Andy.

After which, we will open the call up for your questions. [Operator Instructions] Before we begin, I would like to remind you that comments today regarding the company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements are made based on management's current knowledge and assumptions about future events, and they involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them.

For additional information on important factors that could affect these expectations, please see our annual report for the year ended December 31, 2012, and our subsequent filings with the U.S. Securities and Exchange Commission.

And with that, I'll turn the call over to David.

Thanks, Craig. Good morning, everyone, and thank you for joining us.

Discovery's strong financial and operational performance continued in the second quarter, as the company further capitalized on the organic growth initiatives we've been driving around the globe, while also beginning to take advantage of the opportunities provided by our recent strategic acquisitions. The backbone of Discovery's success remains constant.

Sustained investment in broad and diverse on-screen content, with great storytelling, compelling characters and real stakes is enabling us to capitalize on global ad opportunities and a growing demand for content across emerging pay-TV markets and new distribution platforms. There's no question that consumers around the world are watching more video content than ever before, both on conventional television and through emerging distribution channels.

With our sustained investment, global appeal, demographic reach and content ownership, Discovery is uniquely positioned to capitalize on this audience demand wherever it emerges on any platform in any market around the world. The sustained financial results we are delivering are a testament to the targeted investment in content we have made over the last several years and reflect our ability to translate the larger audiences that we are generating into consistent ad gains.

This past quarter, we generated 13% total company organic ad growth, building on the double-digit growth we delivered in the first quarter of 2013. Domestically, the ad market remains quite strong, with scatter pricing well above last year's upfront, and cancellations at very low levels.

When you combine this market strength with the 6% viewership growth we delivered in prime time among our key demographic, the result was double-digit domestic advertising growth during the second quarter. Despite the noise surrounding cable channel ratings, when you look at the sustained success of our portfolio and the multiple new brands we have built, it is apparent that if you invest wisely and deliver high-quality content that is unique and engaging, you can grow your overall audience and deliver increasing value to advertiser and affiliate partners.

A great example of this was the phenomenal success of Skywire Live last month on Discovery. Nik Wallenda's breath-taking walk across the Grand Canyon captivated audiences, highlighting how powerful Discovery's mission of showing compelling content that satisfies curiosity can be.

Skywire was the most-watched show on cable for the entire quarter, drawing more than 13 million viewers, and it matched that success online where it generated over 2 million streams. Not only did Skywire help drive Discovery Channel's ratings up 6% this past quarter, but it also served as a great platform for launching Naked and Afraid, the latest hit series on our flagship.

Naked and Afraid aired immediately following Wallenda, and was Discovery's highest rated new series premiere of the year. While Discovery Channel success this past quarter certainly helped drive our advertising growth, the biggest viewership gains among our network portfolio were in Animal Planet, which expanded its audience another 11% and delivered the best quarter in its history, led by the successful returns of River Monsters and Call of the Wildman, as well as the debut of the new hit show, Treehouse Masters.

Animal Planet is a brand we have carefully cultivated over the last 5 years, and it has now grown from a top 40 network to a top 20 network for men, delivering real value to advertisers. Discovery and Animal Planet were not alone in ratings success this past quarter.

TLC and ID were up 4% and 6%, respectively, in their key women 25-to-54 demo. And we also saw success from our emerging networks, including Destination America, which was up 16% year-on-year among adults 25 to 54; and Velocity, which increased 49% versus the second quarter a year ago.

The diverse ratings success we are delivering, along with the strength of our brands, put us in a great position heading into our upfront negotiations, where we were able to negotiate mid to high single-digit price increases, while generating the highest dollar volume in our history. Equally as important, given the investment we have made in several of our younger networks and the viewership growth they are delivering, Joe Abruzzese's sales team, during the upfront, was able to garner higher volumes across these channels, as advertisers recognize the value and the significant opportunity that brands such as ID, Velocity and Destination America provide.

Looking ahead, with a strong upfront under our belts, ratings momentum across our portfolio and a scatter market that remains very healthy, we are confident that we can deliver sustained advertising growth going forward. The ratings success we are enjoying across our domestic portfolio is not limited to our wholly-owned networks.

The Hub delivered 32% growth this past quarter in Total Day among kids 2 to 11, its best quarter ever and its seventh consecutive quarter of double-digit growth. At OWN, the addition of Tyler Perry's 2 new series has further accelerated the network's momentum.

Tyler delivered 2 bona fide hits with the Haves and Have Nots and Love Thy Neighbor. And along with the success of returning favorites Our America with Lisa Ling, and new series Raising Whitley and Life With La Toya, led viewership gains of 39% in the second quarter among its key women 25-to-54 demo, the highest growth of any cable network in the second quarter.

OWN also became a top 20 network in June for women and is now a top 3 network with African-American women and #1 network for African-American women several nights a week. That ratings success is translating into significant advertising growth, including signing over 30 new clients during this upfront and driving double-digit scatter pricing.

As a result, I'm proud to report that when combined with the long-term affiliate fees that the channel has previously secured, OWN is now cash flow positive and starting to pay down the investment Discovery has made in the venture. This was ahead of the originally anticipated second half of the year goal of cash flow breakeven.

I want to congratulate Oprah and the entire team at OWN for this significant milestone, and we remain very bullish on its long-term trajectory and our ability to drive continued asset appreciation in the future. The second quarter results for our domestic networks also highlight the value of our content across nonlinear platforms, as we began to recognize revenue from the third year of our Netflix agreement.

Owning the vast majority of our programming provides us flexibility regarding when and how we monetize our content library. We remain platform agnostic with regards to distributing our programming and continue to explore additional opportunities to extract value by leveraging our expansive library, while protecting the existing pay-TV ecosystem.

While the growth and momentum across our domestic business continues, the biggest driver and the one with the most opportunity remains our businesses outside the United States. Our robust portfolio of 45 brands, 183 networks and 238 feeds across more than 220 countries and territories around the world provides a unique opportunity to capitalize on the continued penetration of pay television in the developing global advertising landscape.

On the distribution front, we continue to drive subscriber growth from the further evolution of pay-TV, especially in markets like Brazil, Mexico, India and Russia, where there is growing demand for content from the burgeoning middle class. Overall, excluding the SBS acquisition, we expanded our subscriber base 12% versus the second quarter a year ago, which not only drove 14% organic affiliate revenue growth, but also was a significant contributor to the 21% organic ad growth we delivered this quarter.

Much like in the U.S., we are strategically investing in content to further capitalize on market opportunities and drive audience and advertising growth. We do this through broader partnerships with our domestic networks, investment in targeted local content and through development of original series from our experienced international production team.

We also continue to roll out several of our global brands into additional markets, by diligently capitalizing on opportunities that our existing broad distribution provides, such as expanding ID's reach into now over 160 countries or by further broadening the global distribution of our female flagship, TLC. TLC is now in 164 countries and most recently launched in the U.K., where viewership has more than doubled since its rebrand last quarter.

As a result of the subscriber growth we are generating and a stronger content portfolio, we were able to grow viewership this past quarter over 20% globally, making us more and more attractive to advertisers. And this growth is not predicated on one market, rather we are delivering double-digit growth in every one of our regions.

I know there is some concern in the marketplace regarding ad trends in Western Europe. And while the market is certainly not robust, we have been able to continue to deliver better than double-digit ad growth due to our strategic programming initiatives.

It is certainly difficult to predict how these markets will perform going forward, but we remain optimistic about our long-term growth prospects, given the strong double-digit increases we are delivering today, despite a relatively slow economic climate in many of the countries we operate in. As we continue to invest in our organic growth initiatives, we are also beginning to take advantage of some of the synergy opportunities associated with our recent acquisitions.

The combined SBS Discovery Media business in the Nordic region has significant market share, including nearly 40% in Norway, 30% in Denmark and over 20% reach in Sweden. And we are just starting to scratch the surface of what that market strength provides.

We have already integrated the sales teams and are beginning to explore joint sales opportunities to fully capitalize on the attractive consumer demographics these networks deliver. On the cost side, we have acted quickly and carefully to reduce redundant positions and consolidate office locations where appropriate.

We are also in the midst of a full content portfolio review to explore the opportunities to leverage program libraries across our suite of networks. At the same time, we already have taken several steps to deliver on the opportunities associated with our 20% ownership interest in Eurosport Group, including creating a joint affiliate sales organization to utilize the local relationships Discovery has across Europe.

It's still very early days, but we are more confident than ever that these assets are a great complement to our organic growth story, further strengthening the unmatched platform Discovery has built up over the last 2 decades in helping to bolster our long-term growth outlook. Overall, Discovery's second quarter results are very much a continuation of the strategic focus and financial execution we delivered throughout 2012 and into the first quarter of this year.

Discovery remains committed to building our diverse portfolio of brands, developing our global distribution platform and capitalizing on our strategic opportunities to best position ourselves for durable and sustained growth, while delivering strong financial results and returning capital to shareholders. And with that, I'll turn the call over to Andy.

Thanks, David, and thank you, everyone, for joining us today. As David mentioned, Discovery continued to deliver strong operating results in the second quarter, as we've further executed upon our key strategic growth initiatives around the globe.

On a reported basis, total company revenue in the second quarter increased 30%, led by 61% international growth and 13% domestic growth. Please note that current quarter results include several newly acquired businesses and additional licensing revenue, primarily related to our deal with Netflix.

Excluding these items and the impact of foreign currency, total company revenue growth was 10%. Total operating expenses on a reported basis increased 37%, primarily due to the inclusion of newly acquired businesses, as well as the expected higher content amortization and marketing spend during the quarter.

Excluding the newly acquired businesses, the additional cost related to our Netflix agreement and the impact of foreign currency movements, total company expenses increased 15% versus the prior year. As we indicated on our last earnings call, given the higher content amortization and the timing of marketing spending, it is anticipated that organic operating expense growth would be in the mid-teen range in the third quarter before abating in Q4.

On a reported basis, adjusted OIBDA in the second quarter increased 23%. Excluding newly acquired businesses, the licensing agreements impact and foreign exchange, Discovery's continued ability to generate revenue growth in excess of expenses as we continue to invest in future growth opportunities, translated into a 5% increase in adjusted OIBDA.

Net income from continuing operations increased to $300 million in the second quarter, driven by strong operating performance, partially offset by $54 million of higher tax expense and $19 million of increased interest expense associated with the debt we issued in March of this year. It is important to note that SBS Nordic's contribution to net income was not material in the quarter as the OIBDA generated was mostly offset by higher purchase accounting amortization associated with the acquisition.

The SBS purchase price allocation to amortizable trade names, distribution contracts, broadcast licenses and other assets would result in additional amortization expense in 2013 of about $130 million, with a similar amount anticipated in 2014. Free cash flow increased 125% in the quarter to $311 million, as the improved operating performance and lower tax payments, primarily resulting from the extension of the accelerated content cost recovery under Section 181, were partially offset by higher content investment.

As David highlighted, the increased programming spend continues to pay off in terms of ratings momentum and higher advertising revenue, as we still expect content spending growth to slow down considerably for the full year, excluding newly acquired businesses. While not part of our free cash flow, I do want to highlight that OWN was cash flow positive in the second quarter, well ahead of our previously anticipated time frame, and that the joint venture did begin to pay down its outstanding obligation to Discovery.

Now turning to the operating units. The U.S.

Networks continued to perform well during the second quarter, with total reported domestic revenues up 13%, including 17% affiliate revenue growth, due in part to $37 million of additional licensing revenue in the quarter. Much like when the Netflix agreement was originally executed in the third quarter of 2011, the current quarter includes a significant portion of the revenues from the third year of the agreement.

Revenues recognized upon delivery of the content and titles already in Netflix's possession are now considered to be delivered for the third year. We anticipate additional revenue under this agreement in both the third and fourth quarters to deliver new titles under the agreement with full year total licensing revenue similar to 2012.

Excluding the additional licensing revenue in the current quarter, total domestic revenue increased 8%, with distribution revenue of 5%, predominantly from higher rates and to a lesser extent, additional digital subscribers. The U.S.

Networks ad sales team delivered another strong quarter of growth with advertising revenue up 10%, driven by higher delivery, most notably from Discovery Channel, Animal Planet and Destination America, as well as from higher pricing across all networks. The current market trends continue to be encouraging, with double-digit scatter pricing above the gains we garnered during last year's upfront negotiations.

And given the ratings momentum across many of our networks, we anticipate low double-digit ad growth in the third quarter of this year. Turning to the cost side.

Domestic operating expenses were up 17% from the second quarter of 2012, primarily due to higher content amortization associated with the increased cash spending on programming over the past 3 years, and additional marketing costs for series such as North America, Deadliest Catch and Skywire Live on Discovery, as well as Breaking Amish on TLC, and Call of the Wildman on Animal Planet. The current quarter also included $5 million of additional content costs associated with the digital licensing agreements.

On a reported basis, domestic adjusted OIBDA increased 11% versus last year's second quarter. And excluding the impact of licensing agreements, adjusted OIBDA increased 3% year-on-year.

Turning to our international operations. Current quarter results reflect the impact of the newly acquired businesses: SBS Nordic, Switchover Media and Fatafeat, a pay-TV channel in the Middle East.

For comparability purposes, my following international comments will refer to the results, excluding these acquisitions. Our international segment continues to deliver strong momentum across our global operations this past quarter, with revenues expanding 13%, led by 20% ad and 12% inflated growth.

Excluding the impact of exchange rates, total revenue growth was 14%, with advertising revenue increasing 21% and affiliate revenue up 14%. The advertising revenue growth was broad based, with double-digit growth across every region, led by Western Europe, mainly from the continued success of several of our free-to-air initiatives, particularly in Italy and Spain.

On the affiliate front, the growth was driven by subscriber growth, especially in Latin America, from the continued growth in Brazil and Mexico, as well as by the consolidation of Discovery Japan. Operating costs internationally were up 16%, excluding the currency impact, primarily driven by consolidation of Discovery Japan, as well as by higher content amortization and increased personnel costs, as we continue to expand our global footprint.

The international segment delivered 12% adjusted OIBDA growth in the second quarter, excluding foreign currency, as our international team continued to generate strong revenue increases, while thoughtfully investing in key long-term growth initiatives. Turning to the remainder of 2013.

We're encouraged by the sustained momentum across our portfolio and the continued strong ad sales trends, both domestically and internationally. We're updating our revenue and adjusted OIBDA guidance to reflect the continued operating momentum across our businesses and the impact of the SBS transaction closing over 1 month later than originally planned, as well as the additional foreign currency headwinds.

For the full year 2013, we now expect total revenues to be between $5.55 billion and $5.625 billion and adjusted OIBDA to be between $2.425 billion and $2.475 billion. Importantly and as anticipated, we are also adjusting our net income guidance to reflect the impact of the SBS purchase price allocation.

As I mentioned earlier, we expect $130 million of purchase price amortization expense related to the acquisition in the current year. Our new net income guidance, including this amortization impact and an increase in stock compensation expense due to the appreciation in the stock price, is $1.1 billion to $1.15 billion for 2013.

Turning now to our financial position. With a strong balance sheet and sustained financial and operating momentum, we continue to return capital to shareholders through execution of our share repurchase program.

As we discussed, our first priority remains investing in our core businesses to drive sustained, long-term growth, be it through investment in existing networks and platforms or through exploring external initiatives. While that is our first priority, given the free cash flow we are generating, our gross leverage targets and the long-range free cash flow per share growth assumptions, we have the unique opportunity to continue returning capital to shareholders, as we also invest in our businesses.

During the second quarter, Discovery repurchased over $520 million of stock, and we still anticipate returning similar amounts of capital to shareholders through buybacks in 2013, and we did in 2012. Since we began buying back shares towards the end of 2010, we have spent over $3.6 billion buying back shares, reducing the outstanding share count by over 81 million shares or 19%.

Thanks, again, for your time this morning. And now David and I will be happy to answer any questions you may have.

Two questions, limit. The first question, I guess, is on international margins.

They seem exceptionally strong, at least relative to our expectations despite the increased purchase price accounting and D&A. Could you just talk about the outlook for long-term margins?

Is there still some upside there? And then I have a second question.

Thanks, Jessica. First, sorry about the technical difficulty there.

International is -- it's encouraging in that the strength continues. The markets really haven't rebounded in Western Europe, and yet we're still growing 20% there.

If -- as we look at Latin America, subscriber growth is continuing. In Eastern Europe, we're seeing some strength, as well as in Asia.

And so we found a way through the cost of content. We spent some more money in the last couple of years getting our sales teams in place and building some real infrastructure.

And so now, we're -- of the incremental dollars we're seeing, a lot of that is coming to margin. Working against that is the SBS acquisition, which we've indicated to you is going to have -- will give us some margin pressure for another few quarters.

But overall, if this kind of growth continues, you'll continue to see the margins grow. But they won't be as high as the U.S., where we can feed to 100 million homes much more efficiently.

But Western Europe in the aggregate is as big or bigger than the U.S. alone, and so we see international as a big opportunity for us.

And as I've said before, if we can grow like this, when 2/3 of the countries we're dealing with are flat or in recession, we're not -- our expectation is not that those countries are going to turn. But if they did turn, you would see even more aggressive growth, and therefore, more aggressive margin expansion.

And then the second kind of question or topic is on advertising, which was solid, as you guys said, across the board, I mean, double digits U.S. and international.

How do you think you've done competitively? How would you compare?

And can you give us any more specific color on second half?

Sure. Well, first, the upfront, we head into the upfront, really, with some good ratings momentum.

Our ratings were up in prime time about 6%. But more than that, we have brands that are really resonating with viewers.

OWN now being the #1 or #2 or #3 for African-American women. We have Velocity really starting to build a viewership with men.

Animal Planet was the #30 or #40 channel in America for many years. It's now a top 15 network.

And so we have a lot of networks that are on the upswing. I think you'll see some additional growth because it's -- ideas in that category, Destination America.

These are channels that over the next 3 years, even if viewership was flat, will get CPM growth because the viewership that we're delivering -- there's a catch-up. But we did well on the upfront.

We saw a mid to high single-digit as well as volume increase. So I do think we're outperforming the market.

Joe Abruzzese and his team are very strong. We did get volume and we did get a lot of new advertisers in a number of our -- the networks that we've launched over the last few years, which is -- whether it's 30 new advertisers in OWN, abroad, a slot of new advertisers in Velocity and Destination America, more in Science.

And so it's not just the volume, it's the quality of advertisers. So domestically, we feel good.

Internationally, last quarter, we were at 20. This quarter, we were at 21.

The market is continuing, maybe even getting a little better outside the U.S. for us.

And so on the advertising side, we feel good domestically and we feel maybe even a little bit better internationally.

And just to add, Jessica, to that for a second. For the third quarter, where our line of sight is obviously much, much better, we think we'll have low double-digit growth in the U.S.

And for the fourth quarter, where today, cancellations and options are kind of at or below historical levels, we certainly have some good momentum there as well.

David, I sort of wanted to follow up on that -- at that question looking a little bit longer term. You're very confident about the sustainability of international growth.

Given the growth is being driven by ID and TLC expansions in free-to-air stations and a few markets, as those growth drivers expire, what's waiting in the wings to sustain growth internationally?

Thanks, Doug. Well, first, we have been very effective in getting ID and TLC rolled out around the world.

That was an objective of ours 2.5 years ago. And today, TLC is the most distributed women's brand in the world, over 165 countries, and ID is in over 160.

But they've lapped themselves. So the growth that we're seeing now on ID and TLC is real, and it's an indication that crime is really working around the world.

And in many of these markets, there hasn't been a strong women's network. So in Italy, we have a top 5 network for women, including the broadcasters there, and that network has been around now for over 2.5 years and continues to grow aggressively.

And when we look at all of our free-to-air channels, we've lapped all of them. And so what you're seeing now is really core to our strategy.

Now, we're investing more money in content. And we're doing it with confidence because we have a lot of returning series, and we're investing in brands that we think are resonating here in the U.S.

and around the world. And so we're growing market share here in the U.S., about 6%.

Outside the U.S., we grew market share over 20%. And again, that was pretty pure, and we feel like there's some meaningful momentum that we have in terms of our channels growing.

And ads in the U.S., a lot of these channels that are 2, 2.5, 3 years old, we'll get the same kind of advertising lift as we're getting more and more on the agenda of the advertising market makers. Because in each case, it takes a few years.

First, you want to have them come into your channel and then you get to drive up over a period of years the true CPM you should be getting.

Very helpful. And then one for Andy.

The PP&A adjustments that drove the higher D&A, are those items that ultimately will require cash in the future? Or are those essentially noncash items related to the step-up in some asset values that don't require future capital?

Yes. No, they're all noncash and there's no future capital required.

Okay. So and that D&A adjustment that we saw in the third -- in the second quarter, that's a good base of D&A to use going forward?

It is. It includes, Doug -- we've finalized the purchase accounting adjustments for SBS.

And so when you go through the allocation, the purchase price, you allocate that value to both hard assets, like content and cash receivables; goodwill; and then the intangibles. And so that's the piece that we get amortized over time is the intangibles around distribution contracts, trade contracts, et cetera, that's the piece that now we've finalized and that's the piece that has about $130 million of amortization impact this year.

Moving around the world, let me be the guy who maybe checks off the questions on domestic affiliate fees. I think you described them as up about 5%, I guess, on a core basis, year-over-year for the quarter.

I know you don't give guidance on a line-item basis, but is that sort of emblematic of what we should expect for the rest of this calendar year until your next round of distribution renewals come through? And remind us when those start.

I think over the course of next year, you get another 20% or so, is that correct?

That's right, Todd. We said that the negotiation is staggered.

So roughly 20% a year starting in 2012 through the remaining 5 years is when you kind of have these renewals. We do expect this year about 5% a quarter.

Because again, last year, we only did 20%. This year, we'll do another 20%, and that's at year end.

So we think staggering would create roughly a 5% for this year.

Okay, fair enough. And just a quick follow-up for my second one on that.

You mentioned in the press release a little bit about some distribution gains at your digital tier networks. Would love to hear whatever you'd be willing to provide on how much that contributes to the sort of 5% growth and how big a priority is that for you going forward.

And should we expect maybe to see more of that roll through as part of your distribution expansion efforts?

This quarter was quite small. But it's a freebie for us because with our 14 channels here in the U.S., we have deals that require the operators to launch all of our channels, non-analog channels, on digital when they distribute a digital box.

We saw 2 or 3 years ago -- well, 4 years ago, when the economy was a little bit better that, that was -- there were significant growth. If the economy picks up, that will be a freebie, and we'll get some extra dollars because all of our channels get launched on digital when a new box rolls out.

And for the rest of this year, you'll see some more Netflix come in. Netflix will be in the $75 million to $80 million, similar to what it was last year, only some of it came in so far.

And last year, we did significantly less than 20%. So you're not seeing much of our new deal stuff, that will really kick in beginning next year.

But yes, if, in fact, things picked up and there was more digital boxes deployed, that would be -- we'd be the immediate beneficiary of that.

Quick question, David, I'm wondering what your discussions with Mr. Abruzzese have been around the announcement of the Publicis-Omnicom merger, and the potential for sort of more concentration in the media buying area, and how you think that might sort of impact business.

Sure. Well, look, I don't really think it's going to have an effect.

We have a good relationship with both of those companies. Having them come together is probably a good thing for us.

The focus is how strong are our brands and what kind of growth are we showing. 6.5 years ago, we were a little less than 4% of the viewership on cable.

At this point now, we're more than 11%. And we have -- before, with the demographics that we were reaching, we're smaller.

We have -- now, we have the #1 channel for Hispanic men with Discovery Español. We have a top -- we have 2 top networks for African-Americans, Oprah being at the very top and ID.

The diversity of our audience is broader, and the reach of Discovery and TLC and Animal Planet are up. So I think as long as we continue to grow our audience, we're going to find that we're going to have a very receptive buyers, also because the marketplace is changing.

The ability to reach a broad audience is more and more on cable. And so the 30% CPM differential -- 30%-plus that advertisers are paying for broadcast feels a little softer.

And so it's one of the reasons why our volume picked up in the upfront. It's one of the reasons why we've been doing better in scatter, and I think if our market share continues to grow and the audiences that we can deliver, whether it be Wallenda, where we get 13 -- where we have the #1 cablecast of a show for last month, or whether it's Sunday night on TLC, we can deliver big numbers.

The justification for the 30% to 35% discount to broadcast seems more challenged, and I think will attract more dollars.

I have one for David and a follow-up for Andy. David, could you talk about how the upfront results played out, particularly as it relates to some of your growing and more emerging digital networks, like ID, Velocity, Destination America?

I would have assumed that given the growth there, you would have seen more of a shift out of what used to be DR into cash and that might have led to you selling more of your inventory across the portfolio in the upfront than you did last year. Wondered if you can comment on sort of the strategy and results there, if you could.

Sure. Thanks, Ben.

We sold about 55%, so it's pretty close to what we did last year, maybe a little bit more. The overall strategy was to get better advertisers into those brands so that they could see the value of it.

The good news for us on Destination America and ID is they skew very female and very strong on the DR during the day. The real gain for us with these brands that are growing aggressively is to get the CPM up.

And so we're not so keen to increase volume. We're much more keen, over the long term, to increase price.

As a backstop, we do pretty well with DR, but we've been able to get that price up and we still think it's going to take us 2 to 3 years, but we would give up and we have in the last 1.5 years the option of taking more money and we've leaned toward getting more price. In the long term, if -- ID is the #5 network in daytime and late night and it's the #9 network in America.

There's very, very significant upside for us, if we can get the CPM to where it should be, much more so than taking 10% more dollars at a lower price. And so we feel good about the fact that we're very successful in getting more quality advertisers spending time with those brands, and we think that's going to help accelerate the strategy of ultimately higher pricing and much more economics in those channels over the next few years.

And then, Andy, just 2 numbers or 2 lines on the financials I want to ask you about. One on the cash spending on programming, which I think was up 30% year-on-year.

I didn't know if that was impacted by the acquisitions and sort of that's not a clean number or how we might want to think about that for the full year. And then on the affiliate revenue, is the slowdown from 6% to 5% from Q1 to Q2 x digital, is that just sort of noise?

Or is anything you'd call out behind that deceleration?

Okay. Ben, on the first one, yes, that number is significantly impacted by the consolidation of predominantly SBS, but also Switchover Media.

We do anticipate for the full year '13 our kind of apples-to-apples content spend to be up in the mid-single digits. So clearly, a lower run rate than we've had the last couple of years as the number of original hours and launching new channels is largely behind us.

And so now we're at a different kind of run rate. So clearly, the SBS was a big impact there.

On the 6% to 5% affiliate growth, it really is more of a one-off, onetime item there that drove that increase -- the decrease down to 5%.

Couple questions. Investors are quite excited about the potential of consolidation in the cable sector, with John Malone kind of leading the charge very vocally.

And their focus -- the investor focus is really on the significant programming cost synergies. The obvious implication for Discovery is that some of your deals could be reset lower.

And I was just wondering how you think, as you go look out over the next couple of years, how you think about that risk of significant consolidation in the MVPD space. And then just a housekeeping question on your MVPD contracts, are you prevented from selling by your current deals to nonfacility-based players in the MVPD space like Intel?

Thanks, Rich. First, our agreements are clean.

We own all of our content, and we have a right to sell our content to anyone that we want to. I think that's probably, at least for the next few years and particularly now, there's probably never been a better time to be in the content business.

That was an argument 4 or 5 years ago, in this tug-of-war between content and distribution, which one is going to be more successful. I think as you look at the dollars that have moved into content and the successful -- and the success that content players have had with distribution, I think you have to say that distribution has been a must-have.

And so for us, at least, with Amazon and Netflix on the SVOD with TV Everywhere, which the cable guys want, along with the fact that this is a very competitive market, you have 2 satellite guys, 2 phone guys and a cable guy, I think if there is -- there very well may be consolidation, although there already has been, there may be more consolidation. But we think we'll be able to continue to get significant -- do very well and get significant increases.

A big piece of it is, how are we doing? How are the channels doing?

Are more people spending more time with your channels? And the people that have your channels, do they feel activated by it?

Do they feel emotionally connected to the channels? And so that's the journey we've been on.

We are up to 11% of viewership on cable from a little less than 4% several years ago. But more importantly, we have activated people that love science.

Discovery is still the #1 most valued brand on cable, and that's from the cable operators survey this year themselves. And so with our brand stronger, our reach larger and the fact that there's a competitive market, I think you'll see us continuing to do better.

Some of these additional sales of content are incremental to us and very high margin, if not dropping all to the bottom line because we own all of our content. And to the extent that there is an Intel or there is over-the-top players that end up coming into the space, we are platform agnostic.

And if the business plan -- the business model works, it's just somebody else bidding up for the ability to offer our content to viewers, so that's a good thing.

And just a quick question for Andy. What is the total OWN liability currently before -- in terms of what's left after what was ever paid back this quarter?

$509 million.

David, there's been talk, broadly speaking, about a slowdown and maybe some issues in Latin America. Your comment suggests it's still pretty strong.

At this point, are you concerned about the trajectory of pay-TV penetration and growth? And how does the ad environment look?

It really depends by region. A lot of Western Europe looks a lot like the U.S.

The U.K. looks a lot like the U.S.

There's a lot of -- pretty flat. But then there are a number of markets like Russia where there's only 35% penetration, where there's very substantial growth and HD is first rolling out.

There's an overall aggressive pitch to the C class in Latin America, which is providing -- still providing a lot of growth. Mexico is still only 42% penetrated, Brazil only 26% penetrated.

In Asia, we're seeing a significant amount of growth in India. So it's a mixed bag.

But in the aggregate, we grew our sub base, just the pure sub base, 12% from a year ago. And so we still see very significant growth.

And in some countries, it feels a lot like the U.S. did 10 years ago, where we're seeing sub growth, advertising growth, CPM growth and viewership growth.

And so those are the markets like Brazil, like Mexico, like Russia where you -- where it's very attractive.

So speaking of CPM, so I think we all tend to focus, as you know, on the gap between the U.S. broadcast and cable.

You talked about the global ad opportunities. Can you talk about any CPM gap dynamic in Europe?

And to what extent you're able to benefit, given the weak macro?

It's massive. What you find in a lot of the markets is that there's 2 or 3 broadcast players that dominate the market.

Now this isn't true of all, but in a number of markets. When you go to Europe, you hear power ratio everywhere you go.

And you're looking at this formula of the value that you're getting. Here, we're discounted by 30% or 35%.

There, we may be discounted by 70% or 75%. If you look at the overall -- one of the things that made SBS so attractive to us is that we had this huge power ratio deficit in all those markets by just being a cable player that had 5% share.

So by doing that deal with SBS and emerging in Norway with 40% share or in Denmark with 36% share, we get the piggyback on their power ratio. So that's why we've formed the joint sales team there, which we're starting to do now.

And our view is we can go out with all of our packages together. They're getting much more dollars for their cable networks, even ones that were getting lower ratings than ours.

And so the package together gives us that lift. And as our market share grows, we continue to eat away at that power ratio issue.

And finally, as cable becomes gestationally more attractive because the younger generation is spending more time watching cable versus broadcast, you see that phenomenon. It's slower, but you see what happened here in the U.S.

That when you want to reach younger viewers in the 18 to 30 group throughout Europe, then cable becomes more attractive, and maybe you have a little bit more leverage to drive pricing.

I hope you can hear me. Just one clarification, I wanted to make sure I understood.

Will the amortization you spoke of go away next year and start to taper? Or is it a similar amount in '14 as it was in '13?

And then I have a quick follow-up.

The amortization does taper off a little bit next year and in following years. But the amortization, that intangible for SBS, goes out several years.

So it's about $40-plus million a quarter this year and a little over $30 million a quarter next year. So you do see a little bit of tapering, but it's still has a meaningful amount of amortization for the next several years.

Okay, great. And then a question for David on SVOD -- or first off, I guess for Andy.

Does your guidance imply or include the prospect for any new SVOD deals besides Netflix and Amazon for 2013? We assume it does not.

And then for David on SVOD, just wondering if you could talk about the strategy or strategies of the players out there shifting around a little bit. For example, Netflix going to more exclusivity of shows.

And as you look at that and as you look at potential new players in that space, how does that change how you think about SVOD and the distribution of your content in those windows?

Yes. The SVOD number for this year does not include any new deals.

It only is deals that have already been completed or extended.

So if we did a deal, we wouldn't have [ph] done a deal yet with Hulu...

That would be all incremental.

So Anthony, I think the -- from our perspective, there's pretty good alignment in how we run the cable business and then how we approach these different windows, which is the more quality shows we have with great characters, the better our storytelling, the more people are going to be spending more time with our channels, the more valuable we're going to be in the SVOD universe, in the TV Everywhere universe and in the long tail of our library. So the fact that Discovery now has a big hit in Naked and Afraid on Sunday night and a big hit with Fast N' Loud and Deadliest Catch last night did over a 2 2 and won the night, including beating the broadcasters in the male demo.

All of that, I think, is good. On TLC with Honey Boo Boo and Long Island Medium and Breaking Amish or great shows on Oprah with Tyler having 2 big hits on Tuesday night, being a top 5 network for women with the Haves and Have Nots.

All of that, I think, helps us when we sit down with cable operators and it helps us when we sit down with Reed or with Amazon and they say, "Okay, what do you got?" And so the more shows that we have that people are spending more time with, I think the better our hand.

And we have more shows now that have a story arc, which I think helps us. To the extent that we're building shows like Gold Rush, Breaking Amish, those are shows that have a longer story arc and it's way too early to tell.

But so far, we haven't seen any degradation in audience from content that we've given to the SVOD window. And we're starting to think that the story arc shows on that platform may actually help viewership of the new seasons when they come out.

And so it is something that we think about that maybe these story arc shows can be creating more value for us. But I do think bigger hits that have more traction with viewers and bigger characters that the viewers love are important, and that's -- we're moving in that direction and having some success.

This is Caroline Anastasi for Alexia. Can you just talk a bit more about the demand you saw on your upfront deals and whether certain categories stood out or whether strength was broad based?

And secondly, can you give us a sense of how much of the domestic ad strength you're seeing this quarter reflects a bit of a catch-up from last year's Olympic comp?

Sure. The overall demand was broad based.

I mean, there's particular success in financial, pharmaceutical, insurance had strength. But really the strength in the demand was broad based, which allowed us, as David said, to not only allocate dollars across the different platforms, but drive some good CPM growth.

The next question was? What was your second question again?

Just how much of the domestic ad strength you're seeing this quarter reflects catch-up from last year's Olympic comp.

Yes. It's a little bit of it.

I mean, clearly, we're seeing some strong strength in scatter. It's still 20% above what we garnered in the upfront last year.

And so while there's a little bit of an improvement based on the Olympics last year, this low double digits that we've highlighted for the third quarter is a little bit of that, but mostly just strong ratings, strong CPM and overall momentum of the overall sales.

I've got 2 questions. First, David, with respect to that 30% to 35% cable-broadcast CPM differential, we've been hearing about this for years.

What was that differential a few years ago? And what's going to make that change now -- what's going to make that start changing?

And then secondly, following up on Rich's question. If there is consolidation in the domestic distribution companies, do your affiliate fees contractually drop to the lower rate immediately after those mergers are completed?

Thanks, Alan. It was in the 40% to 42% range a few years ago.

And so it's now in the 30% to 35% range. You're seeing more and more.

I think Josh at AMC has done a great job. FX has done a great job.

I think we've done a great job. Almost across the board, Turner, we're all finding major audiences, which chips away at that mindset that the way to reach a big audience is broadcast.

So I think it's just going to take time. I think we make progress in every upfront.

The fact that we can get mid to high single-digit CPM increase and drive -- and get more volume is, that's sort of a way of saying that we're chipping away at that. So I think it's going to take some time.

Okay. And on the consolidation question?

It really depends. It depends on how the agreements are written.

So sometimes on acquisition, they would pick up -- if the bigger guy has a lower rate, they'd pick it up. And sometimes, they don't, depending on how the agreement is written.

It's Barton Crockett from Lazard. I was wondering about the margin trends.

So in the U.S., organic EBITDA was up 3% on what was very healthy ad growth. Internationally, you had good double-digit growth, but your EBITDA grew a little bit less than that.

Looking longer term in your business, what kind of revenue growth do you really need to get margin expansion? I mean, you'd think that these levels would get you there, but you didn't get there this quarter.

So how should we think about this longer term?

Well, first, strategically, we've been very clear. We were spending, 7 years ago, $500 million on content.

This year, it's $1.5 billion. Our strategy is we're going to invest in content.

We are very local outside the U.S. And we started out where we did, we had people selling our advertising.

When that happens, you have to give them an agency fee, and you get packaged with a number of other programmers. And so our strategy, and you see that cost escalation, has been that we've been spending more money on content and we've been spending more money on getting boots on the ground.

We're starting to see the real benefit of that in terms of getting better at selling advertising and being able to get the benefit of our -- the value. And on the content side, you're going to see that abate significantly, that additional investment.

And part of that has to do with the fact that as we've talked about before, as you're building brands, you're trying a whole bunch of different shows, as you have more and more shows returning. That's true on Discovery.

It's true on Animal Planet. It's true on TLC.

It's true on ID. That the amount of new shows you have to try to get a show to be successful drops, and so we think we're going to be able to abate that, and therefore, start to -- having cost come down and margin start to grow.

Andy?

Yes. Barton, just to add 2 comments to that.

The -- for the second quarter, we had this high amortization. And even though, as I said, the content spending growth for this year will be kind of mid-single digits, so you'll certainly see the amortization come down over time.

And so most importantly, you'll see our incremental margin on profit growth and revenue growth in the future will be much higher. So we have a bit of this anomaly now of an amort catch-up based on productive and successful content spending the last couple of years.

But as that content spending abates, and as I said, this year being mid-single digits, you'll see the expense come down, and therefore, we'll have a much higher uptick on the incremental margin for additional dollars, particularly internationally.

And then if I could ask one last question. The equity in JV, that number at minus $7 million in this quarter versus minus $6 million in the year ago, I would have thought that the improvements in OWN would have driven some improvement in that line year-over-year.

But we didn't see it. I was wondering if you could explain what happened there.

And also from an accounting perspective, I think you're -- we're accruing 100% of the OWN results for a while. That might change as they start to kind of -- recoup your losses in excess of your cost base.

So how do we see the accounting changing there over the next few quarters?

Yes. Well, look, most importantly for OWN, as we know, they did in the second quarter way ahead of schedule, actually have a net paydown of debt and positive cash flow.

OWN has a similar situation we have, where there's a higher amount of amortization, and that impacts their net income line, which is what we pick up. So you'll definitely see a positive earnings out of OWN in the second half of this year.

And so we'll have that positive equity pickup on our line, as well as continued paydown of debt in the second half as well. So the OWN story continues to evolve, and we definitely see a positive momentum and more importantly, some big second half numbers.

Thank you, everybody, for joining us today, and please give us a call with any follow-up questions in the office. We appreciate it.

Thanks.