Exclusive Interview: Lionsgate’s Jon Feltheimer

PREMIUM, September 19: As Mad Men wins the Emmy for Best Drama for the fourth year in a row, Lionsgate co-chairman and CEO Jon Feltheimer talks to World Screen Newsflash about “turning digital pennies into millions of digital dollars.”

In many professions, whether in the arts or in business, you need to know the rules—the correct technique, procedure or transaction—before you can change them to do something differently or even better. Jon Feltheimer spent many years at major media companies, including New World Entertainment and the Hollywood studio Sony Pictures Entertainment, developing relationships with the creative community and selling shows domestically and internationally. Some of the hits he oversaw included The Wonder Years, Mad About You, The Nanny and Dawson’s Creek. He and his teams excelled at making the best possible deals in what today is considered the traditional media.

When Feltheimer joined Lionsgate, where he is now co-chairman and CEO, he infused the company with an entrepreneurial spirit. He applied his considerable experience in the world of new-media platforms. Where other companies are still struggling to monetize their content, Lionsgate has changed traditional distribution rules, made up new ones, and in the process, made quite a bit of money from digital platforms.

It produces the critically ac­claimed series Mad Men, which has made more than $100 million in revenue just from home entertainment, which includes VOD, SVOD and electronic sell-through.

Lionsgate is a nearly $2-billion diversified global entertainment corporation and includes motion-picture production and distribution, television programming and syndication, home entertainment, family entertainment, digital distribution and new channel platforms.
The company manages a library of around 13,000 titles. Its feature-film slate generated more than $500 million at the North American box office in calendar year 2010, fueled by such hits as The Expendables, Lionsgate’s most profitable film ever; The Last Exorcism; Saw 3D: The Final Chapter; and Kick Ass.

Last fall, Lionsgate announced a joint venture with the Mexican media giant Televisa called Pantelion Films, which acquires, produces and distributes a full slate of English- and Spanish-language feature films for the 26 million Hispanic moviegoers in the U.S.
The company’s television-production-and-syndication business has 15 prime-time cable and broadcast network series on 12 channels, including the Emmy Award-winning drama series Mad Men and the Showtime comedy Weeds.

Lionsgate is also building a portfolio of new channel businesses, which includes FEARnet, the branded horror channel operated with partners Sony and Comcast; TV Guide Network, acquired in February 2009 and run in conjunction with JPMorgan’s One Equity Partners; EPIX, a premium entertainment channel with partners Viacom and MGM; and Tiger Gate, whose branded action and horror channels Kix and Thrill in Asia are managed in partnership with the Saban Capital Group.

Feltheimer is equally bullish about traditional and new-media platforms; as long as Lionsgate continues to produce quality content, it will always find lucrative distribution opportunities.

WS: Lionsgate has demonstrated a willingness to embrace new platforms, perhaps more so than other studios.
FELTHEIMER: As a young company, we were structured from day one to target the large niche-affinity audiences that are a part of today’s digital marketplace, and we’ve become pretty adept at using new distribution platforms to connect with these consumers.
Building our company without a lot of legacy has enabled us to take a fresh approach to new digital platforms that allow us to market, distribute and monetize our content in different ways. We believe that one of the value propositions we offer our investors is that we’re young enough to have a fluent digital vocabulary but old enough to have built a valuable stockpile of brands and franchises.
We want to position ourselves as an industry leader in each of the four ways we look at the digital marketplace: One, we just started creating new content specifically for digital platforms. We know Netflix is doing House of Cards with Kevin Spacey. It’s also been reported that Jenji Kohan, the creator of Weeds, is developing a show for Netflix. Though we can’t comment specifically on that report, that is exactly the kind of premium content that we are looking to create for these digital platforms.

Two, we are monetizing our content on these digital platforms both domestically and internationally. Whether it’s the Mad Men syndication deal or the deal we made recently in Latin America for Mad Men and our library product that is generating five times more revenue and EBITDA than we got previously for our catalogue in that region—this brings in millions and millions of incremental dollars to our EBITDA.
Three, we have formed distribution partnerships. EPIX is a good example of that. The EPIX deal with Netflix gave us a way to layer both new and traditional distribution partners in what I think is a new business paradigm for the pay-television business. It allowed us to respect our traditional partners, it allowed us to support our investment in high-value feature films, and it enabled us to connect to consumers with an “anytime, anywhere” approach that was different from what had been tried previously.

And the fourth thing that digital does for us is it allows us to experiment with windows and variable pricing in ways that we weren’t able to explore before.

WS: You have said that producers and distributors shouldn’t shape content to the distribution model, but shape the distribution model around the content. How have you been doing that?
FELTHEIMER: Content creation drives the whole value chain. You take something that reaches an audience and has long-lasting value and then you build a distribution pattern and a business model around it. You can’t create a deal and then look for content that fits the deal.

I was recently reminded of the analogy that the Yankees built Yankee Stadium around Babe Ruth. They made the right field porch so that he could hit most of his 714 home runs there. I guess that was the same thing—they took a piece of content, which was Babe Ruth, and they built the distribution, which was the stadium, around him. Fragmentation within the digital marketplace fits our business model of targeting large niche audiences, and that has changed the game for us. A lot of shows, particularly cable and pay-television shows, can generate really significant profits in a digital world by aggregating lots of revenue from lots of platforms without attracting the tens of millions of eyeballs that broadcast-network shows do. A show like Mad Men, whose loyal audience isn’t that broad but is really deep and continues to increase on a long-term basis, can air on multiple platforms over a long period of time and become a very, very valuable franchise.

When you have shows with a deep audience, and platforms like Netflix that recognize the value of these deep affinity audiences, you can generate really significant dollars. When you look across all platforms, not all of them digital, Mad Men has made over $100 million in revenue just from home entertainment, which includes VOD, SVOD and EST [electronic sell-through]. It’s pretty indicative of how digital distribution, shaped around a great piece of content, is a tremendous combination.

WS: How are you using Netflix?
FELTHEIMER: The interesting thing about digital partners is that they provide us with various ways of doing business. Netflix is an important buyer of our content and a key strategic and financial customer/partner within EPIX, extending our content delivery to consumers who might not otherwise have it. But we also have 260 ad-supported and 180 on-demand titles on YouTube, and we’ve licensed nearly 500 feature films and television episodes combined to Hulu. These kinds of digital platforms have given us many options that we didn’t have before, and we can offer content to more buyers, across more platforms and windows, packaged in more different ways than ever before and, as a result, we’re turning digital pennies into millions of digital dollars.

WS: How do you feel about the proposed premium pay-TV window that would make films available in the home 60 days after theatrical release?
FELTHEIMER: We don’t believe that there is any single “right” approach, but we do believe that the digital marketplace not only expands our audience and generates higher margin revenue, but it also enables us to explore different windowing strategies that allow us to customize our product offering for our consumers. We will release Abduction, starring Taylor Lautner, 91 days after its September 23 theatrical release in a premium VOD window over the Christmas holidays, prior to its DVD release, priced at $6.99. This premium window will only be available for ten days, meaning we can put it up and take it down, which we could never do without the flexibility that digital platforms provide us. Our theatrical exhibition partners are comfortable with our approach and even offered a statement of support.
We’re releasing Kevin Smith’s film Red State at a premium VOD price of $9.99 30 days prior to its theatrical release, and you’ll see us experiment with other windows in the months to come.

WS: It’s been about a year since Pantelion Films, the joint venture with Televisa, was announced. How is that doing, and do you still see big potential in the U.S. Hispanic market?
FELTHEIMER: I do. Nobody has ever brought out a full slate of Spanish- and English-language films specifically for that market, and you don’t build a brand overnight, but we were pleased that Pantelion got off to a good start with the solid performance of their debut film, From Prada to Nada. We’re in the process of developing it as a television series, and we’re excited about the next release, which is Saving Private Perez.

We’ve targeted a large and fast-growing niche, we’ve got a strong partner in Televisa who understands the Hispanic audience and the programming they want and we’ve established the foundation for building the Pantelion brand over time.

WS: How have you been using social media to help draw attention and create communities around Lionsgate’s films and TV series?
FELTHEIMER: Social media serves as both an important outlet for the marketing of our films and TV shows and a strong platform for the launch of social games and other new content. Our film group is as adept as any team in the business at utilizing new media innovatively and cost-effectively to market our product. For example, our recent partnership with Groupon enabled us to reach tens of millions of online consumers as an adjunct to our marketing campaign for the film The Lincoln Lawyer with very modest incremental spend, and the film grossed nearly $60 million at the North American box office. Facebook is another example of the importance of social media. Lions-
gate sites have nearly 45 million Facebook fans, growing at the rate of 5 million fans a month. We’re utilizing this huge base not only to market our content online but to extend our brands into new businesses. As an example, we’re launching two new social games this fall built around our highly successful Weeds and Dirty Dancing brands. The launch of Dirty Dancing’s social game is part of a multiplatform initiative under which we will bring Dirty Dancing back to the big screen next year under the direction of Kenny Ortega, the choreographer of the original film and the director of High School Musical.

WS: Lionsgate’s TV division has significantly contributed to the company’s strong financial performance. What has been driving its success, and how important a role has the digital marketplace played in its recent growth?
FELTHEIMER: Part of our television strategy was to avoid duplicating what the major studios were doing. We had a specific and targeted approach: producing shows for pay and basic cable and becoming a market leader in that niche. From our cable series Mad Men, Weeds, Nurse Jackie and Blue Mountain State to our syndicated shows like the Tyler Perry series House of Payne and Meet the Browns and Joe Roth’s series Are We There Yet?, we produce or distribute shows that are evergreen, enduring and repeatable properties, and we’ve created some unique financial models to maximize their profitability.

Even in the talk-show genre, we had a second cycle on BET for The Wendy Williams Show right from the beginning to mitigate our risks.
As television series mature they begin to create better margins and therefore make increasing contributions to our bottom line. Again, part of the benefit of digital distribution is that there are certain shows that are more valuable to the digital players than they are to the traditional players. Look at Mad Men. The two most significant bidders were both digital players. The rights went to Netflix, and the deal ended up being worth two or three times what we would have gotten from traditional distributors. And the reason is pretty interesting—for a subscription VOD player a serialized program may be stickier and more valuable than an episodic series. That’s what’s so great about what’s happening in the marketplace. As we expand our distribution choices and potential distribution partners, everyone wants something different. Things that are valuable to one might not be as valuable to someone else and vice versa. What we saw in the Mad Men deal was that a very important part of our catalogue was significantly bolstered by demand from a new, different and well-capitalized buyer.

WS: When I was speaking to Josh Sapan (the president and CEO of AMC Networks, which owns the cable network AMC, the home of Mad Men in the U.S.), he was remarking on one hand how complicated the business has become, compared to “the good old days of three broadcast networks,” but on the other hand there are so many opportunities to be mined.
FELTHEIMER: We had a very complicated negotiation over the three-year renewal of Mad Men and the three-year deal with Matt Weiner [the show’s creator]. A lot of the complication was due to the very difficult job of ascertaining what digital rights mean, the value of those digital rights and how one would share those values. It was a very good example of both the tremendous value and tremendous opportunity going forward, but also of how much work we all have to put in to find these new models and be innovative as we
go forward.

WS: Tell us about the progress you’ve made with TV Guide Network.
FELTHEIMER: We’ve made good progress transforming what was primarily a split-screen utility channel with a navigational component into a full-screen channel delivering entertainment. Our first priority was to phase out the TV listings scroll, and by the end of the year we expect TV Guide Network to be a full-screen channel in more than 80 percent of its homes.We’ve renewed carriage agreements with nearly all the cable operators, including Comcast, Charter and Time Warner Cable. So the first part of transforming the real estate is going very well. The second priority is programming: getting ratings up and growing advertising. We’ve acquired several shows, including our own show Weeds, and we just rolled out a new show called The Nail Files from Jersey Shore creator SallyAnn Salsano, with several more new series and pilots planned in the fall. Those are the kinds of programming initiatives we need to elevate the ratings, increase the advertising revenue and grow the network’s EBITDA and free cash flow, and I’m confident about where the network is headed.

WS: What can you tell us about the show with Charlie Sheen?
FELTHEIMER: We’re excited to be in business with Charlie and Joe Roth, who produced the hit movie Anger Management, on which our comedy adaptation is based. We’re doing what we like to do—moving quickly to capitalize on an opportunity and creating a unique and innovative business model that has lots of upside in success but which is also disciplined and mitigates risk. There is a tre­mendous amount of interest from show­runners, agents who represent showrunners and potential buyers of the show. We think this could be a very big win for our company.

The key to Lionsgate’s success has been identifying audience niches that the major studios were not serving and providing them with movies and TV series they could not find elsewhere. Jon Feltheimer and his team continue to look for new business ventures and are mining opportunities in the digital world.