Studios seek new model for output deals

Pay cablers rely on originals

With DreamWorks Animation signing an exclusive streaming deal with Netflix — two years before the studio’s output deal with HBO is due to end — the biz got a glimpse Monday into just how much traditional film-TV output pacts are evolving.

Simply put, pay cablers just aren’t as interested in movies as they used to be. Pay-TV channels are shifting their attention away from expensive theatrical output deals with the studios and reaping the benefits of original series that significantly boost viewership and revenues.

Netflix’s deal to stream DreamWorks toons like “Shrek” starts in 2013, around the time when Warner Bros. will start negotiating its own deal with HBO (see chart). While the latter deal is likely to be renewed given the companies’ shared corporate parentage, pacts with 20th Century Fox and Universal that account for blockbuster titles aren’t as precious to HBO as they were in the premium cabler’s formative years.

But if Netflix becomes the first of a new generation of digital buyers, the studios may be able to lessen the impact of pay-TV’s disinterest in their product. Indeed, DreamWorks Animation topper Jeffrey Katzenberg called the studio’s exclusive streaming deal with Netflix “game-changing.”

Still, neither DreamWorks Animation nor Relativity Media, which became Netflix’s first-ever pact in the pay-TV window last July, has a volume of titles on par with the box office clout delivered by the major studios.

Moreover, Netflix’s stock plunge may make theatrical output deals too rich to afford, contends Tony Wible, analyst with Janney Montgomery Scott.

“The major studio pay TV deals are locked up until 2015-16, which will keep Netflix from winning them until then,” he wrote in a research note Monday. “Netflix’s ability to fund the acquisition of these rights will be a big question.”

Given that the typical theatrical deal with a major studio runs in the neighborhood of $200 million per year, a pay net has to consider whether that chunk of change might better spent taking a few swings at originals, like creating the next “True Blood.”

“We can actually drop a studio and fill in that space with more original programming or we can opt to keep that studio,” said HBO CEO Bill Nelson at an investors conference in June.

HBO rival Showtime may be an even better example of the decreasing dependence on output deals. The CBS Corp.-owned property shed deals with Paramount Pictures, MGM and Lionsgate, leading to the creation of a fourth pay-TV net, Epix, while ramping up on original programming that helped drive subscription growth up 2.5 million over the past year.

CBS Corp. CEO Leslie Moonves made clear what he felt was the secret to Showtime’s success last week at the Goldman Sachs Communicopia conference. “The key to success for Showtime is original programming, not in paying these large amounts to the studios for motion pictures,” he said.

No wonder Starz has spent the last few years building its own stable of original series.

Films also still make up 90% of the average monthly schedules on Epix and Starz, according to Nomura Equity Research, but they’re declining on Showtime, currently at 68%, and HBO, currently at 56%. During primetime hours, movies matter even less, representing 39% and 38% of programming for HBO and Showtime, respectively.

Original series also make more sense than theatricals because of their value beyond the linear schedule. Content ownership allows pay nets to monetize in other revenue streams seen as increasing important to supplementing subscription dollars, ranging from syndication to DVD.

Netflix is estimated to have paid roughly $30 million per DWA title, perhaps as much as double the per-title fee HBO paid, according to Lazard Capital Markets.

The Los Gatos, Calif.-based video company may not be the only new bidder capable of shelling out hundreds of millions of dollars to lock down film deals. Walmart-owned Vudu, Dish’s Blockbuster, Hulu and Best Buy’s CinemaNow all have deep pockets capable of funding film library acquisitions as more consumers rent or buy movies online and through streaming services. And Amazon.com this week secured 2,000 films and TV episodes from 20th Century Fox for its Amazon Prime Instant Video program.

There’s talk of the multiplicity of potential new buyers triggering a shift from the pay-TV window’s traditional reliance on exclusive output deals to non-exclusivity.

A Nomura report on the sector back in June projected such a shift, as well as an increase in the value of such deals.

“As the major studios’ deals start to expire, the idea of exclusivity to one network will be weighed against going non-exclusive for a higher total payment per film. … The cost for film studio deals will likely increase with Netflix and other potential online competitors entering the bidding process.”

That said, the pay nets aren’t forgoing output deals entirely. HBO recently bid successfully for pics from Summit Entertainment, whose previous distribution deal with Showtime won’t end for another year. For HBO, the exit of DreamWorks and arrival of Summit reflects the cabler’s preference for more hours of live action over just a few titles in the animation genre, which is already pretty well represented between Warner Bros. (“Happy Feet”) and Fox (“Ice Age”).