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Starz could turn into an ‘acquisition machine’ after Lionsgate spins it off



Liberty Media’s John Malone

Michael Kovac | Getty Images

By “free radicals,” Malone was referring to affordable media companies, such as AMC Networks, which is controlled by the Dolan family, or A&E Networks, co-owned by Hearst and Disney, which lacked the global scale to compete with Disney and Comcast‘s NBCUniversal for original programming and A-list talent.

While these companies may wallow independently, banding together would give them balance sheet heft and leverage to increase programming fees on pay-TV providers.

Malone’s vision never materialized. Lionsgate hasn’t made another acquisition of significance since Starz and has seen its market capitalization shrink in recent years. Lionsgate’s current market valuation is just over $2 billion. In 2016, Lionsgate paid $4.4 billion for Starz. Malone is no longer a Lionsgate shareholder, selling the remainder of his voting shares in 2019.

But even without Malone’s influence, and even amid a transforming media and entertainment landscape, Starz may carry the torch of his vision.

Starz to be spun

In the last six years, streaming video has become the media world’s north star. Pushing together companies to gain a negotiation advantage against pay-TV operators in carriage fee disputes is anachronistic as millions of Americans cancel cable each year. Investors have viewed Lionsgate as an also-ran in the streaming wars.

That’s led Lionsgate’s management and board to decide spinning off Starz is its best course of action. As part of the Starz spinoff, a minority stake will likely be sold to help set a market valuation for the new public company. Vivendi‘s Canal Plus and private equity firm Apollo Global, in tandem with streaming distributor Roku, have both made preliminary bids for a 20% stake, according to people familiar with the matter.

Starz and Lionsgate “will do great trading separately,” said Jimmy Barge, Lionsgate’s chief financial officer, earlier this month. “They can pursue their own initiatives, opportunities that might not otherwise arise for the combined company.”

A deal could be announced as soon as Aug. 4, Lionsgate’s estimated next earnings date, the people said. A spokesperson for Starz declined to comment.

As an initial valuation, based on the minority stake sale, Starz will likely be pegged somewhere between $2 billion and $4 billion, said the people, who asked not to be named because the discussions are private. In other words, Starz alone may be valued with a higher market valuation than Starz and Lionsgate combined.

After the spinoff

A publicly traded Starz will have to get bigger to compete with Netflix, Disney, Warner Bros. Discovery, Paramount Global, NBCUniversal, Apple and Amazon in the streaming wars. Even several of those companies may not be large enough on their own.

Starz has 24.5 million global streaming subscribers. When combined with Starz’s premium cable network, which competes with HBO and Showtime, it has 35.8 million subscribers worldwide. For comparison, Netflix has 222 million global subscribers.

Starz tends to focus on female and Black audiences and has had some success with shows including “Power,” “Outlander” and “Gaslit,” the recently released series about Watergate based on season one of the “Slow Burn” podcast, starring Sean Penn and Julia Roberts.

“Starz seems to have strong content but is struggling to attract attention,” JPMorgan analyst Philip Cusick wrote in a note to clients. “This is in line with our thesis that streaming is a scale business, and we believe Starz content is better in another distributor’s hands.”

Lionsgate has attempted to sell Starz for years. It got fairly close in 2019, nearly striking a deal with CBS. That sale never crossed the finish line because vice chair and controlling shareholder Shari Redstone chose instead to push Viacom together with CBS. While former CBS Chief Executive Officer Joseph Ianniello had interest in acquiring Starz, Bob Bakish, the CEO of the combined ViacomCBS, now named Paramount Global, didn’t share his vision, two of the people said.

Every large media company has ultimately decided not to acquire Starz. Buying a subscale streaming service with ties to the legacy pay-TV model is a hard sell for Wall Street. Investors don’t want to see large media companies spending their acquisition cash on deals that don’t move the needle on future growth.

Ways for Starz to grow

Starz CEO Jeffrey Hirsch

Source: Starz

That gives Starz one other path to get bigger quickly: acquire or merge with other companies, itself. Two possible targets are, once again, AMC Networks and A&E Networks. AMC Networks has a market valuation of $1.3 billion. An AMC spokesperson declined to comment on a potential merger. An A&E spokesperson didn’t immediately respond for comment.

Investors may be far more sanguine on Starz and AMC Networks merging than a larger company picking off smaller rivals. Bulking up in a series of deals won’t make Starz a major player overnight. But it could give it the size to acquire carve outs and divestitures from other large media companies. Over time, Starz could conceivably become a media company with enough scale to be a competitive threat. Or, at the very least, not an afterthought.

Starz CEO Jeff Hirsch hinted at this possibility in an interview with CNBC in 2020.

“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?’,” Hirsch said. “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.” (MGM has since been acquired by Amazon.)

It’s possible AMC Networks and A&E will balk at selling. But they, too, find themselves as legacy holdovers — owners of cable networks with declining values. Starz could act as a sort of “horizontal acquisition machine” in the coming years to stay viable.

If you’ve heard that phrase before, that’s because someone used to it describe his intensions in taking a stake in cable company Charter Communications back in 2013.

That person was Liberty Media Chair John Malone.

WATCH: Liberty Media Chairman John Malone on equity markets and streaming services

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Allbirds ‘dramatically’ slows pace of new hires as loss widens



A woman walks past an Allbirds store in the Georgetown neighborhood of Washington, D.C., on Tuesday, Feb. 16, 2021.

Al Drago | Bloomberg | Getty Images

Allbirds on Monday trimmed its financial forecast for the year and announced a number of efforts to cut costs as the sustainable shoe maker reported a wider quarterly loss compared with a year earlier.

The company citied a slowdown in consumer spending toward the end of June and said it has “dramatically” slowed the pace of corporate new hires and backfills for departing employees. It said it has cut its global corporate workforce by about 8%, or 23 people.

Chief Financial Officer Mike Bufano said the retailer anticipates any external headwinds pressuring consumer spending in the United States will persist in the back half of 2022. “As a result, we continue to take a cautious outlook,” he said in a statement.

Allbirds shares fell more than 13% in after-hours trading on the news. The stock had tumbled more than 60% year to date, as of Monday’s market close, bringing Allbirds’ market cap to about $842 million.

Here’s how Allbirds did in its fiscal second quarter compared with what analysts were anticipating, based on Refinitiv estimates:

  • Loss per share: 12 cents adjusted vs. 16 cents expected
  • Revenue: $78.2 million vs. $77.8 million expected

Allbirds reported a net loss in the three-month period ended June 30 of $29.4 million, or 20 cents per share, compared with a loss of $7.6 million, or 14 cents a share, a year earlier. Excluding one-time items it lost 12 cents per share, better than the 16-cent loss that analysts were looking for.

Revenue grew 15% to $78.2 million compared with $67.9 million a year earlier. That topped estimates for sales of $77.8 million.

Allbirds reported both an increase in the number of orders and in average order value, which it said was due in part to price hikes amid inflation. The company is best known for its slip-on wool loafers but also entered the apparel business during the pandemic and has been launching a variety of shoes, including for running.

Sales in the United States grew 21% from year-ago levels, while it said international revenue was flat due to ongoing Covid-related restrictions in China and the war in Ukraine.

Retailers from Walmart to Gap in recent weeks have trimmed their expectations for future sales and profits as businesses attempt to gauge how consumers are responding to 40-year-high inflation. Companies say lower-income households have been particularly pressured by the higher prices and have started to tighten their budgets for discretionary items, including apparel.

For the year, Allbirds is now calling for adjusted net revenue to between $305 million and $315 million. It previously forecast net revenue of $335 million to $345 million.

It sees adjusted gross profits amounting to between $150 million and $157.5 million, compared with prior guidance for gross profit of $170 million to $177.5 million.

And it’s anticipating an adjusted EBITDA loss of $42.5 million to $37.5 million, compared with a prior forecast for a loss of $25 million to $21 million.

Along with the slower pace of hiring, Allbirds said it will look to trim logistics costs in the United States by transitioning to automated distribution centers and a dedicated returns processor. The company is also hoping to accelerate the scaling of its owned manufacturing base to slash product costs over time.

Bufano said the changes are expected to save the company between $13 million to $15 million on an annualized basis beginning in 2023.

We will reinvest some of these savings into building brand momentum through product innovation, marketing, retail stores, and marquee third party partnerships,” he said.

Allbirds, which went public at a more than $4 billion valuation last November, recently inked a deal to sell its products in Nordstrom‘s department stores. The retailer has also been opening brick-and-mortar shops to reach more consumers, ending the second quarter with 46 locations globally.

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Why creating a horror movie haven on Netflix may be a smart move for the streaming giant



A button for launching the Netflix application is seen on a remote control in this photo illustration in Warsaw, Poland on April 25, 2019.

Jaap Arriens | NurPhoto | Getty Images

There’s a big money question haunting Netflix.

In recent years, the streamer has spent big on flashy, blockbuster-style action movies like “The Gray Man” and “Red Notice,” which ran the company $200 million each. The films are the first steps in bids to spark event-level franchises. But they’re costly, and it’s unclear how impactful they have been for Netflix’s bottom line.

Meanwhile, the platform’s smash hit “Stranger Things,” a supernatural thriller with horror undertones, has become a clear cultural touchstone. The series, which just released its fourth season, has inspired Halloween costumes and videogame versions of the monster-filled alternative universe.

While the show has a similar budget to these high-octane action flicks — around $30 million per episode, or more than $200 million per season — its success has led some in the industry to question whether high-budget features are worth Netflix’s investment.

Netflix’s streaming rivals have begun to shift their own content strategies in order to spend less on direct-to-streaming film content. Warner Bros. Discovery CEO David Zaslav said Thursday his company has been unable to find an “economic value” in producing big-budget films for its streaming services.

“We’ve seen, luckily, by having access now to all the data, how direct-to-streaming movies perform,” Zaslav said during the company’s second-quarter earnings call. “And our conclusion is that expensive direct-to-streaming movies … is no comparison to what happens when you launch a film in the motion picture, in the theaters.”

Netflix doesn’t often release films in theaters, unless it’s seeking Academy Award eligibility, so it budgets for movies knowing that its only option for recouping spend is through subscription growth.

That’s why analysts have pointed to the horror genre as a potential avenue for Netflix.

The horror genre, in particular, typically comes with lower production costs, making these kinds of films ideal for the box office as they often rake in significantly more in ticket sales than they cost to make.

Blumhouse and Universal’s “Get Out” cost just $4.5 million to produce and went on to generate more than $250 million at the global box office.

And while “The Gray Man” is set to be developed into a franchise, Peter Csathy, founder and chairman of advisory firm Creative Media, suggested Netflix is overlooking franchise opportunities in horror that could save the company hundreds of millions per film.

“Scream,” “Insidious,” “Halloween” and other horror film series have won over fans of the genre, as low-budget alternatives to more expensive franchise endeavors like Fast and Furious, Star Wars, Marvel or Lord of the Rings.

“The production costs are a sliver, a fraction, a small fraction of what it is for these huge bets that are made,” he said. “And why not go for an inexpensive sure thing that hits your targeted demo? Why not put your money there, rather than doing these big prestige plays?”

Plus, Csathy added, the target audience for the horror genre also happens to be young — the demographic advertisers and streamers want to tap into.

Netflix has seen success from past horror releases including its “Fear Street” trilogy and has a number of Netflix Original releases in the genre including “No One Gets Out Alive” and “There’s Someone Inside Your House.”

Michael Pachter, an analyst at Wedbush, suggested Netflix could get more for its money by sticking with a lineup of horror and rom-com projects, both of which tend to be relatively low-budget. With more modest budgets, missteps aren’t as big of a deal.

“The cool thing about low budget is you can make mistakes,” he said. “Big budget, you just can’t make any. If you screw up, you’re screwed. So which is riskier, a $150 million movie or three $50 million movies?”

Missing metrics

Part of the scrutiny on Netflix’s content spend stems from the lack of clear metrics around the financial performance of streaming-first shows and movies.

Box office tallies for theater releases and TV ad revenue are tried-and-true metrics. With streaming-only platforms, viewership data varies from service to service and paints an incomplete picture for analysts trying to determine how a film or television show has actually performed.

A bill upwards of $200 million for a film like “The Gray Man” is harder to explain when there’s no visible financial gain at the end of production, like studios see in box office ticket sales. Streaming subscribers pay flat monthly or annual fees to access all available content. Netflix argues its content keeps users on the platform and handing over subscriber fees.

For Netflix, the push into big-budget movies is a way to burnish its image and quiet criticisms that it churns out mediocre content. The company has shored up its balance sheet, is cash flow positive and has a three-year window before a significant portion of its debt matures, giving it some wiggle room to spend.

It’s unclear how much Netflix spent per film for its “Fear Street” trilogy, and there’s limited data around its performance on the platform. But Nielsen ratings estimated that “Fear Street 1994” generated 284 million viewing minutes during its first week on the service and “Fear Street 1978” tallied 229 million minutes. It is unclear how the third film, “Fear Street 1666” performed.

What’s more, the fourth season of “Stranger Things” has become just the second Netflix series to cross 1 billion hours viewed within the first 28 days of availability. Of course, comparing Netflix’s films to its television series is a bit like comparing apples to oranges, but it’s the best data analysts have access to as long as the company keeps quiet about content spend and success.

Many entertainment experts have tried to crunch the numbers on how streaming hours translate to revenue, retention and, ultimately, the strength of Netflix’s business. But much of how Netflix decides what to greenlight and what to cancel remains a mystery to analysts.

Based on Netflix’s own data, “The Gray Man” amassed more than 88 million hours in worldwide viewing during its opening weekend on the service, 60 million fewer hours than “Red Notice” pulled during the same period last November. “Red Notice” stayed in the top spot of Netflix’s top 10 list for 12 days, while “The Gray Man” was usurped after just eight days.

As of Friday, the film holds the fourth spot on the list behind “Purple Hearts,” “Tower Heist” and “Age of Adaline.”

So, was “The Gray Man” worth its $200 million price tag? It appears to have have hit some behind-the-curtain metric for Netflix, which is moving forward with a sequel and a spinoff.

“Netflix, obviously has the data and the methodology that they believe is accurate, to determine what is this success at Netflix and what isn’t,” said Dan Rayburn, a media and streaming analyst. “If [‘The Gray Man’] had bombed by their definition of bombing, whatever that is, we don’t know, they would not have announced an expanded deal.”

As for how Netflix makes its content choices, Rayburn says that while data is not currently widely available, that could change once the streamer enters the ad market.

“Whether they want to give us data or not, we’re gonna get more data as the years go on, because the advertising side,” he said. “That’s gonna help us better understand content.”

Disclosure: Comcast is the parent company of NBCUniversal and CNBC. Universal is the distributor of the Halloween franchise and “Get Out.”

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Netflix is expanding its push into video games, but few subscribers are playing along



Dado Ruvic | Reuters

Netflix is accelerating its push into video games with plans to double its catalog of offerings by the end of the year, but for now, few of the streaming giant’s subscribers are playing.

Since last November, the company has been rolling out the games as a way to keep users engaged between show releases. The games are accessible only to subscribers, but have to be downloaded as separate apps.

The games have been downloaded a total of 23.3 million times and average 1.7 million daily users, according to Apptopia, an app analytics company. That’s less than 1% of Netflix’s 221 million subscribers.

The importance of games to Netflix’s overall strategy has arguably increased in recent months as the company faces intensifying competition for user attention. In the second quarter, Netflix lost nearly a million subscribers, after losing 200,000 subscribers during the first quarter — its first subscriber declines in more than a decade.

In a letter to shareholders last year, Netflix named Epic Games and TikTok as among its biggest rivals for people’s time.

“One of the many advantages to Netflix in pursuing the strategy is the ability to drive engagement beyond when the show first comes out on the platform,” Prosek Partners analyst Tom Forte said.

Still, Netflix Chief Operating Officer Greg Peters said last year the company was “many months and really, frankly, years” into learning how games can keep customers on the service.

“We’re going to be experimental and try a bunch of things,” Peters said during the company’s fourth-quarter earnings conference call. “But I would say the eyes that we have on the long-term prize really center more around our ability to create properties that are connected to the universes, the characters, the stories that we’re building.”

The company’s current catalog of 24 game apps covers a variety of genres and Netflix shows, such as “Stranger Things: 1984.” Several are modeled after popular card games, such as “Mahjong Solitaire” and “Exploding Kittens.”

The catalog will grow to 50 games by the end of the year, including “Queen’s Gambit Chess,” based on the hit Netflix series, according a company representative.

Intentionally vague

Netflix has been cagey about how it plans to make video gaming a core part of the company’s strategy, rather than merely a side hobby.

“We’re still intentionally keeping things a little bit quiet because we’re still learning and experimenting and trying to figure out what things are going to actually resonate with our members, what games people want to play,” Leanne Loombe, Netflix’s head of external games, said during a panel at the Tribeca Film Festival in June.

Netflix hinted earlier this year that it will license popular intellectual property for its new gaming additions.

“We’re open to licensing, accessing large game IP that people will recognize,” Peters said in January. “And I think you will see some of that happen over the year to come.”

Netflix tapped outside developers for its current catalog, but has acquired three video game developers in the past year.

All of that adds up to growing investment. Netflix hasn’t disclosed how much it’s spending to develop its video game segment, but the efforts are capital-intensive. Netflix’s acquisition of Finnish developer Next Games cost the streamer about $72 million.

Forrester analyst Mike Proulx noted that Netflix has been investing in gaming slowly, and that it still appears to be what he would consider “more of a test and experiment at this stage.” He noted that most people don’t associate Netflix with games.

So far, download figures for Netflix games fall far short of the leading mobile games — Subway Surfers, Roblox and Among Us, for a few — which each have more than 100 million downloads, according to Apptopia. Still, downloads have slowly climbed since May, after a downward trend that started in December.

“We’ve got to please our members by having the absolute best in the category,” Netflix co-CEO and co-founder Reed Hastings said in January. “We have to be differentially great at it. There’s no point of just being in it.”

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