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Channel X: MGM Paramount and Lions Gate run at Cable

channel xAfter the compensation information revealed in Friday’s proxy filings, Monday morning coffee talk and water cooler conversations might well have been peppered with gossip about hefty executive pay packages at Viacom in 2007. Instead, an oddly timed Sunday announcement marrying Paramount, MGM and Lions Gate in joint venture to launch a cable TV channel of their own played the trump card.  The bigger headline than pay: New Channel coming 2009, news at 11.

So far, much of the detail, including things like whether the channel will be pay or basic cable, remains unclear.  A few key facts were revealed in the press materials headlined by studio toppers from MGM, Lions Gate and Paramount:

First, the unnamed studio (“Studio X”) will focus on a combination of new and classic feature film releases.  These include the companies’ massive back catalogs of content (MGM has more than 4,100 films and 10hrs of Television programming, Paramount more than 3,500 feature films and Lions Gate more than 12,000 total titles).   Newer films will be included based on release date.  For Paramount or Paramount Vantage, that means titles theatrically released after January 1, 2008.  For MGM, United Artists and Lions Gate, it means all titles released after January 1, 2009 will apply.

In addition to feature length films, and back catalog, the joint venture will also consider airing original content from any of the five studios involved. (Currently, Lions Gate is the production company behind Weeds, one of Showtime’s current hits.  They also produce AMC’s new show, Mad Men.)  In the future, first offer of new programs could go to Channel X.

Which Cable and Teleco carriers will host the channel won’t be disclosed for at least a week or two.  The terms are still being discussed.  Wide release is expected.

The equity distribution between the three principal companies is also a secret, for now.  Speculation is that it will run something like 30 percent to MGM and Lions Gate, and 40 percent to Viacom.  The added ownership stake given to Viacom will compensate for increased promotional expense the company will take on.  It will also provide consideration for the contributions their more than 100 cable channels bring to the package. (That includes intangibles like their experience from running those channels and how it might help with distribution agreements and promotion).

Regarding an online distribution platform, little has been said.  It’s expected, however, that at least on some scale, the joint venture will explore on-demand Internet offerings.  In an interview given with PaidContent.Org, Viacom’s CEO Philippe Dauman said, “This will be oriented toward the consumer.  It will also meet the needs of varying distributors and take advantage of online distribution… innovating both in presenting the content and distributing it. “He went on to point out that traditional deals put a lot of blockades up in the way of what could or couldn’t be done (which is why a channel like HBO doesn’t offer much in the way of on-demand programming).  In the new joint venture, by having their own channel, the inference is, the companies will be better equipped to explore with far less interference.

The new Channel X will reportedly be run out of New York and staffed with its own management.  A CEO hasn’t been named but insiders say that a candidate will be named shortly.

The channel, which will compete against Showtime, HBO, Starz (Liberty Media) and cable channels like News Corp’s F/X is scheduled, tentatively, for a 2009 launch date. 

 In press comments, Viacom’s Dauman has said he thinks the “venture has the potential to be a ‘game changer’ for the industry.”    

His forecast may or may not prove accurate.  Regardless, a number of factors conspired to make a deal like this a near necessity, even amidst its high risks:

•• Changing Dynamics in Cable Programming and Movie Distribution
In recent years, basic cable networks have become more and more aggressive in bidding for exclusive broadcast rights to air feature films.  At the same time, while those premiums have gone up somewhat, the pay channels that used to count feature films as their bread and butter have shifted to put more emphasis original programming.  You can call it the Soprano Effect, or the Sex in the City Shadow.   Whatever the name, it’s the recognition that serial programming incapable of airing on broadcast TV (for language, nudity, violence or other reasons) has far more earning  (and drawing) power over time, than replaying a movie.  A program like the Soprano’s or Weeds builds the brand of its exclusive distributor.  HBO became known as the Soprano’s home.  Replaying a James Bond movie doesn’t have the same impact.  Even a brand new major box office hit, is a limited return by comparison because it’s already been diluted by the mix of theatrical and pay per view release (not to mention the DVD).

Drawn to conclusions, the consequence of the Soprano Effect is that movie rights are worth less to the cable channels.  As Showtime’s CEO  Matthew Blank told the LA Times after the announcement of this deal, “We would rather invest the money in the original productions that have been so successful” rather than pay the premiums the studios wanted to receive for their content.

•• Changing Consumer Behaviors
If the third party distributors changing priorities represent one angle, changes in the consumer landscape represent another that has direct correlation.  Today’s consumer is inundated with leisure time options.  As always, we have broadcast TV. Then, just looking at video choices- there are pay per view programs, DVDs, and Internet on-demand services.   Mix in video games, and non-video entertainment and our dance cards get fuller and fuller. We have too many choices.

On top of that, there is the impact of Digital Video Recorders to consider.  A few years ago, we watched what was on when it was on.  Today, we can build our own mini-library of must see TV, stockpiling shows that don’t match our schedule for times more suited.

These choices of what and when combine to make cable aired movies less significant than they once were.    For content makers, that means there is likely to be more dependence on widely spread out distribution partners and more experimentation.  That’s dilutive on brand.  It also introduces the burden of managing many partnerships.

Owning a distribution network of your own, if you’re a content owner, gives  you leeway.  It allows the option of controlling which content becomes ubiquitous and which, exclusive.  In a media age, that’s a kernel of power that may prove valuable.

•• Movie Finance Can Be A Roller Coaster
Movie making is an expensive business.  Like venture investments and other high risk endeavors, for each success, there are failures that didn’t earn back their development expense.   The winners, or the longer tail of the losing ventures, need to pick up the slack.

Today, as issues with financial services firms continue to spread out like spider cracks in glass, there is potential for capital previously allocated for investment in movie production to be reduced.   Hedge funds, for example, aren’t just investing in emerging markets, or derivatives strategies. Some fund films. Some large financial institutions are also significant contributors to film finance.

Translated to movie makers, having the added income of a subscription TV channel (or the ad revenue of a basic cable network), brings a potentially offsetting revenue stream that didn’t exist before.   If it’s sizable enough, it could exceed the money earned from licensing to a pay channel in the past.   It also allows an opportunity for less desirable back catalog to get premium airtime (and generate revenue via the long-tail concept that embodies)

•• Release Windows
A fourth but still relevant factor is changing practices in theatrical and DVD release windows, the prescribed time gaps between which films are aired on different media.  Once upon a time, these windows were sacred.  A theatrical release was followed by a pay per view window, followed by a DVD, followed by pay channels.

Today, in an effort to milk extra mileage out of early marketing (to insure a movie remains prescient in memory) ,  to combat potential piracy, or even to gain leverage over peers, these windows are undergoing experimental changes.  That might mean an iTunes digital sale on the same day as a DVD initial release (Lions Gate just tried this).  It might mean a DVD issued just a week after the film exits a theater.

Nobody knows for sure which of these changes will remain, or how they’ll influence the marketplace in the longer term.  By controlling a primary distribution channel directly the studios behind the new Channel X will gain some ability to better manage their content in this environment.

•• The Result
Add all this up and Channel X almost seems a foregone conclusion.  It might have even happened sooner if the studios involved hadn’t already been locked in distribution agreements.  (Paramount’s expired this year. The others expire next).   It’s the studios effort to implement their own concept of Manifest Destiny.   It’s their own pre-emptive attack.


The Side Bar
An interesting side channel to this will showcase how it plays out in the context of CBS and Viacom’s close sibling relationship.  Only a few years ago, the two companies were one in the same.  When they separated in 2005, CBS took with it the Showtime cable channel. Viacom, held on to Paramount and its MTV properties.   Summer Redstone remained Executive Chairman and controlling shareholder at both.

The new Joint Venture will pit his companies against the other.  It’s potentially like taking two brothers and throwing them into a UFC cage to compete against each other. One or both is bound to come out at least a little bloodied.

Redstone, in his statements doesn’t seem concerned.   “Viacom and CBS have the right to pursue their own strategic objectives in the best interests of their individual shareholders,” he says.  Competition between them, he added “hones their skills and their productivity.” 

That may prove true if CBS’s Showtime continues to focus on original works and the new Channel X is all about feature films.   But if the joint venture takes on original works, as currently reported, it’s a head to head battle.  It could get ugly. T hen again, CBS Films already encroached on Paramount (and Viacom’s) film territory. So, the fight was already starting. Maybe it’ll be a friendly sibling rivalry. Maybe a slug fest. Too early to tell.


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