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Studios fret over online crack in cable window

Increased web exposure could cost billions

Shared windows may be a better basic fit

The majors have been worrying for a long time about flat domestic box office and plummeting DVD sales, but there’s a newer area of big concern: the coin from the lucrative basic cable window. Increased online exposure for film product — via Netflix, iTunes, Vudu and the proprietary site of premium cablers, such as HBO Go — could cause basic nets like FX, TNT, Comedy Central and others to cut back on acquisitions. And billions of dollars are at stake.

Time Warner corporate chief Jeffrey Bewkes says his conglom’s TNT and TBS would reduce purchases of some theatricals, though features would still remain a force. “The big movie packages, particularly really expensive, giant movies, are a little weaker because they are getting seen so many places,” Bewkes told a Sept. 22 investor conference. He added that the company will fine-tune how it acquires films, focusing more on “certain evergreen titles and genres that are essentially in the sweet spot.”

Even such mildly discouraging words have seldom been heard in the two decades that theatricals became ever-increasing mainstays in the schedules of many basic networks. Bewkes’ comments are particularly significant because his company is both a buyer and seller of movies.

For the congloms’ studio arms, revenue from cable has long been critical to their economics — with premium subscription services and ad-supported basic channels both playing a major role.

Every film that’s part of a pay cable output deal generates a wad of cash in the first premium window. And while payouts may be reduced for a film’s later, basic cable window, basic cable networks actually spend more overall dollars for film product than do the premium nets, because there are so many more basic channels with so many more slots to program. Plus, basic cable airs the full gamut of movies, ranging from recent high-budget blockbusters all the way to films that have finished their first-cycle telecasts — so-called library or catalog titles — which appear far less often on premium services.

According to SNL Kagan, basic cable channels in the U.S. will fork over more than $2.8 billion licensing theatricals in 2011, compared with the just-under $2 billion spent by premium pay channels for theatricals.

A lot of the movie spending is concentrated in a dozen basic channels such as FX, Syfy, TBS, Turner Classic Movies and Comedy Central. These heavy users of movies are critical to the economics of the basic window. (Theatrical slots have even appeared on basic networks such as Animal Planet and the Weather Channel in recent years, but those dedicated movie nights didn’t stick.)

Addressing Bewkes’ statement, Deana Myers, senior analyst at SNL Kagan Research, says, “If one major buying basic cable network says it’s not going to acquire as many films, that’s going to have an impact. Pricing will come down if you have fewer buyers in the marketplace. Then it depends if other networks step in to buy films.”

According to one school of thought, however theatricals won’t suffer much loss in basic cable, because their star power makes them easy to promote and repeat. In the multichannel cable dial, big stars and glossy production values prompt America’s nomadic channel surfers to pause. Even better — and perhaps flying in the face of the idea of online viewing devaluing a film — familiarity has its own cache.

“Basic cable networks deliver reliable ratings by way of quality brand-centric content that people love to watch over and over,” says Ken Werner, president of Warner Bros. domestic television distribution. “It’s like spending time with an old friend.”

And while it can be argued that theatricals increasingly are taking a back seat due to original cable series gobbling up time periods and program budgets, first-run cable series remain an expensive proposition, especially if they flop. On the other hand, movies are usually licensed after their theatrical premiere, when they are known quantities, with predictable pricing tied to box office, and are generally much cheaper than original fare and provide high-quality fodder to fill cablers’ vast 24-hour schedules.

Jim Packer, Lionsgate president of worldwide TV and digital distribution, adds yet another positive: “Films not only rate well, but will provide each network with a promotional vehicle for their originals.”

Still, if online viewing adversely impacts ratings for a film on cable, the result could hit basic cablers harder than the premium outlets, simply due to their different business models. The top-grossing theatricals command about the same price from premium pay outlets like HBO and Starz as they do from basic, which these days is around $25 million per title. But basic cablers are partly ad-supported, — as opposed to the ad-free, subscription premium networks — which means that any reduction in ratings would cause a similar reduction in revenue.

And basic cablers buy films differently that the premium channels do. Premium nets lock in all the films of a major studio for multiple years in output deals, committing to most films sight unseen. But basic networks generally buy only a handful at a time, making their deals only after films reach the theatrical window and their box office is known. Perhaps some basic cablers will want to look into online viewing trends for specific movies as well.

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