Thank you for joining Lionsgate. We're thrilled to have Jeffrey Hirsch here, president and CEO of STARZ. So I'll get started. I'm joined up here by Brent Navon, who is on my team, and I'll get started, and we'll chat to you. So Jeff, several streaming services have raised or indicated they will raise prices for their DTC service, and you've indicated that STARZ will raise your price for the first time from $8.99 to $9.99 at the end of June. What are you seeing from a consumer demand perspective? And, you know, your domestic subs, over-the-top subs are down, were down 500,000 in the June quarter. With the price increase, do you expect, do you anticipate further sub declines?
Yeah. So, you know, we've looked at the business over the last couple of years, and this is the first rate increase we've done since we launched our DTC app in 2016. So we've gone from six shows to 11 shows. We put on a Lionsgate Pay One, Universal Pay Two, so we've got a lot more content. And we've also always wanted to be priced below our peer group so that we're a complimentary service, not a competitive service for these big, broad-based streaming services. And with our peers doing one, two, three, four rate increases over the last couple of years, it gave us a little room, excuse me, to increase our price. So we went ahead and did that June 26th. We didn't just do it on DTC, we did it across our entire ecosystem.
So Comcast raised its rate, so we are universally priced at $9.95 in the marketplace. And what we've seen to date has been really kind of encouraging. Actually, I said to somebody the other day, I thought we could do more based on the response that we've seen. We did a lot of work around how to do the rate increase, how to launch it, when to launch it, when do we have open rates on emails, so people will be notified, all the way through the customer journey in terms of if they co-- if they want to disconnect, where do we land them? And we've been really encouraged about what we've seen. It's been kind of quiet. It's right within my expectations, and so we feel like either we did a really good job of doing that.
We had a little more pricing power, so we had a little impact in the last quarter because of the rate increase. I think the majority of what we saw. You know, we've had three quarters in the history of the business of sub loss on the DTC product, really driven by lack of movies and lack of content. So I think we had Ghost coming off, which is our biggest show from the quarter before. We use content as a retention tail, so we put a show called Run the World behind it. It didn't retain as much as we should. That, coupled with the rate increase, we saw some downward pressure on subs last quarter.
I do expect, based on being back in all of our biggest content for the next 30 weeks, the return to sub growth in the second half of the year.
You know, just to follow up on that, I mean, the strategy across the industry just appears to be trending towards less content spend and higher prices in order to reach profitability. You know, you guys are already profitable at STARZ, but do you anticipate following that similar playbook? At what point do you think consumers push back on paying more for less, and the demand for these streaming services in general begins to taper off?
Yeah. So I think we're a little different than the rest of the industry. We didn't, as Jessica and I were talking earlier, we didn't create content specifically for our streaming service and not have it on our linear service. So when we went from six to 11 shows, it was actually to make all of our distribution partners stronger. And so we're not looking to cut back streaming specific shows to reduce costs, to kind of generate where we want to get to. We've stated publicly, I want to get the business to a 20% margin business. We're sitting around 15.6% margin right now. In order to get there, we've got to get the cost of content back in line with what the portfolio requires. And so it's not less content, it's less expensive content. And the way to...
There's a lot, lot of ways to do that. You can put, go from scripted to unscripted. You can do, instead of 58-minute shows, you can do 52-minute shows. You can do newer shows versus older season shows. In the arc of shows, when you go from season three to season four, most of the talent get big raises, so there's a big cost spike there. So what we're looking to do is actually... What, what we do at STARZ is we focus on two core demos. We focus on women and underrepresented audiences. So we know what our audience is like. So we have mapped every one of our shows to three to four to five shows in development that we can then go ahead and replace those older shows with.
So same amount of shows, just either fresher or shorter or newer shows to bring that content cost down. So we've got real line of sight getting to that 20% by the, you know, somewhere in fiscal 2026-2027 based on that strategy.
You announced on your last earnings call that you're exiting Latin America, the streaming market in Latin America, by the end of the year. Can you walk us through the logic and what your international strategy will be going forward?
Yeah. So we launched significantly into the international markets, Continental Europe, UK, LATAM, Canada, four or five years ago, and the strategy was really a wholesale strategy that was based on, you know, really Amazon, Apple, and Google expanding rapidly around the world with their streaming services. Amazon showed up in a big way, and we've had great success with them. Apple really has not shown up to the extent we thought they would, and Google still hasn't launched yet. And so two of our three big distribution partners didn't show up, and so we were a little challenged there, and we had to revert back to local markets in our DTC product, which local operators outside the U.S. are really struggling as well.
We actually pulled out of Continental Europe nine months ago, and then we just followed with LATAM. The two really gating factors around our international expansion was, does the domestic content work well? So we don't have to spend more money in those marketplaces to expand there, and do we have great distribution? In LATAM, we had actually great distribution across the footprint. We had a deal with Disney, where they were bundling us in Disney+ and Star+ . Content works really well there with the exception of Mexico, where we had to augment some content there. But content in Mexico isn't that expensive to produce, and we could use it in the U.S., so it was okay.
Disney came to us a few months back and said, "Not as excited about the partnership as we had hoped." Under the new regime, they were able to do some accounting principles around it. And so we negotiated an exit, and with Disney no longer backstopping the marketplace, we made the decision to exit. And it's also been, you know, our ability to actually reduce a lot of costs out of the business long term. As we set the business up for separation, we're really gonna be focused on English-speaking territories, so U.K., Canada, and Australia. Canada's already profitable. U.K. was well on its way to being profitable before inflation spiked over 10 or 12%. We've seen that come down, and the market has started to return to growth.
So our real focus for the global footprint is on the English-speaking territories.
So what does your content pipeline look like for the next 12 months, given the strike? Are there any adjustments that you have had to make with programming and your scheduling to adapt? Do you expect to license more library content to fill in the gaps if the strike lasts longer?
So, you know, as a premium network, non-ad supported, we've always been about big originals supplemented with Pay One, Pay Two, and library. But we do shoot a year, you know, nine months to 12 months in advance, and so most of our content for this coming year was done. We have a couple shows. We had a show in the U.K. that needed five days left of shooting. We got a waiver to do that. So our slate is pretty much intact for fiscal 2025. Fourth quarter, fiscal 2025, if the strike continues, we'll have to move some content around, but we're pretty solid in terms of our originals. And the Pay One and Pay Two, because we get those a year after they've premiered in the theater, we're still gonna get all those movies.
So we're pretty robust in terms of our slate heading into fiscal 25 right now. If it continues longer into next year, then we may have to start to move some content around to fill gaps. We will go out and buy some international properties to have on the shelf, like we did early in COVID, to make sure that we don't have any gaps.
Before I ask the next question, does anybody have a sense of timing on this one? Like, it just seems kind of endless.
I don't know. I just hope everybody gets back to work. The business is much more fun when everybody's working.
Yeah, I'm sure. So, you've announced that you're separating your studio business from STARZ in Q1 of 2024. How do you think about the standalone STARZ investment case versus how STARZ's position is perceived by investors inside of Lionsgate today?
It's a great question. I think we are. I don't think the STARZ story is as clear as it could be because we're part of a bigger company. And you know, as you learn in Hollywood, people making movies, it's. Movies are much more excited than television. So I. Look, I think we are a premium add-on service, primarily English-speaking. We are 20-25 million subscribers. We have, you know, a 20% margin business that we'll get to by fiscal 2026, and we'll be. We will return to having a very robust, unlevered free cash flow business as we move into fiscal 2025, which I think is a really good standalone business.
And I think we should see margin expansion on the business if we get to that margin portfolio, and we continue to return unlevered free cash flow to the business. So we're excited about that and being able to tell that story. I also think based on the fact that we are 65% digital, we really pivoted away from linear while being profitable, is a really great story. We have not as much dependence on the linear business that you're seeing with all these fights that are going on in the marketplace today.
And I also think it sets us up to be, you know, a strategic, platform for some of the assets that may fall out of some of our peer groups to kinda convert them, whether it's into SVOD or AVOD, and window content back and forth between the two different products. So I'm excited about the separation. I think it will allow both businesses to tell their standalone story in a big way. I think investors, we saw this when we spun out Time Warner Cable in 2009. Investors like to invest in kinda simple, simple stories, whether it's pure studio selling and an arms dealer or a network story. I think it's very hard for investors to get their head around in kind of a combination company. So we'll separate. We'll do what we do best on our side.
They'll do what they do best, and I think investors will find their way into both of those assets in a great way.
Before we move on, let me just follow up on something you just said. So as a standalone, what are the relationships that you envision? You know, like you said there are more opportunities. You could partner with companies or become part of their bundle, is it?
Well, look, I think when we have—if we're a standalone with a currency, there will be opportunities for us to get bigger one way or the other, whether it's we get acquired because of the asset that we've built.
Mm-hmm.
Or if, you know, you continue to look at some of our peer groups that are looking to, you know, de-lever their businesses and, and change their, the construct of their portfolio, I think we become the natural consolidator of some of the, the, some of the space because of our platform. So I'm excited to see where how that unfolds. You know, I just think as, as the business kind of, kind of rightsize itself, there's opportunities for us.
Given the recent dispute and subsequent resolution between Charter and Disney, what is STARZ's comfortability with its place in the linear ecosystem? Can linear networks survive, or is it your view that the entire ecosystem eventually makes that transition towards streaming?
That's a big question. Look, I'm a retired cable person. I spent 15 years at cable, so I'm always a big fan of the cable business. And for us, we're an add-on service, you know, so we're not a fully distributed service. You know, so even in HBO's heyday, when there was 108 million TV households, they got to 33 million subscribers. So a lot of opportunity left for us, I think, to work with our cable partners to grow that business. But, you know, we pivoted away pretty aggressively seven years ago, and like I said, you know, 64% of our revenue is digital. When I started at STARZ in 2015, 90% of our customers were in bundles.
Today, 88% of all of our customers are a la carte, which means consumers are picking STARZ, right? But what it also means is that we share revenue with our cable partners, so we're no longer a cost center. So for every, you know, $9 that we take in from a consumer, the cable company benefits from that and gets revenue in that. And so we've changed the paradigm for our business since 2019 to be a revenue generator for these companies versus cost, and so it's put us in a different place.
I also think the one thing that we've done differently than most of our peers is our content, as I said earlier, is the same, no matter what the platform is, whether it's Comcast, Charter, DirecTV, Amazon, our own app. It's the same product everywhere. Our view is we want to be wherever the consumer wants to watch the content. We're not. That may be because we don't have advertising, that we're not trying to drive people away from linear to our app. We want people to watch it where they're comfortable watching it, and so that's also given us a much different relationship with our cable partners and our digital partners. And so I think there's a lot of opportunity still, but we'll continue to drive the business to wherever the consumer wants to watch it, and it's profitable for us.
So you alluded to this in the response to the last question, about M&A, but, you know, we'd love, love to get your views on M&A in general, on, you know, regarding linear television. You know, we know that Paramount contemplated, maybe walked away from selling BET. And then, you know, Disney's CEO made comments about, you know, I, I guess, I don't know, selling or disposing, considering all options for linear television, you know, the just maybe not core. So, you know, how do you see the industry evolving, and do you think there are buyers of these assets or, you know, will there just be consolidation of those that are left behind? Like, how-- what, what do you-- what's your vision?
Well, if I knew that, I wouldn't be sitting here. But, look, I think there's a lot of leverage in a lot of these businesses, and I think that has to change, right? You know, you look at people with a lot of leverage, it's not something people want to invest in today, and so there's ways to de-lever, obviously. I think the BET conversation, there was a lot of factors that made that complicated in terms of minority ownership and distribution and advertising sales. I think that became complicated. I think it's a great asset. I think there's a bunch of great assets there. But I do think some people will start to reimagine what that content business looks like, whether it's linear, it's digital advertising, it's FAST.
I worry that this rush to FAST is really gonna drive the destruction of the linear bundle faster, and I don't think people are paying attention to that right now, and I think that's a really good ecosystem still, and we have to be protective of our cable partners that way. But I do think there's gonna be opportunities where some of these assets that were core are no longer core, and they will fall out, and there will be opportunities for people to reimagine what they look like and how to take that content and distribute it and monetize it in different ways.
Are the buyers—like, you know, in the case of BET, there were four, reportedly four strategic private entities, you know, whether individual or not, with access to capital. And then in some cases, you know, it feels like it might be private equity, so it would run for cash. Like, what do you think there are more strategic buyers, maybe private, that people aren't thinking of, or do you think it's really, you know, kind of private equity will just come in and, you know, pare down the cost?
I think it's a combination of all that. I mean, I look at us as a strategic. I look at a lot of private equity with a lot of money that could partner with somebody like us to do something. I look at some of the big companies that would like the infrastructure we built to help drive their OTT business so we could be acquired. So I think everything's on the table right now. I'm not close to... Obviously, you'll have to ask, you know, Bob and those guys. I don't. I'm not close enough to what happened there. I think he's got a lot of wonderful assets that, you know, have big audiences that fit well with us. But, you know, it's, you know, I think the next 6-10 months are gonna be really fascinating.
On the most recent earnings call, you guys discussed eagerly anticipating some of your Pay One films from Lionsgate coming to STARZ in the near future. Can you talk a little bit more about the importance of the Pay One movies for STARZ, what you're seeing from movies on your service in terms of driving acquisition and retention?
Movies are really important for pay services. You know, it's always been this, you know, combination of big movies, big originals at a good retail price as a way to drive video. I mean, Comcast built a lot of their video packages on, you know, buy this video and get STARZ, HBO, and Showtime included. And so we've always been that kind of cherry on top to help drive services. And we actually started as a movie service. I mean, there's a lot of people that I talk to today and say, "Oh, STARZ, you're that movie service," right? So movies are really important to us. Last quarter, as we talked about, was the lowest quarter of movies we've had in probably the last five years, based on a lot of production delays and the end of the second year.
I think everybody thinks movies are back, but we're feeling the second year of COVID coming through. That's behind us now. Friday, we premiere John Wick 4 on the service, which we're really excited about, coming from Lionsgate, and that's a great movie. It'll be a wonderful acquisition tool for us, and we have it on Friday, so we're excited. And if you think about the way we retail our business, you know, we have premieres on Sunday nights of big originals. Then in between that, we promote movies. And so when you don't have movies on a service like Charter or a service like Amazon, where people go the old-fashioned way to scroll and find stuff to watch, it's hard to retail your business when you don't have anything fresh to talk about during the week.
And so the return of the Pay One movies with Lionsgate, the Pay Two movies with Universal, with our originals, has really completed our programming portfolio, and I really expect us to start to return to growth on OTT in the second half of this year because of that.
... There was a recent announcement of extending pay one between STARZ and Lionsgate's Motion Picture Group through 2027. Can you talk about what drove that?
I think there's two key things that drove the extension of the deal. One, it's getting harder and harder, as an independent to find pay-one movies. People are keeping their own pay one for their own service. And so as we looked out over the next couple of years, we got worried that there wouldn't be one out there. And it's such a critical part, as we just talked about, for our growth, is having that pay one. So given the opportunity to extend with Lionsgate, knowing, you know, being in the building and knowing what their slate looks like for the next four or five years, with some of the John Wicks and the John Wick spin-offs and Highlander with Chad and, you know, the Michael Jackson movie that they've been talking back and forth.
It's a really great Pay One, and those are big titles, so we were excited about that. I think it also demonstrates to the street, even if we're separate, you know, as separate companies, we're still gonna be working together and tied at the hip. And I think that's important for everybody to understand, that even though we're separate, we've got 14-16 intercompany deals that kinda talk about how we're gonna make it easy to work together and keep those synergies going. And so this was a great example of that also.
Before we do the next one, but what about, like, on Pay Two? I know Universal sold a lot of films. They have Peacock took a lot of the Universal films, but then did Pay Two and even Pay Three deals with others. Is there an opportunity for you to get, do pay—you know, get content from some of these other studios?
We are the Pay Two partner of Universal.
And then others.
So right now on the service, we have pay one with Lionsgate. We have pay two with Universal. We're in the pay three window with Disney from our original pay one deal. We're in the pay two window with a pay third window of Sony from the original Sony pay one deal. And then we have library with everybody else. So we are we probably have the most movies per any of the streaming services out there based on that. We thought the combination of Lionsgate pay one and Universal pay two was a great combination of movies for our audience. And the nice thing about Universal is because they're pulling movies out 17 days, it's really like a pay one and a three quarters, not a pay two.
We're getting them earlier than you normally would, so they're fresher when they get to our service.
Given their market share, that it's actually probably a great deal for you guys.
Well, there's a big—they have a big operator in their Pay One window. So, but, yeah, it comes back-
Right.
-to, comes back to Peacock, then it comes to us. But it's a great deal. We've got 355 on the service today, Marry Me, which I'm a rom-com guy, so I watch Marry Me every time it's on. It's a terrible movie, and I'm guilty of admitting it, but, you know, I'm a J.Lo fan, so. So we've got a lot of big movies. We're excited for Joy Ride to come. Margaret's gonna be coming soon. You know, we'll get Expendables 4, which will be great for us 'cause it ties to a lot of our originals. Saw will be a good one when we get it, too. So, you know, I feel really good about the content portfolio going forward, and I think that will continue to drive the business.
Staying on content, when you look at your pipeline of shows over the next 12-18 months, what are you, what are you most excited about right now?
Hmm. A lot. You know, we've got—obviously, we're now in Force, which is one of the Power spin-offs, so we've got 30 straight weeks of Power shows, and that, you know, that's really great for the business. And so we're excited about that. We've got a prequel for Outlander coming, which we've announced, called Blood of My Blood, which is 30 years prior to the first year of Outlander. And it's kind of a Romeo and Juliet story about Sam's parents. And I think it's great because, at this point, if you haven't watched any Outlander, and it's in season seven, and you haven't read the books, it's hard to watch seven years of television to get caught up.
So this is a prequel, so I think it'll bring a lot new, a lot of new people to the fan base. Excited about that. We have a show that we haven't announced yet, with our partnership with Lionsgate and 3 Arts, that's in the vein of a Big Little Lies, but it's set in Texas, and it's really kind of fun and exciting. I'm excited about that. We've got a political drama based in D.C., but based on you know, our demo side of the world, that I think could be really compelling for the country. So a lot of good stuff coming. A lot of stuff on the air that I really like right now. I mean, we just got through Outlander.
Minx was a great save that we were able to save from HBO Max. Heels, which is a great wrestling, it's my favorite show right now. So I really, I like our content portfolio. I like the fact that we're really focused on two demos, so it allows us to be consistent every week with a piece of content that fits that demo. I was saying earlier that our content spend is really our retention spend, it's our marketing spend, 'cause we're able to take that audience and go from, you know, like, the Power audience, now we have 30 straight weeks. I don't have to go market to that customer because I know they're going to stay for 30 straight weeks, right?
So it's, it's a really nice way of actually being efficient in terms of how you spend content and how you market. So it's, you know, it's tough out there. Streaming is very tough, but I think we're doing better than most, and I really like the position of the business right now.
I'll ask one more question, and then we'll open it up to the audience. You know, there's been a lot of debate about where peak margins are in streaming. Netflix made a little bit of news, like, talking, just, you know, talking about their margin outlook, but their margins are actually higher than anybody else's. What, you know, where do you think margins in the, on the streaming side of the business ultimately land? Like, what's the range?
You know, I can't speak to the other companies. I think it just depends on... You know, it's harder when you're trying to be all things to everybody. Scale obviously helps. I know for us, we think peak margin is around 20%. I mean, I think the days of the 30%-35% cable margins, you know, are kinda gone just because of the change in the business. But I think for us, again, if we can get to a business that's growing 3%-5% on revenue, 20% margins and returning free cash flow, I think that's a really good investment, great company. And I think people would, should look at putting money into STARZ that way. And so that's, that's the goal ultimately, is to get to that margin. We've got a really good plan to get there.
We just got to get the strike over so we can start working toward it.
So with that, are there questions? Anybody? Okay. If not, then thank you for coming.
Yeah. Thank you.
Thank you so much.
Thanks for having me.