Pay Nets Eye Land Grab For Titles

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The three leading premium networks are squabbling about
which has the best movie studio contracts -- and by extension the largest stable of
blockbuster films -- moving into the next century.

Home Box Office, Showtime and Encore Media Group's
Starz! are trying to lock in long-term distribution deals with moviemakers. The land grab
has left Showtime with what some say are a dangerously small number of studios to depend
on for hits, and Starz! scrambling to sign on independent studios before anyone else does.

Premium may be cable's most mature sector. With few
American homes left unwired, growth in premium subscribers now comes mainly from upgrading
basic-only households rather than new subscribers. That makes movies even more of a killer
application than they've been at any time since cable's earliest days.

Output deals (contracts giving premium networks access to
the pay window for all of a studio's releases about 18 months after they leave
theaters) are preferable to strict cash- for-titles deals. In the latter, networks are
forced to pay huge sums for a mix of both movies they don't want, along with hit
titles.

And in the ever-shifting world of movie deals, some
observers say Showtime may be in danger of getting left behind.

The company holds output deals with PolyGram Films, MGM
Studios/United Artists (Goldwyn), and TriStar Pictures. It also has deals with film
boutiques Artisan Entertainment, independent studio Stratosphere, and Dimension Films.
(The latter is a wing of Miramax, whose inventory of horror films including Scream
and Scream2 Starz! turned down due to content concerns when it bought that
distributor's package.)

But two of those deals are in jeopardy. And even though
Showtime will gain access to big titles from fellow Viacom Inc. family member Paramount
Pictures in 1999, the network could find at least some of its stable of big movies cut
off.

The fate of PolyGram Filmed Entertainment remains, for
example, remains uncertain. Seagram Co. Ltd. will complete its acquisition of PolyGram
Holdings late this year. Seagram executives have said they will most likely sell off the
film unit piecemeal, having already unloaded PolyGram's extensive movie library on
MGM.

Meanwhile, Showtime will lose rights to TriStar pictures in
2001, when the network's output deal with the studio expires. According to John
Mizulski, head of marketing for TriStar distribution, that means that "any picture we
release after next summer would not appear on Showtime" under the current contract.

At the same time, executives at HBO have announced they
have obtained the rights to TriStar's pay windows after 2000.HBO already has a
deal with TriStar's corporate sister Columbia Pictures, also owned by Sony.

Industry competitors have made much of the studio shuffle,
alleging that Showtime may get last pick of desirable movies coming to premium networks.

At a gathering with reporters in late October, HBO
president Jeff Bewkes hinted that he believes Showtime lacks adequate studio agreements,
unlike HBO, which, he said, has

"a solid relationship with movie studios well into the
millennium."

Those deals extend to Warner Bros., 20th Century
Fox, Columbia Pictures and DreamWorks SKG to fill its 24 screens (including multiplexing
and dual feeds on Cinemax). In fact, Bewkes said HBO has been busy for the past four years
including video-on-demand agreements in contracts with those studios as the network
prepares for when VOD becomes a reality.

Meanwhile, Bob Leighton, senior vice president of
programming for Encore Media Group, made the same charge in a recent meeting touting
Starz!'s new movie inventory. In explaining the company's security-blanket
strategy of gathering output deals with Universal, New Line Cinema, Fine Line Cinema,
Hollywood/Touchstone Pictures and Miramax, Leighton said, "It helps us sleep at night
because we know come 2000 we'll have this stream of movies coming to us.

"This industry is heavily cyclical, with peaks and
valleys created by studios targeting big premieres for summer and holidays, when teens are
more available. When you find yourself with just a handful of deals, that seasonality can
turn into a real dry spell if the studio fails to produce a stream of money-makers for a
year or two. It's much more cost-efficient to diversify your suppliers and hope you
guess right about which are going to be successful," Leighton said.

In fact, Leighton contended Showtime's alleged lack of
output deals is "part of why [network exececutives] have been focusing on originals.
I think they know it's risky to be a two-studio premium network," he said.

But, Showtime executives strenuously disagreed with those
assessments of their studio output deals.

Matthew Duda, Showtime's vice president of program
acquisitions and planning, said that Showtime's increased emphasis on original movies
is more of a strategic commitment than a lack of planning on the network's part.

"Theatrical films will always be important. But in the
main they'll become less valuable as pay-per-view becomes more prevalent and people
have more of a chance to see them before they get to a premium channel," he said.

"By contrast, original programming is proprietary, it
generates reviews, and I think we're fast reaching a point where consumers expect to
see exclusive, quality originals on premium networks now, and those big movies serve more
as a platform for people to sample our other shows," Duda added.

For her part, Pearlena Igbokwe, director of original
programming for Showtime Entertainment Group, agreed that Showtime is trying to find
alternatives to expensive film titles from major Hollywood studios.

"There's only so much leverage you can get out of
a hit movie that's already been seen in 15 different venues including the flight from
New York to L.A.," Igbokwe said.

Showtime is fully financing 30-to-37 original films,
including 10-to-12 family films, this year alone. The premium network had rolled out a
high-powered image campaign earlier this year, in part to help brand the two or three
original movies it's been premiering each month. In all, Showtime is slated to have aired
35 original films in 1998.

"Historically, we run 50-to-60 movies from theatrical
deals each year. So if we can get that level volume [to mix with originals], we're
happy," Duda said.

Duda pointed out that this year the network will reap
almost 100 films from output deals. And with some 90 studio films coming next year, Duda
said he's happy with the network's movie volume for the next two to three years.

Regarding the fate of its output deal with Polygram, Duda
said, "There's no secret they're trying to restructure. But we're
confident those projects that live on and those that are already finished and in the
pipeline will come to us." For example, Duda said Polygram's James Bond flick Tomorrow
Never Dies
and What Dreams May Come will both arrive on Showtime in 1999.

Still, Showtime is unlikely to get sunk with access to
Paramount, the studio that produced Titanic,Deep Impact and The Truman
Show
.

And Merrill Lynch analyst Jessica Reif Cohen said Titanic
will likely be a bright spot in the company earnings reports for the next two years,
providing an ample and steady flow of cash from distribution windows to put back into
making more successful pictures.

Industry analyst Larry Gerbrandt, of Paul Kagan Associates,
Inc., agreed. Gerbrandt points out that Hollywood's six largest studios (which
together own a large share of the industry's smaller film studios) are primarily
responsible for driving the pay window market for films.

"Even if Showtime only has deals with Paramount and
MGM, that still accounts for about half of all films released in a given year. Studios
like Dreamworks are responsible for only a handful of movies."

Gerbrandt pointed out that just because a studio released a
film it doesn't mean it owns the rights to subsequent distribution windows. For
example, he said Steven Spielberg's Amblin' Entertainment retains rights to
films it produces and negotiates deals independently of Dreamworks.

As more independent studios obtain funding from investors
not tied to major studies, Gerbrandt said that the number of movie suppliers could
skyrocket, leaving a premium network several possibilities to strike deals, without fear
of an industry lock-out.

For example, Starz! has been going the indie route, having
last month inked a long-term output deal with October Films, now 51 percent owned by
Universal.

Starz! has made cash-for-film deals with indie studios
before, but this time it is clearly hoping its investment in a long-term deal will pay
off.

In fact, Leighton recalls the prophetic deal he struck with
a newly minted Miramax (resulting in rights to the pay window for Good Will Hunting
later this year) when the company was still a small upstart. Though Leighton said the deal
was a risky investment at the time, it has paid off in the same way Leighton hopes his
deal with October Films will too.

Among the slate of Universal's current and upcoming
releases that could also strike gold for Starz! are: the Brad Pitt vehicle Meet Joe
Black;
Patch Adams, starring Robin Williams; Babe: Pig in the City, and
director Gus Van Zandt's Psycho remake.

But executives at both HBO and Showtime have said
previously that it's unfair to compare Starz! to either networks, because the
mini-pay service operates on a different economic model making it less dependent on
subscriber numbers and therefore big-name movies.

By contrast, they say most of Starz!'s revenues comes from
a flat MSO fee, which allows it to buy lesser-known, but star-driven, titles rather than
compete head-to-head for more expensive deals. Starz! also targets a different age group
than HBO or Showtime, specializing in romance, family and comedic titles attractive to its
core 25-to-34 year-old audience.

Some critics had contended that Starz! was really missing
the original films that help brand its rivals. The upstart has answered with
co-productions such as The Lady With The Torch, a two-hour documentary from
Columbia Pictures spanning the studio's 75 year history. Starz! will also debut an
original film produced by BET Movies (Funny Valentines), as part of a new slate of
monthly "premieres." Other titles in the pipeline consist mostly of lesser known
films that never made it to theatrical release.

But Showtime's Duda pointed out that his network
isn't necessarily looking for celebrity vehicles to fill its premiere schedule.
Instead, Showtime is more interested in nailing what he calls "guide covers" or
movies that are well-known enough to qualify for the cover slot on network viewing guides.

"The key is having enough deals to get our share of
hits. If we only had 30 films and they were all blockbusters that would be better than
having 150 movies that aren't big hits," he said.

For example, he said Showtime plans to schedule one or two
"cover" movies each month, filling out the rest of its lineup with other
theatricals. Still, Duda said no network can predict with certainty the caliber of studio
films it will get three years down the line.

Analyst Gerbrandt concurred, asking, "would Showtime
like to have more film product? Probably. But output deals are an expensive way to acquire
volume because you've got to pay for the flops as well as the hits. And if a studio
has had a bad run, you could still end up paying for a lot of movies you don't
want."

Instead, as with most other cable networks, Showtime can
invest that money in producing more originals. And while original programming can also be
an expensive prospect, some of that programming has begun to pull down ratings not unlike
expensive theatricals.

For example, HBO executives have long said the $24 million
spent to produce From Earth To The Moon, was equivalent to what they would have
paid for a roster of studio movies -- with one big difference. HBO owns every hour of the
series in perpetuity without fear of expiring contracts, varying quality or troublesome
content.

"HBO really continues to be the leader in the
field," said Mark Todtfeld, a cable analyst at Montgomery Securities, "partly
because they've done a super job of branding and developing original programs that
have developed a steady audience."

Todtfeld pointed out however that his investment firm
recommends both Time Warner (parent company of HBO) as well as Viacom (Showtime's
parent firm) stock.

Kagan analyst Gerbrandt agreed that among premium networks
HBO is likely to keep a healthy lead into the new millenium.

But he was careful to point out, in the hit-or-miss world
of theatrical releases, that could change too.

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