Company claims online sales violates contract

John Malone’s Starz Entertainment has filed suit against the Walt Disney Co., claiming that Disney’s sale of its movies on iTunes and Walmart.com violates the studio’s exclusive pay TV contract with Starz.

Starz Entertainment chairman-CEO Bob Clasen said, “I see a pattern here of Disney’s taking advantage of a big opportunity and going ahead in breach of our agreement.”

The pattern Clasen refers to goes back three years to when Starz sued Disney for funneling its theatricals to the Disney-owned MovieBeam, a subscription video-on-demand platform. The lawsuit went away when MovieBeam piled up big losses and folded.

Clasen said Starz was forced to take action Thursday when Disney did not respond meaningfully to “the settlement proposals we sent them.”

In a statement, Disney’s Buena Vista TV distribution arm said, “Starz misreads its agreement” and its claim is without merit. “BVT retained and has the right to sell its motion pictures in a wide range of mediums.”

According to a Starz spokesman, Disney is publicly boasting that it will rack up $50 million-$70 million this year from the electronic sale of movies through iTunes. In its claim for damages, Starz asks Disney to turn over all of the profits it has pocketed from these electronic movie sales.

Starz is particularly worried by Apple TV, which the suit calls “a small, inexpensive device that wirelessly transmits to the consumer’s television the movies and TV shows electronically downloaded into the consumer iTunes library.”

Apple began shipping Apple TV units on Tuesday.

In the suit, Starz says it has ponied up more than a billion dollars to Disney since the two parties first signed a contract for pay TV exclusivity in 1993. The companies renewed the agreement in 1999 and, for a three-year term, in 2005. Disney has an option to engineer another three-year renewal in 2008.

Starz interprets the contract as prohibiting Disney from selling any of its theatricals on the Internet until about 28 months after the movie makes its debut in U.S. multiplexes. That exclusive license period covers the 10 months before Starz takes title to the movie and the 18 months during which the pay TV exclusivity holds sway. Disney’s offering of pay-per-view movies on the Internet is not addressed in the lawsuit.

Clasen acknowledges that Starz was not able to get restrictive language in the contract with its other leading supplier of theatricals, Sony Pictures Entertainment, which sells movies for electronic downloading on a number of Web sites, including Walmart.com.

Despite the lawsuit, Starz’s dependence on theatrical pics is reflected in a Clasen statement from the press release: “Disney has been a great partner. We hope to continue our relationship.”

Even if Disney becomes infuriated by the lawsuit, Starz is confident the studio won’t walk away from renewing its output deal in 2008 because it has nowhere else to go in the pay TV window.

HBO and Showtime have both said they’re not in the market for any more theatrical outputs. HBO is meeting its theatrical needs through deals with Warner Bros., 20th Century Fox and Universal, among others. Showtime actually may not renew one or more of its existing outputs with Paramount, MGM and Lionsgate because it’s planning for fewer theatricals as it plans for original series and new movies through its CBS parent.

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