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Starz, AMC Networks Reach A "Genre Wars" Crossroads

This morning, AMC Networks had its earnings call, following Lionsgate's - the owner of Starz - last night. Both Starz and AMC Networks's suite of streaming apps have been two of my favorite topics for thinking and writing about both streaming and the future of media business models.

After Q3 2021, each is headed in a different direction: this morning AMC Networks told investors it is doubling down on its streaming strategy with its new CEO, Matt Blank. But, Lionsgate told investors there is:

the opportunity to potentially unlock significant shareholder value under a scenario where investors had the ability to value our studio assets and Starz separately.

The similarity in their strategies was something I labeled the "genre wars" last October 2020, which are "focused, zero-sum conflicts around specific content genres than broader head-to-head, zero-sum conflicts between platforms for the same audience."

The term originated from my skepticism of the term "streaming wars":  

By focusing on specific genres, and aggregating them together in a service that both has a clear value proposition and is cheaper than cable, AMC+ can find wins year-round in the genres that Netflix, Disney+, and Amazon Prime Video simply are not focused on year-round.

In other words, a streaming service hyper-focused on hyper-serving genres and/or particular demographics can engage and convert audiences to build a subscriber base at scale. They can do so without competing head-to-head year-round with the streaming gaints. But, those services could do so only if they find Product Channel fit:

the data we are getting on "the streaming wars" are not about war or zero-sum; rather, I would argue they are about which companies are savvy enough to understand the marketing required to drive scale in those channels where it finds product-channel fit.

What "Genre Wars" Strategies Reveal

These two earnings calls reveal three trends to anticipate in the streaming marketplace through 2025.

Trend #1: Two Different Takes on "Less is More"

Both earnings calls communicated bullishness about  "genre wars" strategies. But, what struck me as most notable is each sold investors with two entirely different spins on "less is more".

AMC Networks CEO Matt Blank sold investors on "the beauty of small numbers and a very specific and carefully constructed approach to serving subscribers with targeted offerings that complement the larger streamers". His key point was that at the target scale of 20MM to 25MM subscribers in 2025, streaming would be “potentially the biggest contributor to our business".

With this outcome as the objective, AMC is exploring organic ways of launching new offerings rather than seeking a sale. "Less is more" means doubling down on "genre wars" offerings, and not aiming for a sale. 

Starz President and Chief Executive Officer Jeffrey Hirsch spun "less is more" very differently in a response to a question about what Starz "brings the potential merger partners in terms of its unique demographic appeal":

Look as you said, we have really built a very unique content pipeline, we really focused on two core demos and we're the global leader. I think and female audience demographic and African American audience demographic, which makes us really unique. For any of our partners, we've built this business in the 62 countries around the world, with over 80 partners all over the world, and as we've always said we're a very complementary service to all these broad based streaming services and is that kind of broad-based streaming competition heats up with all of these mergers. You can compete on price, you can compete on dollars, but you can compete on value and by adding Starz into our portfolio with our unique content strategy, it really will help differentiate somebody that they can't replicate with our services.

Starz's narrow focus on two core demographics will add value to any service which partners with it. 

There was also another spin on "less is more" from Lionsgate: 

While we continue to realize substantial synergies from bringing Lionsgate and Starz together. We also see the opportunity to potentially unlock significant shareholder value under a scenario where investors had the ability to value our studio assets and Starz separately. Recent transaction multiples in the media space give us confidence is exploring alternate path is prudent. Additionally, we believe that a number of the structures we're considering will also allow Lionsgate and Starz to preserve, many of the operational benefits we're currently achieving within a single corporate structure.

A smaller Lionsgate post-Starz spinoff can unlock greater shareholder value than the current entity owning both.

Trend #2: The MVPD Bundle

Both companies seem to be all-in on streaming, and have positive stories about OTT growth: AMC Networks is on track to hit 9MM subscribers by year's end, and Starz has 30MM total global subscribers, 18MM of whom are OTT networks subscribers.

Neither seemed willing to rule out their linear businesses. Starz reported a $2.2MM decline in revenue for its Media Networks segment due to $28.8MM in lower revenues from traditional linear services (MVPDs). The growth of Starz streaming almost entirely offset those losses with $26.2MM in revenues. The segment still generated $358MM in the last quarter, alone.

AMC Networks reported "a low-single digit decrease in linear affiliate revenues, attributable to declines in the linear subscriber universe". Unlike Lionsgate, it has yet to file its 10-Q as of the time of this writing, so we do not have as many details available.

Even if there is decline, they are nowhere near the end for their cable businesses. But with losses that equal ~10% of gross revenues, the end seems to be approaching.

I wondered in A Short Essay on The Dolan Family & AMC Networks CEO Josh Sapan's Resignation:

whether [former CEO Josh] Sapan’s resignation was the result of the Dolan family doing the math and realizing that there will be more upside in pivoting back towards what they know best (linear) than in doubling down on what they know least (streaming) at a smaller scale.

The idea was that even at 40MM to 50MM households, AMC could reach more audiences in a smaller bundle than via streaming. I think it is clear I got that wrong, and that new CEO Matt Blank has been hired to go all-on on streaming.

That said, we saw Disney announce it is sunsetting a linear channel (ESPN Classic) the same week as we learned that Starz lost 10% of its quarterly revenues from MVPDs. A narrower bundle for a narrower base of affiliate subscribers, and at a greater scale than AMC Networks' and Starz's maximum projected user bases, seems inevitable now.

Just how narrow it will be (I imagined 20 to 30 channels based on this tweet from former NBCU executive Salil Dalvi) remains anyone's guess.

Trend #3: The Amazon Bundle

Back in June I wrote about how "Prime Day Is a ”Massive Dry Run” Towards Amazon Channels Bundling", where I was able to build my own bundle of channels priced at near 90% discount via Amazon Prime Video Channels, and the additional cost will be equivalent to the pricing of one app. I predicted:

~150MM U.S. Prime Members are being educated that they can create incredibly cheap bundles through Amazon Prime Channels. They will be back for more.

Notably, neither earnings call has teased out whether Amazon Prime Day had a substantial impact on ARPU or sign-ups in Q2 or Q3. 

But, coming back to the quote from Jeffrey Hirsch, above - "by adding Starz into our portfolio with our unique content strategy, it really will help differentiate somebody that they can't replicate with our services" - the logical question is whether Amazon is better off owning Starz.

Meaning, as an option in Amazon Prime Video Channels, Starz the app helps Amazon drive marginal revenues within Prime.

But, within the Amazon ecosystem, Starz content helps Amazon to engage both female and African American audiences, specifically. That means Starz content helps Amazon market those audiences Prime Video, but it is also as valuable if not more valuable to Amazon's targeted advertising model it is building around IMDb TV, Twitch, gaming, podcasts, and sports streaming.

Starz content would also help Amazon better market its "aggregator 2.0" bundling around Prime.

One implication is, the "genre wars" strategy has narrow upside in streaming, but may have broader upside in a bigger ecosystem that increasingly will rely on audience targeting to reduce churn and capture new audiences around new content offerings.

The other implication is that the best outcome for Starz is to land within an ecosystem which has succeeded with both product channel fit and targeted marketing for targeted audiences. After Amazon that leaves Netflix and WarnerMedia (but not Discovery). It's hard to imagine another outcome that would make sense for it. 

Conclusion

This last point seems to be the general takeaway from these two earnings calls: AMC Networks needs to rely on genre and audiences targeting to hit its "beauty of small numbers" objectives. But, Starz sees more upside for its "genre wars" value proposition elsewhere, perhaps even beyond streaming, and Amazon's model proves why that is true.