Let me pitch you on two deals that I think would create value and benefit film and TV lovers everywhere.
US DEAL: LIONSGATE/STARZ TAKE PRIVATE
Lionsgate owns Starz, which has 20MM US subs — 12 digital, 8 through pay TV — and though they say they are going to spin it off shortly, I am arguing that there is an attractive alternative.
Right now, Starz is somewhat niche but there are gaps in the market that aren’t niche, which I have discussed before. Why not serve those big gaps and grow?
I’ll summarize the gap with some titles: John Wick plus South Park plus The Hangover. Comedy. Action. America wants more of that and is just getting a little. Hollywood has stopped making comedies and pulled back on action and if every restaurant goes vegan, you should open a steakhouse. There’s 50MM US homes in that strategy, which is ~$6B per year in revenue. This strategy also aligns better with the output of Lionsgate, the studio. The market gap is discussed in more detail here:
So buy Lionsgate, do not spin off Starz, redirect Starz, and grow. There is some negative cash flow in years two and three as you ramp up production at Starz and grow the business. This transaction takes LGF private.
NOW, DEAL TWO: LOCAL LANGUAGE SVOD
Local content is important everywhere but particularly in Asia. In Asia, there is no American TV on TV. (Except the Philippines, where a lot of people speak English.) Occasionally there will be an adaptation, for example TV Asahi remade The Fugitive in Japan. Hotstar in India recently produced a remake of The Night Manager. But if you want to win in Asia you really have to have local originals. And Netflix international originals program is only getting stronger.
International streamers can and do produce local content. At Amazon, I was in India and Japan in 2016-2017. We delivered originals in those countries before Netflix and got a lead on Netflix. But of course 95% of the local content that exists is coming from the local networks and studios.
In the typical case, local TV networks in Asia have SVOD services that are somewhat subscale and do not produce digital originals. So they’re like TV catch up services. These compete, but they don’t win.
Here’s the important thing. The local entities in Japan, Korea and India cannot grow that much while remaining locked in just one country. One problem is that it is inefficient to produce high end originals just for one country, so they don’t, but then they have to compete with high end originals at Netflix and Amazon. If they become part of something bigger and multinational, they can deliver a more robust selection and grow faster in every country.
The proposal is to merge all of these local entities into one global entity, and capitalize them so that they can add a layer of originals. The resulting entity would not push Netflix into the sea, but it would be a strong competitor, especially in Asia, and would create more value than is being created now.
JAPAN
In Japan the top local network service, Hulu Japan, is a subsidiary of top broadcaster Nippon TV (no relation to Hulu in the US). Hulu Japan has about 25% of Netflix’s subs and 50% of Amazon’s. U-Next is not a subsidiary of a network but has had a strategy like Amazon and Netflix (licensing HBO and Showtime shows for example) until recently. In February of 2023, U-Next merges with Paravi, which has been owned by Nikkei, TV Tokyo and TBS and which has been largely a catch up service. The standings in 2022 looked like this:
Abema, Paravi and FOD (Fuji on Demand) were/are catch up TV.
KOREA
There are two major services, Waave and TVING. Waave is a subsidiary of SK Telecom and has deals with the major networks. TVING is a sub of CJ, Korea’s largest studio. Netflix has 35% of the streaming market, Waave 21% and TVING 16% (source: AMPD Research).
INDIA
This is a $1.7B market in 2023 (source: Statista).
The players are
Hotstar
Netflix
Amazon
Voot
Sony LIV
Zee5
ErosNow
Alt Balaji
Sony acquired 51% of Zee. Together, they are the biggest broadcaster with 92 TV channels and an estimated 27% viewership in the Indian TV market (source: The Ken) vs Hotstar’s 19%.
Voot is a sub of Viacom18, which is owned primarily by Reliance Jio, India’s leading mobile company; Bodhi Tree, James Murdoch’s PE Fund; and Paramount Global.
Eros and Alt Balaji are independent firms.
(I’m going to skip Indonesia and the Philippines for the sake of space but there are plays there as well. Even Vietnam.)
SO WHAT’S THE PLAY IN ASIA?
Hulu Japan + U-Next + Waave + Viacom18.
Hulu Japan plus U-Next would give you Nippon TV, TV Tokyo and TBS content. If you have that, you don’t need Fuji or TV Asahi (but you could include them or license from them). Waave already has the broadcasters in Korea.
In India, you could do Sony/Zee or Viacom18. They’re both strong. Viacom18 seems like the less complex deal since it is a freestanding entity.
Note that China cannot be a part of this. Non-Chinese entities cannot own media assets in China.
OPERATIONAL BENEFITS
American content doesn’t travel because people love Americans. It travels because we have higher production budgets and a robust industry in Los Angeles that can quickly and consistently provide strong teams for new shows and films and therefore execute well. An average Japanese show would be produced for ~$400,000. By contrast, a $6,000,000 US one hour is not at all expensive. But if there were an Asian service with a large footprint, it could have bigger budgets because those budgets would be amortized against a broader customer base. These shows would stand out more and do more to drive growth. Netflix has demonstrated this model with many of its (successful) ex-US shows, such as Squid Game.
For example, let’s say the new entity starts making Japanese shows at $2MM per episode. Would it work? Let’s say your model requires you to recover 70% of your investment from a show’s home country. So you’ve got $0.6MM to recover ex-Japan on this Japanese show. Can you get 6.0MM views per episode across the world (putatively valuing a view at $0.10)? That’s 300MM minutes of viewing. Let’s say you have 120MM subs ex Japan and each customer who does view the episode will watch 30 minutes on average. Then 8.3% of your ex Japan subs have to watch the show. That’s credible.
As a general observation, I think we are entering a more multipolar era for media. This gets ahead of that.
The benefit to the entity in Japan is that you now have a very competitive, stand-out show. You have significantly upgraded your originals program. And you also have the show around the world.
There are examples of Asian content crossing borders successfully in Asia. Besides Squid Game, Korean television is popular throughout Southeast Asia and the Middle East. Obviously, anime is globally popular (Doraemon is the most popular kids character in India). And Indian films such as Dangal and Baahabuli are increasingly finding audiences outside of India. And this is all without making a conspicuous effort to achieve international success.
Could you realize the same benefits of horizontal integration by making an expensive show in Japan and then just selling international rights at MIP TV? In theory you could, but it’s less dependable and in reality very likely to be much less efficient. You’re not going to sell ex-Japan rights at MIP for $600K per episode for any Japanese show.
The best version of this would combine both deals — Asia and Lionsgate/Starz. Then the goal would be that you have one global service and in 2027 you have at least 130MM global subs. Bringing LGF into the Asia deal would also increase its likelihood of closing.
Are there concerns about leaning into the SVOD model in 2023 as people are expressing concerns about SVOD? Well there are only two options: we can go back in time or we can make SVOD a win. The latter is better.
SEQUENCE OF EVENTS
How could this get going?
Viacom18 drives it, acquiring LGF, and then approaching the other entities in Asia. Or Viacom18 could agree on the plan with NipponTV and SK Telecom ahead of time. They could form a JV that includes Hulu Japan, Waave, etc., and which only consummates if the LGF deal closes. Or they could not have the LGF condition and just merge. (To be super clear, the Japanese and Korean networks would not be part of the merger, just their digital subsidiaries.)
Someone could recruit PIF or some other PE entity (TPG? Temasek?) to sponsor the plan and get the ball rolling, probably by acquiring LGF and then going to Asia to do that part.
A combination of the two where a PE entity is part of the JV, providing some new financing.
In theory, a Chinese entity could spearhead this, but that would be too politically complicated and the deal would not get done.
WHY WOULDN’T THIS HAPPEN?
There are a million reasons why deals don’t happen, valuation questions most prominent among them.
Obviously, it’s a lot of parties, which create personality and political issues.
Currently, the Japan and Korea entities are 100% owned and controlled by their parent companies, which they may prefer. But 30% of 100 is much more than 100% of 10 and the Asia entities have a better chance of success as part of a better capitalized multinational.
The most challenging country could be Japan where the ad-supported broadcast business remains robust and execs sometimes have mixed feelings about really committing to digital.
The new entity would need a side agreement with Nippon TV, TBS, etc. (the parent companies of the digital entities in the JV) that guaranteed exclusive programming supply for an extended period.
Finally, the parties need to agree on someone to run the new entity and on board composition and processes.
To be honest, I don’t think any of that should be insurmountable.
THE GOOD CASE
In the best case, the Asian entities will be producing higher end domestic content, enjoying a flow of strong US and Asian content, and competing successfully. Starz in the US would be much bigger. In 4-5 years you go public with a $50B market cap.
You could also do this with Paramount Global as the US leg of the stool (PARA owns part of Viacom 18 so that makes some sense) but, unless they were fully on board from the beginning, that transaction seems much more complicated due to the voting rights in Paramount stock.
What would you call it? I think there should be one global name. Not Starz because of Hotstar. Not Hulu because of Hulu. Plenty of time to decide.
Roy Price was an executive at Amazon.com for 13 years, where he founded Amazon Video and Studios. He developed 16 patented technologies. His shows have won 14 Best Series Emmys and Globes. He was formerly at McKinsey & Co. and The Walt Disney Co. He graduated from Harvard College in 1989.
I’m a fan of Lionsgate and think your pitch with Starz sounds Bold. And with crisis of faith and direction sweeping through the major studios and streamers. Your version of Lionsgate could become a powerhouse. I’d love to see someone pull it off.
I like your logic. Natural combinations exist but are not obvious yet because people are still mentally in the old paradigm. Wel done.