Pay-TV channel Starz is trying to chart a new orbit.
Early next year, its parent company, Liberty Media, plans to spin off the premium network and its sister channel Encore into a new, stand-alone, publicly traded company.
Such a move would normally be cause for celebration. But for Starz, the separation comes amid uncertainty.
Its track record producing original shows has been mixed. The market is getting increasingly crowded not only from Starz's traditional competitors, HBO and Showtime, but also from new rivals including Netflix, Amazon and Redbox. And, starting in 2017, the network will lose one of its key suppliers of movies — Walt Disney Studios — to Netflix.
"It's an interesting time for Starz," said Matthew Harrigan, a media analyst with Wunderlich Securities. "Losing those Disney movies makes life a little more difficult, and it becomes even more important for them to create successful original programming."
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Liberty Media is spinning off Starz in part to make it more attractive to potential buyers. Companies mentioned by analysts as possible suitors include Comcast Corp., parent of Universal Pictures. Other deep-pocketed prospective buyers could be News Corp., Walt Disney Co. and Viacom Inc. HBO and Showtime probably would face anti-trust issues if either of them made a run at Starz.
The shift also raises the stakes for Starz and its chief executive, Chris Albrecht, who has been given the task of building an original programming pipeline. Albrecht, who joined Starz nearly three years ago, has the experience. As the former head of HBO, he was a key architect of that network's success by helping nurture such culture-defining hits as "Sex and the City" and "The Sopranos."
Achieving those heights again, this time at Starz, has proved more elusive. Starz made a splash with its gladiator series "Spartacus," but another high-profile drama, "Boss," about a corrupt Chicago mayor played by Kelsey Grammer ("Frasier"), failed to deliver ratings to match its critical acclaim. "Boss" was canceled after two seasons. Last year's "Camelot," about a young King Arthur, started strong but then fell on its sword.
Starz, which has 20.8 million subscribers in the U.S., has spent the last few years playing catch-up. The network began developing original dramas much later than industry leaders HBO and Showtime, and also lags behind basic cable channels FX, AMC and USA Network.
At the same time, the availability of movies through other venues has increased dramatically, and film fans can just as easily get their fix by buying or renting DVDs — online or at supermarket kiosks — or through Internet streaming services. That makes the need for strong original content even greater.
Starz executives declined to comment for this story, citing the "quiet period" mandated by regulators before the public stock offering.
Hollywood movie studios have a strong incentive to protect the premium channels, which have long served as their unofficial ATMs. The channels, including HBO, Starz and Showtime, spit out hundreds of millions of dollars each year to movie studios in exchange for the first-run TV rights to recent releases. The fees — which can approach $30 million for a single blockbuster film — have helped studios turn deficits into profits for many movies.
The parent companies of HBO (Time Warner), Showtime (CBS Corp.) and Starz (Liberty Media), also have long collected hundreds of millions of dollars each year in profit from the channels in distribution fees from cable and satellite operators. According to consulting firm SNL Kagan, Starz and sister channel Encore this year will generate revenue of $1.34 billion and $414 million in cash flow, a metric similar to operating income.
Just a few years ago, Starz trailed HBO as the No. 2 movie channel in terms of distribution. But it has since been surpassed by Showtime. The CBS Corp. network has staged a string of hits including "Weeds," the serial killer drama "Dexter," the pill-popping dark comedy "Nurse Jackie" and its latest hit, the terrorist thriller "Homeland," which this fall won the Emmy for TV's best drama.
According to SNL Kagan, Showtime has 21 million subscribers and 2012 revenue of $1.6 billion. Cash flow for Showtime and its sister channels TMC and Flix should approach $690 million combined for this year. Showtime's programming expenses are slightly less because it ended its relationships with movie studios several years ago.
"Showtime has been doing something similar [to Starz] with their strategy, but they have programming that people are talking about," said BTIG analyst Richard Greenfield said. "The question is how does Starz stack up?"
Its shows have largely failed to attract the buzz that can drive subscriptions and ratings. "Spartacus" was Starz's most popular show, averaging more than 5 million viewers an episode during the third season when viewing on all platforms was counted. "Magic City," the channel's stylistic drama about Miami gangsters in the 1950s, averaged 3.1 million viewers an episode when it debuted this year, while "Boss" collared just 2.2 million an episode.
Starz is betting heavily on its lineup for next two years, which includes the second season of "Magic City" and the new prospects "Da Vinci's Demons," a drama about Leonardo's early days from David S. Goyer, a co-writer of the "Dark Knight Rises" film trilogy, and "Black Sails," a swashbuckling adventure from "Transformers" and "Pirates of the Caribbean" filmmaker Michael Bay.
The company this year is spending about $692 million on programming, with four-fifths of that amount earmarked for buying products from Disney and Sony Pictures Entertainment, according to SNL Kagan, which said Starz spends less than $100 million annually creating original series.
"They still need the movies to fill their schedule, but at the same time Starz needs some unique programs to define the channel," said Deana Myers, an SNL Kagan television analyst. "It's not an easy market to get into because a lot of other networks are doing original productions."
Although Starz will continue to receive the Disney movies for three years, the eventual loss puts pressure on the company to keep Sony as a supplier beyond 2016, when the parties' current arrangement ends. The loss of Disney movies and the coming end of the Sony contract could also complicate the picture as Starz tries to attract a new owner.
Potential suitor Viacom already has a presence in the premium channel business. The parent of Paramount Pictures teamed in 2009 with two other studios, Lions Gate Entertainment Corp. and Metro-Goldwyn-Mayer Studios Inc., to launch the movie service Epix. The upstart has struggled to make distribution deals with leading cable and satellite TV systems. That could make a merger between Epix and Starz enticing. Given that Epix is not nearly as powerful as HBO and Showtime, such a deal may also be able to pass regulatory muster.
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