Exclusive Interview: Lionsgate’s Jon Feltheimer

PREMIUM: Jon Feltheimer, the co-chairman and CEO of Lionsgate, talks to World Screen about how he is always looking for ways to grow his businesses and scout for new opportunities to produce and distribute quality content.

WS: Tell us about the Summit Entertainment acquisition and what it brings to Lionsgate.
FELTHEIMER: 2012 was a transformative year for Lionsgate as we acquired Summit and launched The Hunger Games franchise within a few months of each other.

The acquisition of Summit gave us the critical mass to negotiate higher settlement rates with our exhibition partners, structure output deals around the world for our films, negotiate a new domestic distribution agreement for our DVD releases and achieve greater efficiencies in our media buying.

In the past six months, we’ve created our own global distribution infrastructure by establishing output deals with blue-chip partners covering 80 percent of the world’s movie-going population outside India and China, substantially mitigating our risk and increasing our long-term visibility in our international theatrical business.

Our integration of Lionsgate and Summit is substantially complete, and we have proven executives like Rob Friedman, Patrick Wachsberger and Erik Feig, all originally from Summit, leading our film business.

We structured the deal on financial terms that the Street found very attractive, and we paid down the $500 million Summit term loan more than two years early, underscoring our ability to rapidly deliver our balance sheet with The Hunger Games and Twilight cash flows. Overall, we’ve generated approximately $75 million to $100 million in annual margin and cost savings from our integration synergies.

WS: When you greenlit The Hunger Games, did you imagine it would perform as well as it did?
FELTHEIMER: We bought The Hunger Games when only 150,000 copies of the first book were in print. There was no way we could anticipate that there would be over 50 million copies of the books in print today or that the first Hunger Games film would gross over $400 million domestically, becoming the 13th highest-grossing film of all time.

The film clearly struck a resonant chord in our popular culture, but much of its success was attributable to careful execution. We had a great cast, beginning with Jennifer Lawrence, and an innovative marketing campaign that included over 300 digital partners and made unprecedented use of social media.

As you know, we’ve been focused on building strong brands and franchises from our inception—Saw, Tyler Perry, Dirty Dancing, Mad Men—repeatable brands that can be marketed cost-effectively. If you cultivate your brands carefully, sooner or later some of them will break out on a worldwide level. I like what one of our analysts said—we’re an overnight sensation that was 12 years in the making.

We’re focused on maintaining our leadership in the young adult space by cultivating new brands like Ender’s Game and Divergent, which will be opening in The Hunger Games slot in March 2014.

WS: What is fueling the strong performance of Lionsgate’s feature-film business?
FELTHEIMER: We continue to take a portfolio approach to our feature-film business. Our slate is driven by a combination of tentpole franchises, strong brands with worldwide commercial potential and critically exciting, daring films.

Although The Hunger Games and Twilight: Breaking Dawn—Part 2 drove our worldwide box office of more than $2.5 billion last year, a total of eight films contributed to our success with more than $40 million apiece at the domestic box office, including The Expendables 2, Sinister, The Possession, Tyler Perry’s Madea’s Witness Protection, What to Expect When You’re Expecting and Cabin in the Woods. Another two films, The Impossible and Step Up Revolution, each grossed more than $100 million worldwide. We’re continuing our momentum early in 2013 by achieving box-office success with Warm Bodies and Texas Chainsaw 3D, reflecting our leadership in the young adult and horror genres.

We keep costs low, but the primary financial metric we look at is “the gap” on each film—production capital at risk after international presales and before our marketing spend. The average “gap” on each of our films this year is approximately $15 million, only slightly higher than what it’s been the past several years, even with The Hunger Games and Twilight: Breaking Dawn 2 included.

WS: Tell us about Pantelion and its plans for film and television product for the U.S. Hispanic market.
FELTHEIMER: We believe that there is a great opportunity for films and television shows with Hispanic elements aimed at the more than 50 million Latino consumers in the U.S. This is the fastest-growing segment of the U.S. movie-going population and TV audience, and we have the perfect partner in Televisa to help reach them.

We formed Pantelion two years ago to bring a full slate of English- and Spanish-language films to the marketplace on a consistent basis. Although it takes time to build a brand and an audience, we’ve already released successful films like From Prada to Nada, which we’re also developing as a TV series, and Casa de Mi Padre. Our efforts have been successful enough to expand our alliance with Televisa into our South Shore television partnership, where we’re developing TV series like Terminales for ABC Family.

We believe there is a tremendous appetite for content in the Hispanic market not only in the U.S. but throughout Latin America as well.

Latin America has become a major market for us. We recently expanded our partnership with IDC, a company in which we have a 50-percent investment, to encompass both Lionsgate and Summit content in the region. IDC did a great job distributing Twilight: Breaking Dawn—Part 2, which grossed $125 million at the Latin American box office, the best performance ever outside the traditional major studios, and The Impossible has been a hit for us in Latin America as well.

We also recently signed a pay-TV agreement with Netflix for future Hunger Games installments, other upcoming Lionsgate releases and library product in Latin America. With distribution partners like IDC, Televisa and Netflix for our content, we’re now generating revenue and profit from Latin America several orders of magnitude greater than we did just a couple years ago.

WS: Tell us about Orange is the New Black, an upcoming original series for Netflix.
FELTHEIMER: This is basically a traditional cable deal with a nontraditional partner. The show, about a young PR executive whose past comes back to haunt her, is being created by Jenji Kohan, with whom we’ve had a very successful eight-year collaboration on Weeds. Netflix is paying us a generous license fee, and their plan is to make all 13 episodes available to their subscribers simultaneously in the spring. This is another example of new consumption patterns like “binge viewing” driving demand, and we’re capitalizing on the opportunity to create and distribute programming that is custom-tailored to the way people watch television today. We’ve been a leader in supplying programming to new and emerging cable channels and, by continuing to think outside the box, we expect to be a leader in delivering content to digital platforms as well.

WS: With so much time-shifted viewing, what should the television industry be doing to provide better data, for example C3 and C7 ratings, about what viewers are watching?
FELTHEIMER: There has been a paradigm shift in the way audiences consume television content. As I’ve said before, we’re operating in another golden age of appointment television, but this time around consumers are making all the appointments. When Anger Management had its initial 10-episode run last summer, it was one of the most DVR’d shows on television. Nashville is one of the most DVR’d shows today. Nielsen is heading in the right direction in incorporating C3 and C7 ratings, an initiative that needs to extend into measuring our PC and mobile audiences as well in order to build new programming and advertising models.

I wear several hats on this subject—content creator, distributor and also media buyer. We want the success of our TV shows to be measured by the entire universe of viewers watching them across multiple platforms, not just traditional overnight ratings. But as a media buyer, if I’m buying ad time on a show that has its live airing on Wednesday night but will generate much of its viewership after one of our films has opened on Friday, this needs to be factored into the cost equation as well.

WS: How should U.S. cable operators improve their VOD services and addressable advertising capabilities?
FELTHEIMER: We’re all adapting to shifting consumer tastes. Cable operators worked closely with us in refining a specialty theatrical/VOD day-and-date model that created a market for films like Margin Call and Arbitrage, which we released through our Roadside Attractions platform. Arbitrage grossed nearly $8 million at the box office and generated nearly $14 million in consumer VOD spend—an unprecedented VOD-to-box office ratio—and neither window cannibalized the other.

Clearly cable operators need a better user interface. At CTAM, [Cable & Telecommunications Association for Marketing] I told the story of being disappointed by the performance of our film What to Expect When You’re Expecting on VOD. Our head of distribution pointed out to me that the title started with a “W,” and the film underperformed simply because online consumers don’t bother to scroll all the way down to the W’s.

With 20/20 hindsight, we should have released the film on VOD as “A Movie About What to Expect When You’re Expecting.” But we certainly learned our lesson…our next VOD release was Arbitrage, and look how it did.

The moral of the story is that we need to work together to create a better system than allowing the consumer to express his programming preferences for titles according to the alphabetical order in which they’re presented.

We need to be more proactive about dynamic ad insertion as well. Our FEARNet channel has 30 million online subscribers but, without effective dynamic ad insertion, we can’t monetize them. Our advertising models need to keep pace with the evolution of our content businesses in a digital environment.

WS: The DVD business has undergone significant challenges. How are Lionsgate’s film and television DVD titles faring? What growth opportunities remain in the DVD market?
FELTHEIMER: We look at all facets of our home-entertainment business as an integrated whole—packaged media, on demand and digital. This business is growing overall, and we see increasing evidence that digital revenues will be incremental in terms of revenue and, even more importantly, margin.

Industry-wide, packaged media is stabilizing, VOD continues to grow and electronic sell-through, driven in part by Ultraviolet, is finally beginning to take off.

Our own home-entertainment business is being driven by our strong content on several fronts. We had two of the top four DVD titles in 2012 with The Hunger Games and Twilight: Breaking Dawn—Part 1 and they performed well not only in packaged media but on digital and on-demand platforms as well. At the same time, our managed-brands business, led by our leadership in fitness, children’s and direct-to-DVD titles, has quietly grown into a $250 million a year business.

We’re continuing to lead the industry in DVD-to-box-office conversion rate, and we’re focused on translating this leadership into VOD-to-box office and digital-to-box-office conversion rates as well.

Our library has achieved seven straight years of growth, and it’s interesting to see how the composition of library sales has changed during that time. Five years ago, packaged media accounted for 70 percent of our library revenue. Today it accounts for 38 percent of our library sales. As packaged media levels off, digital, television and international are driving library growth and significantly increasing our margins in the process.

As we look for the right balance among the packaged media, on demand and digital components of our home-entertainment business, we’ll continue to explore innovative windowing and pricing strategies like day-and-date theatrical/VOD releases and early EST windows to customize our content to changing consumer needs.

WS: Tell us about Lionsgate’s portfolio of channels. How are they performing?
FELTHEIMER: Our channel business is a natural outgrowth of our content leadership. Our boutique portfolio comprises branded channels targeted at demographics we know well and operated with strong partners.

Three and a half years after its launch, EPIX brings together a mix of traditional MSOs and digital players, reaches 10 million subscribers, attracts an average subscriber a decade younger than its competitors due to its technological leadership and generates approximately $75 million in annual EBITDA.

EPIX is the only pay channel showing The Hunger Games and The Avengers this winter, and we believe the breadth and depth of our content will further enhance the value proposition we offer to the remaining MSOs who don’t carry us, as well as additional digital partners.

We’re very pleased with the performance of our Celestial Tiger Entertainment (CTE) platform in Asia, where we’re partnered with Saban Capital and Astro’s Celestial Pictures. We just announced the launch of three of our branded channels to 3.5 million households in Thailand, and we operate a total of six branded channels on 26 platforms in 11 Asian territories. CTE gives us valuable real estate in Asia, with proximity to the China market and the $25 billion Asian pay-TV business.

FEARnet is a leading VOD and Internet platform and is beginning to gain traction as a linear channel as well. TVGuide Network continues its transformation from a navigation device to an entertainment channel. It has achieved full screen penetration in 83 percent of its households and extended its distribution footprint, and we just gave it a rebranding tweak to accelerate its evolution into an entertainment destination with its own distinct identity.

WS: Linear channels continue to be challenged by on-demand viewing. Technology continues to disrupt business models. What are the best ways to navigate today’s evolving media landscape?
FELTHEIMER: Viewers are offered unprecedented choice today, and they appear to be taking advantage of it. This isn’t an either/or scenario. Audiences are still consuming their content traditionally on the communal family TV sets as well as adopting new viewing habits tailored to PC’s, laptops and mobile platforms.

Consumers want to take advantage of the full palette of choices available to them so, although we’ve seen some cord shaving and new consumption patterns that could be considered cord rewiring, we haven’t seen rampant cord cutting. The subscriber bases of most of the major pay-TV channels are increasing, and the number of viewers actually cancelling their pay-TV subscriptions remains a small minority.

In terms of navigating a marketplace that is being reshaped by disruptive technologies, we believe this plays to our strength. Change is part of our corporate DNA. We’ve embraced disruptive technologies from our inception and we like to think of ourselves as a disruptive company.

Here are a few specific examples:

We’ve embraced social media in our marketing campaigns from Saw to Hunger Games, and we tapped our base of 200 million Facebook friends in marketing our TV series Nashville last fall and opening our feature film Warm Bodies.

We have a long history of creating content for new and emerging platforms, first in the cable world and more recently in the digital marketplace. We’re producing Orange is the New Black for Netflix, and you can expect to see more of these partnerships in the future.

We will continue to be first movers in creating new business models to capitalize on a fast-changing marketplace—launching channels like EPIX, which brings together traditional MSOs and digital partners, and our BeFit fitness channel on YouTube… developing new windowing strategies like our day-and-date theatrical/VOD releases… and generating incremental revenue through partnerships like our multifaceted relationship with Netflix in the U.S., the U.K. and Latin America.

WS: In which areas you see potential for growth in Lionsgate’s international businesses?
FELTHEIMER: Continued growth of the international market provides tremendous upside to our content businesses. We’re focused on three specific growth opportunities internationally.

The emergence of digital platforms like Netflix, Amazon, iTunes and Xbox is helping to drive international growth and creating competition for content in many markets where little or no competition previously existed. We’ve structured multiplatform deals with these digital players for all types of content—films, TV programming and library product. Our recent international digital licensing deals will add tens of millions of dollars of incremental EBITDA to our bottom line.

New territories like Russia and Latin America have been breakout markets for us, and we believe that China has the potential to follow suit. With our release of The Hunger Games and our content licensing deals, we generated several million dollars from China this year compared to pennies just a few years ago. We expect this trend to continue, and we’re also looking at India, another vast, underserved market.

We’re starting to achieve significant benefits from self-distribution in the U.K. Lionsgate UK has had a record year in box office and market share and will generate nearly $150 million in revenue this year driven by a combination of Lionsgate blockbusters like The Hunger Games, homegrown Lionsgate UK hits like Salmon Fishing in the Yemen and third-party acquisitions such as Magic Mike. Lionsgate UK also has a great pay-TV deal with Netflix.

WS: Looking at Mad Men, what innovative ways did you use to piece together various business partners to finance Mad Men?
FELTHEIMER: We focused on cable programming from our inception because this was a growing market that was relatively underserved by the major studios. Cable audiences are typically smaller than broadcast audiences so, in order to build a more profitable business model, we aggregated eyeballs across multiple platforms and orchestrated windows that served the needs of all of our partners.