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Starz! Sticking to Its Strategy

Mar 22, 2004  •  Post A Comment

Executives at Starz! Encore said last week it is still full speed ahead for the second-largest pay TV network, the only one of the major premium services that depends solely on recent theatrical movies to attract viewers, despite reports about a possible sale, merger or change in direction.
“There is no change in our business or programming strategy,” said Starz! spokesman Tom Southwick.
A spate of speculative stories about the future of Starz! Encore appeared last week after a conference call in which John Malone, the chairman of Liberty Media, said the wholly owned Starz Encore division faces a tough road due to rising programming costs and lower fees from some cable operators.
Mr. Malone warned that Starz! Encore “has to deliver on the investment [Liberty has] made.” He added, “The jury is still out in terms of its long-term future and who it should or would combine with. We are always open to combinations that enhance its value, but Starz! has to prove itself.”
Those comments followed a filing with the Securities and Exchange Commission in which Liberty revised its estimate of programming costs, stating that those costs for 2005 would be higher than originally expected.
Though Starz!’s 2004 programming cost increases were revised to between $170 million and $190 million from a third-quarter estimated increase of between $175 million and $225 million, the company said in its March 15 filing that costs in 2005 would exceed 2004 levels by between $125 million and $175 million after having estimated in the third quarter that 2005 costs would rise by just slightly more than the 2004 increases.
That means a cost increase that was once expected to be modest next year is now likely to exceed 25 percent, said Fulcrum Global Partners analyst Richard Greenfield, and will likely delay the channel’s recovery by a year, until 2006, and result in a 35 percent decline in cash flow for 2005.
A lot of the higher-than-expected costs are due to a major change in Starz! Encore’s deal with Comcast, the largest multiple system cable operator. To settle a suit last year, Starz! agreed to forgo payments it was due under an earlier deal with AT&T’s cable systems, which were acquired by Comcast.
However, as part of the settlement, Comcast entered into a new agreement to help market Starz! Encore’s lineup of channels and services. The marketing push kicks in next month.
That is crucial because there is a big upside for Starz! Encore with each new subscriber. The network has long-term contracts with a number of studios for movies that are essentially a fixed cost, so the revenue from each additional subscriber goes directly to boost the Starz! bottom line.
Starz! has exclusive long-term deals with Buena Vista (Disney, Touchstone, Miramax), New Line Cinema (including Fine Line), Sony Pictures (Columbia, Screen Gems, Sony Pictures Classics) and Revolution Studios, in which it holds a minority investment. In all cases, Starz! included in those agreements VOD rights.
Mr. Southwick said the company is also optimistic because Starz! Encore operates on digital systems, which currently represent fewer than 40 percent of cable homes. That number is expected to grow rapidly in the coming months as major MSOs complete system upgrades.
Being tied to upgraded technology allows Starz! to follow an aggressive strategy of offering its premium service along with subscription video-on-demand for one price. That means a subscriber can start viewing a movie at any time of the day.
Starz!’s primary competitors, HBO and Showtime, offer similar services, but Starz! has made the use of new technology a major part of its game plan. “We think SVOD is going to help the whole category,” said Mr. Southwick. “The pay category has been flat over recent years and we think this is going to rejuvenate it.”
Time Warner’s HBO is the largest premium service, according to Kagan World Media. It has more than 27 million subscribers and sister network Cinemax has more than 4 million. Starz! is second largest with just over 12 million subscribers. Showtime is third, also with a little more than 12 million, and its sister network, The Movie Channel, has another 10.7 million subscribers.
Part of what Starz! and Liberty did last week was damage control. Mr. Southwick denied a trade report that a sale or merger is imminent. Separately, Mike Erickson, VP of investor relations for Liberty, said he was misquoted in another trade report, which said he expected Starz! to develop its own original content.
“I have no idea how my comments that we were not entirely convinced original programming is the right route could be construed to mean were thinking about original programming,” said Mr. Erickson.
Despite efforts to assure investors and the industry that Starz! is stable for now, the controversy clearly raised issues. Stock market analyst Jessica Reif Cohen of Merrill Lynch said she believes Starz! Encore “should be part of a bigger company.”
She noted that it is the only one of the big three pay televison services that is not part of a company that also owns a film studio. She said buyers or merger partners might include News Corp., Viacom, Disney or even MGM.
Mr. Malone was not entirely gloomy about the future of Starz! Encore, which he predicted would get a big boost from video-on-demand services and high-definition TV.
“We believe it can grow rapidly as technology changes as people become more interested in [subscription VOD]. If it evolves, it could look like a Netflix service offering,” he said, referring to the online DVD rental service.