Are the Starz (STRZA) Aligned for This Video Network?

Starz (NASDAQ:STRZA) became a public company in January 2013, after being spun off from former parent Liberty Media Corp (NASDAQ:LMCA), which didn’t have Starz in its future plans. The company is one of the top video programming networks, along with CBS Corporation (NYSE:CBS)’ Showtime and Time Warner Inc (NYSE:TWX)’s HBO. However, the video networks have become a slow growth business with cost pressures from both network distributors and newer online entertainment outlets. So, should investors take a look at this spinoff?

Starz (NASDAQ:STRZA) is the only pure-play video network, deriving the vast majority of its revenues from its networks, including Starz, Encore, and Movieplex. With 56 million subscribers as of December 2012, the company is the #3 network, after industry leader HBO and runner-up Showtime. Starz also has smaller business units that compete in the home video distribution and animation production segments.

In FY2 012, Starz (NASDAQ:STRZA) reported fairly flat results compared to the prior year, with a 1% increase in revenues and a 1% decrease in adjusted operating income. Despite a net gain of three million subscribers, the company’s revenue growth was limited by a lack of pricing power with its distributors.  Almost one-third of the company’s revenues are derived from the leading video distributors, including DISH Network Corp. (NASDAQ:DISH) and Comcast Corporation (NASDAQ:CMCSA). In addition, Starz’s operating margin slipped slightly, as programming content costs continued to march higher.

Looking ahead, Starz (NASDAQ:STRZA) has realized the need to ramp up its original content investments in order to maintain its industry position. Competitor CBS has been investing heavily in original content for its Showtime network, as well as leveraging its namesake broadcast network and global sports franchise. In FY2012, the company’s network division performed well, with increases in revenues and adjusted operating income of 9.3% and 14.7%, respectively, versus the prior year.

Despite solid recent results, CBS’ management has recognized the shifting industry landscape and has initiated company-wide restructuring activities, including the potential spin-off of its outdoor advertising division. In addition, the company has embraced alternative distribution formats, with agreements to provide its content to leading video-on-demand providers like Netflix, Inc. (NASDAQ:NFLX), Amazon.com, Inc. (NASDAQ:AMZN), and Hulu. Regardless of its customers’ viewing method, CBS wants to maximize the consumption of its content offerings.