Showdown With Showtime

Roughly two years after Viacom divided itself in two, a family feud has erupted between the offspring of that split. The rift promises to reshape the landscape for premium TV networks.

Three major studios — Viacom's Paramount Pictures, Metro-Goldwyn-Mayer Studios and Lionsgate —  announced April 20 that they were getting into the pay TV business by launching their own network and on-demand service in fall 2009.

Their plans amount to a double punch at Showtime, which until the end of 2005 was a corporate sibling within Viacom. The movie-studio triumvirate in roughly two years is yanking its first-run movies from Showtime, and its new service will compete against that programmer as well.

Currently, Paramount, MGM and Lionsgate provide essentially all of the new movies that Showtime presents to its 15.5 million subscribers. But the three studios, led by Viacom, will have to overcome some hefty obstacles in order to successfully launch their own premium entertainment service, using those movies.

For starters, the unnamed network will be forgoing the guaranteed revenue — more than $300 million last year — that Showtime is paying the three studios in output deals for first-run theatrical releases.

And the new network will have to jockey for cable, satellite and telephone-company distribution. When HBO, Showtime and Starz launched, each could count on a corporate cousin for initial carriage.

Here, the cousins are at each other's throats. Showtime is owned by CBS Corp., while Paramount Pictures is owned by Viacom. Until the end of 2005, the two were part of the same company, also known as Viacom. Both are chaired by Sumner Redstone.

“These guys [Viacom and CBS] are shooting each other,” said a pay TV competitor.

The new premium network's debut brings to the forefront the question of whether first-run releases — in the age of iTunes, DVDs, video on-demand, broadband and DVRs — remain crucial for services such as Showtime, HBO and Starz.

After about two years of deal-renewal negotiations collapsed, Showtime in the future will forge forward without first-run movies from Paramount, MGM and Lionsgate.

Showtime chairman and CEO Matt Blank downplayed the impact, saying he already had been approached by more than a dozen entities wanting to supply original movies or programming. And Showtime will have several hundred million dollars — and two years — to create or acquire programming to replace those first-run films.

“It's taken a long time for Showtime to achieve the status level and success that we've had, and we don't plan to let our franchise be diminished even minutely over the next few years,” Blank said.

First-run movies don't have as much value as they once did, now that audiences can see them not just in theaters, but on airplanes, on DVDs and in electronic downloads, before they reach premium TV, according to Blank. But Showtime's competition, among other instant critics, argue that first-run movies play a crucial role in the success of a premium cable channel.

First-run movies are still important, according to Starz CEO Robert Clasen, “because a lot of people don't go to iTunes, a lot of people are not in-demand customers or pay-per-view customers.”


There may not be a happy start — or ending — for the new premium service either. A variety of cable operators and cable-network officials last week said that the new Paramount-MGM-Lionsgate venture will face an uphill battle to get distribution as a TV channel.

“The appetite from cable operators for premium channels in general is pretty light,” said Bob Gessner, president of Massillon Cable TV in Ohio. “The margins are small and the churn is high. To attract new premium-channel customers takes a lot of money. Once you've attracted them, they stick around for a short period of time. … Very often, the marketing costs burn up six months worth of margin.”

The Paramount-MGM-Lionsgate venture, which will offer not only first-run and library films but also original TV series, came out of the gate without announcing a distributor on board yet as either an investor or an affiliate. Having that kind of support and backing from the get-go was crucial in the rollouts of Showtime, HBO and Starz. Showtime, for instance, was created in 1976 to give Viacom International's Northern California cable systems a premium TV service.

“I can't think of a channel that has announced in the last 10 years that has been successful that didn't announce with distribution deals or a distribution partner,” said Lindsay Gardner, a director at MediaTech Capital Partners and former president of affiliate sales for Fox Cable Networks.

The most obvious potential partner for the new premium service, Comcast, is conspicuously missing, which had several network executives scratching their heads last week.

Comcast is already in business with both MGM and Lionsgate. The nation's largest cable operator owns 20% of MGM. And Comcast and Lionsgate, along with Sony Pictures Entertainment, are all partners in Fearnet, the on-demand video and broadband horror service.

Comcast declined to comment last week, but the cable company is not interested in the coming premium service, according to an official familiar with the situation.


Paramount, MGM and Lionsgate decided to create a network for their own movies, and eliminate “the middle man,” after they failed to reach new output deals with Showtime, which wanted to pay less for the product.

“We certainly still made a very aggressive offer to all of these studios, in terms of the total dollars,” Blank said. “We tried to negotiate for a good period of time. Unfortunately, it didn't work out. We wish them luck.”

Showtime's contract with Paramount expired the end of last year, and its deals with MGM and Lionsgate will run out the end of this year. According to Showtime officials, they will have access to films from those output deals into 2010 and 2011.

For its part, Showtime maintains that the first-run theatricals aren't critical to its programming strategy anymore, and that it's a better game plan to focus on and expand its original programming — hits such as The Tudors, renewed for a third season last week, and Weeds, in its fourth season — and air library fare.

“Our subscribers don't know what films are on Showtime versus HBO versus Starz,” Blank said. “But they know where The Tudors is.”

Blank estimated that Showtime gets about 40 to 45 first-run movies a year via its three output deals.

Certainly, Showtime will be cutting its costs by not renewing its three deals. Last year, it shelled out $320 million for theatricals, according to preliminary figures from SNL Kagan senior analyst Deana Myers. HBO paid $725 million in theatrical deals, while Starz paid $650 million, Myers said.

So without its three output deals, Showtime will have more money to spend on original programming and can go to other sources, such as independent movie studios, to get first-run product.

“We have no doubt about our ability to program this network, better than we're programming it today, three years from now,” Blank said. “Don't get me wrong: We're going to have as many first-run feature films on Showtime in three or four years as we have today.”

He said he's been approached by as many as a dozen content providers, like independent studios and producers, about working with them. And Showtime will get a handful of fresh movies from sister company CBS Films.

But Myers and Clasen, with Showtime rival Starz, contend first-run movies are still important — and it will be harder for Showtime to line them up.

“Showtime has said for well over a year now that they want to focus on original programming, and not as much on movies, but I don't know,” Kagan's Myers said. “Both HBO and Starz will tell you in all of their customer surveys, customers say the No. 1 reason they subscribe to a pay service is for the movies.”

To fill in its program lineup, and the schedules of its various multiplex networks, Showtime is “going to have to go to independent films, one-off deals, that type of thing, library-product deals. But new fresh product is what a lot of people are seeking,” according to Myers.

For example, 40% of HBO subscribers only watch movies, and the network averages 10 million viewers for its Saturday-night films, about double the audience of multiple airings of its original series.

Movies remain the cornerstone of Starz's programming strategy, according to Clasen, even though they are available on a variety of new-media platforms.

“From our perspective, having movies for our service is vitally important — to have Pirates of the Caribbean and Talladega Nights and The Da Vinci Code,” he said. “The studios spend tens of millions of dollars marketing these titles, and people who didn't see them in the theaters love to see them in that early pay TV window.”

But Clasen noted that with new technologies, movies are now available on various platforms, which means pay TV services should be paying less for first-run movies, as Showtime argues.


Details on the new pay TV service are sketchy, but in a prepared statement, Viacom president Philippe Dauman said it will be a “game changer” by using “traditional and new digital distribution technology.” That could include a subscription video-on-demand service, since the three studios own all rights to their movies and enjoy the flexibility to distribute them on any platform they choose, when they choose.

Some operators said the new premium-service could be willing to accept carriage on digital programming tiers, not just as a standalone premium channel. reported last week that a former Showtime executive, Mark Greenberg, would be named CEO of the service.

Viacom declined to comment. And former AMC Networks chief Kate McEnroe, who is Lionsgate's president of TV-new media platforms, worked on the new pay service's plan, a person familiar with the company said. Affiliate sales and marketing for the new entity will be handled by MTV Networks.

While MTVN is known for using its distribution muscle by bundling its many networks together, basic cable and premium services traditionally have not been marketed together to distributors.

And it will be hard for the new service to get a toehold as an additional TV network, some operators said. Providers would rather sell voice and data, and use their precious bandwidth to offer more HDTV, which gives them a competitive edge.

“Our members are always concerned when programming they are currently paying for and receiving from an incumbent network moves to a new network that now requires both additional license fees and more bandwidth for the same product just to continue to provide the same programming to their customers,” said Frank Hughes, senior vice president of programming for the National Cable Television Cooperative.

“As happens too often when new networks are created to meet a corporate rather than a consumer need, the cable subscribers will end up paying more for little or no additional content,” Hughes said.

Gessner said he'd be interested in the new Paramount-MGM-Lionsgate offering if it didn't have the linear TV network aspect.

“Why not just make it totally a VOD channel?” he said. “If they said this is a full studio of movies, and there's a subscription fee associated with it, no linear channel, it's just all on-demand,” it would be more attractive.

The three-studio venture has a tough row to hoe, according to Gardner, who once researched launching a pay-TV network.

“In today's world, it takes 10 years and several hundred million dollars to make a real, true premium movie channel work,'' he said. “Part of the reason it takes 10 years is it takes a long time to get distribution.”