Cable networks look to inhouse film

HBO, Starz, and Showtime hope to boost profit

In-house theatrical movies have become all the rage at HBO, Starz and Showtime.

All three networks are counting on these theatricals to strengthen an overall pay TV business that has pretty much stopped adding new subscribers.

“To keep their profits growing, the networks have to move into new areas,” cable analyst Larry Gerbrandt says, and one of them is producing — and owning — their own theatrical movies.

Each network has its own, unique take on the making of movies.

  • HBO Films is a thriving operation that actually produces more movies for world premiere on the network than for Picturehouse, its direct pipeline to the theaters.

  • Starz’s owner John Malone created theatrical movie company Overture Films earlier this year, hiring Chris McGurk, former head of MGM, to run it. Armed with a $225 million line of credit from Morgan Stanley, McGurk staffed up fast, and six movies are already in various stages of production, featuring such actors as Charlize Theron, Al Pacino, Queen Latifah, Robert DeNiro, Katie Holmes, Dustin Hoffman and Don Cheadle.

  • The network that may end up needing in-house theatricals the most, Showtime, is still waiting for CBS Feature Films to bring in a CEO five months after Leslie Moonves, president and CEO of the CBS Corp., Showtime’s parent, hired the former Paramount Pictures exec VP Bruce Tobey as chief operating officer. Without an experienced CEO calling the shots, CBS Feature Films has yet to buy or commission even one theatrical.

While the game plan of Overture and CBS Features is to get their movies into theaters first, HBO Films targets the network first, engineering such premieres as the 12-hour, $125 million World War II epic “Band of Brothers”; the elaborate biopic “The Life & Death of Peter Sellers,” featuring Geoffrey Rush in the title role; and a four-hour costume picture starring Helen Mirren as “Elizabeth I.”

But the siren song of theatrical release has lured HBO Films into producing pictures like “American Splendor” and “Maria Full of Grace,” which became such festival darlings that HBO’s sister company Fine Line Films catapulted them into the multiplexes well in advance of their debut on HBO.

New Line ended up scuttling Fine Line in favor of going into partnership with HBO to create Picturehouse in 2005, run by the veteran Bob Berney, which has distributed four low-budgeted movies from HBO Films since then: “Last Days,” “The Nororious Bettie Page,” “Starter for 10” and “Rocket Science.”

At Starz’s Overture, the one title of its six projects likely to hit the cineplexes first is “Mad Money,” a caper movie with Latifah, Holmes and Diane Keaton. The release is slated for the first quarter. “Mad Money” and the five others will eventually make their way to Starz in the pay TV window about 10 months after their theatrical release.

But Bob Clasen, chairman and CEO of Starz, stresses that Overture is a full-fledged theatrical company; the pics will debut in theaters, and the studio will create a library by owning the backend rights.

The backend that clamors most for Overture’s attention is Starz, bolstered by the horde of multiplex premium channels it has created with its Encore sibling. But Clasen says Starz’s parent will control all of the aftermarket rights, including DVD, pay per view, video iTunes and other electronic sellthroughs, basic cable and TV syndication.

While Overture is supervising its own theatrical distribution domestically, the company has hired Paramount Vantage to handle Overture product outside the U.S. Clasen says his aim is to keep production costs at a relatively modest average of $15 million a picture.

CBS Feature Films is behind the curve, says Paul Vogel, head of Vogel Capital Management, because “its timing is bad. A startup company like CBS Features will have trouble attracting a talented executive because the credit markets have tightened and the unions are threatening a strike.”

Overall, Moonves has said that his goal is to produce five or so movies a year budgeted at between $10 million and $40 million apiece, covering up to half of the production cost through Showtime’s license fee.

Showtime’s participation is the key because the network’s theatrical-output deal with Paramount Pictures expires at the end of the year, and its outputs with MGM and Lionsgate run out in December 2008.

Matt Blank, chairman and CEO of Showtime Networks, has said in the past that he’d be perfectly willing to scrap one or more of his studio deals and put that considerable amount of money (from $100 million to $150 million a year for each studio, depending on overall box-office performance) into original scripted series.

In this regard, Showtime is contrarian. HBO recently renewed its output deals with Twentieth Century Fox and Universal to supplement its previously negotiated contracts with Warner Bros., DreamWorks and New Line. All of the these deals are long-term, running well into the next decade.

Starz has theatrical outputs with Walt Disney and all of its theatrical distribution companies, including Miramax Films, and with Sony’s Columbia Pictures and divisions like Screen Gems. By the end of the year, Starz expects to renew these deals through 2012 (Disney) and 2013 (Sony).

One question raised by in-house theatricals may be how these movies end up affecting the networks’ bottom line, particularly if most of them flop at the box office. Showtime, with $306 million in cash flow in 2006, and Starz, with $186 million, are both profitable, according to SNL Kagan, but HBO is super-profitable, harvesting $1.27 billion in cash flow last year.

As Jimmy Schaeffler, chairman of the Carmel Group, puts it, “HBO is still the 800-pound gorilla.”

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