Revenues increase despite recessionary climate

In a challenging economic environment, Starz has become a solid performer for Liberty Media, whose holdings include DirecTV, Overture Films, Anchor Bay and Sirius XM radio.

Revenues are up, subscriptions are growing, and original programming is multiplying.

“We are in execution mode,” says Starz LLC chairman and CEO Robert Clasen of the company’s strategy going forward. “You will see more original programming over the next few years, and we’ve locked into our theatricals through next year.”

While Clasen’s quick to point out that no company can claim immunity from the current economic downturn, he does believe entertainment appears to be bucking the recession trend. It’s an opinion shared by several media analysts.

“People are watching more television, renting DVDs and going to the movies,” says Robert Greenfield, managing director and media analyst for Pali Research. “There’s no doubt that entertainment benefits in a recession.”

The fourth-quarter results for Starz Entertainment appear to bolster the theory. Subscriptions increased by 1.4 million in 2008, and 300,000 new subscribers were added in the fourth quarter, primarily through new video services from phone companies. In 2008, Starz Entertainment revenue increased 8% in the fourth quarter to $285 million and 4% for the year to $1.11 billion.

In a fourth-quarter earnings conference call this Feb. 25, Greg Maffei, president and CEO of Liberty Media Corp., said 2008 was a volatile year for Liberty, yet “Starz Entertainment performs well in a challenging environment, seemingly affirming the thesis that subscription businesses are more recession resistant than some of our other businesses.”

On the ratings front, Starz finished the year tied with HBO for ninth place in total day ratings among the 82 networks rated by Nielsen in television households with all premium services.

HBO and Showtime are destination services, but most cable and satellite subscribers don’t sign up just for Starz alone. Starz is packaged with other premium channels, so it tends to draw a more affluent audience paying for full cable packages. The core audience for Starz is in the 35-54 demo, evenly split between men and women with incomes averaging about $75,000 a year.

Currently, there has not been a significant drop-off in cable subscriptions, with all premium channels growing.

“Although the environment could change instantly, the signs are not there yet for a slowdown,” says Deana Myers, senior analyst at SNL Kagan. “(Cable) is one of the cheaper forms of entertainment and I don’t think people want to give that up. Plus, with bundled services of Internet, phone and cable, it’s a real value now.”

As a premium pay cable channel, Starz hasn’t been as susceptible to the volatility of the ad market that has plagued commercial television. The subscription channels don’t have to retrench when ads pull away from their programs.

“When you take the ad business out, it’s a relatively predictable form of income, as long as you maintain quality content,” says Bill Myers, president and chief operating officer of Starz Entertainment and Starz Media. “So you are comfortable in making long-term investments in original programming. One of the attractive things of being (a subscription-based channel) is that you can nurture (series) along.”

In addition to ordering a second season of the drama “Crash” and a third for comedy “Head Case,” Starz is moving ahead with a second half-hour comedy, “Party Down,” produced by “Veronica Mars” creator Rob Thomas about struggling actors employed by a Los Angeles-based catering company, and the hour-long drama “Spartacus” from producers Sam Raimi and Rob Tapert. “Spartacus” will be the first dramatic series produced by Starz Media.

“This lineup of exclusive originals will enable us to differentiate our network, to create a library of programming that we can air on the Starz channels and to monetize the productions by selling the programming in homevideo, and domestic and international syndication,” Clasen says. “Liberty Media sees the importance of having that unique story to sell to the distributors, because the distributors are our real customers.”

Analyst Myers says adding original programming is essential to the growth of cable networks, which once provided only theatrical movies.

“Movies are becoming more readily available through DVDs and online, so they’re not as important to customers as they once were,” she says. “It’s important to have a strong brand to draw in regular viewership, to have series where you can draw people in week after week.”

Last year was the first in which Liberty Media was able to see the results of the new strategy of audience aggregation. Films were released theatrically by Overture before going to homevideo through Anchor Bay, followed by an airing on the Starz channels before being sold to pay-per-view and television syndication through inhouse sales teams.

“This enables us to achieve two objectives: first, to monetize the programming across multiple platforms using our own inhouse distribution and sales units, and second, to build a library of films and original series that we can use in a variety of ways for as long as they will draw audiences,” Clasen says. “(Starz was) later to the (originals) game than our competitors, but that doesn’t bother us. It was the right strategy for us.”

BY THE NUMBERS

Financials

$1.11B Revenue (2008)

$301M Operating cash flow (2008)

Subscribers (Through december 2008)

$17.7M Starz

$31.7M Encore

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