Premium TV takes a hit

User cancellations during recession affecting earnings

NEW YORK -- Basic cable might be buoyant, but premium payboxes are feeling the pinch.

Latest earnings reports from entertainment and distribution biggies suggest that the likes of Starz, Encore, HBO and Showtime are seeing slower subscriber growth or even declines because of user cancellations amid the recession.

Liberty Media said Friday that its Starz service saw an average sub gain of 5% in the second quarter compared with the year-ago period, and Encore essentially was flat year-over-year. But sequentially, meaning compared with the first quarter, Starz lost 3% of its subscribers in the period and Encore was down 1%.

Starz chairman and CEO Robert Clasen said this was "the result of multiple factors, including the general economic conditions" and fewer housing starts. Management said its distribution partners in some cases also didn't run marketing campaigns, which will happen during the current quarter, though.

Liberty Media president and CEO Greg Maffei said he still feels "very good about Starz's overall relationships with distributors," citing a carriage-deal renewal with Liberty-controlled DirecTV. Management also said renewal talks with such cable giants as Comcast, Time Warner Cable and Cox Communications are progressing well.

The signs of Starz's weakness came a day after satcaster DirecTV highlighted in its second-quarter earnings call that demand for premium channels and pay-per-view buys has weakened amid the recession.

"The primary reason for the lower growth is that we're continuing to see more customers than expected right-size their bills by purchasing fewer premium packages and PPV titles," DirecTV CFO Pat Doyle said. "In other words, more customers are finding less value in premium channels, particularly because of the tough economic environment." But he also mentioned "less compelling premium content" as a reason.

Through the first half of the year, DirecTV's premium-package penetration rate is down about 10 percentage points from the same period last year, Doyle said. "This rate of decline is much deeper than we've seen in recent years," he added.

DirecTV interim CEO Larry Hunter added that his team sees "no value" in adding another premium movie channel like Epix, the joint venture of Viacom, Lionsgate and MGM. (The long-gestating Epix unveiled its first carriage deal just 10 days ago, with Verizon.)

Meanwhile, asked about possible pressure on premium channels, CBS Corp. president and CEO Leslie Moonves said last week that he feels good about his firm's pay cabler, Showtime.

"We are protected by the packages and by the carriage deals," he said. "We do not anticipate the weakness in premium to affect us."

He also noted that Showtime is "growing in a lot of our MSOs, and there is a real strength for the service caused by original programming," he said, pointing out that carriage deals with telecom giants' burgeoning video services are providing downside protection. "Every new subscriber a telco gets, Showtime goes up. So, we're rooting for their success."

The talk about premium TV's economic challenges came after Time Warner had reported second-quarter earnings. All the information it provided about HBO in the report was that it saw "higher subscription rates" than in the year-ago period.

Including HBO sister Cinemax, the pay service had almost 41 million subscriptions as of Dec. 31, according to TW's annual report for 2008. But like the other cablers, HBO subs have slowed in the second quarter compared with the first, a spokesman said.

Meanwhile, in Canada, Corus Entertainment, which runs Movie Central in western Canada and partnered on the launch of HBO Canada, added 30,000 pay TV subs during its fiscal third quarter ending May 31 and is up 63,000 subs year-to-date.

"We expect continued strong results from our pay TV business," Corus CEO John Cassaday told analysts last month.

Etan Vlessing in Toronto contributed to this report.
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