Okay, so we have Jeff Hirsch, CEO of Starz, and I'm happy to have you here, Jeff.
Thanks, Alex.
Obviously, it's very timely as well, just given all the transition within the company. So maybe a good place to start is the changes that you're most excited about as you transition towards a standalone company. What are you most focused on?
Yeah. I mean, I think we're all excited. I think it's going to be really great for both the studio and the network to separate companies and really allow each of us to focus on what we do really well. I think being owned by a studio, rightly so, the Starz story has a little been lost. So it's a good opportunity to get out now and tell the real transition story that we made from Starz. We are a company that has $1 billion in revenue. 70% by the end of this fiscal will be digital. We really made the transition away from a linear business to digital. So we were much more of a digital company than we were before. We're sitting around $200 million EBITDA. We converted about 70% of that to unlevered free cash flow. So a very good investable business.
And we'll separate with about three times leverage on the balance sheet. And so now we have big plans to take this and support business and grow that in terms of even growth over the next three fiscals. But also, I think it's an opportunity to lever the platform that we've built in terms of our data center and our app, with the disruptions still going on in the business, to kind of grow the business from a real growth driver point of view. So we're excited to get out and really focus on what we do well. And I think the CEO is also excited to get out and focus on what they do well.
It seems like you focus on EBITDA and is that the metric you're managing for? And what are the other key metrics of the financial or subscribers? How are you thinking about the business in a few years?
Yeah. So I think, look, we've said publicly we're really focused on the core business today, those 20% that they say margin long-term. We're sitting around a 15% margin today. We've never really dipped below that 15%, even as we went through the digital transition. If you look at our revenue over the last seven years, it's been really durable at a time where the industry is down 12%. And so that has allowed us to continue to transition the business underneath that revenue line to digital and maintain some profitability. I think we have to get that margin back to 20% coming into fiscal 2028. And so there's really kind of five components to drive that. On the top line, we think we can get the business going 1% to 2% on the revenue side. And that's really made up of really three things.
We're obviously subscriber growth and subscriber growth, with the a la carte now giving me the way to get the subscriber growth. Rate increases , we've done a couple of those. We've got to get stuff put off the rating case last year. And then partnerships and bundles. You're seeing today a lot of noise around bundles. It's still very early, although we've been talking about being a complementary bundling partner for a long time. You're starting to see that really happen. We just launched a Max bundle on Amazon for an AMC+ bundle on Vizio. I think you'll start to see other platforms really start to follow that. YouTube has done bundles with traditional kind of cable bundles for a long time. So those three components will drive top line. And then on the cost side, as we separate from the studio, we'll start to get some ownership back of content.
Half the slate in fiscal 2027 will be Starz's own. That gives us the ability, one, to start with fresh content. So with season one, obviously, we've set on cost for season one. Two, we can offload that cost by either taking on a production partner or actually selling that internationally. We don't have that economics today. I think Jon, rightly so, looked at the combined company, kind of the 11 or 12 or 13 multiple on the studio side and a three multiple on Starz, putting a dollar of profit on TV, etc. And that's the side so that put pressure on our standalone P&L. So we'll unwind some of that going forward. And then there's some other content costs that we can actually work our way out of that aren't performing over time. So we can cash profit in the summer right now around $750.
We can certainly see some growth in the season of $700 million. So those components long-term get us to a top line growing 1% to 3% and a 20% margin business. And with leverage sitting somewhere south of three times, I think that's a very investable business.
You talked about the, and maybe this is also part of the cost dynamics you tend to manage, but you still have one window with landscape change recently. And so how are you just thinking about the windowing of something in general, but also more at the industry level? I mean, does windowing matter as much, given that every distribution channel seems to have a different scale of impact?
Yeah. I mean, that's where my network's at with windowing. Obviously, I'm much more in the category of content exclusivity than content ubiquity. I think keeping our video shows exclusive to us. You can see it in the data. It drives subscriber growth. Even when we have a season four on the air, season one sitting there exclusive with us, you're the last people coming in, seeing first title streams. So I'm much more in that keep everything exclusive, get people to come to your network as a destination. I think we've seen that in the numbers. I think we've got some real-life examples with Outlander on Netflix. We don't see the attribution back to Starz. People will wait for the current season and go to Netflix. They don't come to us, and so keeping everything exclusive for us really works.
I think what we worked out with the studio was a really smart way to window the day one. We're getting it multiple months earlier, so it's closer to the premiere window where all that P&A really drives marketing and the brand of that title. And so we think there's going to be a lot more subscriber acquisition the earlier we get it. We also extend it another year. That created an opportunity for the studio to create another window so they can then monetize again. And I think as the world gets bigger and bigger in terms of scale for these one-day streamers, monetizing windows are obviously continuing to be important for studios. But having a small premium network like us, around 20 million to 22 million, you can put cost in front of a bigger 70 or 80 and still monetize those windows.
If you do it the other way, it really actually isn't able to monetize. So I think we still provide that great value of these smaller, like I say, lightly used business in front of these broad-based streamers. So you can still like to be opportunities for us to get a nice day one sitting in there. But we've got Lionsgate locked up from 2028, and their movies really fit our demos really well. And we're really excited about the deal that we struck with Lionsgate. I think it was a deal for both sides that was really great.
And in terms of the distribution strategy, I mean, as the ecosystem evolves, there are newer models that are available. You can bundle your services with a whole bunch of different providers compared to what you've been doing in the past at CAD. How are you going to approach the retail market yourself, which is pretty expensive? So how do you think about these three alternatives and the cost versus benefit equation?
So I think it starts with the consumer, right? We have always taken a distribution-agnostic strategy where if you think about DTC digital coming in, that looks a lot like us doing satellite carriage for cable. And so we never actually created a separate business that was for B2C. Every Starz product, whether it's on Amazon, on DTC, DIRECTV, Comcast, it's the same content I'll tell you everywhere. And so wherever the consumer wants to watch Starz, we want to do that. And I think that continues through. That's one of the reasons that we've been able to make this transition profitably. We didn't outsize spend to serve ourselves versus our partners. And we've always been having clarity with all of our partners because if a consumer wants to watch Starz on Amazon, we're happy. We have the economics for this.
If they want to watch it on DTC, we're all stoked there. And the patterns are a little different. So you want to be the same to everyone everywhere. And so that allows us, depending on whether it's our D2C product, we bundle with Fox into the Starz app, or we're bundled with Max on Amazon. If the consumer wants to watch our content that way, we're going to be there. And so it gives us a lot of flexibility to do that. It also allows our economics to be almost consistent across the board. Obviously, D2C is a little higher, but there's more cost. And ultimately, the subscriber is not as sticky as another platform. But if the consumer is really interested in watching our originals and they'll be leaning into our originals, that's D2C is probably the best location.
If you want to watch the grid guide and see all the movies that we have from Universal and Disney and Sony and Lionsgate, then you watch. I do. I watch DIRECTV, and I scroll through the 17 channels. And so depending on the platform, the content portfolio flexes one way or the other. So again, we want to be wherever the consumer wants to watch us with the same product everywhere.
In terms of your content spend, I mean, you talked about $600 million-ish kind of a number. I mean, you already have a content base that's smaller than your peers and you kind of manage the business with less spending. When you think about that balance, is part of the answer on how you scale even with this less spending distribution or how you customize it? How do you balance that?
I think we have to take a step back and think about what we do differently than what our peers do, right? So we're very focused on women, right? So 2/3 of our base is women, but in that half of the plate was Black women, right? So we are only relentlessly focused on serving women and females. So we're not trying to serve the husband in the home. We're trying to serve the dog in the home. We're not doing weather. We're not doing news. We're not trying to be all things to everybody in the home. So we're not competing with Netflix and Amazon. Those folks are number one or two in the home. We've never been viewed as a choice. No one picked Starz versus Comcast back in the olden years.
You just DIRECTV or Comcast, and you put it on top of those, right? We've kind of mirrored that same approach into the digital world. And so while we're only spending $600 to $700 million, it's laser-focused on that demo, right? So what I would say is if you look at all of the other content spend from our peer group, very few are spending that much money on one demo, right? And so it's allowed us to be in a lane that others can't harm us because we're focusing on everything. And so while our content spend is smaller in aggregate, I think the focus allowed us to be a destination for women around Outlander, White Queen, White Princess, Serpent Queen, Power, Ghost, Force, those kind of shows.
We just had an announcement called All Fours that we just won the rights to produce as a TV show in every film studio and wanted it . But because we are so laser-focused on this demo and we are R-rated and we are adults, we're able to actually do the kind of show that Miranda wanted us to be on television. I think that was a big asset for us, winning the rights to make that TV show. And so I think that served us very well. And what it does is it makes us complementary to everybody, right? So we're not competing with getting that first person in the home. If we're three, four, or five in the home, we can grow the business alternatively and be very successful.
And so it's allowed us to just continue to push down this path of profitability and growth into the digital world while everybody's very hyper-competitive for consumers on this side.
And I guess you're in a unique environment in a way where a lot of media companies are looking for the last steps. And maybe M&A is a more acceptable policy perspective in terms of the scale that is allowed. And you've talked about using DIRECTV as a strategy potentially to scale into a larger business. So could you talk about what kind of assets you would be interested in and what the ultimate objective is?
Sure. Look, I think the other thing that Starz has built that not a lot of people know about is that we built a really significant data stack and app business on the back end. I mean, from inception to today, I think we've spent $90 million on building this phenomenal back end that has allowed us to scale our business profitably. Compare that to the cost of the transaction, $2.1 billion. I think we've had a good deal, and that has given us the flexibility to do a digital transition for others like we did for Starz.
If you think about our companies, if you think about women's buying power has moved from the linear world to the digital world, there's a lot of great brands that sit in the linear world today that have never made the transition to digital because they don't have the back end or they're part of a larger company that has a focus on them. And so those brands have been disconnected from the buying power sitting on the digital side, and they've been marooned on the linear side. And I don't really look at them as linear networks. I look at them as ad-supported content that focuses on the same demos we focus on, wrapped with a lot of cost, which I already have.
And so I think there's an opportunity to go into the linear side of the world, find brands that marry our demos on a non-R-rated, non-ad-supported basis that are DTC movies and holiday movies and really more ad-supported content. Take that content and those brands, build them a digital future, and make the same transition that we did with Starz as linear revenue comes down and you stand up digital revenue on the other side, marrying that with the Starz business and working content back and forth and taking cost out underneath it. I mean, we run most of these networks are built the same way. And so the back end of all these networks is cost. So that cost coming out while we make the transition allows us to really buy time to bring revenue up as linear comes down and give those businesses a digital future.
And so brands that sit with our demos that are marooned on the linear side are really great opportunities for us to run through our infrastructure and build a digital future.
Got it. I guess that ends, as you transition some of these companies into you, and if you were able to apply some of these ads companies and do some content over, is there a risk that there's some kind of cannibalization and that equally the opportunities? I mean, obviously, maybe some cost benefits that you realize out of it, but is there a risk that maybe you have to somehow manage it on the linear side with some degree of equilibrium in the sense that you don't lose revenues to offset the cost benefits?
It's always that risk. I think ultimately what you're doing is product on the digital side is an exact mirror of the product on the linear side. Much like you took this distribution agnostic approach with Starz, it's the same approach, right? And so if you think about our cable partners today, almost 50% of their footprints are broadband only, right? A lot of these brands could actually be sold over broadband because they don't have a digital mirror to do that. And so the idea was to create that not just for the D2C side or YouTube or Hulu Live, but also create it for our cable partners as well so that they can monetize those businesses on the broadband side. Charter and Comcast are going to launch Xumo in a pretty significant way.
And so to have those brands sitting on Xumo where you can sell digital ads, you can have the content there, it opens up 50% of their footprints that they don't have access to today. And so you're not creating something to benefit one versus the other. Again, you're creating a digital mirror of what you have on the linear side and allowing all of our partners to network on the economics on it.
Got it. And you talked about unsold demos or demos that you're focused on. And it's clearly been an area that not a lot of companies seem as focused. I mean, Netflix is all about direct, and increasingly every streamer seems to be about direct rather than get to the next particular demo. From your perspective, is that something that's difficult to scale for the others, just given that you've done this for a long time, you have a base of content that you can target it to? Or what are the other hurdles for others to replicate this strategy?
Look, creating content is hard. Once you kind of learn to make it from side to side, creating six shows is very hard. It's not easy. I think people struggle to create a show that serves your demo and they put it on and your business goes to zero. I think years and years of content creation, it's hard. Creators can make the content great content that we have on the air. All of our peers are super talented in a way that I could never really understand the concepts of linear cable, retired guy. It's hard to recreate that. I think once you start to have hits for those demos and you have repetition and you know that you've become the destination for it, it's very hard to replicate that brand destination for others.
We have five shows that do somewhere between 9 million to 12 million eyeballs a week. Those are some of the major shows on television. We're a third the size of most of our peers. If you took those five shows and threw them into the Netflix data that I think I released not last time, but two times ago, seven times ago, three of those five shows would be in the top 1% of anything viewed on Netflix domestically, right, from where it's hurt the size. These are shows that really punch way above their weight class. We have our phenomenal shows. We had two NAACP awards this weekend from Michael Rainey and Method Man. That was great to see the recognition there. These are some of the biggest shows on TV that not a lot of people have talked about, unfortunately.
It's very hard to replicate the success that we've had. Because we have not just one show for them, like some of our peers, we have four or five shows. We string them together. It creates that habit of coming back repeatedly and becoming that destination. I think unless you're really willing to focus on it on the scale that we are, and instead of doing one for a bunch of different audiences, it's really hard to replicate that kind of destination viewing that we've created.
I guess that also, from your perspective, when you think about a platform like Netflix, does it also create this opportunity where you have these original, you focus on a particular demo, use Netflix for scale, and then feed it back into your system?
Yeah. I mean, look, I think that's purely the case. We have two - that's not where I am. Again, I said earlier, content scarcity is much more important. I think if you look at Outlander as an example, we don't see the value accruing back to us. I think people will wait till this current season comes on. We often saw that with Power on Hulu, where we actually had the older seasons of Power on Hulu and our apps on Hulu, and we just didn't see people accruing up. So I think it's really important to keep your content exclusively for yourself so that you can drive people to the destination, past-season streams , obviously, is a great marker for acquisition.
Like I said earlier, when we have shows that are in their fourth or fifth season and we put season one on or we sample season one out, it drives a lot of acquisition for people catching up. And so I think ultimately, from a network point of view, keeping stuff ,this is content exclusive to your brand, is really important to continue to drive growth.
Got it. Another area where Starz shares a lot with you is a lot more on the international growth and big market, which always inherently brings from an outreach perspective. So what do you think about international from a growth perspective? And is that an opportunity with?
So we were an international. We pulled back significantly. Currently, we're just in the U.S. and Canada. And I think that was the right decision. I think we had a plan that was built on three wholesale partners and expansion on their backs. And one of them showed up in a big way, which was great. And two never really showed up. So that kind of hurt our ability to grow. Never predicted it unlocking a DTC business internationally. And so I think we were early. I think some of our partners didn't show up. And so we pulled back. And I think that was the right decision for us. And so right now, we're very focused on U.S. and Canada. If you look at our domestic TAM right now, we think we're somewhere between 80 to 90 million households in our demo. And we're sitting around 20 million.
So there's a lot of room for us to grow. I think we have a really good lead in terms of, you talked about the destination for these demos, and so as a small management team, we're very focused on growing the domestic business, and I never say never going back to international, but right now, I think we're onto something very good, and so we're just keeping to our knitting. I think context and simplicity is incredibly important in times of disruption, which we've been in today, and so we are going to be laser-focused on the U.S. and Canada business and kind of push up into that 80 to 90 TAM.
Got it. Last question. I think you're kind of out of time. Oh, we have time. Okay. I was getting a little worried that you were. When you think about content, one of the things to consider, I guess, is we're in an environment where everybody else is scaling down on volume similar to yours. We had a lot of folks, WGA and so on, who basically talked about potentially a recession kind of an environment for content creators in general. Has that opened up creators who typically wouldn't talk to you, starting to maybe reach out to you and therefore maybe better quality content feeding into your system?
I think we have a different approach to that. We've always looked at content and scheduling of content as a way to drive production in turn and increase lifetime value. If you take a show that you have for 10 weeks and have a similar show that you put the first episode with the 10th episode and you move another 10 weeks and another 10 weeks, you can drive lifetime value from 10 weeks to 40 weeks just by spending money on content, not having to spend marketing money on the front end, not having to be competitive, and really driving your business by a longer lifetime value. And so that's always been our approach.
The right number of shows to pick for our network, I think where we are looking at dealing with the cost of content isn't so much on the number of less or more. It's keeping to that same number, but actually looking at shows that are newer in a sense, right? Shows that get older become much more expensive. You can look at, obviously, acquisition as a marker. You can look at audience as a marker. As shows start to get older, you get outside of the financial envelope that's acceptable based on acquisition and viewership. The idea is to take similar stories and repeat them with newer shows. So you get season one economics. If you look at one of the things I think that we've been really good at doing with Lionsgate and our partners in Lionsgate TV is creating franchise kickoffs.
are four Power shows today. There are two more that we have in development coming. Those stories will continue to go. And what you get is you keep the audience, you get acquisition, it's familiar to the audience, some of the characters are the same. And so you get people to come from those older shows to the newer shows. We've got everything that we have mapped and developed in today is similar to that, right? Outlander just completed the second half of the seventh season. We have an eighth season coming, which is the last. We have a spinoff coming that is 30 years before the first Outlander. It is back in Scotland. It is younger. It has two love stories. I've seen it. It's spectacular. I think not only will you get the Outlander that you've just come across, you get a new audience to come.
If you don't have to read 10 books and watch 90 hours of television, you get caught up, and so that's one way to continue to do it, and that's the season one, and then we have a bunch of acquisitions that minimize cost, but we have to maintain the same quantity of shows in order to continue to drive churn down and drive the profitability of our business. And so there's other ways to do it versus just cutting shows, and again, because we're focused on those two demos, it's important that we keep that quantity at the same level. I would argue with you that our shows of this set are some of the best, not only from a viewership size, but a quality point of view. I don't think us getting the right content has ever been an issue.
We are a premium adult non-ad-supported business, and so if you want a show that is authentic and racy to the real world, there's really only a few destinations, and we're one of them, and I think our studio partner, Lionsgate, has been a wonderful partner on expanding that and knows how to make shows work that way, and it's been a great relationship the last nine years.
I guess when you think about some of the conversations, it might be available to you to build on this content going forward, and there's a lot of companies, obviously, Netflix is doing its thing and then want to restructure their businesses and so on, and there are some networks there which overlap into our demos, so when you think about these opportunities, are you thinking about these as maybe an opportunity to pick up a few assets from some of these businesses? Are you thinking about this as a much more skilled kind of an opportunity where something is available and then you gain the time of the prize?
It's somewhere in the middle. I would define it as just the scale, right? I think we've learned in this business over the last couple of years or five or seven years is scale for the sake of scale has not really worked. We have a very good focused target and audience that has made us transition to digital profitably in a period where very few have been profitable in this transition. And I think there's opportunities to scale that business around this focus. And that's what we're laser-focused on doing. I mean, I just think getting networks again. I think focus is really important. And we know what we're good at. And so getting bigger is kind of getting bigger isn't the right approach. I think that will cause us a lot of distraction. And so we focus on our two demos.
We diversify revenue by into AVOD with different types of content for those demos is the way that we think about scaling the business. Whether it's onesie, twosies, here or there, or it's a bouquet of five or six or seven, we think there's an opportunity to do that.
Got it. And when you think about content consumption on the linear side versus streaming, and I mean, you've seen the patterns on both sides. So is there any kind of a difference in how people engage with the content on the digital side versus how they're used to engage on the linear side?
I don't think it's so much digital versus linear. I think it's wholesale versus retail is the difference. I can remember back 15 years ago when Richard Plepler was talking about when they first launched HBO, that 65% of the audience online was watching movies and it split on the app. And I think it's not consistent in wholesale retail. If you have all those channels in a grid guide , that's how I watch TV. I'm old school TV guy. So I watch that just surfed. And if I see a movie I like, instead of the fact that we have originals that premiere once a week, but we have 800 movies on the service that are good movies. Of course, on that, people are going to have to watch it to the scale of movies than they watch the originals.
But on our D2C, people are actually actively coming to watch our originals to split, right? So there's a different usage pattern. That's why having data is so important. That's why sharing data with our partners is important so that we know what Amazon, the consumer on Amazon watches more than on our own app versus on Hulu versus on Comcast. When we go out to buy content, we are buying with all of our partners in mind. And so we know that we can't just focus on something that works for our D2C product because we need something that's going to work for our big partner on Amazon and Comcast and DIRECTV. And so we share data back and forth with our partners that we know we got and why we're buying efficiently for our partners, not just ourselves.
And then when you think about some of these partners like Amazon for instance, I mean, they've driven a lot of growth for not just a lot of streamers across the ecosystem. How do you think about the trade-offs associated with a DTC opportunity, right? When you think about a partner like Amazon, they can immediately give you a lot of distribution skills, reduce the acquisition costs, give you some churn benefits. But on the other hand, you also lose a little bit of control. How do you balance these trade-offs?
Again, I think if you have a distribution-agnostic strategy, you want to be on all of the partners and consumers, right? Where it will be very hard for us on our scale to try to grow our direct-to-consumer business to be head and shoulders above our biggest platform. Now, our direct-to-consumer business, when we built it, was designed to do two things. Provide data for us because cable didn't get a lot of data. So it was, "Who is our consumer now?" So we pivoted into the strategy on top of them and did the data from our direct-to-consumer app. So this is what was driving our business. And we said, "Let's lean in." But it was also supposed to provide an avenue that if we got into a distribution fight with one of our single partners, we had a place to run. It's now our second biggest channel.
It's been widely successful. The learnings from the data from the DTC product has really helped strengthen our business across not just the linear cable world, but also the digital wholesale world. It's been very beneficial there. Ultimately, where you have partners that have large groups of consumers like our cable partners, like Amazon, like Hulu, we want to be there as that complementary add-on. Part of it has always been in the old world. Obviously, the economics are a little different. If you look back to us when we were cable-only, I guess for ARPU, somewhere around $4.45. Today, ARPU there from last quarter, I think we just published the $6.32. I think that was the right number for last quarter.
So you've seen as the business has moved from the old cable world to the digital world, we've become much more profitable in terms of subscribers, and so that's allowed us to grow the business that way too. I think part of that also is when I started Starz in 2015, 100%, not 100%, 90% of our customers were in bundles. I remember there was this great one of your competitors who had this kind of piece that said no one's buying Starz. Everybody's just getting it in a bundle, and no one even knows what's on it, and it's going to die of slow death. This was 10 years ago now. Today, 80% of all of our customers are DTC or à la carte, which means two things. One, we're making money for our partners who are not a cost center anymore. We're a revenue center.
Two, that means customers are choosing Starz app, and that means the programming is working. That's part of the reason why you've seen this phenomenally durable revenue line item over the last seven years when the industry is down 12%. We've been flat. You've seen the content performing to these demos being digitally agnostic, which means we're everywhere with those demos. You've seen this business go from 100% linear revenue in 2015 to 70% digital revenue today, right? That's what you've seen in this business.
Thank you for those things. So thank you, guys.
Thank you.