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Starz Power
05/23/2006
Among mass-market programmers, Starz Entertainment Group LLC clearly has been a pioneer in the new media revolution. The premium content supplier in 2004 launched Starz Ticket, an Internet-based video streaming version of its service, with RealNetworks Inc. It recently expanded that Internet effort with a broader video streaming service called Vongo, for which AT&T Inc. has agreed to be the first distribution partner. And Starz was the first content provider named by Verizon for its FiOS deployment. xchange Editor in Chief Paula Bernier recently spoke with Edward L. Huguez, executive vice president of affiliate sales and marketing at Starz, about the new world of content distribution.
XC: Starz recently announced a deal with AT&T Inc. to offer Vongo. Tell me about it. EH: Essentially, it’s another example of our desire to want to work through distributors to sell our services. Starz has a long history of working with new technologies and new distributors in order to sell its services. In fact, quite frankly, our whole business began with the advent of the satellite industry. That’s when we were formed, about that time, and it was because of this new distribution technology called satellite 12 years ago that we exist. Today we pride ourselves on our desire and willingness to work with as many partners as possible to get our movie services out there to the consumer. Certainly, we expect that we will have similar types of relationships [to this AT&T one] with our current distributors, who will be selling and marketing Vongo. And we have active discussions with those distributors today. This is just the first one to step up to the plate. (For more detail on the AT&T, Starz Vongo deal, click here.)
XC: What will each company contribute in terms of assets and dollars to this Vongo relationship, and how will you market it? EH: We haven’t divulged that yet, and we’re still working through all the specifics. Soon we’ll be in the market with the service to AT&T’s 7 million or so DSL subscribers.
XC: You say Vongo is still in the beta stage. What have you decided to tweak on it? EH: We’re adding features. For example, the ability for pay-per-view and getting those rights. We’re adding new kinds of content. Most of the additions are around the content and making it easier to access the content with recommendation engines and things like that. When you’ve got the opportunity to select 1,500 titles, you need a simple way of accessing those titles and getting to where you want at the time you’re looking for it.
XC: What are Starz’ other new media efforts as they relate to the Internet, mobile and other forms of communications? EH: For almost two years now we’ve had Starz Ticket. That is a distribution relationship with RealNetworks whereby we offer some 300 movies for broadband consumers to download. Vongo is the next step in that. Certainly, the main difference is that Starz Ticket was singularly focused on RealNetworks and their technology and them as being the sole distributor. Vongo, in particular, is available to bolt onto any network with our current distributors so that they can offer this service as an extension to their current services. So we’re not new at this. In addition, we’ve also announced recently our relationship with Verizon whereby fiber to the home is a new platform delivery system. They’ll be delivering virtually all of our services.
XC: How is Starz affected by telco and wireless operator entry into video distribution? EH: It affects us very well. For the same reason that satellite, really, was a boon for us and really helped to launch us, we expect the same to happen as the telcos enter the business. Like the satellites, they’re entering the business as an all-digital platform, and they have sufficient capacity and the desire to take as many services as possible and as many versions of services as possible in order to have not just an equal service to cable, but a better service, in their view. So we expect to benefit from this as we expect all programmers will. We think that the pie grows; it doesn’t shift, necessarily.
XC: At the NTCA show, Tony Vinciquerra, president and CEO for Fox Networks Group, said telco entry into video services is a zero-sum game, since there are a set number of subscribers willing to pay for cable TV services. What are your thoughts on that? EH: That’s definitely not true in our case, and I don’t think it’s generally true. The business, even though it’s mature, is still growing. I think last year it grew about 2 percent. And, not only that, for a programmer like us, that is primarily a digital service. Another words, we have the disadvantage of not being on something like 60 percent of cable because it’s analog. We’re a digital offering. So as cable converts from analog to digital and as telcos come into the market in addition to satellite, which are both also digital platforms, we benefit. We continue to grow.
XC: What do consumers want as far as video programming? EH: It’s like anything, they want to take it with them. They want the ability to pay once – an appropriate and reasonable price – and they want the ability to consume it in as many places as possible. And Vongo is an extension of our current services that starts to fulfill that desire to take the content with you. In the on-demand world, short form, long form, they want it all, certainly. They just want it when it’s convenient. I think, generally, people like the subscription model. When they pay for the subscription service, like Vongo, for ten bucks a month, they want to be able to use it as many times as possible. They want to be able to enjoy it without having to be dinged every time they view it or downloaded it. The subscription model seems to be the way to go.
XC: So what is Starz doing related to mobility? EH: Vongo is probably the best direction where we’re heading. We’re offering the subscription service to broadband subscribers to be able to download movie product to a computer and the ability to also download it to portable devices.
XC: What do you mean by portable devices? Mobile phones? EH: No, I don’t think necessarily that cell phones are good devices for long-form movie content. I’m talking more about something that resembles a DVD [player] with the same quality and decent screen size, but is light and less expensive and something that people can carry with them.
XC: You mentioned one product that fits into this category is Toshiba’s gigabeat, an iPod-like device that can store 50 movies to be watched either on its own screen or the screen of a TV it’s plugged into. So do you see Starz partnering with Toshiba or other consumer electronics entities to do joint marketing and packaging around such offers? EH: Certainly we would. We’re having conversations with Toshiba and other consumer electronics brands. HP is another one; we made the announcement a month or so ago, whereby they’re going to preload the Vongo application so you can fire that up and become a subscriber quickly and easily on HP’s new laptops. I think Starz in particular has been very progressive in all these areas. I think our only frustration is that the market adoption never seems to happen as quickly as we would like.
XC: You mentioned Starz was the first programming service to announce a deal with Verizon for its FiOS system. Were you involved in that? How did that happen? EH: Verizon is a huge company; they have a valuation of greater than $80 billion. I think anybody would be a fool not to want to engage with them and not to want to distribute through them. (To read the Verizon-Starz announcement, click here.)
XC: On what is pricing for your content based? EH: There certainly are a lot of factors that play into it. First and foremost, we do have a basic rate card from which we derive the appropriate license fee structure for the appropriate distributor. Again, one thing that I think is unique about Starz is we are very flexible in working with distributors so that within that platform and within the priorities of that distributor, we work very hard to construct a relationship that maximizes the distribution of our service for that distributor. Some of the big criteria [in pricing] are the packaging and how aggressive the distributor wants to be with their service, and the number of services they choose to distribute with their service, and the type of marketing they do. Every distributor is different. Some distributors are keen to highlight premium services, especially movie services, as a lead offer. And that certainly benefits it. Others might want to focus more on high-speed data. We customize every deal to the distributor because every distributor is different.
XC: Who is Starz biggest distributor customer? EH: That’s kind of a loaded question. It depends on how you look at it. Certainly the top four distributors are, in no particular order, DIRECTV, Comcast, EchoStar and Time Warner Cable.
XC: How, if at all, do negotiations with telcos differ from those you have with cablecos and DBS providers? EH: With the telcos, this is greenfield opportunity. So they are eager to want to engage, and they are eager to want to distribute the broadest array of services possible because it is not enough for them just to match what the entrenched and established distributors do – they have to exceed it. So that is – for a programmer – a very positive way to enter into a relationship. But we’re pragmatists. As soon as an AT&T or a Verizon has as many subscribers as one of the top four who I described, I’m sure the nature of the discussions will change.
XC: If I’m a telco new to offering TV services and I’m trying to negotiate a content deal with a company like Starz, how does that work, since my customer base of viewers is slim to none? EH: First of all, it’s just market dynamics. Leverage works both ways. When you’re a Comcast with 22 million subscribers you have a certain amount of leverage and a certain amount of ability to control the costs of all of their raw materials, whether it’s programming or set-top boxes or whatever. And vice versa. A programming service like Disney with probably 30 or so services for which you have the big banana, ESPN, you have a certain amount of leverage. But that notion of basing prices on volume has probably existed forever. When you go in and buy a gallon of milk on a per-ounce basis, it’s cheaper than when you buy a pint. It’s just market dynamics. So I don’t think that anybody is surprised – if you have zero subscribers you’re not getting the Comcast rate.
XC: There are a lot of small and mid-sized telcos now talking about or getting into offering TV. Does Starz deal directly with small and mid-sized telcos, or does it tend to work with them through a larger organization, like a telco consortium? EH: When you do a programming deal it takes time. These are legal documents that have huge and material impact on revenue and margin, etc. There’s only so much time in a day, so certainly when we’re dealing with smaller and mid-sized operators we prefer to deal through cooperatives.
XC: How have the fees Starz charges distribution partners like cablecos, DBS and now telcos changed in the past five years? EH: If you take a look at our Starz and our Encore packages of services, in the past five years they have grown more than any of the premium services in aggregate viewership. With Encore, for example, the aggregate viewership over the last five years has been about 82 percent growth, but yet we have only been passing cost through at a rate just slightly above CPI (the Consumer Price Index). So I think we’ve been very good actors in this relationship with our distributors even though our programming costs have increased over 50 percent.
XC: So it sounds like we should expect a rate increase from Starz, is that right? EH: We have to continue to increase rates in order to keep our business working. But as I said, we’ve been very good actors and are, quite frankly, probably underselling our product to our distributors.
XC: How can telcos new to the TV game compete with the entrenched cablecos and DBS providers? EH: It’s like anything else, when you’re the last guy in, you need to be better. But from where I sit they seem more than willing to want to have the widest possible offerings – linear, on demand and I think with this AT&T announcement, a demonstration of enhanced broadband services. I think that’s what they have to do, and it looks like that’s what they’re doing. They also have to look at other things like perhaps user interfaces that are easier to use and more intuitive, and perhaps other forms of technologies – adopting them sooner in order to differentiate themselves. It certainly can’t just be a ‘me too.’ I think that’s apparent.
XC: Starz offers two on-demand services. What sort of demand has it seen for those TV-based services? EH: I was looking at some numbers today and, at least for our service, we’re doing exceptionally well. I think the number is around 55 percent of set-top boxes that have Starz On Demand use it on a monthly basis. That’s a pretty phenomenal statistic. We lag as a premium service only to HBO, and that’s just because they have wider distribution than we do. If you talk to some of our distributors, especially Comcast, they can corroborate the fact that on-demand is working for them and certainly is a real coup for the consumers to enjoy movies.
XC: OK, but isn’t it true that on an industry-wide basis, demand for on-demand isn’t what we hoped it would be? EH: It may have more to do with an economic model, especially for ad-supported services. But for a premium service like Starz, it’s definitely living up to expectations. In fact, it’s probably exceeding everyone’s expectations. We see the numbers from each of our distributors who have Starz On Demand, and it’s consistent. Those who have Starz, enjoy Starz and are more satisfied with Starz as a result of having the on-demand element. And the usage is tremendous. If the criterion for success were the number of minutes that a consumer spends on a service, we would be the most successful service out there.
XC: What is the number of minutes? EH: That would be 65 minutes per view. The on-demand numbers are skewed toward short form – music videos and the like, and songs, for example. If you are in the middle of a music video and decide that you want to go have lunch, and you turn it off and you come back, it doesn’t bookmark. You have to start it all over again. So you get the benefit, if you’re a short-form programming service, of multiple views that get counted toward your usage. With a movie, you get bookmarked, so people pick it up where it leaves off. So, by definition, it’s kind of skewed toward short-form programming.
XC: Can you talk a little bit more about short-form programming. What kind of demand are you seeing for it, and how does it fit into your strategy? EH: Short-form for us is anything less than a feature-length movie. We’ve certainly beefed up our themes with more short-form to give them more unique identity than just being movies, although still, substantially we’re still a movie service. [Short-form] can be movies; it can be animation. It can be our bunnies, for example. If you go to our Web site or the Vongo Web site you’ll see examples of 30-second, one-minute clips that essentially take well-known movies and replicate the plot of the movie in a very short but hilarious way [featuring animated bunnies]. That’s one inexpensive way of adding more value to linear, on-demand or even our Vongo service, above and beyond just movies. The other part of short-form is the interstitial, providing information to a movie lover in between our movies to keep it interesting but to add value. An interstitial just means programming between the programming you’re waiting for. It could be individuals talking about movies that are recently released and maybe rating them. In our Starz On Demand we have a Starz Central where you order the movie and before it comes up someone at Starz Central says ‘Hey, you’ve just ordered so and so, and if you like that you should try this other movie.’ Maybe there are common actors, or the director. So [it’s about] providing something that’s pertinent to the selection that you’ve chosen in a way that adds value.
XC: Is this also a way you can promote some of the other triple/quad-play services of your distributors? EH: Absolutely. And we do that today. For example, on our linear Starz feed we also discuss Starz On Demand and direct people to that part of the distributor’s service to enhance the overall enjoyment of that distributor. We could certainly do the same for broadband and by pointing people to downloading movies from Vongo from our distributors’ high-speed data site.
XC: How does the move to HDTV affect Starz? EH: For as long as I’ve been in this business – since ’87 – it’s been the same thing. The No. 1 most-viewed programming is movies. People want to see movies, and they want to see sports in HD. So we think it’s going to be helpful to us in the retention of our subscribers and in continual growing of our subscription base. So, it’s one of those things that has improved the enjoyment of our programming.
XC: Will you make more money as a result of HD? EH: No. Unfortunately, at this point, HD is just an added value that’s provided to our distributors as part of their carrying our Starz or Encore packages. We do not charge extra for it.
XC: Do you expect programmers to charge extra for it in the future? EH: It depends on the programmer. Unfortunately, we didn’t set the stage for this, so we actually had to pay extra from our studio partners in order to get the HD content. But, unfortunately, the market and our competitors established the price point of zero for HD, so we ended up having to follow that model.
XC: So HD has been more of a burden than a boon for you, it sounds like. EH: Well, no, because consumers -- just like with on-demand -- consumers that have on-demand and HD enjoy our Starz service overall much better having that feature.
XC: So what does that mean, less churn? EH: Yeah, less churn and higher satisfaction. We see greater satisfaction with our service when somebody has HD and also when somebody has On Demand.
XC: Can you quantify that? EH: It’s difficult to quantify, quite frankly, because getting the numbers from our distributors to quantify has always been a problem in this industry. But I’ve heard operators declare it could be anywhere from 10 percent to 25 percent, but it’s very difficult to get the exact numbers to quantify. (To read more about customer satisfaction with Starz On Demand, click here.)
XC: So, are you working to get more consumer and/or usage data from your distributors? EH: Right now we’re at the beginning of getting the appropriate information from Rentrak and from Concurrent and SeaChange and the other vendors out there. So we’re really at the beginnings of getting that kind of information to be able to quantify the impact on the business.
XC: The industry has changed a lot in the last 10 years. What were you doing in 1996, when the Telecom Act passed and opened the gates to the cable-telco competition that’s happening today? EH: I was at DIRECTV in charge of programming acquisition. I was involved with the first Encore deal for distribution over DIRECTV. XC: What brought you from where you were 10 years ago to where you are today? EH: I’ve been on a meandering stream. I got into this business first with ESPN in the mid to late ’80s. Then I joined DIRECTV and when we launched DIRECTV, I was asked to focus on new ways of using technology to enhance programming services. So I led the group that entered into relationships using TiVo technology. We engaged with Microsoft to have a personal computer version of DIRECTV with an enhanced user interface and the ability to download content, etc. That’s what got me involved with new media services. Then I ran two new media technologies companies, and then after the last one sold, Bob Clasen, who’s our president and CEO, was just taking over running Starz and asked me to come join him.
AT&T Inc. www.thenewatt.com
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