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On Topic With John Malone

Dec 20, 2004  •  Post A Comment

As John Malone, the former chairman of Tele-Communications Inc., which in 1994 was the nation’s largest cable operator, tells it, Starz! was the brainchild of Brendan Clouston, TCI’s president at the time.

“Brendan decided that we were really getting squeezed hard by HBO and Showtime on pricing,” Mr. Malone said, “and we needed some leverage to fight back-something we could do that would offset some of that pressure. And there were at the time a studio or two that didn’t have output deals. Particularly Universal.”

Indeed, as Sid Sheinberg, then president and CEO of Universal parent MCA, told Variety when Starz! launched in 1994, HBO and Showtime had been telling Universal, “You can’t help us-we don’t need your movies.”

So with the stroke of a pen, TCI instantly made Universal a player in the multimillion-dollar premium pay service business.

In the following interview with TelevisionWeek Publisher and Editorial Director Chuck Ross, Mr. Malone, chairman of Starz Encore Group owner Liberty Media, recounts the early days of Starz! and discusses where the service is headed in the future.

TelevisionWeek: So Brendan Clouston worked out the studio deals and Starz! was launched to the TCI subs?

John Malone: That’s right. But what we found pretty quickly was that you pretty obviously would have a hard time making it successful if you only offered it to TCI. So it was decided to offer it more broadly as a third pay service to the rest of the industry. And TCI didn’t have the expertise to do that. So we asked John Sie if he would get involved in that, which led ultimately to the acquisition of Starz! by Encore [at the time a basic cable channel showing movies]. Johnny Sie had started Encore three years before that. So Encore acquired Starz! from the TCI side. And TCI had a distribution agreement-sort of a flat deal-to distribute Starz! and Encore on the TCI systems. And from there John developed his organization and began marketing Encore, Starz! and the multiplex version of Encore and ultimately the multiplex version of Starz!

TVWeek: And eventually Johnny Sie developed the idea of subscriber video-on-demand-SVOD, which at that time was a pretty new concept, right?

Mr. Malone: We saw SVOD coming along. So John, I guess, innovated various things- multiplex was one. The thematic challenge was another. And then the third was his emphasis on SVOD as opposed to VOD. He believed that that’s the way the public would want to use VOD. He always felt that when that kind of VOD would become practical-technologically feasible-which of course it is now, that’s the way consumers would really prefer it. So when he went out and did the most recent round of output deals with Hollywood, in addition to acquiring the output rights for the pay channels, he also acquired the SVOD rights to those movies as well as the [Internet protocol] video rights, anticipating that there may be in the fairly near future a value to the SVOD business. And then a little further out, but quite within the time frame of these deals, a business would form in the Internet delivery of subscription movie services.

TVWeek: Do you think SVOD will continue to be a success or will things evolve all over to IP?

Mr. Malone: Well, the public clearly likes the flexibility of watching what they want when they want to watch it. And they also like to know that they’ve paid one flat charge and have a lot of flexibility. That’s why subscription, I think, ultimately turns out to be a better system for the public. There’s more efficiency in it. And people will use it more. And so I think that that is being proven as we speak by the successes that the cable operators are having with their server-based SVOD. You know, when you sign up for Starz! you get random access to the movies. When you sign up for HBO, you get random access to the movies. It’s working quite well. It’s probably being pushed by Comcast as hard as anybody. And I think they’re reporting pretty good consumer enthusiasm for it. On the IP side, IP-based servers also give you the ability to do random access, and as data speeds speed up-as connection, broadband speeds pick up-it becomes quite feasible to offer a Netflix kind of service electronically, where people can download or in fact stream and watch movies in real time. We think that that’s best, just like what Netflix does at a subscription level. You pay $20 a month and it gives you access to 200 movies or something. And I think that’s a great system and it’s gonna be feasible on a high-speed connection.

TVWeek: If studios charge more and more for the product, is Starz Encore always going be a good business for Liberty Media?

Mr. Malone: I think what you have to look at is not so much that rights get more expensive but that the rights get broader, and therefore you pay more for them. In other words, if you just wanted the premium TV rights, my guess is those numbers will be going down now. But if you also want the SVOD and the IP rights, well, those rights have probably gone up. It’s one of the reasons why we paid quite a bit more this last time than we have historically. We’ve got wonderful broad rights. I suspect that Hollywood right now wishes they hadn’t done that. But we got those rights for a fairly extended period of time. So how those markets develop and how we position ourselves in those markets and evolve will determine how successful Starz! is. But we certainly have a pretty strong package of rights with which to offer those kind of services.

TVWeek: How far away do you think that is before owning rights to things like cellphone delivery will be meaningful?

Mr. Malone: Well, that depends on how you define meaningful. But the financial markets, if they see it working somewhere, they project it ahead and then it’s meaningful. So the question is when do you have it available in enough scale where people use it and they like it. And I haven’t seen it in the U.S. yet, but it’s certainly happening outside the U.S. What we see in Korea is people are using their cellphones to watch streaming video.

TVWeek: Speaking of News Corp., what are your plans there?

Mr. Malone: We’re enormous fans of Rupert and News Corp. We’re very supportive shareholders. We have no intention of interfering with their control of the company and we’re happy with the current position. We wish them the best. We now have votes that equal our ownership. So we own 18 percent of the company and we’ve got 18 percent of the vote. So that’s about where we should be.

TVWeek: Is anything going to happen with your other major programming asset, Discovery Communications?

Mr. Malone: Well, if [Discovery’s other major owners] Cox or Newhouse wanted to sell some or all of their positions we’d be happy to buy, but so far they’ve indicated absolutely no interest in doing so.