With time dwindling before the December 31 expiration of their current carriage agreement, Lionsgate and Comcast remain in discussions about the continued distribution of Starz. The talks are being closely watched, not only in media industry circles as streaming continues to alter the pay-TV landscape, but also by fans of Power, the hit Starz drama whose next season kicks off January 5.
Benjamin Swinburne, a veteran media analyst at Morgan Stanley, does not foresee angst for Comcast viewers in what he considers the most likely scenario, a renewal without any lapse in carriage. In a new research note to clients on Wednesday, though, Swinburne predicts a renewal will hurt near-term profits at Starz as the premium network makes the transition from traditional carriage to à la carte distribution.
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Swinburne forecasts a 5% dip in the profit of Starz’ U.S. Networks unit in fiscal 2020, with a 10% decline the following fiscal year. Accordingly, he lowered his 12-month price target on Lionsgate shares from $11 to $10. The stock closed Wednesday at $9.46, down about 1.5%, with much of the overhang from the carriage negotiations already priced into the shares. Comcast stock finished at $43.19, down a fraction.
“We acknowledge there is a variety of outcomes, and visibility is low,” Swinburne wrote of the discussions. “Our base case now assumes Comcast transitions Starz to an à la carte distribution deal over a three-year period, with fixed bridge payments being slowly replaced by a wholesale distribution rate paid out to Starz.”
The outlook for the premium network reflects the growing pains being experienced by all programmers looking to continue to manage secular decline in the pay-TV bundle while funding direct-to-consumer streaming offerings. Despite losing 3.1 million traditional pay-TV subscribers between fiscal 2017 and fiscal 2019, the analyst notes, Starz saw its DTC streaming subscription base rise to 3.7 million as revenue grew 8%.
À la carte streaming and on-demand channels generally produce more revenue per user than fully linear carriage. (Power producer 50 Cent is clearly mindful of that when he frequently attaches the hashtag #starzgettheapp to his social media posts — a plug to ensure that fans won’t be sidetracked by any carriage drama.) Lionsgate CEO Jon Feltheimer addressed the changing operating environment on the company’s last quarterly conference call with analysts in November. “This year for the first time more than half of Starz’s revenue comes from à la carte customers as we continue to achieve success with our traditional MVPD partners and new digital distributors alike,” he said.
In Swinburne’s formulation, the first year of a three-year carriage agreement would see a “transition payment” by Comcast of $100 million, falling to zero by the third year as the distributor boosts its revenue-share payout to $5 per subscriber. Comcast, which also sells the broadband internet that even cord-shaving customers use to access the Starz streaming service, currently retails Starz for about $12, $3 higher than what customers pay to sign up directly.
Comcast, of course, would also save on programming costs, which would drop from their current level of 89 cents per subscriber now to 27 cents by fiscal 2023, in Swinburne’s model. While the dynamics are always unique in various cases, keeping a lid on programming costs has also been the rule at distributors like Dish Network, which has had an impasse with HBO for more than a year.
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