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Starz Subscription Pay Television Features Output Deal

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Starz Subscription Pay Television Features Output Deal DRAFT Starz Subscription Pay Television Features Output Deal Presentation to the Group Executive Committee January 16, 2013 Executive Summary • SPE is seeking approval to extend the feature film output agreement in the US market with Starz for five additional slate years (2017-21) • The agreement provides an essential component for the financing of SPE’s feature films through the 2021 slate • SPE strongly recommends executing an agreement now when we have the greatest leverage over Starz. This leverage may dissipate if the negotiations are postponed • The five year term extension (2017-21) is estimated to generate an additional $1.3BN in license fees and bonus and presents the opportunity for significant additional compensation from Internet exploitation and the ability to carve-out certain titles • Starz also offers additional compensation in the near term (2014-16) (e.g., an increased bonus and Internet fees and the ability to carve-out titles ) that wouldn’t be offered by other partners • The value of the new Starz deal from 2014 – 2021 represents an improvement of $331M as compared to the license fees and bonus of the current Starz deal ($739M if an additional 25M Internet subscribers are assumed) • The Starz deal provides better flexibility for Sony content services than those offered by other providers in the market and the current2 Starz deal, including more favorable terms for EST/Home Theater, SVOD and carriage of Starz service Background Considerations • Premium Pay Television Output Deals • Major motion picture studios rely on long-term feature film output licenses to secure financing for film production • Pay TV channels include Starz, HBO, Showtime and the relatively new channel EPIX • Internet-delivered subscription-video-on-demand (SVOD) services (e.g., Netflix, Amazon and Hulu) have also recently become potential buyers • In 2012, Disney became the first major studio to enter into an output deal with an exclusively Internet-delivered service (Netflix, starting with the 2016 slate) • Existing SPE-Starz Output Deal • SPE’s output partner was HBO prior to the 2005 slate • SPE first closed an output deal with Starz in 2000, effective with the 2005- 10 slates This deal had an option for SPE to extend the deal for the 2011-13 slates • In 2009, SPE negotiated an extension with Starz for the 2014-16 slates NOTE: Feature film output deals are typically negotiated several years in advance for financial planning of film slates and are long-term in nature 3 Timing Considerations • SPE now has leverage in the negotiation with Starz • SPE deliberately waited until now to negotiate this deal • Starz announced it will be ‘spun out’ as a separate company in early 2013 and needs to show investors it has secure access to movies • Starz recently lost Disney films to Netflix starting in 2016 • Recently closed Pay TV deals between Fox and HBO; Universal and HBO; Disney and Netflix; and EPIX and Netflix provide SPE significant leverage in its negotiations • This leverage may dissipate if SPE postpones negotiation of an extension • SPE believes the leverage it currently enjoys may be reduced after the Starz ‘spin-out’ (e.g., if Starz is acquired) • Starz currently lacks a strong original programming slate. If Starz succeeds in developing an original series hit (like HBO did with The Sopranos), it may place a lower value on feature films • Because of the favorable financial and other terms available at this time, SPE strongly recommends closing a new deal through the 2021 slate 4 Market Dynamics • SPE Sought and Obtained Competing Bids • During 2012, SPE actively discussed a potential output deal with every willing partner in the market. Starz emerged as the strongest partner: • Offered strongest rate-card in the market and an annual bonus • Financially viable with long-term cable carriage • Offered near-term modifications to existing deal that are favorable to SPE • Reasonable rights requirements with potential Sony Service accommodations • Offered strong rate-card but no bonus. Plus, a long payment plan for each license • Financially uncertain prospects, if Sony were added to Disney as a Netflix output partner. SPE believes Netflix’s subscriber base must grow above 40M HHs by 2017 (larger than any US pay service), or Netflix’s pricing must increase, or some combination thereof in order for Netflix to afford output agreements with two major studios • Rights requirements: included a long (24 month) first pay license window that creates negative downstream impact • Submitted a late bid for Screen Gems films only. Competitive rate-card. No bonus • Regarded as financially viable • Rights requirements: believed to be comparable to Starz • Did not submit a bid. HBO recently renewed with Universal • HBO’s rights requirements are more restrictive than Starz’ • Other potential buyers (EPIX, HuluPlus, Amazon, Redbox, StreamPix, DirecTV, Others Vutopia, SENI) • None submitted bids or were committed to the feature film output licenses 5 Summary of Key Changes • Linear license fees for the 2017-21 slates are 35% ($56M/year) higher than the 2014-16 license fees • Increase the annual bonus from $40M to $46M (15%) beginning in Calendar 2014 • Eliminate the Internet subscriber caps in exchange for significant uncapped Internet fees – e.g., $54M assuming 25M additional Internet subs vs. $3M for current deal (assuming current $7.99 Netflix pricing and subs) • Option to remove SPA titles from the deal and license them to a different buyer instead of Starz • Reduce minimum annual movie volume from 14 to 12 • Reduce maximum annual movie volume from 50 to 45 (starting with 2014 slate) • Improve rights for Sony Services/offerings during the Starz term 6 Sony Content Services Improvements for Sony Services/Home Entertainment • SVOD for Sony Services: Sony Internet-delivered Services may have access to certain films on an SVOD basis earlier than before (as early as 2 years from theatrical release), between the two Starz windows • Early EST for Sony Services: Sony Services may offer EST 30 days earlier than standard date for up to 7 Pictures per year without restriction • Theatrical Window Pay-Per-View/Transactional VOD: SPT may offer Pictures during the Theatrical Window with greater pricing flexibility than before to develop this new market • Favorable Terms for Sony Services: A Sony service may carry the Starz channels via the Internet on non-discriminatory terms compared to Starz’ other distribution partners (cable or Internet), subject to good faith agreement with Starz 7 Overall Deal Value Existing Extension Output Deal: ($ in MMs) 2014 2015 2016 2017 2018 2019 2020 2021 Total • Improved linear rate Output Deal * Fees $163 $163 $163 $163 $163 $163 $163 $163 $1,304 card effective in 2017 Starz Existing Bonus $40 $40 $40 $40 $40 $40 $40 $40 $320 Terms • Increased annual Total $203 $203 $203 $203 $203 $203 $203 $203 $1,624 bonus from $40M to Fees $163 $163 $163 $219 $219 $219 $219 $219 $1,586 $46M effective Starz Proposed Bonus $46 $46 $46 $46 $46 $46 $46 $46 $369 immediately Terms Total $209 $209 $209 $265 $265 $265 $265 $265 $1,955 Fees $0 $0 $0 $56 $56 $56 $56 $56 $282 Improvement Bonus $6 $6 $6 $6 $6 $6 $6 $6 $49 / Variance Total $6 $6 $6 $63 $63 $63 $63 $63 $331 Additional Opportunity: Potential Additional Internet Opportunity Starz Existing OTT Upside** $3 $3 $3 $3 $3 $3 $3 $3 $24 • Additional Internet Terms Total $3 $3 $3 $3 $3 $3 $3 $3 $24 fees apply if Starz distributes over the Starz Proposed OTT Upside** $54 $54 $54 $54 $54 $54 $54 $54 $432 Internet through an Terms Total $54 $54 $54 $54 $54 $54 $54 $54 $432 over-the-top “OTT” Improvement OTT Upside** $51 $51 $51 $51 $51 $51 $51 $51 $408 service (e.g., on / Variance Total $51 $51 $51 $51 $51 $51 $51 $51 $408 Netflix) * Estimates based on an average slate over a historical 5-year period. • SPE has the option to ** Assumes for illustration only a "Netflix" sized deal (25M additional subs) at current Netflix pricing ($7.99/mos). license SPA pictures elsewhere for higher fees 8 Deal Terms Summary License Term and Rights • Theatrical releases from January 1, 2017 – December 31, 2021 (5 years) • Exclusive Subscription Pay Television (including SVOD) across all means of delivery, subject to usage rules and content protection. Starz can deliver its service via the Internet on a stand-alone basis (i.e., not tied to cable subscription), with incremental license fees due after certain subscriber counts are reached Motion Picture Qualifications • All qualifying feature films theatrically released by an SPE label up to a maximum of 45 films per year, in the following categories: • 25 “A” Films: Film released in the U.S. by Sony on over 800 screens • 15 SPC Films: Film released in the U.S. under the Sony Pictures Classics label • 5 “B” Films: Films in excess of the “A” Film and SPC Film caps above, as well as up to 2 films theatrically released by a third party but for which SPE controls the Pay Television rights. The License Fee for “B” Films is 65% of the Rate Card • SPE may also require Starz to license up to 1 “Live Event” film (e.g., concert films) to Starz at 75% of the Rate Card License Fee. This is a new right that secures a Pay TV license fee revenue stream for Live Event films occasionally released by SPE • SPE also has the opportunity to enter into a Library film deal for incremental license fees 9 Deal Terms Summary (Cont’d) License Periods/Exhibitions • License Periods – Starz will have two “windows” or license periods for each film: • A “Pay 1” window commencing 7-9 months after U.S. theatrical
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