Pay-TV test set for film venture

A partnership of Viacom Inc.’s Paramount Pictures, Metro-Goldwyn-Mayer and Lionsgate to launch a movie channel and video-on-demand service is a risky test of the promise of new media.

The question is whether the joint venture will be able to yield the same enormous dividends that Hollywood studios have reaped for decades from pay-TV services such as HBO, Showtime and Starz.

The major film studios have earned hundreds of millions of dollars a year in fees from these premium movie channels, which have paid mightily for the right to run their newest releases. But Showtime, having placed a greater emphasis recently on original series such as “Weeds” and “Dexter,” told the three movie suppliers it was no longer willing to pay such high fees, which totaled more than $300 million a year.

That’s what prompted Paramount, MGM and Lionsgate to announce Sunday that they planned to launch a rival service that they say will shatter an archaic business model that no longer serves consumers who want to watch movies on their favorite portable devices as well as in the living room.

“The key to this is that three studios control all the rights to the content and we can [release] and market this product in unique ways in this digital age,” said Lionsgate Chief Executive Jon Feltheimer.

Showtime and the other premium movie channels’ contracts forbid studios from selling their films as downloads over the Internet, for instance, during the exclusive period when they offer them to subscribers. Paramount, Lionsgate and MGM believe they could reap larger paydays from their movies by offering them on new digital services such as Apple Inc.’s iTunes, Amazon.com and Blockbuster Inc.-owned Movielink at the same time or even before they would appear on Showtime.

Before the venture gains legitimacy, however, the partners must convince a major cable company, such as Time Warner Cable, or a satellite TV leader, such as DirecTV, to carry their channel. The studios also might add a fourth equity partner to the mix, and it is expected to announce shortly that it has hired former Showtime executive Mark Greenberg as CEO of the yet-to-be-named channel, said several people close to the venture.

Greenberg, said to be one of the architects of the new service, has most recently been a consultant to Blockbuster. He did not respond to calls for comment. Blockbuster, which has been trying to move into the digital realm, also could play a role in the new venture.

“We are exploring all sorts of options, so there are bound to be rumors,” said Blockbuster spokeswoman Karen Raskopf.

Many industry veterans question whether the service will fly. Already there are numerous cable channels that play movies, and consumers are bridling over ever-rising cable bills. Some cable executives question whether they should take a chance on a movie service consumers might not be willing to pay for.

Viacom CEO Philippe Dauman, who brought the parties together, has said that the service would have an advantage over rivals because of its flexibility to offer blockbuster films to consumers much sooner and in different formats than is currently possible under the existing pay-TV deals. In addition, the studios could use the service to cross-promote their movies and DVD releases.

It’s unclear how soon or even whether the studios will be able to match the $100 million or more a year in revenue they each receive through their Showtime deals.

“By optimizing the pay-TV window and gaining national distribution for our channel, we will generate more revenue beginning in 2010,” said MGM Chairman Harry Sloan.

That’s when MGM’s and Lionsgate’s obligations to Showtime end. Paramount films, which will become available in late 2009, will be used to launch the new channel.

For the last year, Paramount and the others have been negotiating to extend their deals with Showtime. But the studios walked away after Showtime, owned by CBS Corp., attempted to lower the maximum amount it would pay for each movie, set annual caps on the amounts paid and provide fewer slots. Several sources said that would have resulted in a 40% to 50% reduction in fees to the studios.

Executives from Showtime declined to comment.

Any movie chief will tell you how crucial pay-TV revenue is to a studio’s bottom line.

Paramount, which has collected as much as $100 million to $200 million a year from Showtime, turned a profit of only $104 million last year.

Having such guaranteed revenue, beyond their cut of the box office, helps studios attract outside investors to finance their movie slates. The fees, which are based on a percentage of revenue that a studio receives from movie ticket sales, can average $10 million per movie or twice that on a big hit.

In 2006, when former MGM executive Chris McGurk and his partners were planning to launch a studio, they made sure they had locked in a pay-TV deal. In fact, Colorado billionaire John Malone, who owns Starz, became a key investor in Overture Films.

“The single most important part of the distribution equation was making sure we had a long-term pay-TV output deal,” McGurk said. “When financing a movie slate, it’s very important to have one because it makes the returns more predictable -- which is what investors are looking for.”

But Showtime contends that movies are less important today than they once were. By the time a movie reaches its channel, it has already played in theaters and has been sold on DVD and on cable’s video-on-demand services.

Yet HBO maintains that movies are still the cornerstone.

“For us, movies have been, are and will continue to be a very important aspect of our service,” said David Baldwin, executive vice president, program planning, for HBO and sister channel Cinemax. “It’s the primary reason for people to get the pay service.”

More than 70% of HBO’s schedule is devoted to movies, which still reel in large audiences. Last year HBO’s marquee Saturday-night films, including “The Departed,” drew an average of 10 million viewers, more than three times the audience for multiple runs of such shows as “Big Love.”

That kind of popularity could prove to be a windfall for the new partners. “The pay-TV business is living with a 30-year-old model that doesn’t address these new opportunities,” MGM’s Sloan said.

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