Jon Feltheimer

March 23, 2009 World Screen
Co-chairman & CEO
Lionsgate
 
Any conversation with Jon Feltheimer, the co-chairman and CEO of Lionsgate, about his company will quickly come to the word “entrepreneurial.” He uses it often, with pride and satisfaction, to describe the approach that his company, the leading independent producer and distributor of film and television content, has taken in staking out opportunities in the media landscape. Lionsgate has built successful businesses by targeting niches that have been underserved by the Hollywood major studios: horror films like the Saw franchise, urban movies like the Tyler Perry franchise, prestige movies like Academy Award winners Crash and Monster’s Ball, and feature documentaries.
In parallel with the film business, Lionsgate has become the leading supplier of programming to U.S. cable channels and several of its shows have become critically acclaimed hits: The Dead Zone, Weeds and Mad Men, just to name a few.
Feltheimer has two main tenets to his operating philosophy: attract the best talent and make them partners, sharing risks and rewards; and communicate regularly with his team to ensure that Lionsgate maintains its ability to act quickly and be responsive to market needs.
Lionsgate has leveraged its content and marketing expertise through a series of partnerships that include the operation of FEARnet, the branded VOD and Internet horror channel, with Sony and Comcast; the creation of EPIX, a new premium entertainment channel expected to launch in the fall of this year, with partners Viacom, Paramount Pictures and MGM; and an investment in the leading young men’s digital distribution platform, Break.com. The company’s biggest investment in the channel business was announced earlier this year with the acquisition of TV Guide Network and TVGuide.com.
Lionsgate also owns the independent television syndication company Debmar-Mercury, and has formed an alliance with the independent filmed-entertainment production-and-distribution company Roadside Attractions. Feltheimer and his team have also forged partnerships with leading content creators, owners and distributors in key territories around the world, including Televisa in the U.S. and Latin America, StudioCanal in the U.K., Hoyts and Sony in Australia, and Eros International in India.
Well aware of the continuing fragmentation of the media market, with consumers watching what they want, when they want and on whatever screen they prefer, Feltheimer believes that the companies that will succeed in this evolving landscape are those that are smaller, nimbler, more entrepreneurial (there’s that word again) and structured to profit from smaller audiences. He is confident in the prowess of Lionsgate’s library, which consists of 12,000 feature-film and television titles, and also in the company’s current slate of movies, New in Town, Madea Goes to Jail, My Bloody Valentine in 3-D, Crank 2: High Voltage and The Haunting in Connecticut. Feltheimer is especially excited about the company’s television output, which includes the new drama Nurse Jackie and the reality show Paris Hilton’s My New BFF.
 
WS: When you left Sony and joined Lionsgate, what opportunities did you see in the market that the studios were not exploiting?
FELTHEIMER: Having worked both at New World, an independent, and then at Sony, a major, one thing I thought we could do was create a slightly different culture that blended the strengths of both an independent and a major studio. We wanted to combine an entrepreneurial, fast-moving and opportunistic approach typical of independents with the financial and strategic relationships, product pipelines, market share and diversification of a major.We empowered people to move quickly, make fast decisions and be entrepreneurial, and we rewarded them with stock as opposed to just upfront compensation. We also set up strategic relationships with some of the biggest media companies around the world, including Televisa, StudioCanal, Comcast, Sony, Viacom, MGM, Hoyts and Eros International.
That blend of cultures ultimately served us very well in our operational philosophy, which was to apply game-changing strategies to both film and television. The studios have tended to use a “get everybody into the tent” philosophy in their film and television businesses. We looked at large niches instead. Initially we didn’t own distribution outlets, so we could be agnostic to platforms. We could take advantage of a more fragmented, youth-dominated digital world with myriad platforms. We concentrated on content that would appeal to those large market niches—horror, action films, prestige movies like Crash, Monster’s Ball and 3:10 to Yuma, the urban audience of the Tyler Perry films.
 
WS: Why is it important to have both film and television operations?
FELTHEIMER: The old adage is that diversification helps you weather the cyclicality of individual businesses. I had worked in television, so it made a lot of sense for me to enter that business at Lionsgate. My background not only included doing studio shows for networks in the U.S. but also producing indigenous and formatted content for international platforms and content for cable networks. At Lionsgate our thought was that we could retain this same focus on alternative buyers and take a similarly entrepreneurial approach to the marketplace at a time when there were a lot of branded cable networks starting to invest in branded content. We believed that we were the perfect supplier for them, so there was both an opportunity and a necessity, and it made perfect sense to go into that business.
And now our television business has become a full partner to our film business. We have a $250-million to $300-million business spread across our production operations run by Kevin Beggs and our distribution business run by Ira Bernstein and Mort Marcus at Debmar-Mercury. It’s a very broad-based television operation, and I told Wall Street analysts recently that I see that becoming a $500-million business in the next two to three years.
 
WS: How do hits like Weeds and Mad Men affect the growth of your TV division?
FELTHEIMER: Those shows are great calling cards for our Lionsgate television brand, both in terms of additional opportunities on the domestic side as well as generating great international sales and attracting great international partners. There is no question these shows told both international and domestic buyers that we were serious about our content, that we were going to provide an alternative to studio offerings and that we were willing to invest in our business.
Weeds and Mad Men are premier properties with enormous long-term value, and they have helped pave the way for other kinds of shows with great upside that we are doing right now. We’re really high on the show Nurse Jackie, which stars The Sopranos’ Edie Falco and which we’re launching with our partner CBS, for Showtime. Crash had a pretty good first season, and we’re going to take it to another level in its second season. We think it’s another quality show with long-term value.
But expansion of our television business extends beyond the production side. We also did the Tyler Perry House of Payne deal through our Debmar-Mercury distribution company, which included an unprecedented initial 100-episode order with TBS and FOX syndication, and we’ve now delivered 126 episodes. TBS has ordered a spin-off of that show, Meet the Browns. These shows are another good example of the success you can achieve when you produce quality, branded entertainment, and when you and the network know exactly who the target audience is and how to reach them.        
 

WS: Lionsgate has a track record of being able to attract top talent while remaining very careful about spending. How do you balance the two?

FELTHEIMER: We do films and TV shows like Crash, Monster’s Ball, 3:10 to Yuma, Mad Men and Weeds that wouldn’t have been distributed by the major studios. That gives talent creative opportunities they might not get elsewhere. The other side is financial. There are times when you want to pay rate card and times when you don’t. But what you do consistently is look for ways to do things differently by creating financial opportunity for people like Mark Burg and Oren Koules, producers of the Saw franchise, or Tyler Perry, by making them real partners. In other words, treat entrepreneurs the way they want to be treated—as full creative and financial partners. We do that whether it’s Mandate Pictures, which we bought in August 2007, or Ish Entertainment, with whom we have a partnership that has led to a number of successful reality shows in the very first year, like Paris Hilton’s My New BFF, or the ongoing partnership with Debmar-Mercury.

Mandate Pictures is doing a fantastic job of fulfilling its entrepreneurial promise. Virtually the day we bought the company, they had a big hit with Juno, and they have continued their success with a number of films and packages, some of which have already been released in North America—Harold and Kumar and Nick and Norah’s Infinite Playlist. The key is that if people are going to be your partner and take risks with you up front, then you should reward them handsomely on the back end. Not only do we treat Nathan Kahane and his group as entrepreneurs, but they treat the talent who they deal with in a similar way.
 
WS: Has the credit crunch affected the size of your production slates, whether film or television?
FELTHEIMER: We started with a very strong credit facility, which we finished just before the economy started going sour. We have added to that through the years a number of other financing deals, production credits and similar arrangements that we’ve used successfully. This past year we did 16 or 17 pictures; my guess is that this coming year we will be closer to 12 or 13. I think that is more an outgrowth of the crowded marketplace and trying to concentrate on doing a better job on fewer titles than reflective of the credit crunch.
On the positive side, the credit crunch and the soft economy probably will make producing films and buying advertising a little bit cheaper. But clearly the soft market will have a negative affect on the local stations’ ad sales, and therefore it will affect barter on certain shows. We have to keep an eye on that in terms of shows like The Wendy Williams Show, which will be launching late this summer, and some of the other syndication shows we’re doing with Debmar-Mercury. But at the end of the day, I would say the key is that the economic downturn is a great wake-up call for all of us to look at the businesses we’re running and how much overhead we’re spending and just make sure that we are employing our capital as efficiently as possible. I gave the keynote speech at NATPE and I said, “A bad economy is the best critic on the planet.” At the end of the day, consumers are being a lot more selective about their entertainment, and that says to all entertainment executives that we have to be particularly disciplined and selective about the way we run our business.
 
WS: Some studios spend enormous amounts to market movies. I imagine that is another area where you have to be careful how you spend your money. Does the fact that you are in a niche business help you decide how much money you are going to spend for each movie?
FELTHEIMER: Absolutely. There is no question that if you can more clearly define your audience—meaning you know exactly who that audience is, or at least have a pretty good sense of it—it becomes a lot easier to create a marketing plan and a buying pattern that is pretty efficient. Coupled with the fact that ad rates are softening and the dollar should go a pretty long way right now, I think that does give us and the other studios some benefits. But again, like all companies across the board, we have to be very disciplined about how we spend our dollars, very creative about our marketing plans and, to use the old adage, we need to think a little outside the box.
 
WS: Tell me about your channel business and what potential for growth you see there.
FELTHEIMER: We have tried to approach it in our own unique way. We’ve looked at digital distribution as a very viable form of creating channel platforms, so we started with FEARnet, which has an on-demand as well as an online component. We think that is a great brand and it’s consistent with one of our most dominant content brands, which is horror.
We invested in Break.com, in which we have a 42-percent stake, for two reasons: We saw an opportunity very consistent with our horror and youth comedies that appeal to the young male audience, and we also found an entrepreneur, Keith Richman, who we wanted to support. FEARnet is a place where we can cross-market all of our young male properties as well. We are launching EPIX, because there was an opportunity in the marketplace to do something a little different in terms of a premium channel, and we have two great partners in Paramount and MGM. And the fact that we have a tremendous library, tremendous first-run movies and tremendous first-run television-series capability, made us feel that avoiding the middle man and going direct to consumers made a certain amount of sense.
With the TV Guide Network, we are making a large investment. It will be the first time that we have actually controlled the infrastructure and all of the operations, meaning that for the first time we will have an ad-sales team, an affiliate marketing team, and will be able to start integrating and consolidating other kinds of businesses into our operational capability.This is the first time we will be in a position to actually start building a boutique of channel- and video-platform units.
 
WS: Lionsgate product is doing very well in the DVD market, and not everybody can make that claim right now. Why do your niches lend themselves so well to such a high conversion rate between the box-office revenues and DVD revenues?
FELTHEIMER: Our success in home entertainment, including the conversion rate and our ability to sell titles in the library area, comes from two strengths. We take a very brand-centric approach to the business. We have a dedicated group of marketing and brand-manager specialists who take a number of brands and work very closely with them, looking at them from a creative and a P&L perspective.
The second factor is that the niches we work with typically over-convert. R-rated programming, for example, has significantly over-converted during the past year compared to everything else. And pictures in the $30-million to $70-million box-office range are also over-converting relative to films that were bigger at the box office. Once a picture performs above $150 million or $200 million, the conversion rate tends to go down, which makes perfect sense if you think about it. So the fact that we are doing branded entertainment in the $30-million to $70-million box-office range is critical to our continued over-indexing. By the way, I wish more were in the $70-million range than in the $30-million range. But R-rated films and the edgier PG-rated films are converting 20- to 30-percent higher. As a matter of fact, I think R-rated films are the only genre that performed better in 2008 than in 2007. That happens to be where we play.
 
WS: In what areas of your business are you seeing growth?
FELTHEIMER: We’re starting to aggregate some very significant online assets from Break.com and FEARnet.com, and now from TVGuide.com, which is very successful. The online business is frankly even more successful right now than the channel, and there is real opportunity there. So we think there are great opportunities with those assets and some other similar businesses we’re exploring. We reach a huge and growing body of Internet users.
We still see our core businesses as very viable, ongoing businesses. We are continuing to have strong growth in our library sales. We still believe that our television business has tremendous growth ahead of it. With Debmar-Mercury, we are one of the only real independent distribution forces in domestic television. We think there is great growth remaining there, when you look at Wendy Williams or Meet the Browns or House of Payne, which is now up to 126 episodes. Trivial Pursuit came out this past year and was not as successful as we hoped, but the fact that we could launch and get that off the ground was significant in itself. We see our television business as a significant growth area of the company.
We have been expanding our nontheatrical family-video business, and we’re up to something like a 17- or 18-percent share.  We’re obviously in a difficult economy right now, but I think that kind of market share will ultimately be very valuable to us when the economy turns around.
We do think the film business became oversaturated this past year. There is less financing available in the marketplace, but I think that is going to change toward the end of this year. The theatrical business is already robust in terms of overall box office. But we think in terms of overall profitability, and there is a good chance that we’ll see that business become much more profitable toward the end of this year as there are fewer films in the marketplace, leading to more audience per film.
We like our new businesses, and we like our old businesses. We like to continue to leverage our distribution pipelines with relationships like we have with Relativity Media and Gold Circle Films and Miramax. We like the new strategic relationships we’ve formed with Televisa and StudioCanal and Eros in India. And we think that the more we develop our brands, the more of those kinds of partnerships and the more new opportunities we can create all around the world.
One piece of the business that we haven’t talked about yet is the growing revenue from online distribution of traditional content. There is no question in my mind that this is not just replacement revenue but is instead ongoing, growing and higher-margin revenue that is starting to be created by VOD, by EST and by new technology like 3-D. We were very successful with My Bloody Valentine in 3-D.
So new digital distribution opportunities and new tech-related formats for our content are definitely driving incremental revenue and, more importantly, incremental margin. We’ve been doubling our online revenues from traditional entertainment every year for the last two or three years.  That’s going to continue, and it’s starting to become significant revenue.
 
WS: Given the economic climate, is this the time to avoid acquisitions and just keep your cash, or are you still interested if the right thing comes along, whether it’s a library or channels or other assets?
FELTHEIMER: We’re definitely looking at this marketplace as an opportunity with acquisitions like TV Guide Network, and there are some other things we’re exploring. Some might suggest waiting because they believe that the marketplace hasn’t hit bottom yet and things will get even cheaper. But I think it’s very rare that people can accurately predict the bottom of anything.  My feeling is that when we see an opportunity out there, if it fits strategically with our business plan and we think we can grow great value, then I think we will continue to be motivated to act.
 
WS: Looking back at the goals you set when you joined Lionsgate, are you where you were hoping you’d be? Is there still a whole lot more you want to do?
FELTHEIMER: I think we are very much on plan. The first four or five years were definitely intended to build up the content capability, the diversification and the international markets. The next three years were focused on starting to expand into the channel-platform business while continuing that growth in our other core businesses. That is exactly what we have done, but I’m never satisfied, so, if anything, I would say we’re on plan but chomping at the bit to do more.          

ADVERTISEMENT

Watch GoQuest Media’s Kuma (The Other Wife) in their Exclusive Showcase