Joint venture enters pay TV, VOD space

Viacom, MGM, Lionsgate set to launch service

UPDATED 5:24 p.m. PT April 20, 2008

Viacom Inc. and its Paramount Pictures unit, MGM and Lionsgate said Sunday that they will jointly launch a premium TV channel and VOD service in the fall of 2009.

The deal was unveiled by Viacom president and CEO Philippe Dauman, Paramount chairman and CEO Brad Grey, MGM chairman and CEO Harry Sloan and Lionsgate co-chairman and CEO Jon Feltheimer, who all emphasized their hope to make it a "next generation" service. The deal gives MGM and Lionsgate, two of the last movie companies not affiliated with a TV network, ownership in a TV channel.

The unnamed studio venture will tap new and classic feature films and original TV series produced by the partners, including an expected renewal of a major TV production effort at Paramount.

In addition to the studios' libraries, all Paramount and Paramount Vantage titles released theatrically on or after Jan. 1, 2008, and all MGM, United Artists and Lionsgate titles released theatrically on or after Jan. 1, 2009, will be part of the mix.

That means the venture will have exclusive access during the pay TV window to recent and upcoming films such as "Iron Man," "Star Trek," "The Pink Panther 2," "Cloverfield" and "Robocop." It also covers such library hits as "Dirty Dancing," "Reservoir Dogs," "Crash," "Braveheart," "Forrest Gump," the "Godfather" series and the Rocky and James Bond franchises.

"This venture has the potential to be a game changer for the industry," Dauman said. "We are building an innovative service that will use traditional and new digital distribution technologies to bring great film and television entertainment directly to the consumer."

Sloan said the service will offer "flexibility for program distributors as well as consumer options." And Feltheimer also touted it as a "true next-generation premium content offering for the consumer."

It was not clear what innovative approaches to premium TV programming and distribution the new venture might include. Sources said those things still are the subject of discussions, but they mentioned possible online and other digital components.

While it won't be an ad-supported basic-cable network, the venture will have to detail whether its network will be marketed as a traditional premium pay TV channel or further differentiate itself. It appears that an a la carte approach is one possibility. The venture partners also have zeroed in on a CEO with the necessary credentials and expect to name him shortly.

Although the companies didn't disclose their ownership stakes in the venture, Viacom clearly is taking the lead role. One source said the company will get some potential upside because it will provide what it called "operational support to the venture, including marketing and affiliate services through its MTV Networks division."

This is key given that MTV has some of the strongest relationships and big pull with cable and satellite TV providers. Some first carriage arrangements are expected to be unveiled in the near future.

The new venture will take on Time Warner's HBO, Liberty Media's Starz and Viacom sibling CBS Corp.'s Showtime. The move further increases the competition between Viacom and CBS, both of which are controlled by chairman Sumner Redstone and have moved onto each other's turf since their 2006 split in an effort to turn themselves into separate yet full-fledged conglomerates.

Redstone countered suggestions that he is allowing one of his companies to make a major dent into the business of its sibling.

"I have stated from the beginning that Viacom and CBS have the right to pursue their own strategic objectives in the best interest of their individual shareholders," he said. "Competition between the two companies hones their skills and their productivity."

CBS chairman and CEO Leslie Moonves was briefed on the venture plans Sunday.

"We wish them well," Showtime Networks' chairman and CEO Matt Blank said Sunday. "We've never enjoyed the success, subscriber growth and press attention we are enjoying today with our original programming, and we believe that will go well into the future."

Dauman said that "it's not the objective" of the new venture to hurt or kill off Showtime, which has increasingly focused on original content.

"I wish CBS and Les well," Dauman said. "He's my friend. They are free to pursue their strategy."

Dauman also pointed to the recent launch of CBS Films as another example where the siblings have moved into each other's businesses. "It's not (Moonves') job to create value for Viacom shareholders," he said. "And it is not my job to create value for his company."

Showtime brass were not surprised by the announcement. The pay cable channel had been in negotiations with Paramount, Lionsgate and MGM about renewing their output deals until recently when the studios began to explore other options. Showtime's output deals expire at year's end (for Paramount) and at the end of 2009 (for MGM and Lionsgate), so the network will continue to run movies under the pacts well into 2011. However, they won't be renewed given that the new venture will have exclusive pay TV access to its partners' content.

Showtime is now expected to invest some of the money earmarked for output deals into more original series to join "Dexter," "The Tudors" and Lionsgate-produced "Weeds." Blank had repeatedly stated, as recently as in February, that acquired movies were not regarded as a primary driver of subscriptions. And about a year ago, CBS Corp. CFO Fred Reynolds pegged the cost of the three output deals at Showtime at more than $300 million a year.

Meanwhile, the average household ratings for theatrical premieres on Showtime have declined 80% since 2001, while its scripted series have performed steadily.

Showtime already has been approached by a number of feature players outside of the output deals offering their movies. Showtime also will rely on the product of sibling feature startup CBS Films. Still, with 11 channels to fill, eight of them Showtime and its multiplexes, plus two Movie Channel siblings and Flix, having a deep inventory of theatricals is important.

While details of the service are still in the works, analystssaid it fits in with the continued evolution of the entertainment business. "The new digital era continues to highlight the power of combining quality content with distribution," Miller Tabak analyst David Joyce said. "This is a new version of a challenger to HBO, Showtime, Starz and Hulu."

HBO, the clear leader in premium TV, declined comment Sunday. But Dauman acknowledged HBO's dominant position. "HBO is a great, great service," he told The Hollywood Reporter. "But there is clearly consumer demand. Many services can be successful here."

The new venture faces some challenges. Paramount, MGM and Lionsgate's slates are not as strong as that of other studios, such as Disney, 20th Century Fox TV, Warner Bros., Sony and Universal, which have output deals with HBO and Starz.

Also, with the proliferation of DVDs and on-demand, the value of theatrical movies on pay cable is going down, replaced by the rise of original programming. Even Starz, which was built on the premise of an exclusive destination for movies, recently ventured into original series, greenlighting its first drama, "Crash."

Georg Szalai reported from New York; Nellie Andreeva reported from Los Angeles.