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Movie Studios to Pull the Plug on Showtime: Financial News - Yahoo! Finance


BySteve Birenberg, RealMoney Contributor


A planned fourth pay-TV channel could leave CBS' Showtime without movies.
Viacom, Lions Gate Entertainment and MGM announced that they will no longer sell their movies to Showtime and instead will launch a new, fourth pay-TV channel.


The announcement leaves Showtime, the current owner of rights to films from Viacom, Lions Gate and MGM, without the rights to output from any of the major movie studios.

This move would affect many companies in the entertainment industry, including the owners of the current pay-TV services, Time Warner (HBO and Cinemax) and Liberty Entertainment (Starz and Encore). Time Warner would also be affected at the studio level via its ownership of Warner Brothers.

Other movie studios likely to be affected include Universal (owned by GE), Sony Pictures, 20th Century Fox (owned by News Corp. and Disney. Cable, satellite and telecom companies that distribute the pay-TV channels would also feel effects from the new venture.

Pay TV is a big business, but the financial impact on any of the companies involved in the industry is not likely to significantly affect their stock prices. Pay TV is a modest revenue stream for both studios and pay-TV network owners. Nevertheless, there are positive and negative implications for the companies involved.

Showtime is going to feel the largest impact. According to Jessica Reif Cohen of Merrill Lynch, Showtime represented 8% of revenue and 12% of EBITDA for CBS in 2007. As a result of this new venture, Showtime would not have a supply deal with any major film studio.

Given that pay TV does not get new movies until well after the films have been available for sale or rent (usually six months), I have long wondered how valuable the films are in terms of gaining and retaining subscribers. I suspect that films play an important psychological role, in that subscribers like the idea that they will be able to browse their pay-TV channels and find something to watch. On this basis, the loss of new movies will hurt Showtime's subscriber retention efforts.

Picking Up the Slack

Fortunately, Showtime has been on a roll in terms of original series production, generating buzz not far from what HBO used to get. In the near term, Showtime's margins will probably rise, as movie rights are very expensive. That would be a good thing for CBS, if subscriber numbers can be maintained.

Another possible risk to CBS is that the recent decision to start its own movie studio will now lead to a much greater commitment to movie production, a difficult and volatile business. Overall, this news is negative for CBS, because Showtime has been one of the few growing businesses the company operates.

For Viacom and Lions Gate, the deal also offers mixed news. Even at a lower rights fee, the companies would be forgoing a very profitable revenue stream in exchange for the commitment of potentially significant capital to launch a new channel. Equity ownership can offset capital commitments and operating losses. This is especially true if the model can be tweaked by shortening the run-up to pay TV and developing digital opportunities via video-on-demand, streaming and other digital distribution channels.

But I remain skeptical that there is sufficient consumer demand to support a fourth pay-TV network. Expect to hear a lot from Viacom, Lions Gate and MGM about "reinventing the pay-TV model in a digital world."

For the other pay-TV networks, a new entrant in the business would be a negative, as the potential subscriber base would fragment. On the other hand, a potential positive is that as other studio output deals expire, there will now be only two bidders for their content, since it seems unlikely other studios' parent companies would support the new competitor. This might lower pricing on future rights deals, which were expected to trend significantly lower anyhow.

The other major studios, Sony, Universal, Fox and Disney, will be in a worse position to negotiate new output deals, as there will now be more supply of films than demand, with just two pay-TV networks bidding for product. Many rights deals are expiring in the near future, and substantial cost savings were already expected by the networks. I am not sure how much analysts have adjusted their operating profit estimates to account for lower fees in the new rights deals, but I suspect these estimates need to come down further now.


Cable in the Cross-Hairs

The final impact from this deal is on cable, satellite and telco companies, which carry and sell the pay-TV networks. Cable has modest capacity constraints and probably isn't too happy about having to carry another network. In fact, according to Tuesday's Wall Street Journal, cable is leading a pushback against the creation of the new network with threats to not carry it.

However, cable's big competitive advantage over satellite is video-on-demand, which is likely to be a major emphasis of the new channel. Furthermore, satellite companies (DirecTV and Dish Network) and telco TV (AT&T and Verizon) are not constrained by capacity and might use the new network as a weapon in the battle for subscribers. Thus, I expect the channel to gain carriage despite the rhetoric.

Cable, satellite and telecom companies would the least affected by the new channel, but to the extent they are, I would put cable at a slight disadvantage.