Starz will face new, challenging world as public company

Pay-TV channel Starz is trying to chart a new orbit.

Early this year, its parent company, Liberty Media, plans to spin off the premium network and its sister channel Encore into a new, stand-alone, publicly traded company.

Such a move would normally be cause for celebration. But for Starz, the separation comes amid uncertainty.

Its track record producing original shows has been mixed. The market is getting increasingly crowded not only from Starz's traditional competitors, HBO and Showtime, but also from new rivals including Netflix, Amazon and Redbox. And, starting in 2017, the network will lose one of its key suppliers of movies - Walt Disney Studios - to Netflix.

"It's an interesting time for Starz," said Matthew Harrigan, a media analyst with Wunderlich Securities. "Losing those Disney movies makes life a little more difficult, and it becomes even more important for them to create successful original programming."

Liberty Media is spinning off Starz in part to make it more attractive to potential buyers. Companies mentioned by analysts as possible suitors include Comcast Corp., parent of Universal Pictures. Other deep-pocketed prospective buyers could be News Corp., Walt Disney Co. and Viacom Inc. HBO and Showtime probably would face anti-trust issues if either of them made a run at Starz.

The shift also raises the stakes for Starz and its chief executive, Chris Albrecht, who has been given the task of building an original programming pipeline. Albrecht, who joined Starz nearly three years ago, has the experience. As the former head of HBO, he was a key architect of that network's success by helping nurture such culture-defining hits as "Sex and the City" and "The Sopranos."

Achieving those heights again, this time at Starz, has proved more elusive. Starz made a splash with its gladiator series "Spartacus," but another high-profile drama, "Boss," about a corrupt Chicago mayor played by Kelsey Grammer ("Frasier"), failed to deliver ratings to match its critical acclaim. "Boss" was canceled after two seasons. "Camelot," about a young King Arthur, started strong in 2011 but then fell on its sword.

Starz, which has 20.8 million subscribers in the U.S., has spent the past few years playing catch-up. The network began developing original dramas much later than industry leaders HBO and Showtime, and also lags behind basic cable channels FX, AMC and USA Network.

At the same time, the availability of movies through other venues has increased dramatically, and film fans can just as easily get their fix by buying or renting DVDs - online or at supermarket kiosks - or through Internet streaming services. That makes the need for strong original content even greater.

Starz executives declined to comment for this report, citing the "quiet period" mandated by regulators before the public stock offering.

Hollywood movie studios have a strong incentive to protect the premium channels, which have long served as their unofficial ATMs. The channels, including HBO, Starz and Showtime, spit out hundreds of millions of dollars each year to movie studios in exchange for the first-run TV rights to recent releases. The fees - which can approach $30 million for a single blockbuster film - have helped studios turn deficits into profits for many movies.

The parent companies of HBO (Time Warner Inc.), Showtime (CBS Corp.) and Starz (Liberty Media), also have long collected hundreds of millions of dollars each year in profit from the channels in distribution fees from cable and satellite operators. According to consulting firm SNL Kagan, Starz and sister channel Encore in 2012 generated revenue of $1.34 billion and $414 million in cash flow, a metric similar to operating income.

Just a few years ago, Starz trailed HBO as the No. 2 movie channel in terms of distribution. But it has since been surpassed by Showtime. The CBS Corp. network has staged a string of hits including "Weeds," the serial killer drama "Dexter," the pill-popping dark comedy "Nurse Jackie" and its latest hit, the terrorist thriller "Homeland," which last fall won the Emmy for TV's best drama.

According to SNL Kagan, Showtime has 21 million subscribers and 2012 revenue of $1.6 billion. Cash flow for Showtime and its sister channels TMC and Flix should approach $690 million combined for 2012. Showtime's programming expenses are slightly less because it ended its relationships with movie studios several years ago.

"Showtime has been doing something similar (to Starz) with their strategy, but they have programming that people are talking about," BTIG analyst Richard Greenfield said. "The question is: How does Starz stack up?"

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