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Coverage Initiation: Starz
Value Line has initiated coverage of Starz (STRZA) in its flagship product, The Value Line Investment Survey. Starz is a leading integrated global media entertainment company with operating units that provide premium subscription video programming on domestic U.S. pay television channels (Starz Networks), global content distribution (Starz Distribution), and animated television and movie production (Starz Animation). The company began trading on the NASDAQ exchange market on January 14, 2013 as a result of a spin off. Its predecessor company spun off what is now Liberty Media Corporation (LMCA), with the remaining assets renamed Starz.
Starz Networks is responsible for about 72% of the top line, and is a leading provider of premium subscription video programming through the flagship Starz and Encore pay TV networks. These networks showcase premium original programming and movies to U.S. multichannel video programming distributors (MVPDs), including cable operators (such as Comcast (CMCSA) and Time Warner Cable (TWC)), satellite television providers (such as DIRECTV (DTV) and Dish Network (DISH)), and telecommunications companies (such as AT&T (T -Free AT&T Stock Report) and Verizon (VZ) - Free Verizon Stock Report). As of the end of September, the two networks served a combined 57 million subscribers (22 million at Starz and 35 million at Encore). The company’s third network, MoviePlex, offers a variety of art house, independent films, and a classic movie library content. Altogether, the three networks air over 1,000 movies monthly across 17 linear channel offerings, complemented by on-demand and Internet services.
Starz Distribution includes the Home Video, Digital Media, and Worldwide Distribution businesses. This segment makes up about 27% of sales and distributes original programming content produced by Starz, as well as entertainment content for itself and third parties. These titles are sold to and distributed by regional and national retailers and other distributors, including Wal-Mart (WMT - Free Wal-Mart Stock Report), Target (TGT), Best Buy (BBY), Ingram Entertainment, Amazon (AMZN) and Netflix (NFLX). Lastly, Starz Animation (roughly 1% of sales) produces animated TV and movie content for studios, networks, distributors, and audiences worldwide.
Starz, Encore, and MoviePlex are distributed pursuant to affiliation agreements with MVPDs. In return for delivering programming that meets certain standards, Starz earns revenue based on either the number of subscribers receiving its programming or via fixed monthly payment. The deals are generally structured to cover multiple years with staggered expiration dates and generally provide for contractual rate increases, sometimes tied to inflation.
The majority of the content on the company’s programming networks consists of theatrically released films, and Starz has exclusive long-term licensing agreements with The Walt Disney Company (DIS - Free Disney Stock Report) and Sony Corporation (SNE). These deals expire in 2015 and 2021, respectively. Starz also licenses content from other major studios, including Lionsgate (LGF), MGM, Paramount, Twenty First Century Fox (FOX), Universal, and Warner Bros. In addition to theatrical films, Starz licenses made-for-television movies, series, and other content.
Overall, the company’s markets are highly competitive. In terms of programming, Starz competes with other networks, including premium television network providers HBO/Cinemax, Showtime, and EPIX, for viewing and subscribership. Competition also comes from over-the-air broadcast television, Internet-based video and other online services, mobile services, radio, print media, motion picture theaters, DVDs, and other sources of information and entertainment. The Distribution unit also faces intense competition, especially regarding DVD sales.
Looking out, Starz’s strategy is based on four objectives. First is to deepen relationships with core network distributors. The company has maintained uninterrupted carriage with some of the largest MVPDs in the U.S. and to keep this up, the company plans to create valuable new products and services that will assist its distributors in strengthening their products. Second is to expand the slate of original programming. To do so, Starz intends to create unique and fully immersive content ecosystems around its original programming and theatrical movie content, such as authenticated online offerings, second screen, and social media integration. Third is to optimize existing and emerging distribution opportunities. Lastly, the company intends to increase brand awareness, perception, and loyalty among distributors to attract new and retain existing subscribers through increased marketing efforts.
On a macroeconomic basis, Starz is affected by prevailing conditions in that decreases in consumer discretionary spending could affect network subscriptions. More of a micro challenge includes the ability to renew and extend affiliation agreements with distributors on favorable terms. Due to consolidation of MVPDs, the largest companies have significant leverage in their relationship with certain programming networks. Further, in 2012, Comcast and DIRECTV each accounted for at least 10% of Starz’s revenue. The loss of either of which could have material financial repercussions. Also, increasing rates paid by MVPDs to other programmers may result in increased rates charged to their subscribers for their services, making it more costly for subscribers to purchase Starz packages. To combat this, Starz needs to continue to acquire or produce affordable programming content, including original programming content that appeals to distributors and viewers. Moreover, piracy of films and television programs is an increasingly prevalent problem and could adversely affect the business over time.
All told, investors interested in this entertainment company are advised to consult Value Line’s quarterly reports for Starz, as well as any supplemental reports and relevant articles as important news items arise.
The author held a position in AMZN at the time of this article’s writing.