Starz Subscription Pay Television Features Output Deal - DRAFT - WikiLeaks
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DRAFT
Starz Subscription Pay Television Features
Output Deal
Presentation to the Group Executive Committee
January 16, 2013Executive Summary • SPE is seeking approval to extend the feature film output agreement in the US market with Starz for five additional slate years (2017-21) • The agreement provides an essential component for the financing of SPE’s feature films through the 2021 slate • SPE strongly recommends executing an agreement now when we have the greatest leverage over Starz. This leverage may dissipate if the negotiations are postponed • The five year term extension (2017-21) is estimated to generate an additional $1.3BN in license fees and bonus and presents the opportunity for significant additional compensation from Internet exploitation and the ability to carve-out certain titles • Starz also offers additional compensation in the near term (2014-16) (e.g., an increased bonus and Internet fees and the ability to carve-out titles ) that wouldn’t be offered by other partners • The value of the new Starz deal from 2014 – 2021 represents an improvement of $331M as compared to the license fees and bonus of the current Starz deal ($739M if an additional 25M Internet subscribers are assumed) • The Starz deal provides better flexibility for Sony content services than those offered by other providers in the market and the current2 Starz deal,
Background Considerations
• Premium Pay Television Output Deals
• Major motion picture studios rely on long-term feature film output licenses to
secure financing for film production
• Pay TV channels include Starz, HBO, Showtime and the relatively new
channel EPIX
• Internet-delivered subscription-video-on-demand (SVOD) services (e.g.,
Netflix, Amazon and Hulu) have also recently become potential buyers
• In 2012, Disney became the first major studio to enter into an output deal
with an exclusively Internet-delivered service (Netflix, starting with the 2016
slate)
• Existing SPE-Starz Output Deal
• SPE’s output partner was HBO prior to the 2005 slate
• SPE first closed an output deal with Starz in 2000, effective with the 2005-
10 slates This deal had an option for SPE to extend the deal for the 2011-13
slates
• In 2009, SPE negotiated an extension with Starz for the 2014-16 slates
NOTE: Feature film output deals are typically negotiated several years in advance
for financial planning of film slates and are long-term in nature 3Timing Considerations
• SPE now has leverage in the negotiation with Starz
• SPE deliberately waited until now to negotiate this deal
• Starz announced it will be ‘spun out’ as a separate company in early 2013
and needs to show investors it has secure access to movies
• Starz recently lost Disney films to Netflix starting in 2016
• Recently closed Pay TV deals between Fox and HBO; Universal and HBO;
Disney and Netflix; and EPIX and Netflix provide SPE significant leverage in
its negotiations
• This leverage may dissipate if SPE postpones negotiation of an extension
• SPE believes the leverage it currently enjoys may be reduced after the
Starz ‘spin-out’ (e.g., if Starz is acquired)
• Starz currently lacks a strong original programming slate. If Starz succeeds
in developing an original series hit (like HBO did with The Sopranos), it may
place a lower value on feature films
• Because of the favorable financial and other terms available at this time,
SPE strongly recommends closing a new deal through the 2021 slate
4Market Dynamics
• SPE Sought and Obtained Competing Bids
• During 2012, SPE actively discussed a potential output deal with every willing
partner in the market. Starz emerged as the strongest partner:
• Offered strongest rate-card in the market and an annual bonus
• Financially viable with long-term cable carriage
• Offered near-term modifications to existing deal that are favorable to SPE
• Reasonable rights requirements with potential Sony Service accommodations
• Offered strong rate-card but no bonus. Plus, a long payment plan for each license
• Financially uncertain prospects, if Sony were added to Disney as a Netflix output
partner. SPE believes Netflix’s subscriber base must grow above 40M HHs by 2017
(larger than any US pay service), or Netflix’s pricing must increase, or some
combination thereof in order for Netflix to afford output agreements with two major
studios
• Rights requirements: included a long (24 month) first pay license window that
creates negative downstream impact
• Submitted a late bid for Screen Gems films only. Competitive rate-card. No bonus
• Regarded as financially viable
• Rights requirements: believed to be comparable to Starz
• Did not submit a bid. HBO recently renewed with Universal
• HBO’s rights requirements are more restrictive than Starz’
• Other potential buyers (EPIX, HuluPlus, Amazon, Redbox, StreamPix, DirecTV,
Others Vutopia, SENI)
• None submitted bids or were committed to the feature film output licenses
5Summary of Key Changes
• Linear license fees for the 2017-21 slates are 35% ($56M/year) higher than
the 2014-16 license fees
• Increase the annual bonus from $40M to $46M (15%) beginning in Calendar
2014
• Eliminate the Internet subscriber caps in exchange for significant
uncapped Internet fees – e.g., $54M assuming 25M additional Internet subs
vs. $3M for current deal (assuming current $7.99 Netflix pricing and subs)
• Option to remove SPA titles from the deal and license them to a different
buyer instead of Starz
• Reduce minimum annual movie volume from 14 to 12
• Reduce maximum annual movie volume from 50 to 45 (starting with 2014
slate)
• Improve rights for Sony Services/offerings during the Starz term
6Sony Content Services
Improvements for Sony Services/Home Entertainment
• SVOD for Sony Services: Sony Internet-delivered Services may have
access to certain films on an SVOD basis earlier than before (as early as 2
years from theatrical release), between the two Starz windows
• Early EST for Sony Services: Sony Services may offer EST 30 days earlier
than standard date for up to 7 Pictures per year without restriction
• Theatrical Window Pay-Per-View/Transactional VOD: SPT may offer
Pictures during the Theatrical Window with greater pricing flexibility than
before to develop this new market
• Favorable Terms for Sony Services: A Sony service may carry the Starz
channels via the Internet on non-discriminatory terms compared to Starz’
other distribution partners (cable or Internet), subject to good faith agreement
with Starz
7Overall Deal Value
Existing Extension Output Deal:
($ in MMs) 2014 2015 2016 2017 2018 2019 2020 2021 Total
Output Deal *
• Improved linear rate
Fees $163 $163 $163 $163 $163 $163 $163 $163 $1,304 card effective in 2017
Starz Existing
Terms
Bonus $40 $40 $40 $40 $40 $40 $40 $40 $320 • Increased annual
Total $203 $203 $203 $203 $203 $203 $203 $203 $1,624
bonus from $40M to
Fees $163 $163 $163 $219 $219 $219 $219 $219 $1,586 $46M effective
Starz Proposed
Terms
Bonus $46 $46 $46 $46 $46 $46 $46 $46 $369 immediately
Total $209 $209 $209 $265 $265 $265 $265 $265 $1,955
Fees $0 $0 $0 $56 $56 $56 $56 $56 $282
Improvement
Bonus $6 $6 $6 $6 $6 $6 $6 $6 $49
/ Variance
Total $6 $6 $6 $63 $63 $63 $63 $63 $331
Additional Opportunity:
Potential Additional Internet Opportunity
Starz Existing OTT Upside** $3 $3 $3 $3 $3 $3 $3 $3 $24 • Additional Internet
Terms Total $3 $3 $3 $3 $3 $3 $3 $3 $24 fees apply if Starz
distributes over the
Starz Proposed OTT Upside** $54 $54 $54 $54 $54 $54 $54 $54 $432
Internet through an
Terms Total $54 $54 $54 $54 $54 $54 $54 $54 $432
over-the-top “OTT”
Improvement OTT Upside** $51 $51 $51 $51 $51 $51 $51 $51 $408 service (e.g., on
/ Variance Total $51 $51 $51 $51 $51 $51 $51 $51 $408 Netflix)
* Estimates based on an average slate over a historical 5-year period.
• SPE has the option to
** Assumes for illustration only a "Netflix" sized deal (25M additional subs) at current Netflix pricing ($7.99/ mos). license SPA pictures
elsewhere for higher
fees
8Deal Terms Summary
License Term and Rights
• Theatrical releases from January 1, 2017 – December 31, 2021 (5 years)
• Exclusive Subscription Pay Television (including SVOD) across all means of delivery, subject to
usage rules and content protection. Starz can deliver its service via the Internet on a stand-alone
basis (i.e., not tied to cable subscription), with incremental license fees due after certain subscriber
counts are reached
Motion Picture Qualifications
• All qualifying feature films theatrically released by an SPE label up to a maximum of 45 films per
year, in the following categories:
• 25 “A” Films: Film released in the U.S. by Sony on over 800 screens
• 15 SPC Films: Film released in the U.S. under the Sony Pictures Classics label
• 5 “B” Films: Films in excess of the “A” Film and SPC Film caps above, as well as up to 2 films
theatrically released by a third party but for which SPE controls the Pay Television rights. The
License Fee for “B” Films is 65% of the Rate Card
• SPE may also require Starz to license up to 1 “Live Event” film (e.g., concert films) to Starz at 75%
of the Rate Card License Fee. This is a new right that secures a Pay TV license fee revenue
stream for Live Event films occasionally released by SPE
• SPE also has the opportunity to enter into a Library film deal for incremental license fees
9Deal Terms Summary (Cont’d)
License Periods/Exhibitions
• License Periods – Starz will have two “windows” or license periods for each film:
• A “Pay 1” window commencing 7-9 months after U.S. theatrical release (on average), and
lasting 16 months (for 2013 releases) and 18 months (starting with 2014 releases)
• A “Pay 2” window commencing between 1 year and 6 years after the end of Pay 1 (at SPE’s
discretion), and lasting 13 months (for releases prior to 2017) and 15 months (starting with
2017 releases)
• Exhibitions:
• During Pay 1, 300 Exhibitions across all Starz channels (and not per channel)
• During Pay 2, 300 Exhibitions across all Starz channels (and not per channel)
• Starz also has the right to exhibit the Pictures on a Subscription Video-On-Demand basis
during the Pay 1 and Pay 2 windows (i) as an enhancement to the linear Starz subscription,
and (ii) as a stand-alone Internet-delivered SVOD service
Payment Terms
• Per-Picture License Fees: 100% due 60 days after the start of Pay 1 for each Picture
• Internet License Fees: Due and payable monthly following each month during which Starz had fee-
generating Internet subscribers
• Bonus Payments: One annual installment during the Term
10Deal Terms Summary (Cont’d)
Internet Rights
• Effective immediately, Starz may offer the linear or SVOD services over the Internet in
consideration for paying an incremental license fee to SPE. The license fee applies to so-called
“over the top” subscribers (e.g., Netflix, Amazon, Hulu) and not to subscribers who get Internet
rights as part of their cable/satellite Starz subscription.
Holdbacks
• Permitted at any time (but triggers Starz first window), but
Some restrictions on pricing during the theatrical window and during
Pay-Per-View /
the Starz windows
Transactional VOD
Prohibition on delivery over cable/satellite during a portion of the first
Starz window
• Permitted at any time (but triggers Starz first window)
• Sony service may offer EST early for 7 titles/year without triggering Starz first
EST/DVD window
• Some restrictions on pricing during the Starz windows
• UltraViolet and sales bundled with hardware are permitted
• Sony service may exhibit certain pictures on an SVOD basis between the
Subscription
Starz windows.
Linear or SVOD
• Otherwise, SVOD is restricted until the end of Starz second window for other
(TV or Internet)
services
Free Linear or
• Permitted between the Starz windows, but not before or during
Free-on-
• Sony may offer Free-on-Demand exhibitions packaged with other goods,
Demand/AdVOD
including Sony hardware
(TV or Internet)
11Timing and Next Steps
• Sony Deliberations
• January 16, 2013: Group Executive Committee
• Sign Definitive Agreements
• Targeted for January 30, 2013
12APPENDIX
13Starz Entertainment Overview
• Starz Entertainment is a wholly owned television programming subsidiary
of Liberty Media
• Starz’ film output content currently comes from Disney, Sony and Liberty
subsidiary Overture Films. Disney’s output films will move to Netflix
starting with the 2016 slate
• Starz Entertainment is comprised of three branded channel line-ups:
• Starz: Premium brand. 6 channels. Includes original programming and
output films. (20.7M subs)
• Encore: Genre/library offering. 8 channels. (34.2M subs)
• movieplex: Library/art house/independent. Limited distribution. 3 channels.
(24.1M subs)
• Liberty Media was expected to finalize its spin-off of Starz LLC which
owns Starz Entertainment, into a separate public company on January 14,
2013 and analysts predict that the spin-off will likely be acquired thereafter
14Output Deals Summary
Annual Film Output
Studios/ Sellers Output Deal Expiration Date
(2002 ► 2011 Releases)*
Sony Pictures Starz 2016 31 ► 23
SPC Starz 2016 19 ► 17
Warner Bros. HBO N/A – Sister company 28 ► 26
New Line HBO N/A – Sister company 10 ► 0
FOX HBO 2021 14 ► 15
Searchlight HBO 2021 7 ► 11
Universal HBO 2021 15 ► 15
Focus Features HBO 2016 7►8
Paramount EPIX 2015 (est.) 19 ► 15 (3 P/DW)
Vantage EPIX 2015 (est.) 9►1
Starz (ink ed a deal w/Netflix 2015 (NOTE: Believe Netflix is a 3 year
Buena Vista beginning in 2016) deal thru 2019)
22 ► 14
MGM / UA EPIX 2015 (est.) 19 ► 0
Lionsgate / Summit EPIX 2015 (est.) 13 ► 20
Note: Exhibit 34. BMO Filmed Entertainment Report. Source: Motion Picture Association of America, Hollywood Reporter,
boxofficemojo.com, company reports and BMO Capital Markets and industry estimates. New Line tracked from 2002-2008.
Paramount Classics/Vantage consolidated. Lionsgate/Summit consolidated. 15Picture Availability Dates / Windows
Theatrical PPV / VOD Pay 1 Window:
DVD / EST Pay 2 Window:
Release (Standard or
13 months (to 2016)
Day & Date): 60 16 months (2013)
15 months (2017+)
– 90 days 18 months (2014+)
Early EST Release
(1-30 days prior to Home Video)
Up to 7 pictures / year on Sony Service
Home Theater
No Pay 1 trigger
10 months from theatrical
4.5 months from
DVD/EST
“Network Window”
3.5 months from
PPV/VOD
6 Yrs. + 1 mos. from
end of Pay 1
* Special rules apply to Thanksgiving, Chanukah and Christmas themed pictures. 16Summary of Changes
Financial:
Increased Linear Linear license fees for the 2017-21 slates are 35% ($56M/year) higher
License Fees * than the 2014-16 license fees
Increased Bonus Increase annual bonus from $40M to $46M, effective with 2014 slate
Increased “OTT” Increase the incremental fees payable for “Netflix”-style Internet
Internet Fees subscribers
Right to
Sony granted option to exclude SPA pictures and license them
Arbitrage SPA
elsewhere, effective immediately
Titles
Reduce minimum output to 12 wide releases per year from 14,
Reduce Low
effective immediately, even if SPA titles are extracted. (Note: Below 12
Volume Ratecard
titles/year, the Linear License Fees are reduced)
Starting in 2017: lengthen Pay 2 window by 2 mos. (opportunity cost to
Lengthen Pay 2 *
SPE of $1.5M) in consideration for increasing linear license Fees
* Estimates based on an average slate over a historical 5-year period. 17Summary of Changes (Cont’d)
Film Qualifications:
Output Volume Reduce maximum film cap from 50 to 45
Liberalize
Permits SPE to put 2 titles/year through the Starz agreement even
Qualification
though such titles were theatrically released by another company.
Criteria For
Prior agreement imposed technical restrictions that made this right
“Rent-A-System”
difficult to use
Pictures
Live Events with
Right to include one concert film/year at 75% fee
Concert Footage
Starz requires that Canadian and Mexican Pay TV cannot premiere a
Relax Holdbacks title before Starz. This rule is being relaxed for one foreign language
for SPC picture per year. [Example: This permits a French language picture to
premiere on TV in France and Quebec before the USA.]
Starz requires all US territories and possessions (Ts&Ps) to be granted
Territory Rights exclusively to Starz. This rule is being relaxed for occasional
for SPC omissions of all Ts&Ps. [Example: SPC fails to acquire the Marianas
Islands.]
For a picture to qualify under the deal, Starz has required each picture
Delayed Release to be theatrically released within 36 months of completion of
Pictures production. Under the new deal, this permitted delay is extended to 42
months
18Summary of Changes (Cont’d)
Internet Subscribers:
Internet Subscriber
Remove cap/bundling restrictions on Starz’ Internet-based
Caps/Multipliers; Bundling
distribution in return for higher fees
Rules
Update Marketing / Promotion
Maintain premium positioning. Update “free trial” rules
and Free Trial Parameters
Sony Services/Home Entertainment:
Early/Exclusive EST for Sony Sony Services may offer early/exclusive EST for 7 titles/year
Services without restriction
Eliminate SVOD Holdback for Sony Services may exploit Internet SVOD for certain films between
Sony Services the two Starz windows
Financial incentive for Starz to make its channels available to Sony
Carriage of Starz on Sony
for Internet delivery (e.g., PlayStation) and obligation for Starz to
Internet Platform
offer terms in non-discriminatory manner
Reduces the minimum wholesale price permitted for EST sales
EST Pricing during Starz’ windows. [NOTE: Wholesale pricing below these
minimums triggers a financial penalty payable to Starz.]
EST Promotions Permit free EST promotions during Starz windows
Reduces the price at which SPE may offer pictures during the
Theatrical Window Pay-Per- theatrical window without triggering the start of Pay 1. This
View/Video-on-Demand change helps SPE to have sufficient time to exploit EST, DVD and
PPV/VOD prior to the start of Pay 1 19You can also read
