The economy is in tatters. People are losing their jobs by the hundreds of thousands. The No. 4 cable operator, Charter Communications, has filed for Chapter 11 bankruptcy protection. And television service providers across the board continue to grapple with the national transition to digital and high-definition TV.
In other words, this is a lousy time to launch a cable channel.
But that doesn't seem to bother Hollywood powers Viacom via (which owns Paramount), Lionsgate lgf and Metro-Goldwyn-Mayer. They're defying all odds to launch a bold service, called Epix, that hopes to break into the premium TV business long dominated by HBO, Showtime and Starz.
If you think it sounds crazy, you've got lots of company. Epix is a "mistake" that "will fail to get off the ground," says one of the channel's fiercest critics, Pali Research analyst Richard Greenfield.
No one has agreed yet to carry it, and Credit Suisse analyst Spencer Wang said in a recent report that he found "little interest" among the cable, satellite and phone video operators with whom he spoke.
Yet Epix President Mark Greenberg says the skeptics will be in for a surprise in May, when the service begins to offer some video features on the Internet and then in October when the TV channel makes its debut.
"We have great entertainment" from the three studios, which accounted for about 25% of all ticket sales in 2008, he says. "It's Indiana Jones. It's Iron Man. It's Cloverfield." Epix also will be the place to go for marathons featuring James Bond, Saw and the Pink Panther.
Greenberg hopes to attract lots of young adults by injecting marketing pizazz and some up-to-date technology tricks on an otherwise familiar programming package. The commercial-free service will include original TV series, concerts and movies that will air about nine months after they first appear in theaters — slightly earlier than other studios provide their films to premium channels.
Greenberg's efforts have already stunned some people who thought that the studios' talk about Epix was just a ploy to gain leverage in a bitter contract dispute with CBS-owned Showtime. Few imagined that billionaire Sumner Redstone would let two companies that he controls, Viacom and CBS, go to war with each other.
Yet Showtime's priorities have changed. It wants to boost the airtime it devotes to new series such as Dexter and Weeds and said last year that it would slash the $350 million a year it paid for the studios' movies beginning in 2009. Parent CBS has been under pressure, with its stock price down about 81% from its 52-week high, as it grapples with the soft ad market.
The studios said that they'd rather go it alone. "The wholesaler was taking his (cut), and the manufacturers weren't sure how their content was being used," Greenberg says.
His backers have pledged to invest $150 million to launch Epix. Viacom owns about 42.8% of the venture; the other two partners each have 28.6%.
That could jolt Showtime. It has deals to show films from The Weinstein Co., Summit Entertainment and the newly created CBS Films. But these are relatively small production companies that don't have deep libraries.
What would Showtime do?
Showtime's challenge, then, is to find ways to pack its schedule — as well as its 10 related services, including The Movie Channel and Flix — with shows that can approach the popularity of the 15,000 films in the libraries of Paramount, Lionsgate and MGM. It won't be able to show Paramount, Lionsgate and MGM films released after Jan. 1, including the upcoming Star Trek, G.I. Joe and an updated version of Fame.
The network will continue to have its original series Weeds, which is produced by Lionsgate.
Showtime declined to discuss its plans, or Epix.
Greenberg says there's no chance of a reconciliation. "That opportunity has moved on," he says. The studios "are committed to doing this. Epix will launch." MTV Networks, Viacom's basic cable division, is already out trying to strike deals with cable, satellite and phone video providers.
Greenberg wants operators to include Epix in their packages of digital, movie or HD channels — it wouldn't appear as a separate charge on customers' bills the way premium services usually do. He'll sweeten the deal by making the channel's movies and shows available to their video-on-demand services.
He's asking companies to pay $1.50 a month for every subscriber who can see Epix. That's about 50 cents more than operators typically pay for ad-supported basic channels such as TNT, but far less than they provide to sports services such as ESPN, which costs about $3.65.
But Epix may have to settle for less than it wants.
"It's a difficult environment these days, and everyone's looking at their costs," says Derek Chang, DirecTV's executive vice president for content, strategy and development. "We continue to have conversations with these guys. We're always willing to listen to what they say. They appear to be flexible."
Greenberg says deals will start to come as people learn more about what Epix has to offer. "We're in some meaningful discussions right now," he says. "I'm hoping that we'll be able to announce something in the spring."
The big question is how low he can go on the price. It may be difficult for Epix to accept a lot less.
Impact of cable channel payments
Payments from premium cable channels can have a big impact on a film's bottom line — and that's critically important to A-list actors and directors who often collect a share of a film's profits.
"If the payments (films receive from Epix) are lower than other networks', it might lead profit participants to take their films to other studios" that have deals with HBO, Showtime or Starz, says Deana Myers, analyst at research firm SNL Kagan.
Viacom and Lionsgate investors also might rebel if Epix drains too much cash. Viacom shares have fallen about 65% from their 52-week high as the company has grappled with the soft ad market, weakening DVD sales and disappointing ratings at MTV. Lionsgate is down about 59%.
Greenberg says he expects Epix to break even in about four years, but, "We keep re-evaluating that depending on the economy."
Beyond discussions about price, Epix will have to show that its movies will still seem special to viewers who have growing opportunities to see them on DVD and TV or Internet video-on-demand services before they make it to premium channels.
"The day of pay services suffering from missing big movies is over," says former HBO chief Michael Fuchs.
Others, though, say audiences will still find films exciting, if they're properly promoted.
"There's a difference between availability and usage," says Media Valuation Partners principal Larry Gerbrandt. "Box office admissions are flat and have been for 10 years, so movies aren't overexposed there. DVD sales are flat to down. VOD isn't growing — and iTunes is in that window. You don't see studios jumping up and down when they get their iTunes checks."
Greenberg adds that "movies repeat with high ratings — they'll perform over and over and over again, whereas originals (sitcoms and dramas such as Big Love and The L Word) have a great first play, and sometimes a second play, but then they significantly fall off in ratings."
Indeed, the studios hope that they can do a better job than premium channels do of galvanizing fans, for example by offering outtakes, interviews and clips from actor auditions. The holy grail is to transform a single movie into a durable franchise that can generate a bonanza from sequels, DVDs, digital downloads and licensed merchandise.
Epix's backers think that they can use the Internet to help build buzz, especially among young viewers. People who get the channel from a cable, satellite or phone company will also be able to watch some films and programs online. There'll also be opportunities to buy merchandise and purchase or rent movies — with some revenue possibly going to the distributor.
"Feature films are special, and (most networks and providers) have turned it into a commodity," says Emil Rensing, Epix's head of digital media. "Because we're owned by the studios putting the titles out, we enjoy a unique relationship with the franchises," for example to develop social networks or offer unusual items such as movie ads that were rejected.
"We want to always be treating our fans like fanatics," he says.
Epix won't just rely on theatrical movies, though. The channel recently approved its first original series for 2010, Tough Trade— a one-hour drama about a Nashville music dynasty — that the executive producer of Weeds will make for Lionsgate.
Greenberg says that MTV Networks, which includes MTV, VH1 and Comedy Central, will help with comedy and music specials. He's also talking with an unnamed live-event company about a possible deal.
"We would like to have a live event as part of the launch," he says. "You want to find someone in the next six months who will stage one last event as part of the end of their tour."
It could be interesting, but only if Greenberg can persuade someone to show Epix.
"I don't think it's going to be easy," says Dennis Miller, general manager of Spark Capital, who used to work at Lionsgate. "The early days will be bleak. But over time, their (movies and shows) have real value."