Lionsgate reported its FYQ4 2022 earnings yesterday. Notably, global streaming subscribers were up from 19.7MM in Q3 to 24.5MM. Of those 4.8MM subscribers, 4.3MM were international STARZPLAY subscribers and the rest were implicitly in the U.S. So Starz saw more growth than Netflix in the U.S., which is seeing an increase in churn in the U.S.
I have written often about Starz through the lens of something I labeled the "genre wars" in 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."
Lionsgate described its "genre wars" strategy for Starz in its just-released 10-K. It focuses on "developing and distributing authentic and engaging programming that resonates with women, African American, Latinx and LGBTQIA audiences, all of which have been traditionally underserved in the premium television space.” They also described their library as “a slate of valuable intellectual property with a bold, premium, adult sensibility” on their recent earnings call.
But how much more upside is there to this strategy, especially at a time when the limits of walled gardens are beginning to reveal themselves, and questions? How much longer can it pursue this strategy on its own? And, at a time when it is pursuing a spin-out from Lionsgate, where is its best destination?
“Genre Wars”
The term “genre wars” 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 serving genres and/or particular demographics can engage and convert audiences to build a subscriber base at scale.
Like Starz, AMC Networks’ suite of apps continues to grow with the strategy - currently at 9.5MM subscribers, or ~60% growth year-over-year - and even anime-focused app Crunchyroll continues to find success (5MM subscribers).
Walled Gardens
The “genre wars” strategy can also be described as a “walled garden” strategy for target audiences. A recent description of this other version of the strategy, tweeted by Randall Rothenberg, Executive Chairman of the IAB, reflects the power of Starz’s strategy:
Television will no longer be a single coopetitive platform, where 3-10 media giants inhabit the same ecosystem, competing for fractions of share-points against similar rivals which sit next to them, cheek by jowl, in the same EPG, all of it visible to an audience of 100 million households. Rather, there will be many multiple “televisions,” each one striving to keep its own audience - an audience smaller than historical norms - locked in and blissfully unaware of those other televisions inhabiting other dimensions in different space-time continuums.
If I were to reframe the value proposition of Starz, it aims to attract and retain women, African American, Latinx and LGBTQIA audiences with content that has “a bold, premium, adult sensibility”, at a scale smaller than historical norms, while keeping them “locked in and blissfully unaware” of other walled gardens.
The reality is, this is a difficult statement to prove without more data on which other services Starz subscribers also subscribe to. But, Starz is proving that hyper-targeting these audiences and growing a content slate targeted to them (“new content every single week for our two key cohorts, women and underrepresented audiences”) is a growth model.
Growth & A Spin-Out
The Wall Street Journal reported earlier this month that Roku had teamed with private-equity firm Apollo to bid for a minority stake in Starz. Lionsgate filed securities paperwork back in November 2021 to formalize the separation or “spin-out” process. They plan to announce a partner by the end of this summer and to close the deal by next May (fiscal Q4 2023).
When put in “walled garden” terms, the interesting question is how much growth Starz has ahead of it with a strategy that is hyper-focused on serving genres and/or particular demographics. AMC Networks believes it is on a path to reach 20MM to 25MM streaming subscribers by 2025. Starz believes it is on the path to reaching 50 million to 60 million total subscribers across linear and streaming range by fiscal 2025 (NOTE: Lionsgate’s fiscal Q1 2025 will be Q3 2024), but it has not broken out an objective for streaming subscribers within that.
We can do some math based on the earnings call, though:
CEO Jon Feltheimer told investors that “approximately 80%” of 35.8MM global Starz subscribers are streaming and linear a la carte subscribers, or 28.6MMM.
We know that of the 28.6MM, 24.5MM were streaming subscribers or 85.66%
85.66% of 80% is 68.53%
That means, 68.53% of the 50MM to 60MM subscribers will be 34MM to 41MM streaming subscribers, or 39% to 67% growth over two years.
How will it get there?
Starz CEO Jeffrey Hirsch believes in the bundle, or in Rothenberg’s terms, a bundle of walled gardens. As he told McKinsey in an interview predicting 2030, “And so to me, mass consolidation is coming, whether it’s commercial consolidation on deals and bundles or full consolidation with M&A”.
But, the problem with the walled garden lens on Starz and bundling is the “blissfully unaware” point that Rothenberg made in his Twitter thread. Meaning, Starz will grow but the question is how? Consumers enter walled gardens and then they are excluded from other streaming services. That is both a blessing and a curse for Starz.
If it increasingly must rely on the likes of Roku and Amazon to grow, at some point the walls of the walled garden will need to come down. That is a problem that needs to be solved by third parties and not Starz.
The growing importance of Smart TVs
That logic mirrors what I wrote about the challenges for sports streaming in After Netflix's Self-Inflicted Wounds, Five Recommendations for Streaming CEOs:
The expensive answer is that Smart TVs and CTVs own the real estate and the software that can put individual games one-click away for users on home screens. But that means streaming services paying to play, and both Smart TV and CTV OSes and the streaming apps themselves evolving their respective software into one-click access (also an example of Product Channel Fit).
This helps to explain why Starz relies heavily on bundling: Amazon and Roku help to put them one-click away from subscribers within those interfaces. On this point, Lionsgate CEO Jon Feltheimer also made an interesting comment on the earnings call on this point: “The premium adult focus of our content and the desirability of our core demos gives us confidence that Starz will be bundled and packaged by a growing number of streaming platforms as the industry continues to evolve.”
In other words, Starz needs a partner who already has the target audience at scale, and the real estate to funnel that target audience into the Starz app. That may explain why both Roku and DirecTV are the companies most interested in owning a minority of the business: they have those audiences, and own that real estate (Roku moreso than DirecTV).
So the answer to the question of remaining upside for Starz may lie more in how Smart TV manufacturers evolve their software to bundling Starz content one click away (and live sports broadcasts one click away) for consumers, and less upon anything Starz will do beyond hyper-serving their target audiences.