Liberty Says It’s Trying to Ease Channel Conflicts Between Netflix, Cable Operators
Liberty Media is trying ease “the natural channel conflict” as cable operators and services like Netflix vie for distribution of Starz and Encore programming, Liberty Media executives said Monday on a conference call. Liberty signed a distribution pact in 2008 giving Netflix access to streaming titles in the pay TV window or at the same time they are viewable on the premium channel service. Starz is estimated to be making $25-$30 million a year on the deal, which expires in Q1 2012. A renegotiated streaming agreement could be worth more than $250 million a year and a new deal expected sooner than 2012, BTIG Research analyst Richard Greenfield has said. Starz typically gets $2 a subscriber from cable and satellite distributors, analysts said.
Most subscribers to Starz and Netflix are not in competition and are “additive or in a different segment,” Liberty CEO Greg Maffei said. Starz isn’t trying to tell cable operators that “they know their business better than they do, but that’s our perception,” Maffei said. “Whatever we think is not as important as what our partners think and we should work with them to make sure we're minimizing, as much as possible, the natural channel conflict that exists and we've had some success with that."
But with Netflix estimated to be paying about $900 million in 5-year deal with Epix, Starz should expect a vastly improved agreement, analysts said. In the Epix pact, Netflix is getting streaming titles from Lionsgate, MGM and Paramount, all of whom are investors in the Epix channel. Starz is estimated to account for 50 percent of Netflix’s “freshest” content, Greenfield said.
Starz’s negotiations with Netflix and potentially other over-the-top video services can “only be on terms that work for Liberty and Starz in terms of our existing content and distributor relationships,” Maffei said. “That’s the only way that is going to happen."
Starz’s hand in the negotiations has strengthened in the past year with the arrival of original programming like Spartacus: Blood in the Sand, which debuted last fall. The series is scheduled for a second full season in 2012, and was a major factor in Starz increasing to 18.2 million subscribers in 2010 from 16.9 million a year earlier and provided a strong lead in for channel’s original programming. A six-part Spartacus: Gods of the Arena series ended Feb. 25 and attracted an average of 3.3 million viewers per episode, Starz CEO Chris Albrecht said. Starz will launch Camelot April 1, and Boss, a Chicago political drama starring Kelsey Grammar, in Q4, he said. The 10-episode Magic City, set in Miami during the 1950s, is scheduled for 2012, Albrecht said. Starz eventually plans to air 50-60 hours annually of original programming, he said.
Starz Media also is seeking to expand DVD and Blu-ray distribution through its Anchor Bay affiliate. Anchor Bay signed a 20-title distribution pact with the Weinstein Brothers starting with the Oscar award-winning film The King’s Speech. Anchor Bay also could provide programming for the Starz and Encore channels. Encore ended 2010 with 32 million subscribers, up from 30.6 million a year earlier.
Meanwhile, Liberty expects a shareholder vote in April on plans to split off Liberty Capital and Liberty Starz. At the same time, Liberty Media will convert the Liberty Interactive tracking stock into an asset-based security. Liberty Interactive will contain Expedia, QVC and several other Internet companies. Liberty Capital will have Starz Media, the Atlanta Braves, TruePosition, 40 percent ownership of Sirius XM Radio and minority investments in Time Warner Inc., Time Warner Cable and Live Nation. Liberty Starz will include premium programmer Starz Entertainment, which has 16 channels and was spun off from Liberty Entertainment in 2009.
The complex split-off is at the heart of a trial that concluded last week in Delaware Chancery Court in which Liberty asked a judge to approve its restructuring plan and reject a debt-holders claims that it was a fire sale of assets. Failing to gain court approval for the split off would leave Liberty faced with the threat of $4.7 billion debt coming due immediately, company officials have said. Liberty sued Bank of New York last year as the holder of the public debt. An unidentified bondholder of $250 million in Liberty shares claimed the split off would dispose of all Liberty LLCs in violation of its obligation under the debt agreement. Unless the Chancery Court finds that the split represents a sale of substantially all of its assets, the Bank of New York could accelerate debt payments, Liberty has said.
Liberty is “optimistic” about the outcome of court case and believes its position is “correct” based on the facts involved, Maffei said. When asked if Liberty had an alternate plan if the split off doesn’t get court approval, Maffei said he was “loathe to speculate” about such an outcome.
Liberty’s Q4 operating profit slipped to $396 million from $397 million a year earlier. Liberty Starz operating profit rose 26.5 percent to $62 million as revenue surged 33 percent to $405 million. QVC, Liberty’s largest business, posted a 1.3 percent gain in operating profit to $393 million as revenue grew 4 percent to $2.52 billion led by strong CE sales.