For Lions Gate, Cable Has Become a Reliable Profit-Making Machine

Lions Gate Entertainment Corp. knew it was taking a risk when it put “Weeds,” the first prime-time television show centered around a pot-dealing soccer mom, into production.

Not only was the subject matter edgy, but it came at a high price. With a cast of relatively expensive, big-name actors led by Mary-Louise Parker, the Showtime cable comedy costs $1.6 million per episode -- a hefty sum for a half-hour cable offering.

But by employing financing formulas it has used to make and distribute such profitable, low-budget movies as “Madea’s Family Reunion” and the “Saw” horror franchise, Lions Gate not only covered its costs on “Weeds” but also cleared what industry analysts estimate was about $100,000 per episode of pure profit.

As one of the last remaining independent movie studios in Hollywood, Lions Gate has for years found success seeking out movies to distribute for specific audiences, such as this year’s Academy Award winner for best picture, “Crash.”

As it moves more aggressively into television production, Lions Gate has decided to focus on a ripe and affordable target: prime-time cable.

By cobbling together money from license fees, income from international sales, state and local tax rebates and subsidies, Lions Gate has at least broken even from day one on all nine of its shows -- a rarity in a business where most network shows begin in the red.

The studio also used this model to finance its first foray into broadcast TV: “Hidden Palms,” a one-hour teen drama for the soon-to-be launched CW network. The studio is also planning to announce the launch of a horror cable channel by the fall.

On “Weeds” the studio recovered its costs upfront by receiving a large license fee from Showtime and hundreds of thousands of dollars in Canadian and international sales. That means that when the show’s first-season DVD is released this month -- and if reruns are ever sold into syndication, which typically is what pushes a successful television show into the black -- Lions Gate stands to profit even more.

“We saw an opportunity in cable to play against the grain of most studios,” said Jon Feltheimer, chief executive of Lions Gate. “They were going broadcast and broadcast is very difficult. We set ourselves up to compete in places where we could win.”

Lions Gate is not the only studio dipping into these waters. But because it lacks the deep pockets of major media conglomerates such as Time Warner Inc.’s Warner Bros. Television and News Corp.’s 20th Century Fox Television, it has been in the forefront of finding creative ways to finance its shows.

The studio’s revenue from television production jumped 60% in fiscal 2006, to $133 million, according to the company. Although film is still the studio’s main driver, its TV shows bring in about 10% to 15% of the company’s cash flow. Lions Gate’s total revenue for fiscal 2006 rose 13%, to $951.2 million. Its free cash flow increased to $102 million from $93 million the previous year.

As its television operation has bulked up its earnings and its overall assets, the studio -- which has long been rumored to be seeking a buyer -- even has become an attractive acquisition target. Investor Carl Icahn recently accumulated a small stake in the company in part, analysts said, because of the possibility it could be sold to another studio or to an Internet, phone or cable giant looking to dabble in Hollywood.

Since Feltheimer took the helm in 2000, the publicly traded company, now based in Santa Monica, has brought in investors to expand its motion picture and television library. Lions Gate acquired Trimark Holdings Inc. in 2000 and Artisan Entertainment in 2003.

Lately, Lions Gate’s television endeavor is starting to get some attention on Wall Street.

“They don’t have the benefit of Disney or News Corp.’s balance sheet,” said Eric Handler, an analyst with Lehman Bros. “They cannot afford to be deficit financing. They have to be a lot more nimble and creative.... It’s a nice little business that has been growing.”

Cable is often a better home than network TV for racy content that pushes limits. Because the business model of premium cable channels is dependent on subscribers, not advertising dollars, these channels need shows that generate buzz to lure customers.

However, shopping a show to cable has never been as attractive to the studios because it’s more difficult to have a breakthrough hit when it’s reaching only a fraction of the TV-watching audience. In addition, the possibilities for syndication are more limited.

Most suppliers of traditional network TV create shows and make them at a loss, gambling that a series will last long enough to accumulate the number of episodes (usually four seasons’ worth) required to be resold into syndication.

But lately, some studios are also turning to cable to try to keep soaring costs down.

Warner Bros. Television, producer of the successful cable show “Nip/Tuck” for the FX channel, in April launched Warner Horizon Television as a production label for shows costing less than $2 million an episode.

In 2004, Fox Television, started Fox 21 to make lower-budget shows. So far, the label -- modeled after Fox Searchlight, the studio’s well-regarded specialty film division -- has produced the hit reality show “Beauty and the Geek” for the WB (now the CW) and the drama “Saved” for TNT.

Although there is less profit to be made on cable than on the networks, studios are able to take more creative risks and keep costs down. For example, at less than $2 million an episode, “Saved” costs about 25% less than the average network television program, estimated Gary Newman, president of 20th Century Fox Television.

“People who equate high costs with high quality are making a big mistake,” Newman said. “There isn’t a connection between spending lots of money and having better shows.”

But these divisions are primarily side businesses for Fox and Warner. Cable is Lions Gate TV’s lifeblood.

“This is our core business,” said Kevin Beggs, president of television production for Lions Gate. “It is not just part of a portfolio or just dipping our toes into cable. It’s easier for a small fish to play in these waters than for a big fish to downsize and get small.”

When Feltheimer became CEO of Lions Gate, one of his priorities was to build up a moribund television division that generated one show a year. As the former president of Sony Corp.’s Columbia TriStar Television Group, Feltheimer oversaw the company’s $2-billion annual business and pushed shows such as “Dawson’s Creek” and “Party of Five” into production.

In 2002 Lions Gate launched the supernatural drama “The Dead Zone,” now in its fifth season, for the USA Network. By the end of the summer all five seasons are to be made available for download to an iPod from Apple Computer Inc.’s iTunes. In the fall the show will be sold into syndication.

Other Lions Gate TV shows include the drama “Wildfire” for ABC Family and this year’s reality program for TV Land, “I Pity the Fool,” starring 1980s tough guy Mr. T as a motivational speaker.

At first, “Weeds” didn’t seem like a natural fit for Lions Gate. Three years ago, Beggs was pitched the idea by former “Friends” writer Jenji Kohan and her agent.

Beggs liked the concept, but it took several months to convince Feltheimer that making a half-hour comedy about a widowed, pot-dealing PTA mom would work. The studio had focused mainly on making dramas such as “The Dead Zone” and made-for-television movies such as Lifetime’s “Baby for Sale.” Most of its productions were filmed in Canada, New Mexico or Louisiana, where the studio could take advantage of generous tax incentives and subsidies that lowered its financial risk. “Weeds,” by contrast, would be filmed in pricier Los Angeles.

“We had to find a way of making it a profitable business for us on the front end,” Beggs said.

The gamble paid off. “Weeds” has lifted Showtime’s profile and has given Lions Gate a critical hit, with the show garnering five Emmy nominations last week and winning awards such as a Golden Globe for Parker and a Writers Guild of America win for Kohan. Last fall, episodes of “Weeds” were made available for downloading alongside installments of “Desperate Housewives” and “Lost.” Lions Gate will keep a large percentage of the $600,000 in revenue that deal generated.

Feltheimer is not inclined to change his cable-focused formula. But depending on how “Hidden Palms” does on the CW, he says, Lions Gate may make more shows for network TV.

“We are not trying to build a better mousetrap for anybody else,” he said. “We are just building a better mousetrap for us.”

Times staff writer Meg James contributed to this report.