Lionsgate's Jon Feltheimer

November 2006

Since Jon Feltheimer joined Lionsgate in 2000, the company
has had an impressive run. As CEO, Feltheimer has combined the flexibility and
entrepreneurial culture of an independent with the financial and strategic
relationships of a major studio. As a result, the company’s revenues have grown
from approximately $180 million to nearly $1 billion annually, and its market
capitalization has increased from $80 million to nearly $1 billion.

Today, Lionsgate is the leading independent
filmed-entertainment studio, with a library of more than 9,000 titles and
businesses that range from feature-film production and distribution, with 18 to
20 releases a year, to television, with 12 prime-time cable and broadcast
network series; a $500-million-a-year home-entertainment business; and a
minority interest in CinemaNow, a leading video-on-demand company.

Undoubtedly, Lionsgate’s proudest achievement of the past
year was the Academy Award for Best Motion Picture won by its film Crash. The
movie also won Best Original Screenplay and Best Film Editing. Lionsgate movies
have garnered 25 Oscar nominations in the last seven years. It was also the
studio behind Michael Moore’s controversial documentary Fahrenheit 9/11.

Feltheimer’s strategy for the company calls for remaining
focused on a select number of genres. While urban and horror pictures have
proven very successful, Lionsgate is now branching out to include teen-targeted
and Spanish-language movies. In television, Lionsgate is concentrating on
serving the cable market with original series. In doing so it now boasts such
critically acclaimed and ratings hits as Weeds on Showtime, The Dead Zone on
USA Network, Wildfire on ABC Family, Lovespring International on Lifetime and
The Dresden Files on SCI FI Channel. Lionsgate has also closed a number of
agreements to increase its content, including the recent acquisition of the
Debmar-Mercury syndication company, a distribution deal for the Studio Canal
library and a deal to continue distribution of most of the Republic library.

Feltheimer spent nine years at Sony Pictures Entertainment
before joining Lionsgate. He gained much experience in television production
and distribution, launching branded channels around the world, and setting up
international co-production ventures. He is taking that “traditional media”
experience and applying it to today’s “new media” landscape and is very bullish
on Lionsgate’s future. He feels the studio is well positioned to take advantage
of all the new distribution platforms and portable devices that technology
keeps serving up every day.

WS: What are the
main challenges you are facing as an independent film company today?

FELTHEIMER: We are
the only major independent, fully diversified public film company, and we’ve
been on a very successful financial growth path for the last six years. Our
revenues have grown from approximately $180 million to almost $1 billion, and
the challenge for us is to keep growing without outgrowing the very business
model that has made us successful. It’s a challenge for all of our
businesses—film, television and video. How do we stay ahead of the curve?
How do we stay entrepreneurial and keep innovating? Any time anybody does
something successfully, other people will follow. The minute there’s a
successful film or television-series concept that works, there are a large
number of imitators. So when we think about something like the Crash marketing
campaign, which was very innovative, what’s going to make us successful next
year and the year after is probably something we’re not yet doing. It’s
probably something we haven’t even thought about yet. So the challenge really
is, how do we think about it first and then execute it before somebody else
does?

WS: What motivated
Lionsgate to boost its television production?

FELTHEIMER: From the
beginning, diversification of earnings has been part of our plan, and we saw
television as an important part of that diversification.

The fact is that the greatest growth in original series has
been on cable networks. And the needs of the cable networks, and frankly their
resources and their ability to pay, fit in nicely with our business model for
television. That model really isn’t that different from our film model, in
terms of the efficiency of production and the kind of financing we like to do.
The cable networks’ needs also fit in with our ability to produce and
distribute. We have a good track record in getting and keeping our series on
the air, and it’s because we have a great group.

In addition to Kevin Beggs [the president of television
programming and production], we brought in Sandra Stern [the executive VP and
COO for television], who I worked with at Sony and New World, to help build the
business. I’ve got a lot of confidence in them and in their ability to run an
entrepreneurial business. The final catalyst behind our increasing television
production, frankly, is that in spite of years and years of people saying that
international broadcasters prefer making their own series, the fact is that the
demand for U.S. series is still extremely strong—from reality shows and
formats all the way to scripted dramas and half hours. I like our television
economic model and its scalability. And with my background in television, I’m
having a great time assisting Kevin and Sandra in creating the strategy for the
growth of our television business.

WS: You seem to have
a better batting average with your TV series than several of the studios.

FELTHEIMER: We’re
very focused. We’re not trying to have too many series on the air. We are able
to pick and choose what we think is the right show for the right network. The
cable networks don’t have the resources to put on a show for one episode and
take it off. They are giving their shows a little more of a chance than the
broadcasters, so we’ve taken advantage of that. We are the largest supplier for
cable, they are our primary buyers and promoting their growth is consistent
with promoting our growth as well.

WS: What demand are
you finding for documentaries?

FELTHEIMER: The docs
that we are making are coming out of our television business and we did that
for a couple of reasons. One is that the TV division is very efficient at
producing lower-budgeted content, whether it’s hours, half-hours, movies or
mini-series. Second, on most of the docs that we are producing, we have had
network partners. Discovery was a partner on Grizzly Man. The Sundance Channel
was our network partner on Leonard Cohen: I’m Your Man. VH1 was our partner for
The U.S. vs. John Lennon. We do that for two reasons. One is they are great
partners for marketing once we go out theatrically, and two, as a backstop, if
we don’t go out theatrically, we know we have the TV premiere to supplement the
revenues and to launch the product properly into all its other platforms.

A good example is The U.S. vs. John Lennon. It’s a fantastic
movie. It has some 20 John Lennon songs and two Beatles songs. We did it with
VH1 and there was great cross promotion. Ultimately, they will get a television
window out of it as well. But so far, it’s been a little disappointing
theatrically. However, between VH1’s window and international sales, we will
have a financially successfully movie that will endure forever in our library.

In theatrical distribution, we’ve been pretty successful
with some docs, like Fahrenheit 9/11. We picked up another, Deliver Us From
Evil, that we think will be equally controversial. It involves the shocking
public disclosure by a priest about his pedophilia, and you’ll see a lot of
publicity surrounding it. We like the documentary business as it becomes more
important for advertisers, theatergoers and our industry. Like everything else
we do, we didn’t want docs to be a one-shot business. We put together a slate
to create consistency for this entire segment.

WS: Two strong
genres for Lionsgate’s feature films have been urban films and horror pictures.

FELTHEIMER: We
continue to be pretty dominant in those genres. For the first six months of
this year we have a market share of more than 30 percent if you look at both
our off-theatrical—meaning the theatrical films that play in home
entertainment—as well as our direct-to-video titles. That speaks to how
strong we are in that area.

I think we’ll all have to come up with a different name for
“urban” because it stretches across so many different lines, from edgy and
provocative films to films that can have much more music in them, as well as
family and comedy and the Tyler Perry films. We are pretty active in all those
areas that you would typically call urban. We have Akeelah and The Bee, we’ve
got Tyler Perry’s next movie coming out in three months, we’ve got Pride, with
Terrence Howard and Bernie Mac.

In terms of new areas, we’ve announced that we are going to
enter the Latino market. We released La Mujer de mi Hermano. That did about $3
million at the box office. We are releasing Pretendiendo, which is another
Bárbara Mori film, and we are beginning production on a film called Movidas,
which will be our first original production in this area. It has an all-star
Latino cast, a number of huge telenovela and theatrical stars for that
audience. We see the Spanish-language and Latino-culture film-and-video
business as an area in which we can really be very strong.

We haven’t forgotten the grown-up audience, the audience
that went to Crash and Monster’s Ball. We think that is a great audience. They
are coming back to theaters and we are going to continue to do great films for
them. We have one coming out next year that is called Trade, a beautiful film
that I think will have Academy Award potential.

We have taken genre films a little further this year. We did
The Punisher last year. We started aiming at the teen audience. We just
released Crank, starring Jason Statham, which was a big action comedy that did
very well. Repeat talent relationships are very important to us. Jason Statham
will also be starring with Jet Li in another action film, Rogue, for us next
year. We’ve got Employee of the Month with Dane Cook and Jessica Simpson that
is going to appeal to a teen audience. Dane Cook will be starring with Jessica
Alba in another teen comedy, Good Luck Chuck, for us next year that will appeal
to that same audience.

The key thing for us is not to try to reach everybody with
any one movie but to remain focused on one or two targets for most of our
movies.

WS: Some are
bemoaning the fact that the feature-film segment of the DVD market is slowing
down while episodic television is doing very well. What has Lionsgate’s
experience been in the DVD market?

FELTHEIMER: Last
year the conventional wisdom among the pundits was that the sky was falling in
the DVD business, but we don’t pay much attention to the conventional wisdom
because it’s always changing. We haven’t seen our film business dropping.
Overall home-entertainment revenues for us this past fiscal year grew 13
percent from the prior year. Even better for the first quarter, we had
18-percent growth year over year.

Overall, the DVD performance for films that grossed less
than $50 million at the box office remains very strong. Maybe for the major
studios that’s not quite as relevant; for us it certainly is. The most
important thing for us is the conversion rate: in other words, box office to
home entertainment sales. Right now, overall, we’re running at about 116
percent and I think the studios are at about 95 percent. By concentrating on
the genres we have chosen, we’re over-converting on those films. Movies like
Lord of War had a huge, 182-percent conversion rate, and Waiting had 153
percent. Those were two movies about which, interestingly enough, certain
analysts said, “Oh, look, they failed on those movies.” But those were very
profitable films for us.

We’re not trying to impress people by being number one at
the box office, or even necessarily being number one in home entertainment. But
overall, in terms of our business model, we find films in the
home-entertainment market are doing extremely well for us.

Now, that doesn’t mean TV to DVD isn’t great. It’s a great
business for us and for a lot of companies right now. But we’ve been doing that
for a long time. We distribute for a number of third parties, including Mattel,
Marvel and NBC. Combining our extensive line of product with third parties gives
us an amazing array of content for DVD.

WS: Lionsgate has
chosen the Blu-ray DVD format over HD-DVD. Why did you choose that, and are the
two competing DVD formats going to hurt the DVD industry?

FELTHEIMER: We need
to get resolution on this and, of course, you don’t want to make the consumer
sit around and wait, not knowing which format is going to win. I have to be
clear; we aren’t formally bound to Blu-ray. We do have the flexibility to go
with whichever is the winning format, but we have chosen Blu-ray for a number
of reasons, mostly technical. It has very robust copy protection, which is
obviously very important for anti-piracy. It’s got great capacity—50
gigs—that is going to be very important not just for the additional
features [that can be offered on a DVD] but for enhanced resolution as well.
You’ve got seven studios supporting the format. We think that is important.
There are lots of hardware manufacturers supporting it as well, and we felt in
terms of high-def, this is really the technology of the future.

WS: What is
Lionsgate doing in the area of new media and new platforms, iTunes, wireless,
broadband, etcetera? Are you looking for ways of exploiting your content in
those areas as well?

FELTHEIMER: The
first thing I’m doing is going back to technology college so I can figure all
of this out! We certainly are doing pretty much everything that all the studios
are doing. We got a little head start because of our ownership in CinemaNow.
That’s been very helpful, allowing us to see all the things that it has been
able to do: download to own, pay per view and download to burn, which was
recently announced and offers the ability to make hard-disc copies off of the
Internet. That’s been a great head start for us, and there are a lot of new
players in CinemaNow. EchoStar just came in with a multi-million-dollar
investment, as well as Index Holdings, which is a broadband and mobile supplier
from Japan, a very interesting $2-billion company.

Obviously, there are a lot of new players, Amazon, Apple and
Blockbuster.com, who are all turning into online retailers. We’re going to be
in business with them, as are the other studios. It’s clear that we are at the
beginning of what is going to be a pretty steep revenue spike from digitally
delivered content. And I have said publicly that I believe it’s going to be
added high-margin revenue and not solely replacement revenue. It will be
additive and incremental. I’ll give one great example: Weeds, a fantastic show
we are doing for Showtime, which is available in only 14 million homes in the
U.S. But we put Weeds on iTunes last year and for a long time all 10 episodes
of the series were in the Top 50 [most downloaded items] on iTunes. This year
downloads of Weeds will certainly go over the $1-million mark. One million
dollars may not sound like a whole lot of money, but for a show that’s only in
14 million homes, it’s purely incremental revenue.

We’ve also released the DVD of Weeds, and I’ll tell you
there is no evidence right now—and Forrester Research supports this in
its most recent analysis of the business—that the iTunes downloads have
affected our ability to sell DVDs. This is a great example, first, that our
content is going to play in the digital environment; second, that this revenue
is real and growing; and third, that it is not going to cannibalize our
traditional revenue streams.

WS: Lionsgate has
acquired some libraries recently. Is that part of the growth you see for the
company?

FELTHEIMER: We are
going to continue to look at content, and libraries are aggregations of
content. We will look at the right libraries at the right prices. One of the
challenges is that there are a lot of new players in the market and they have
signed on to our same strategy of exploiting the evergreen nature of library
revenue, so there are not many cheap, really good libraries out there. But at
the end of the day, we have proved ourselves to be experts at library
management. Our ability to take all of our new content, which is prodigious,
and package it together with library content, and sell it on a worldwide basis,
puts us in the driver’s seat position when there is a library out there that we
really want.

Last year we did the Redbus deal, which turned into
Lionsgate U.K. It came with a great library that included titles like Bend It
Like Beckham. We did the MTG deal that included 323 titles, including
consolidating certain rights that we had, like Dirty Dancing. We’ve acquired
some Spanish-language video titles. We are going to continue to look for
content in that form.

WS: Since you joined
Lionsgate, have you met your goals? Is there more you want to do?

FELTHEIMER: I’ll
answer your question this way. About a year ago, my wife said, “We don’t need
to have any more babies, we already have three,” and I said, “Well, I’m not satisfied.”
So we had another one. We’ve grown the company from $100 million in revenue to
$1 billion, and I’m not satisfied. We’ve created a lot of new businesses here
and I’m not yet satisfied.

I’m going to demand some more satisfaction—maybe not
from my wife!—but certainly here at Lionsgate. I think the playing field
is wide open for us. We’ve built an incredible platform. We’ve got a very
strong financial position with lots of cash in the bank and no bank debt. More
than ever, there are international opportunities. There are also opportunities
in music and music publishing, which we use extensively in all of our filmed
entertainment. There are channels we are looking at right now, although I would
say the whole definition of a channel has changed. I don’t think the idea of
having just a linear channel exists anymore. But there are opportunities in
branded entertainment. We can aggregate library titles and new product and then
market branded content over multiple platforms. There is a prime opportunity
for us to create great and explosive equity value for our company. So no, I’m
not satisfied! We still have a lot more to do.