Starz! at 10: A Crazy Idea That Worked

Dec 20, 2004  •  Post A Comment

By Lee Hall

Special to TelevisionWeek

John Sie’s 1993 announcement of his intention to launch Starz!, a new premium movie service, sent shock waves through the cable industry. It was an era before the advent of direct broadcast satellite, when big names such as HBO and Showtime controlled the TV movie business. Few gave the new venture much chance to succeed.

“When we started Starz!, everybody thought we were crazy,” said Que Spaulding, who retired last year as Starz Encore Group’s president of distribution. “A first-run premium movie service to compete with HBO and Showtime was considered ridiculous.”

Starz! uses films licensed from The Walt Disney Co. and other Hollywood studios, and Mr. Sie boldly predicted that Starz! would jump-start the stagnant pay TV business. A decade later, Starz! stands virtually unparalleled in its field, the sole surviving premium service that depends almost exclusively on movies for its programming. The service added 1.3 million subscribers in the first half of 2004, bringing the total to 13.7 million, according to Nielsen Media Research figures. Starz! estimates that revenue will surpass $940 million for the year, with operating cash flow exceeding $225 million.

“The end is not in sight yet. It is our goal to surpass HBO within five years,” Mr. Sie said.

Starz! appears to have plenty of room to grow. A digital product, it is available to only about one-third of U.S. cable households. As cable operators convert more of their customers to digital, the potential subscriber base for Starz! will expand as well. The continued growth of direct broadcast satellite will expose more people to the product.

Mark Bauman, who retired Dec. 1 after serving as the channel’s interim CEO, said he likes the company’s market position. “Movies are an American institution. You wouldn’t have all the DVD sales out there if this wasn’t a good business. It’s a proven marketplace,” he said.

Through its studio licensing agreements, Starz! typically gets first shot at Hollywood’s biggest blockbusters. Its studio partners include The Walt Disney Co., Revolution Studios, Miramax Films, New Line Cinema and Dimension Films. Starting in 2005, Starz! gains access to releases from Sony Pictures Entertainment. Starz! shares with HBO a package of films from Universal Studios.

Rising Costs

The movie business is not without its challenges, not least of which is the escalating cost of programming. Exact figures are hard to come by, but the Starz Encore Group saw cash flow decline by nearly two-thirds during the third quarter of 2004 due to rising rights fees, according to the quarterly earnings report from Liberty Media, which controls the company.

But under the long-term rights deals already in place, these costs will level off beginning in 2006, while the Starz! subscriber base continues to grow. “It’s been a margin squeeze, but we believe this is a temporary thing,” Mr. Bauman said.

Starz! pioneered the multiplex concept. The Starz! package includes six thematic channels, a decision popular with cable operators looking to fill out expanding digital program capacity and one that proved popular with consumers too.

“All this was undertaken with the consumer in mind,” Mr. Sie said. “We started with the idea of giving consumers choice and variety and offering them control.”

The company is moving rapidly to take advantage of emerging technology. Starz presents subscribers with a suite of advanced video offerings, including a high-definition service, Starz! HD, and Starz on Demand, a subscription video-on-demand service available to Starz! customers at no additional charge.

“On-demand addresses the biggest single problem that pay TV had from day one-that the scheduling of the programming and the schedule of the consumer never meshed. People would disconnect the service, not because of the content, but because what they wanted to see was never on at the right time. With on-demand, you have removed that problem entirely,” Mr. Spaulding said.

In June, the company launched Starz! Ticket, a venture with Real Networks. For $12.95 a month, subscribers can download movies to their computers using a broadband Internet connection.

“We see this as the future,” Mr. Sie said. “We believe this is the kind of service that will help drive broadband adoption throughout the country.” The experiment also places Starz! on the cutting edge of what Mr. Sie believes will be the next technological wave for content delivery.

“In the next 10 years most of the video will be transported to the home via [the Internet]. We want to be the first to offer that,” he said.

More change is afoot. Mr. Sie stepped down earlier this year as CEO of Starz Encore Group. He retains the title of chairman and will, he said, remain deeply involved in the company’s future as a consultant to Liberty Media Corp., which owns Starz Encore Group.

Mr. Bauman filled in for Mr. Sie and retired in late November. President and Chief Operating Officer Bob Clasen was named CEO at that time.

Starz! will begin its second decade with a new name, channel lineup and on-screen graphics package. A new corporate moniker, Starz Entertainment Group LLC, is designed to simplify the company’s identity and emphasize the Starz! brand. The new logo sheds the longstanding exclamation point (as in “Starz!”) in favor of a contemporary, streamlined look. Two channels in the current multiplex lineup, Starz! Kids and Starz! Family, will be combined into one to make room for the launch of a new channel devoted to comedy films. Another channel, Starz! Theater will morph to Starz Edge and focus on films that appeal to male viewers 18 to 34.

“We have a few new things on the drawing board to improve the consumer experience, using the Internet both as marketing and a delivery tool and to work with our affiliates,” Mr. Sie said.

Watching the company’s evolution now from arm’s length, Mr. Spaulding said he likes what he sees. “They are doing a lot of things right over there,” he said. “The future looks pretty good.”