Q&A with Starz CEO on why so many investors don't understand his company's strategy

Published Mon, Jul 13 20202:35 PM EDTUpdated Mon, Jul 13 20203:02 PM EDT

Alex Sherman @in/alex-sherman @sherman4949

Key Points

Starz CEO Jeffrey Hirsch has a plan to keep Starz focused on serving African-American and female audiences while other streaming services "bang each other over the head."
He says Starz's focused strategy and global footprint makes the company a "very, very valuable to any of these big folks that are trying to get a competitive edge to be that No. 1 in the home."

A View from the Top is a Q & A series exclusively available on CNBC Pro . Alex Sherman will speak with a new business leader about decision-making, investing and industry news. Starz CEO Jeffrey Hirsch has a mission: to get people to understand why his company is doing what it's doing. While many investors have written off Lionsgate , the parent company of Starz, for being too small in a land of media giants, Hirsch says Starz is purposefully staying focused to capture an underserved audience while the others "bang each other over the head." And while he won't speculate on M & A, he says Starz is "very, very valuable to any of these big folks that are trying to get a competitive edge to be that No. 1 in the home." Starz named Hirsch CEO in September. Prior to joining Starz in 2015, he spent more than a decade at Time Warner Cable. Alex Sherman, CNBC: This is a weird time for entertainment companies. There's an industry wide shutdown that prevents most new shows from being produced. The industry itself is clearly transitioning from an old pay-TV model to a new streaming one. Do you think this is a good time to invest in media? And, if yes, what subsection of media most excites you from an investment standpoint? Jeffrey Hirsch, Starz CEO : If you look at the history of the stock market, any kind of seismic disruption means there are great opportunities to invest at levels you normally wouldn't see. I think that's been good for people who have invested in Amazon , Netflix and Apple , who have been able to invest at levels you probably wouldn't in normal circumstances. But for me, as an investor, the thing that stands out is compression technology. As the business continues to shift to digital, the pipes and 5G become more important for our business. The company that can figure out a full length HD movie into an efficient packet and can move it around the world is in good shape. When AT & T launched mobility in New York City, it was almost impossible to get a cell call at first based on capacity around Central Park. The more you can compress large video files into something that's efficient to move around, the more advantageous 5G will ultimately become. I still think, as an old cable guy, that big broadband, the last mile to the home, is really important to anybody whether you're looking for a job with 40 million people unemployed right now, or you're doing distant learning. I think there are still great opportunities to invest into that broadband pipe, whether it's a connected pipe or 5G pipe. The person who can think about compression in a big way is obviously going to make a lot of money and will be at the sweet spot of what the future looks like. The Starz edge Sticking with that future theme, the way I'm envisioning the media world evolving, you've got layers of distribution. You've got the pipes, and then the aggregators of the aggregators of content -- Apple, Roku, Amazon -- the companies that want to control your home. Then you've another layer of distribution within apps in terms of content. The big guys -- Netflix, Amazon, Peacock, HBO Max -- are interested in licensing programming and adding their own original content on top of it. Beyond that, you've got content companies like yourself becoming distribution-focused by controlling your own platform and keeping the content exclusive to Starz. And then, finally, you have content players who realize they don't have the right assets to be one of the big guys and just sell their programming to Netflix, Amazon, etc. Given all of that, as look at the global media ecosystem, who are going to be the winners and who are going to be the losers here, and how does this framework define your strategy at Starz? It kind of feels like if you put all these companies in a pot and shake it out, it's kind of mud. There's so much flexibility and so many combinations for consumers. You could end up with somebody that has Charter 's Spectrum broadband into the home, with an Apple TV, spending their time watching Peacock . Four years ago, you never could have imagined that. You could have someone with an AT & T wireless phone streaming HBO for free and then buying Peacock. Then you've got the traditional cable guys. How do those packages fit? You've got some cable executives talking about not offering video anymore and just focusing on broadband. Back in my cable days, we always worried that if you didn't offer a video package, you might become a regulated utility, and that would be a really bad place to be. So I'd imagine cable companies will stay in video a little bit. But I think the business will shake out. There will be equipment manufacturers, and that puts a ton of pressure on legacy set-top boxes in the cable business. When I left cable in 2015, our average set-top box was 8 years old. That's the equivalent of trying to do a Zoom call on a 386 IBM Thinkpad. So the question now is does Comcast's Flex replace Roku in people's homes like how DVR replaced TiVo? I think what you'll see is connectivity players, whether it's 5G or broadband, get you into the home. Then you'll have a device, a mobile phone or a box, which someone will sell you separately, like an iPhone or an Apple TV. And then you'll probably pick three to five content providers. At least one will be a great aggregator that wants to serve everyone in the home. Whether it's Peacock, HBO Max, Netflix, Amazon or Disney and Hulu, these guys are going to fighting to be the primary aggregator that serves everybody in the home. Eventually it's going to be kids, sports, news and weather. These guys are fighting to replace the traditional cable TV bundle. The big trigger point to me on this is if Comcast goes out of market and starts to compete with Charter. Do they use Peacock in Flex to say to Charter customers, you don't need Charter television anymore -- sign up for Spectrum broadband and we'll give you a Flex box and free Peacock. There are some benefits for Comcast because advertising is a big piece of this, and Comcast doesn't have a footprint in New York or L.A., which are the No. 1 and No. 2 DMAs. The other big trigger point for content that I'm watching is does Disney pivot and put A-level sports on ESPN+ and sell that with Hulu and/or Disney+? That really throws gas on the fire that ultimately gets the bundle destroyed, if you can get all of the great ESPN sports separately for a price. So, where Starz fits into all of this is we're not trying to be that No. 1 broad-based service in the home. We've always been a premium add-on. No one has ever switched their cable service to get Starz. We don't compete with DirecTV or Charter or Amazon or Hulu -- we're sold on top of those guys. We will continue to play in that bespoke, non-ad supported adult tier that is unique in terms of our content. Our programming strategy is focused on premium content that serves an African-American and female audience. Nobody has been able to replicate what we've done to date with that audience. We see ourselves as a very valuable add-on to all of those broad-based services. I do believe at some point soon Netflix will start to bundle on top of their service because they just can't continue to raise rate, and it's a good way to get more content to consumers. And if ESPN, Hulu and Disney+ really gets more momentum, they'll have to follow suit with more programming and broader programming. So, with all this mess going on, whether you're buying Roku or an Apple TV, whether you're buying Peacock or Hulu or Amazon, we don't care, because our distribution strategy is to be a partner to every single one of these folks, so you can get our service no matter what combination you pick. Are you setting the company up, though, for a parallel existence or a future existence when Starz is acquired by a larger company, which may want eliminate that 'partner with anyone' strategy and make Starz content exclusive as part of a larger bundle of content? If you look at the pace we're growing our over-the-top business, plus the 50 countries we're in outside the U.S. -- only Netflix and Amazon are bigger than Starz globally on an SVOD (subscription video on demand) basis -- we've created this global footprint that no one else has been able to create. And we're doing it two to three years before anyone else. So while I don't want to speculate on M & A, I think we've built a really great global SVOD footprint. I think that coupled with our unique content strategy makes us very, very valuable to any of these big folks that are trying to get a competitive edge to be that No. 1 in the home. Future of industry It's at least plausible that in this "mud," as you described, that you end up with a handful of big players and everyone else that can't find a successful fit has to consolidate. Do you think that's where we're headed? That is not sustainable. That many services can't sustain the cost to run the business to get to scale. So I think either you'll see companies fall out and start licensing their content to others, or you're going to see mass consolidation into four to six core companies. I think you wrote an article a little while ago that there was a new big six. I always go back to the big-box hardware store. When Home Depot and Lowe's came in, everyone said, oh, that's the death of True Value and Ace Hardware. But they're still here, and that's because they provide, just like Starz does, a bespoke experience. If you know how to build a deck, you go to Home Depot and buy what you need and build a deck. If you're Jeff Hirsch who wants to fix something in his house and needs help, I'm not going to Home Depot, I'm going to True Value Hardware. To a certain extent, you'll see these big six players, but over time they'll also start to look at their portfolio of assets and say 'ok, does this fit?' You're seeing it now with ViacomCBS and Simon & Schuster . You'll start to see assets fall out of those big six that will then constitute a new four or five that will come up. You've still got Sony , MGM, Lionsgate, AMC . John Malone has talked about putting some of these smaller dots together. As HBO broadens out as HBO Max and Showtime broadens out being a part of CBS All Access, we're going the other way. We're honing in on being that premium service. I think when you wake up in two years, we'll be that single great premium bespoke service that everyone is going to want to have as part of their portfolio. Ultimately, do Lionsgate and Starz make sense together? Look, it's a great question. My point of view is they do. We could not have launched internationally like we did without access to the Lionsgate library. That 17,000 title library plus the Starz originals gave us broad content in those markets. So when Apple launched more than 100 markets and Amazon and Google are all over the place with video, we had the ability to launch with a lot of hours in a lot of markets quickly. Our original plan was to launch in 50 markets in 3 years. We've done it in 18 months. That doesn't happen if we're not tied to Lionsgate. Then there's the TV group. They are wonderful at doing TV production. They are doing all of our TV production now. That's been really helpful for us in the past six to eight months. I think it's been a great combination. I know many media pundits say the key to winning the streaming wars is scale. But you're sort of arguing maybe you can make it even if you don't have the same degree of scale if you have focus. Scale matters if it's in the right place. But I also think, if you go back in history, the U.S. has had the largest military in the history in the world, but we've been in conflicts where we're fighting in caves. Maybe it's because I'm telling our own story here and we don't have the scale that others have, but I think we're more nimble, and we're forced to be more efficient about marketing and content spend. That's because we knew we had to be a better retailer than anyone else in the OTT business. These large companies that are wholesale companies just thought you go spend some money and you can grow your business. But I think some people are finding out it's not that easy. You don't have to spend $13 billion a year on content like Netflix does to be successful. We're trying to be very focused on core demos. Just because a movie has a $200 million budget doesn't mean it's successful. Not trying to be Netflix OK, but I spoke with a media executive yesterday, and I told him I was speaking with you and asked him what he thought about Starz. Here was his answer: 'They've got a tough road ahead of them because they don't have any money. They're tenth in line for content. It's hard enough when you're third in line.' So, I realize you're saying you've focused on underserved demographics, but are you really in the best position to succeed if you're always missing out on the truly top shows because others are outbidding you? First of all, I would debate we're 10th in line for the best content. "Power" is continuing to be one of the top premium shows on television. "Outlander" just came off its best season. We've announced Debra Messing , Courtney Cox coming to the network. I just got off the phone this morning with one of the biggest movie stars, coming to television. We just bought two shows in Spain that I think are two of the best shows out of Spain. When I said to the production company, 'why Starz?', they said, 'Amazon is looking for family fare, Netflix is looking for family fare, you're the only one in Spain looking for adult content.' If, in fact, that person you spoke with thinks my strategy is to compete for every show, I agree, it's very hard. But we're not trying to be Amazon or Netflix or Hulu. Is it easy? No. And the reason we're doing better is, actually, it's not just about the content. We built a retail team that knows how to retail the business. I came from 15 years in cable. I know how to do subscription marketing. It's a big build for companies that aren't used to this. Is it hard? Yeah. Would it be nice to have money like Netflix? Sure. But just because you have $13 billion doesn't mean you're getting all the best stuff. You still have to pick good content and work with creators to execute good scripts. Yes, it's a hard road, but I think our results to date suggest we're doing something right. I don't think anyone thought we would get more than 2 million OTT subs. We're at 6.8 million as of last quarter. We've got 10.6 million global OTT subscribers and have guided to 13 million to 15 million subs by the end of the year. I like being the little guy. Sure, it's hard, but if you pick the right strategy, you can be successful whether you have $13 billion or $1 billion. It strikes me that as I'm listening to your answers, HBO is doing exactly the opposite of what you're doing. They have a bespoke premium service, which has succeeded for decades, and they're trying to turn it into something else that's broader with HBO Max. Is that a flawed strategy? It's not a flawed strategy because they're trying to build a service they can eventually run ads against. Peacock, Hulu -- these guys are all trying to replace broad-based television that's both a subscription and an advertising-based model. So you have to take HBO and broaden it out so that you can build an ad-based platform and drive advertising across all of AT & T's platforms. But, wait, does HBO have to do this? Why not just keep trying to grow HBO as is? That's a question you should ask [AT & T CEO] John Stankey. But they seem to believe...They have DirecTV, they have more than a hundred million wireless customers. Building out that digital platform to sell ads on is part of their core strategy. They're going for it. At Starz, we don't need to be the No. 1 SVOD in the home. Our goal is to be the No. 3 SVOD in the home. What I mean is if you're subscribing to three services, we want to be that No. 3 SVOD service in your home. So, whether that's Netflix and Disney+ and Starz, or Peacock and HBO Max and Starz, it doesn't matter. That's who we've always been. We're not competing to be the No. 1 SVOD service in your home, and because we're not, we don't have to spend like they do. I don't need to worry about spending money on anime and kids content or news or even male-centric content. We're not like Lifetime where we're excluding men -- "Outlander" is a great mix of both audiences -- but we're trying to go the other way. As everyone else tries to compete with each other and bang each other over the head, we get more focused and try to be a partner with everyone. If Hulu is competing with Peacock, if Hulu is offering a bundle with Starz, Peacock kinda needs to have it too. Otherwise Hulu has an advantage. Coronavirus impact Let's shift gears to Covid-19. What's the latest on getting shows back in production? We think we'll have three to four shows in production by the end of the summer. A lot of those pre-productions start this week. We've gotten our protocols in place. Two shows are in the U.S., the others are in one country in Europe. We think we'll be camera rolling by end of summer. We shoot a year in advance. So most everything coming on the network this year should be fine. And also, we bought three or four pieces of content from different parts of the world that were complete to have on the shelf just in case this thing was prolonged. So, we do have extra content available that we will schedule if we need to. What are your two or three biggest challenges for the next year, besides getting everyone back to work? The biggest challenges we have is getting our story out. That media executive you spoke to doesn't understand what we're doing. We're not trying to compete with Netflix. There's so much disruption right now. Unless you dig deep into what we're doing, you're gonna write us off as being too small. So that's my first challenge -- getting the investment community to understand what we're doing. The second challenge is to start getting credit for our international business. Continuing to grow internationally is a big value growth opportunity, and if you look at the valuation of Lionsgate [enterprise value about $4.5 billion], we're not getting credit for it right now. A year from now, what is the biggest change in the media world from today? Other than hopefully everyone getting back to work. Honestly, I think there's very little change a year from now. I think we're in the 8th or 9th inning of consolidation. That will lead to companies thinking about what they want to keep and what they want to get rid of. And that will lead to another phase of either further acquisition or divestiture. I think AT & T is trying to figure out what they have with Warner. I think Viacom and CBS are still feeling it out after merging. Comcast and Sky, Disney and Fox. We just went through this great period of consolidation. I think everyone is trying to figure out who they are. In a year, we'll come out of this on the other end. And while all this is going on, there's so much venture money out there, I think you'll start to see a whole new crop of media companies 12 to 36 months from now. On TikTok What are your thoughts on TikTok? I had to delete the app because I was getting too addicted to it. I think it's great fun. I think in this environment when you're stuck at home and environments aren't changing, and with everything going on with the other social media apps, it seems to be a very positive uplifting platform that hasn't had to deal with some of the bad stuff yet that others have. I think [CEO] Kevin Mayer is one of the brightest media executives out there. Plus, he has a great moral compass. I think TikTok, Epic Games and Snap that have large user bases are generating for the most part very positive content. I think ultimately TikTok will figure out a way to monetize this, but at the end of the day, we're all just trying to figure out ways to entertain people. Disclosure: Comcast owns NBCUniversal, parent company of CNBC.