MGM, Lionsgate, Paramount Need Movie Channel Help

The studios counted on Comcast to distribute their movie channel and take on HBO and Showtime. With the cable giant out, they're scrambling

Since April three Hollywood studios—Paramount (VIA), MGM, and Lionsgate (LGF)—have been working to create a premium movie channel that would take on HBO, Showtime, and Starz (LMDIA). In a cable world where even the likes of the NFL have found it hard to get space on the dial, that's no easy trick. Early on, the studios, which had left Showtime when their contract renegotiation broke down, were counting on cable giant Comcast (CMCSA), America's largest cable company, which sources said initially contemplated becoming a partner as well.

But Comcast has since lost interest. Now the three Hollywood studios are scrambling to find distribution partners—including offering "market exclusive" deals with satellite or telephone providers eager to steal subscribers from Comcast. "We're going to be flexible," says Mark Greenberg, the former Showtime executive who runs the venture, called Studio Three Partners. The channel, which its partners hope to launch in the fall of 2009, doesn't yet have a name.

At the outset, according to sources, Comcast seemed keen to be a part of the action. Initially approached by Lionsgate and MGM, with whom the cable giant jointly owns channels (Comcast also owns a 20% MGM stake), it contemplated owning a piece, according to sources. Comcast even asked the two to seek out Paramount to join, they say. At another point, Comcast contemplated signing its own exclusive arrangement with the channel but dropped out as a partner. That deal fell apart, when the price to carry the channel started to creep up, sources say. Now, Comcast, which wouldn't comment, is said to openly question whether there's a need for yet another movie channel. It points out that movie watching is declining on channels such as HBO and Showtime, which now entice viewers instead with original programs like HBO's Entourage and Showtime's Weeds.

A Lower Subscriber Cost

Without Comcast, the new venture has revamped its planned offering, say those with knowledge of the situation. Initially, the partners had contemplated offering the channel, as HBO and Showtime do, as a premium offering for which subscribers pay roughly $12 a month (with the channel getting about half, the satellite or cable operator the other half). Instead, the new channel's backers now are floating the idea of charging cable operators $1 to $2 per month to every subscriber, which the operator then would sink into its overall rates.

As a further inducement, Studio Three would offer partners exclusivity—giving operators the right to offer the channel for three or so years without its local competition getting it as well. On top of that, the new channel would help its partners by offering added content for its interactive services and its stars to help market the service. It would also grant its distribution partners the use of its movies for mobile devices and might even share the revenues from movies that the channel would sell online or through services such as iTunes. Under their Showtime arrangement, the three studios were barred from selling their movies online when they were also being shown by the pay-TV channel, which has rights to the movies for an 18 month "window" that generally begins six months after the movies are first sold as DVDs.

It's easy to see why the studios want the cable channel. For starters, they get to cut out their current pay-TV middleman. Under their arrangement, the three studios each owns roughly 29% of the venture, with Paramount's parent Viacom getting an added 10% stake as compensation for using its MTV Networks apparatus to help market and provide other support for the channel. The studios also believe they would do a better job of marketing the flicks, which often aren't shown by the pay channels for weeks or months after they are first available to the channel, they say. To help make the channel "fresher," Greenberg says the studios will also make the movies available to their own channel four months after its available on DVD, about two months earlier than they were giving it to Showtime.

Original Programming

On top of that, the three studios intend to create TV programs for their new channel. Lionsgate, for instance, makes Weeds for Showtime and Mad Men for AMC, MGM made Stargate Atlantis, which airs on the Sci Fi Channel, while Paramount studio chief Brad Grey was executive producer for HBO's show The Sopranos.

The question is whether folks will pay up for more movies, even if they are the likes of MGM's iconic James Bond series or the latest Transformer from Paramount, when movies are available 24/7 from just about every cable channel on the dial. "I just don't see the need for another channel," says analyst Derek Baine, who follows cable channels for financial research firm SNL Kagan. Adds DirecTV Executive Vice-President Derek Chang: "We're always in discussions with potential partners. But we have to make sure that there's interest among our subscribers at a price that works for us."

As for Comcast, it seems happy to sit this one out. That, of course, could be a negotiating ploy. Still, the three studios, which have committed a total of around $100 million to launch the channel, don't have to have a deal in place for some months to make their Fall 2009 launch deadline. There's plenty of time for the negotiating mating dance for which cable has become famous. With such hot channels as AMC only getting around 23¢ a month from operators, according to Kagan, Comcast and others will no doubt pressure the new channel to lower its $1 a month asking price. Then again, the studios might just find a telco eager to pay up to break Comcast's stranglehold. It oughta be a movie.

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