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Starz CFO: Home Entertainment Lowers Original Programming Costs

6 Dec, 2013 By: Erik Gruenwedel

Starz LLC’s increased home entertainment presence (and revenue) is helping the content aggregator expand its portfolio of original programming, CFO Scott MacDonald told an investor group.

Starz, which operates 17 premium channels (via Starz, Encore and MoviePlex) for multichannel video program distributors such as cable, satellite and telecommunications, distributes original and third-party content (i.e. The Weinstein Co.) via its Anchor Bay Home Entertainment unit.

Speaking Dec. 4 at Bank of America 2013 Leveraged Finance Conference, MacDonald said packaged media and digital distribution domestically and abroad help expand the brand and lower production costs on an escalating slate of original shows.

Starz has had success selling packaged media releases of the “Spartacus” and “Da Vinci's Demons” franchises, among others. The company is currently selling disc releases of “Magic City,” as well as pre-selling “Black Sails.”

“As we grow, the more [distribution] rights we have, [home entertainment] allows us to grow our international presence, but it really helps us to reduce the overall cost that we pay for a show, when we have a success like in the case of ‘Spartacus,’” MacDonald said.

He said the company’s association with Anchor Bay Home Entertainment enables the company to better control ancillary market distribution and reduce costs than through a third-party. Through the first nine months of the year, home video net sales increased 81% to $241.8 million, compared with $133.3 million last year.

Home entertainment remains a profitable segment, as home video operating income in the quarter increased 12% to $21.3 million from $19 million last year. Through Sept. 30, home video operating income rose 28% to $51.5 million, compared with $40.2 million last year.

MacDonald said 2013 would see higher home entertainment revenue due in part to the retail successes of AMC Networks’ “The Walking Dead” and The Weinstein Co.’s Django Unchained and Silver Linings Playbook, among others.

Meanwhile, lower license fees for Sony Pictures’ movies, coupled with winding down of a pay-TV deal with Walt Disney Studios, means Starz LLC will up spending on original programming heading into 2014 and beyond, MacDonald said.

Its license agreement with Disney expires at the end of 2015 (the studio is transitioning pay-TV rights to Netflix), while a similar deal with Sony was renewed.

“We’re going to be able to ramp up 65 to 75 hours annually of original programming by 2017 — roughly the levels you see on Showtime and HBO,” MacDonald said. “And we’re going to be able to do that without negatively affecting our margins.”

Currently, 5% of Starz’ airtime programming is original. That percentage is increasing as 49 of Starz’s top 100 telecasts through September involved original programming. About 1.1 million people watch a Starz/Encore premium channel daily, which tops HBO/CineMax (900,000 million) and Showtime (200,000) daily, according to Starz.

The company ended its 2013 fiscal year broadcasting original series “The White Queen,” which attracted 5 million viewers an episode.

“It well-exceeded our expectations,” MacDonald said, adding that 60% of the show’s audience was female.

New original series in 2014 include Michael Bay-produced “Black Sails,” “Da Vinci’s Demons” (co-produced with the BBC), 50 Cent’s drama “Power,” “Outlander” (produced by Sony Television) and “Fortitude.”

“We’ve just really started out in this [originals] space,” MacDonald said.

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