Comcast Gets What It Wants

MSO wrests cheaper distribution deal from Starz

Comcast Cable flexed its considerable programming muscle to resolve a legal tussle with pay-TV service Starz Encore Group and fashion a new distribution pact. It boils down to this: Basically, the country's largest operator got what it wanted.

Comcast, with its 21 million customers, will now pay a per-subscriber fee for the Starz and Encore channels for all its systems, including former AT&T Broadband systems, and will no longer absorb any of Starz' programming costs. Analysts called the settlement a big win for Comcast, which essentially wrestled Starz to the kind of terms that operators typically make with programmers.

The two companies have been battling since Comcast closed its deal for AT&T Broadband last November. Comcast sued to essentially void AT&T Broadband's Starz deal. Under a sweetheart deal inherited from predecessor Tele-Communications Inc. (once owned by Starz parent Liberty Media), AT&T paid an above-market flat fee for Starz services and picked up some programming costs.

AT&T, realizing the big ticket it was paying for Starz, also had sued to get out of the deal, and, in 2001, Starz initiated its own litigation, trying to hold the MSO to the agreement.

It was important for Starz, and its parent Liberty Media, to settle and move on, analysts agree. The litigation could have dragged on for months or longer, leaving the pay service without access to Comcast's systems.

"Starz could no longer bear the pressure from Comcast's not marketing its product and favoring HBO and Showtime," noted Fulcrum Global analyst Richard Greenfield.

Now it gets access, and Comcast will once again promote Starz products, which is critical for the pay service's subscription business. And, of course, getting some subscriber fee out of Comcast helps.

But Starz has been adjusting its financial estimates. In early September, Liberty Media said programming costs at Starz are rising—with license fees for theatricals surging $175 million-$225 million next year—and will impinge on its profits, assuming it couldn't pass the costs along to Comcast.

That's roughly the amount Comcast is saving. Merrill Lynch media analyst Jessica Reif Cohen called the deal "essentially a big win for Comcast" and said in a report that, under the new pact, the MSO should save an estimated $100 million this year and $200 million next year.

As part of the new deal, Comcast will also roll out Starz' on-demand and high-definition services in markets where the operator offers them. Starz will also develop an Encore on-demand product, which Comcast will carry. Like its other on-demand and HD programming, the Starz and Encore services will be available at no additional cost to digital subscribers who also subscribe to the pay channels.

Starz views these high-tech products as its future for growth. While HBO and Showtime can tempt subscribers with original programming, Starz basically just trades in big-name theatrical movies, such as Lord of the Rings: The Two Towers and Sweet Home Alabama. It emphasizes its exclusive first windows on TV and the flexibility of its on-demand product.

But at least one analyst is wary of Starz' dependence on movies. "Starz has gone nowhere in original programming, and that puts it at risk longer term," said Fulcrum Global's Greenfield. "Its earnings level is lower without this above-market deal, and, on top of that, it is increasingly exposed in being third of three pay-TV channels."