Showtime-Viacom split feeds drama

Plans for 4th pay cable channel in works

Tales of boardroom skirmishes between Viacom chief Philippe Dauman and CBS honcho Leslie Moonves have added some edgy drama to the advent of a new pay TV network.

But, oblivious to the high-level corporate infighting, cable operators are trying to figure out whether they should spring for the proposed Viacom-driven channel, stocked with movies from Paramount, MGM and Lionsgate.

Many of the potential buyers know that the only reason the still-unnamed network has started delivering sales pitches is that Moonves’ Showtime walked away from renewing the theatrical-movie output of the three studios, led by Dauman’s Paramount.

The studios’ Plan B faltered when they got no encouragement from HBO and Starz, Showtime’s pay TV rivals — neither of which was eager to take on another theatrical output.

The pay TV networks agree that theatrical movies are becoming less important as more people buy the films in DVD, stream them on their computers and download them to portable media players, including cell phones and video iPods. All of these uses take place before the movie even gets to HBO, Starz and Showtime.

So now the movie companies have decided to do it the hard way — creating a fourth pay service — in a bid to prevent the loss of an average pay TV license fee that amounts to about $6 million a title.

The marketplace reaction to the fourth feevee was predictable: Who needs it?

“On its merits,” says Rob Stengel, cable consultant and a principal of the Boston-based Continental Consulting Group, “I don’t think you’ll be able to find any distributors jumping up and down with eagerness to get their hands on another pay TV network.”

Cable ops and satellite distributors “are crapping all over the idea in public,” says a Viacom spokesman, “but privately, the early discussions are promising.”

One prominent skeptic, Lindsay Gardner, a partner in Mediatech Capital Partners and former head of affiliate sales for the Fox Cable Networks, says the most powerful evidence that the new network may not have clear sailing is that there wasn’t one distribution deal in the original press release put forward on April 20.

“In the last 10 years,” Gardner says, “I can’t think of one single announcement of a new cable channel that didn’t include the names of a few distributors to show that the network had some wind at its back.” The Viacom spokesman says the channel will soon be ready to publish the identity of a few distribs who plan to carry it when the service opens for business in the fall of 2009.

With the approval of Lionsgate, MGM and its sister company United Artists, Viacom has handed MTV Networks, a Viacom division, the responsibility of getting cable ops and satcasters to buy the service.

That’s a plus, says Mike Egan, a principal in Renaissance Partners and a cable consultant, because the affil-sales arm of MTV “has the staff in place and the relationships” to buddy up to would-be buyers.

But Stengel says MTV is an expert in clearing ad-supported basic-cable networks, not pay services. He says that when Showtime and MTV were under the same Viacom umbrella before Sumner Redstone split the company into two parts late in 2005, Showtime had its own affil-sales operation that was kept apart from MTV’s.

Similarly, “HBO keeps its pay negotiations with cable operators separate from Turner Broadcasting,” an HBO sibling, which handles clearances for the ad-supported TNT, TBS, CNN, Cartoon Network and other basic-cable networks, according to Stengel.

Pay TV deals are complicated, says Gardner, but a premium network has one advantage for a cable op: “He doesn’t have to take it on faith that the network is delivering an audience.”

As Gardner puts it: “Every month, subscribers who pay an additional fee for a pay network deliver money that goes right to the operator’s P&L statement.”

And if the new channel can engineer a deal with one or both of the satcasters, DirecTV and Dish Network, cable ops may fall in line to stay competitive.

Some subscribers may be attracted to the high-octane titles the network will deploy in the pay window, including “Iron Man,” “Shutter Island,” “Valkyrie” and the latest “Star Trek” sequel. The channel is also promising to commission original scripted series and draw on a vast inventory of library titles.

A successful launch of the network could create a lucrative asset that would end up funneling a lot more money to each of the three studios than they could pocket from Showtime’s license fees, which, depending on the number of box office hits and misses, range between $75 million and $200 million a year.

Pay TV is a rewarding business, and HBO is in a class by itself, accumulating a cash flow of $1.27 billion last year, according to SNL Kagan. Since 2005, the cash flow of Showtime and Starz has risen nicely each year, and the projections show steady gains for the next four years. Showtime chalked up $334 million in cash flow in 2007 and Starz pulled in $259 million.

HBO and Starz won’t be affected by a possible fourth player in the pay TV arena for many years, because they’ve locked up their theatrical outputs well into the next decade.

But Hal Vogel, head of Vogel Capital Management, says if the new network gets off the ground, “there’s a risk that Showtime could get bumped by some cable operators” because it won’t have a regular supply of theatrical movies in the first pay window.

A Showtime spokesman says there are always theatrical movies not part of output deals that the network can pick up at reasonable prices, and it will also have access to any pics from nascent CBS Films. And the money Showtime will save by not laying out big bucks for theatrical outputs goes into the production of original series that are beginning to resonate with critics and the public, including “The Tudors,” “Dexter,” “Californication” and “Weeds.”

HBO has set the standard of originals success, harvesting big bucks selling the likes of “The Sopranos” and “Sex & the City” in ancillary markets.

And if any of Showtime’s inhouse series become big hits, Moonves’ company will reap the rewards from DVD sales and from TV distribution in international markets.

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