Studios’ Epix venture runs into tough times

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This Epix tale might not be one the Hollywood studios were banking on.

Ten months ago, three film studios -- Viacom Inc.’s Paramount Pictures, Lions Gate Entertainment Corp. and Metro-Goldwyn-Mayer Inc. -- teamed up to create a ‘next generation’ movie channel that would debut on the Internet and revolutionize the pay-television business.

So far, the studios have invested $35 million in the venture, dubbed it Epix and said that Lionsgate would produce the channel’s first original TV series, a drama about a Nashville music family called ‘Tough Trade.’

That’s not all that’s tough. Epix -- a pun on ‘epics,’ a term for the most ambitious films -- has so far been unable to secure distribution with a cable or satellite TV company, a crucial step in the launch of any new network. Industry titans Time Warner Cable Inc., Comcast Corp. and DirecTV Group Inc., the biggest cable and satellite operators in the country, all appear skittish about adding a pricey new movie channel during a recession, when they are fighting to hold the line on program expenses and retain subscribers.

‘This is a really tough economy to be launching a new cable network, let alone a new premium pay channel,’ said Deana Myers, a TV analyst with consulting firm SNL Kagan.

The partners are unfazed. Viacom Chief Executive Philippe Dauman assured Wall Street analysts recently that the venture was on track to launch a subscription-based Internet site in May and a television channel in October.

‘We continue to feel very bullish about the prospects for Epix as we go forward,’ Dauman said.

Executives involved in Epix contend that resistance by cable companies to committing to the new channel is nothing more than jawboning for better terms. They predict that Epix will win the backing of cable and satellite operators within a few months and be on the air by fall.

Epix Chief Executive Mark Greenberg said the plan to stream movies should lure cable, satellite and telephone companies because it could encourage customers to upgrade their Internet service to higher speeds that accommodate movie viewing. The dual offerings -- an Internet movie feature and television channel -- are the reason that Epix wants a hefty $1.50 monthly per-subscriber fee from distributors.

Epix may have other pathways into the home. One potential partner is Netflix Inc., the video rental company, which attributes its growth despite the recession to rising demand for online movie streams, suggesting that customers are warming to watching movies on their computer rather than on cable TV or DVD.

‘We do have a number of traditional, nontraditional solid offers right now, which we hope certainly to close imminently,’ told analysts during the company’s quarterly results call.

Derek Chang, DirecTV’s executive vice president for content strategies, said his company -- which serves 17.6 million subscribers -- was not ready to sign up.

‘It’s still preliminary,’ he said. ‘They are continuing to adjust their business strategy and we are continuing to have conversations with them.’

The stakes are high. Studios depend on licensing fees from pay-TV contracts with HBO, Starz and Showtime to help offset the costs of filmmaking. The arrangements provide steady income, a tonic in a volatile business where millions of dollars are spent making and marketing a single movie -- which might land with a thud in theaters. Even modest box-office performers generate millions in revenue from their runs on premium movie channels.

The desire to wring as much as possible from pay-TV contracts was the reason Epix was formed in the first place.

Paramount, Lions Gate and MGM decided to launch their own pay-movie channel after negotiations with Showtime to extend their movie deals fell apart. Showtime, owned by CBS Corp., said it no longer was willing to pay the $350 million annually to the three studios for licensing their films.

‘Movies are online, they are on video-on-demand services,’ Myers of SNL Kagan said. ‘They are just not as valuable as they were five years ago.’

The studio partners also believe that by cutting out the middleman -- in this case Showtime -- the venture will be able to offer movies on the Internet only nine months after their release in theaters and before they appear on cable. Typically, there is a one-year lag before the movies appear on HBO or Starz.

In many ways, however, the venture is gambling on the promise of the Internet for distribution.

‘We think that making the films available on broadband, on-demand television and through their mobile phones allows the viewer to see the content the way that they want to,’ said Greenberg, a pay-TV veteran. ‘We can be adaptive to the marketplace, and from our view that’s exciting. We are going to find our way.’

However, making movies easily available on the Internet could backfire by alienating traditional cable companies that have long paid hefty fees for exclusivity. Cable executives are worried that viewers won’t have a reason to watch their channels if studios make their shows and movies available for free on the Internet, through such sites as Hulu.

But, given that Showtime was unwilling to pay Paramount, Lions Gate and MGM what they were seeking for the rights to air their movies, the studios believe that they have little choice but to bet on new methods of distribution, said Dennis A. Miller, a partner of Spark Capital and a former Lions Gate executive.

‘Showtime was offering less and less money for these movies,’ he said. ‘These studios are giving up some short-term revenue in return for a meaningful equity stake in something that has the potential to become a viable pay-TV and broadband business. That’s the calculated risk this group is taking.’

--Meg James

Photo 1: Viacom Chief Executive Philippe Dauman, left, and Viacom Chairman Sumner Redstone at Redstone’s home in Beverly Hills in 2007. Credit: Mel Melcon/Los Angeles Times

Photo 2: Lions Gate CEO Jon Feltheimer, left, and CBS President Les Moonves at Mortons in West Hollywood in 2006. Credit: Vince Bucci/Getty Images