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.
Meanwhile, Time Warner Inc (NYSE:TWX) has a long history of generating original content for its HBO unit, with recent hits like Game of Thrones and True Blood. HBO is the king of the video programming networks, with roughly 114 million global subscribers across its HBO and Cinemax units. Like CBS, Time Warner can also leverage content from its far-flung media empire, which includes the Turner cable network and the Warner Brothers movie studio.
In FY2012, Time Warner’s network division reported decent financial results, with increases in revenues and adjusted operating income of 4.0% and 9.1%, respectively, versus the prior year. The company benefited from higher demand for its original series, as well as its move into new international markets. The company’s operating margin improved slightly as it negotiated higher pricing for its products, exhibiting pricing power that is lacking in the case of Starz (NASDAQ:STRZA).
Looking ahead, Time Warner isn’t resting on its laurels, as it reviews its overall mix of businesses. While its network business had solid results in 2012, its film and publishing units reported lower sales and profits during the period. As such, the company recently made the decision to spin off its publishing unit, after choosing not to sell the unit during a closed bid process. The downsizing should allow Time Warner to continue investing resources in its film and network businesses, which will create content to drive future increases in shareholder value.
Despite a large subscriber base, Starz (NASDAQ:STRZA) is going to have an increasingly difficult time competing against the larger networks, as well as the online upstarts. While Starz was able to secure exclusive content from Sony Corporation (ADR) (NYSE:SNE) through 2021, the company will lose exclusive content from Disney in 2015, after it was outbid for the contract by Netflix, Inc. (NASDAQ:NFLX). Starz’ joint venture with the Weinstein Company in the film distribution segment, though, may be a precursor to a future tie-up with the Hollywood studio. In any case, Starz (NASDAQ:STRZA) should use its new-found stock currency to add bulk in the content arena, in order to level the playing field with CBS and Time Warner. Until then, investors need to leave this third-string player on the bench.
The article Are the Starz Aligned for This Video Network? originally appeared on Fool.com and is written by Robert Hanley.
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