The long legal and distribution slugfest between Comcast Corp. and Starz Encore Group LLC ended last week, with the carriage of the latter's program services on terms analysts said work in the MSO's favor.
The out-of-court settlement dissolves a Comcast lawsuit filed against the Liberty Media Corp.-owned programmer over the lucrative distribution terms Starz Encore had originally had in its deal with Tele-Communications Inc., and later with AT&T Broadband.
Comcast, which acquired the AT&T cable systems last year, will pay based on the number of subscribers to the Starz Encore premium services, rather than a flat fee. It also won't be required to absorb incremental programming costs passed along by Starz Encore.
The premium programmer gets much-desired marketing support from Comcast for its 13-channel Starz! multiplex package, as well as distribution for Starz On Demand, an upcoming Encore On Demand offering, and its Starz HD and Starz Kids service.
Comcast Cable Communications president Steve Burke called the deal a "win-win" for both sides in a press release.
Starz Encore president of sales and marketing Bob Clasen last week said the outcome benefits the current Starz! lineup and potential new services.
"Our view is that this looked like a two- to three-year protracted [legal] case where we had no control over how fast or slow the judges were moving," said Clasen, a former Comcast Cable president. "We had some exciting new products that we wanted to get into the marketplace, and when you're in a lawsuit, your relationship isn't very good, and this is our largest cable affiliate. So it worked to both of our advantages."
One such new product: An on-demand version of the Encore older-movie service, which Comcast is expected to be the first MSO to launch, a Starz Encore official said.
Analysts lavished praised on Comcast for once again using 21-million-subscribers' worth of leverage to hold down the rising cost of programming.
"Comcast has really shown they have the muscle," Janco Partners cable analyst Matt Harrigan said. "Some of the other programmers, certainly [the Walt Disney Co.'s] ESPN, have more leverage than Starz Encore. But it's pretty apparent that the salad days are over, in terms of being able to put through these indiscriminate price increases.
"It's good news for MSOs and mixed news for programmers," Harrigan said. "But I think the writing has been on the wall for a while."
Some analysts questioned how much influence the Starz settlement would have on Comcast's future dealings with other programmers.
Comcast might not be able to exert as much pressure on more established networks such as The Walt Disney Co.'s ESPN, SunTrust Robinson Humphrey cable analyst Gary Farber said.
"It depends on what else Disney wants carriage for," he said. "ESPN is the one everybody crows about, but it's a lot like MTV: It's a standard offering.
"It could be a little more difficult. But it certainly means [Comcast] is flexing its muscles and will be pretty successful doing so most of the time."
The multiyear deal terminates all pending litigation between the two parties.
Comcast had sued last year over distribution terms Starz Encore had with AT&T Broadband. Comcast bought AT&T Broadband in November 2002, becoming the country's largest MSO with about 21 million subscribers.
In 2001, Starz Encore got the ball rolling by suing AT&T Broadband to enforce the earlier contract, which dated back to when Liberty was owned by Tele-Communications Inc.
AT&T Broadband — which bought TCI — had objected to making a $44 million payment to cover programming costs, as per the TCI deal.
The new agreement eliminates any pass-through incremental costs.
That — along with the new affiliate deals — could net Comcast $200 million in annual savings compared with the AT&T Broadband rate for Starz Encore services, Merrill Lynch & Co. analyst Jessica Reif Cohen estimated last week.
Some sources last week said the new affiliate fee Comcast agreed to pay for the Starz! new-movie service was less than $3.50 per subscriber per month, compared with the average of about $4 per month Starz Encore gets from other MSOs.
"That suggests that Comcast may be getting an even better deal than they were before," one analyst said.
Losing the programming pass-through will put some financial pressure on Starz Encore. Earlier this month, Liberty projected that Starz Encore programming costs would rise by $175 million to $225 million in 2004, based on the expected box-office performance of movie titles that will become available to the premium network over that period. Programming costs are expected to hold steady in 2005, Liberty said.
Analysts said Starz Encore had little choice but to settle up with Comcast.
"Liberty was well-advised to do this," Janco Partners' Harrigan said. "The contracts had to be reconciled, and in the past the acquiring MSO has generally prevailed."
"When someone who controls one out of four of the multichannel video subscribers in the country decides not to market your service at all, it hurts you more than it hurts them," Citigroup Smith Barney cable analyst Niraj Gupta said. "That recognition should have happened a lot earlier in the process."
While no figures were available as far as how many Starz subscribers were on Comcast systems, according to financial documents filed with the Securities and Exchange Commission, Starz had 12.5 million subscribers as of June 30, about 700,000 customers less than the 13.2 million it reported as of March 31.
Between Sept. 23, when the agreement was announced, and the following Thursday, Liberty's share price fell by 59 cents (5.6%), to $9.91 from $10.50. That translated to a $1.6-billion decline in Liberty's market capitalization, almost equal to the $2 billion valuation most analysts put on Starz Encore.
Adding to pressure on Liberty, an article in last Monday's The New York Times
highlighted a payout Liberty agreed to with Starz Encore chairman John Sie earlier this year. According to Liberty's 10-K annual report filed in March, Sie exercised 54% of his stock options (in the form of phantom stock appreciation rights), which Liberty agreed to purchase for $275 million in cash and stock.
At the time, Liberty said Sie had exercised those rights to diversify his portfolio.
The payout put Starz Encore's value at about $5.1 billion. But after Liberty said the group's programming costs could rise $175 million to $225 million, analysts cut projections for Starz Encore operating cash flow by nearly 50%. On that basis, analysts put a value on Starz Encore closer to $3 billion.