Discovery’s departure is ‘shot across the bow’ for Silver Spring, state and region

From The Washington Post:

Across the street from Discovery Communications’ towering headquarters in downtown Silver Spring, Jay Ayaba eyed the line of customers at the Starbucks where he works as a shift supervisor. It was almost time for an early afternoon surge, overwhelmingly made up of Discovery employees whom Ayaba has come to know by name, face and order — such as Susie and her extra-hot decaf latte.

“This might be a Discovery rush right here,” Ayaba said, looking over his shoulder.

Ayaba, 24, remembers how much Discovery’s arrival enlivened Silver Spring. He says it was as if “a whole new community had been built overnight.” Now he’s worried about the impact of the company’s announcement Tuesday that it will move its corporate headquarters to New York and relocate most of its 1,300 Maryland jobs.

“We’re still going to be open,” Ayaba said, “but it’s going to be slower than usual around here.”

Plenty of others share his concerns. Discovery’s exit will cost Montgomery County and Maryland tens of millions of dollars in lost payroll, tax receipts and vendor sales. It will deprive Silver Spring of the high-profile anchor company — perhaps best-known for airing “Shark Week” — that sparked the suburb’s commercial revival beginning in the late 1990s. It will also force the county to find a new occupant for the landmark edifice close to the Silver Spring Metro station.

In addition, for the greater Washington region, Discovery’s decision stirred fresh anxiety about structural weaknesses in the area’s economy that hamper its ability to compete for top-quality companies. The headquarters move — largely to be closer to the entertainment industry mecca that is New York — cripples hopes that the Washington region can develop as a national hub for broadcast and digital entertainment media.

Montgomery’s failed effort to retain several hundred back-office jobs also highlighted the challenges posed by the area’s high prices. Discovery is moving those positions to Knoxville, Tenn., where it said the cost of living is about 40 percent lower.

“It’s unfortunate because this is exactly the type of company Washington is trying to attract: a business that isn’t dependent on government spending and can help diversify the economy,” said Stephen S. Fuller, a regional economist at George Mason University.

“It does damage to our brand and the brand we would like to have, that the Washington area is a good place to do business,” Fuller said.

Discovery executives and Maryland elected officials pushed back against the notion that the company’s decision resulted from an unattractive business climate. They said the change was inevitable because of Discovery’s acquisition, a $14.6 billion cash-and-stock deal that is still in progress, of Scripps Networks Interactive, owner of HGTV, Food Network and the Travel Channel.

The new company would have major offices in three locations — New York, Silver Spring and Knoxville — and it made sense to consolidate operations and reduce that number to two.

“Our decision has nothing to do with incentives or the business environment in Montgomery County,” chief corporate operating officer David C. Leavy said. “We’ve had a wonderful run [here].”

Gov. Larry Hogan (R) said top Discovery executives told him there was nothing the state could have done to prevent the loss.

“They assured us it didn’t have anything to do with Maryland,” Hogan said. “They’re simply going through a merger, as most media outlets are.”

But there was no disguising the sobering reality that the state lost out to New York for the high-end, creative jobs — some of which will also go to Los Angeles — and to Tennessee for the low-end positions. Some technology jobs will also cross the river to Sterling, Va., while several hundred positions will remain in Maryland.

“This is a shot across the bow for this region,” said Bob Buchanan, chairman of the Montgomery County Economic Development Corp. “We need to seriously address some of these challenges.”

Sparking a revival

Discovery’s departure is particularly bitter because it was a homegrown success story that grew to be an international powerhouse. The company had its origins in Bethesda and was founded in Landover in 1985. Its exit follows an all-too-familiar pattern in which start-ups take root here, blossom and then are plucked away, often through takeovers, to go to more nurturing business ecosystems.

“We don’t seem to be able to hold on to companies as they scale and become successful,” Fuller said. “Businesses are realizing they get a bigger bang for their buck if they go elsewhere.”

From its origins as the Discovery Channel, dedicated to documentaries and nonfiction television programming, Discovery Communications added channels such as TLC, Animal Planet, the Science Channel and OWN (the Oprah Winfrey Network).

Discovery was lured to downtown Silver Spring in the late 1990s, when Montgomery County offered an incentives package worth more than $10 million in tax credits, grants and loans to set up shop there.

The company built a $165 million, 10-story tower. The move was the primary catalyst for the revival of Silver Spring, which enjoyed a surge of development including new restaurants, theaters and minority-owned small businesses.

Discovery’s arrival “put Silver Spring on the map and made it a center of documentary work around the world,” said Doug Duncan, who was Montgomery county executive at the time.

Since 2000, the company has received $12.3 million in local and state tax incentives, grants and loans, according to Good Jobs First, a nonprofit that tracks subsidies.

The company’s departure is “devastating for Silver Spring,” Duncan said. “It is going to be really hard to replace them.”

That view was echoed by business owners near Discovery’s headquarter. Half a mile up Georgia Avenue at Crisfield Seafood, Bonnie Swanson was tending to the tail end of the lunch crowd at the restaurant her grandparents opened in 1945. Swanson said the family business survived waves of economic instability in Silver Spring and the 2008 recession. But Discovery pulling out of Silver Spring was “petrifying.”

Moving forward, Swanson said, the county and state can’t neglect Silver Spring in favor of other development plans, such as those in Bethesda, saying that Silver Spring had long been “Bethesda’s redheaded stepsister.”

Facing the loss of lunchtime foot traffic and Discovery employees who host business dinners at Crisfield, Swanson said her restaurant would “just have to buckle our seat belts and hold on. It’s all we can do.”

A few blocks away, Juancarlo Parkhurst still had a few hours before his restaurant, Lina’s Diner and Bar, opened for dinner. He’d heard rumors that Discovery might be pulling out of the area for more than a year, but on Tuesday, he was forced to deal with the prospect of losing much of his happy-hour crowd of Discovery employees.

Parkhurst said Discovery was “really big in helping the renaissance of Silver Spring” but also helped drive rent increases that were straining tenants.

“Now that there’s no longer this anchor tenant and thousands of employees, it’s very scary as a business operator,” Parkhurst said.

An industry exodus

Discovery’s decision dealt a potentially fatal setback to ambitions in the Washington area to become a major player in the entertainment industry.

Economists said consolidation among media companies has already helped fuel an exodus in the sector. BET Networks, the country’s largest cable network for African American audiences, relocated its headquarters from Northeast Washington to New York last summer. Executives said the move was part of a years-long transition into the Manhattan offices of its parent company, Viacom, which bought BET for $3 billion in 2000. The company had about 40 full-time employees and 36 freelancers in Washington.

Silver Spring is still home to Urban One, which operates 55 radio stations targeting African American listeners. But Discovery was the flagship company for this region’s hopes to secure a permanent niche in the industry.

“We have advocacy media and are the information center for political reasons, but not necessarily for documentaries or film entertainment,” Buchanan said.

Business leaders said Discovery’s decision highlighted the importance for the Washington region to promote economic sectors where the area already enjoys a competitive advantage and thus has good prospects to succeed.

Such sectors include cybersecurity, biotechnology, hospitality and financial services, industries with leading companies in the Washington area. A Silver Spring pharmaceutical company, United Therapeutics, has been expanding.

The Greater Washington Partnership, an alliance of chief executives of large employers, last month urged greater efforts in the area to train digital technology workers to aid all of those sectors.

“Regions need to focus on their strengths,” said Peter L. Scher, vice chairman of the partnership and chairman of the Mid-Atlantic region for JPMorgan Chase. “What’s important for the region is to keep its eye on the ball. What are the growth sectors, and how do we continue to nurture them?”

The need to do more to promote growth separate from the federal government has become acute in recent years because of mandated government budget cuts in the process known as sequestration.

Economic growth has been weak since 2010, compared with other big metro areas, as the region struggles to add new, well-paying jobs. The jobs it has added — many of them in the service industry — are often low-paid positions with high turnover rates. Among the country’s 15 largest metropolitan areas, the Washington region ranks last in job creation and income growth, according to data from the Stephen S. Fuller Institute at GMU.

As Discovery showed by shipping low-end jobs to Tennessee, the Washington region struggles to compete when business costs are a factor.

Montgomery and Maryland officials offered undisclosed incentives to Discovery to offset the lower costs in Knoxville, but the gap was too wide to bridge.

“There’s no question it’s cheaper to do business in Knoxville,” said Leavy, the Discovery executive. “They don’t have a state income tax. Property values are in the 40 percent to 50 percent range,” compared with those in Montgomery, he said.

Discovery also pointed to other cost advantages in Tennessee. According to the 2017 business tax index, it said, Tennessee ranked 13th best while Maryland was 42nd. Tennessee’s corporate income tax rate is 6.5 percent, compared with Maryland’s 8.25 percent. According to the Council for Community and Economic Research, the cost of living in Knoxville was 41 percent below that of Silver Spring, Rockville and Frederick.

Roots in Maryland

Discovery’s move did not come as a surprise to close observers of the company. It has cut its workforce in Silver Spring by nearly half over the past decade. Chief executive David Zaslav, a native New Yorker who took over the company in 2007, has been living in Manhattan in recent years even though the company’s headquarters was in Maryland.

“When the new guy came in, there didn’t seem to be any connection between him and the county, between him and Silver Spring,” Duncan, the former county executive, said.

That was in contrast with Discovery’s founder, John Hendricks, who had close relations with Duncan and other local officials. A West Virginia native, Hendricks was running a Maryland consulting firm before he launched Discovery in 1985 with a $5 million investment from Allen & Co., a boutique New York investment firm known for its media expertise. The timing was right. Cable pioneer John Malone was searching for content for his nascent cable system, and he invested in Discovery and agreed to carry the channel. It hit the airwaves with an after-school special on icebergs.

In time, the network was a giant of reality TV, the home of shows such as “19 Kids and Counting,” “The Crocodile Hunter” and “Dirty Jobs.”

Hendricks lured Zaslav, who turns 58 on Monday, from a top post at NBC Universal in 2007 to become its chief executive.

“Working with John gave me the fever,” Zaslav said in a 2006 interview with The Washington Post, calling Hendricks “a mentor.”

Zaslav overhauled the company, closing its retail stores, ousting veteran executives and reducing the workforce by 20 percent. He rebranded some of the channel’s properties, making it leaner and more profitable.

“David is a hard-driving guy, direct but likable,” said Hugh Panero, founder and former chief executive at XM Satellite Radio and an adjunct professor at the George Washington University School of Media and Public Affairs. “He came to Discovery when it was down, and he turned it around. He is very focused, smart. He identifies what needs to be fixed . . . sees the pins and knocks them down, pursuing his objectives relentlessly.”

Malone, who sits on the Discovery board, is reportedly a fan.

“Malone does not suffer fools,” said Panero, who has known Zaslav since they worked together in New York media circles 30 years ago. “For Malone, it’s all about what you deliver. He thinks very highly of him.”

Zaslav was well rewarded. He is one of the most highly compensated people in the country, earning $341 million in cash, stock and other benefits over company fiscal years 2012 through 2016, according to Equilar, an executive data firm. Total shareholder return during that period was 34 percent, according to Equilar.

The news hasn’t all been bad for Montgomery and Maryland. Last year, state and county officials succeeded in keeping Marriott International in Montgomery. They offered $62 million in loans, tax credits and grants to build a new headquarters in Bethesda, where the hospitality giant has been based for 40 years.

Once Discovery leaves, however, Maryland will be the home of only two Fortune 500 companies other than Marriott: Lockheed Martin and Host Hotels & Resorts.

The loss of Discovery “is a real setback, both symbolically and in terms of local employment,” said Anirban Basu, an economist at Baltimore-based Sage Policy Group. “Maryland is not home to many Fortune 500 companies, and to lose this headquarters represents an unsightly blemish for the state.”

View the full story›