Long-term shareholders of Lions Gate Entertainment (NYSE:LGF.A) (NYSE:LGF.B), or those who are thinking about buying the stock, probably found John Malone's recent comments quite fascinating. In this article from Variety, he is quoted as wondering about the prospects of Lions Gate competing with Netflix (NASDAQ: NFLX). He mused: "Can you create a Netflix-like direct-to-consumer relationship branded on a global basis...".
Granted, one can't necessarily automatically consider those fighting words, but in my mind, they come close. Is he setting the tone for some grand vision for Lions Gate's Starz asset?
One might hope so - a shareholder certainly would. Netflix has had a meteoric rise over the last several years as its quality original content, as well a deal with Disney (NYSE: DIS), combined with a technologically slick streaming service, served to fuel a rising equity price. Netflix and its celebrated CEO, Reed Hastings, has so far satisfied Wall Street, for the most part, with an increasing subscriber base that spans the international markets.
But there is concern that the cost for making Netflix what it is, as well as the ongoing expense needed to keep it popular, is on an unsustainable growth curve. The problem for Starz/Lions Gate is that, to turn Starz into a Netflix (or to create a new service altogether), would mean one of two things: either spend as much money or spend more money to effectively compete. (There is the third option of spending less money more intelligently and efficiently, and while I'm for that and idealistically believe it can be done, we've got to remember that this is Hollywood, and that the name of the game for execs lies in the idea that job security comes from placing overvalued bids for talent in an effort to create excitement for a content slate that may or may not pan out for the other people and their money-- read: investors.)
I can only wonder, notwithstanding the above, if this is the hopeful inflection point that shareholders have been waiting for all along - does it signal an upcoming redoubled effort to finally get Lions Gate's stock back on an upswing? The problem, as mentioned, is the capital, the debt level, the money needed to embark upon one huge bet. Forget all the press releases about all the partnerships Lions Gate strikes on an almost daily basis such long-tail thinking is something for a start-up. By now, the studio should have enough experience in content creation/distribution that it can see the obligatory path before it: if you're going to buy Starz and seemingly go against the original platform-agnostic ethos, then you better get into a disruptive mood immediately and start... well... disrupting. According to the first page of the 2016 annual report (.pdf file), the company plans to spend $1.8 billion generating original content every year. Lions Gate will have to do better than that. Ash vs Evil Dead is great, but Stranger Things is a brand juggernaut.
There is one truly interesting point of differentiation between Lions Gate and Netflix: Netflix doesn't have much experience in creating and releasing films to the multiplex - Lions Gate does. Think about that: Lions Gate already has an infrastructure in place that can take a movie and distribute it on screens. Netflix doesn't have that, preferring to strike deals with Adam Sandler for purposes of bypassing that option so as to increase the perceived value of the service. Over time, though, I'd have to imagine that Netflix realizes it will have to become more like a traditional studio to offset the risk of its enormous investment in original content (this article talks about the risks associated with the stock).
I'm sure there are many out there who don't want to own Lions Gate. I don't blame anyone who has no desire to add this one to an investment portfolio - it's an odd stock, to be sure, one in which the business plan behind it can be confusing to interpret. Malone's hypothetical proposition will hopefully act as a catalyst for management and inspire those execs to really look at Starz as a way into the Netflix cultural shift. Shareholders of the latter won't need to worry anytime soon, but the main thesis here is that Lions Gate stock should at the very least be put on a watch list. Maybe the Malone statement won't amount to anything, but when you think about it, if you own Starz, you've got to leverage it somehow, right? It's time for the studio to get serious and seek not another partnership but a new protocol with which to engage the millennial demographic looking not just to cut the cord (or the cord's price via a mix of services), but also for a new source of binge-worthy series to close out yet another banal day.
Disclosure: I am/we are long DIS, LGF.A, LGF.B, NFLX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.