BY K. C. NEEL John Sie wants to retire. But he has a few things to do first. The founder and chairman of Starz Encore Group wants to make sure his company’s subscription video-on-demand product is widely deployed. And he wants the world to know that the current high-definition TV standard isn’t the best solution for technological, business and U.S. policy reasons. He’s willing to go out on a limb to prove it. All this means, of course, that Sie isn’t going anywhere just yet. At this point, Starz On Demand is available to customers in two Adelphia markets and to Los Angeles area customers who subscribe to Altrio Communications’ services. There’s also an SVOD trial of sorts with DirecTV using PVR technology to download movies to customers. The company also is in the final stages of signing a big SVOD deal with an as-yet-unidentified top-five MSO. President Mark Bauman says Starz Encore is talking to the major MSOs and expects to sign several affiliation deals throughout the year. The meager launches to date don’t discourage Sie or his executive team. He expects to surpass HBO in terms of subscriber counts within the next four years. “We have more room for growth than the other services, and we are already No. 1 and No. 2 in the fully digital world of DBS,” Sie says. That’s a fair turnabout from the early 1990s, when Encore was dismissed by critics as a mini-pay full of old and cheaply purchased movies. But the company committed years ago to acquire as much movie product as it could, no matter the cost. And cost it did. Encore spent $1 billion securing films from every major Hollywood studio. Sie says that has paid off handsomely for the company. First, it allowed Encore to support Starz, a first-run, full-pay movie service that today has exclusive access to 11 of the 24 movies that made over $100 million at the box office in 2002. It also enabled the company to launch 12 themed channels, which in turn secured a good chunk of real estate on digital cable systems throughout the country. Sie’s sales and marketing team is now peddling Starz Encore even harder. “People love movies,” says Jillaina Wachendorf, SVP of marketing. “It’s up to us to show people we’re different from the other services.” Starz Encore continues to push for a low-entry premium movie package similar to what the DBS services offer, saying customers will be happier. But so far, few operators are openly pushing such an offering. The chief initiative, however, remains digital. An engineer by trade and education, Sie long ago recognized the value of digital transmission. The company began securing subscription video-on-demand rights (and subsequently broadband distribution rights) for its entire film product in 1999, three years before SVOD was even a blip on operators’ radar screens. “The studios didn’t like it much,” says Stephen Shelanski, SVP of program acquisitions, planning and scheduling. “But we fought for it, and we don’t do any deals without them now.” “We placed a big bet with on-demand and getting those rights,” says Robert Leighton, president of Starz Encore Entertainment and SVP of programming. “But the early indication is that it’s being embraced. It’s in our nature to take risks. And that’s why we’ve done the things we’ve done. When the others zig, we zag.” That is pure Sie. He thinks big and generally doesn’t do what everyone else does — at least, that is, when they’re doing it. In 1987, the Japanese were touting their analog high-definition system MUSE to broadcasters. In Sie’s view, MUSE had two major drawbacks: First, it required 9 MHz of spectrum, and second, all TV equipment from studios to consumers’ homes would have to be replaced in order to receive the enhanced, wide-screen (16:9 aspect ratio) images. Sie argued that the Japanese wanted to push the system simply to reinvigorate their slumping consumer electronics business. As the lone voice during testimony to the Senate, House and FCC, Sie argued that the U.S.’s next television system needed to be digital and that such a system would be possible within ten years. In the meantime, he reasoned, the U.S. could use new, domestically developed technology that doubled the resolution of an NTSC picture without using additional spectrum. Not only that, but this new digital technology could be used with existing technology so consumers wouldn’t have to buy new equipment. ABC and NBC eventually dropped support for the MUSE standard in 1990, and the American National Standards Institute then reversed its support for the technical standard — the first time in history the group had ever done so. Subsequently, the FCC decided to withhold a decision on standards until further detailed testing was complete. Sie hopes he can halt the current march toward HD in a similar fashion. Starz Encore isn’t offering an HD product like competitors HBO or Showtime, and it won’t until it can come up with an alternative. Sie thinks it will be more efficient and cost-effective. He believes high-resolution TV (DVD quality) is more than sufficient to the human eye. And don’t even get him started on the aspect ratios of HD. He is a firm believer that the 4:3 ratio now used in NTSC delivery is better and easier on the eye than the 16:9 ratio now being used to deliver hi-def. Some experts believe this time he may be tilting at windmills, considering that 5 million consumers have bought into HDTV, TV stations have sunk hundreds of millions into the technology and that one can easily distinguish the difference between 480p and 1080i, particularly if the source material is recorded in 1080i and not upconverted from 480p or 720p. “There will be improvements in the way HD is delivered in the future, and it will be more efficient,” says Adi Kishore, a senior analyst with the Yankee Group. “But no one wants to hold back until that happens. There are too many competitive market and governmental pressures for operators to not deliver HD today. The train has left the station.” Nevertheless, Sie has a team working on a high-resolution solution, and once he has what he thinks is a viable alternative to the existing HD offering, he plans to find allies who will work with him to help change policymakers’ as well as industry players’ minds on the topic of HD. Starz Encore has a couple of patents pending, and Sie says he expects to do something about HD before the end of the year. “We don’t want to bash something until we have a solution for the problem,” he says. “We can replicate the DVD experience and use one-third the bandwidth as the current HD standard. The eventual winner in this race will be the most efficient transmission system, so it’s not really a big battle at all.” In the meantime, Sie continues to prophesy passionately about the benefits of SVOD. “Operators haven’t found their stride with this product yet, but they will follow success. If we can get one MSO to do the right thing, it won’t take long before the entire industry sees a transformative paradigm shift,” Sie says. Rather than look at SVOD as a small piece of business with some incremental revenue, he thinks SVOD will change the way the business is conducted — if it’s done correctly. And that doesn’t mean offering free VOD either. The pendulum, Sie says, has swung from SVOD being a full add-on revenue-generating service to a free offering, and both are a mistake. Sie and his team have in the past been accused of telling operators how to do their jobs, but he and Bauman maintain they simply show operators the numbers and prove their way is the best way. Sie believes SVOD should be a product that customers pay for but should be automatically part of a customer’s premium offering. “On-demand has to be valuable to the consumer, and it shouldn’t be free, because there is value in commercial-free movies,” he says, predicting it will be another two years before SVOD becomes a mainstay in consumer usage behavior. But once it does, Sie is also sure customers will be so used to clicking for product that they will be more apt to buy true VOD product. Consumers won’t be afraid to use the service, but the value will still be there as well. And they’ll be willing to pay for it. That’s what’s happening in Los Angeles with Altrio, says Hope Neiman, Altrio’s SVP of marketing. Last fall, the overbuilder began offering Starz On Demand free to customers who sign up for Starz Super Pak. The results have been phenomenal, Neiman says. Between Oct. 2 and Dec. 2, the number of Starz Super Pak customers rose from 34% of its total digital customer base to 50%. In addition, customers that use Starz On Demand purchased 50% more pay-per-view and video-on-demand movies than non-Starz On Demand customers. The average Starz On Demand customer is buying about ten movies a month, Neiman says. Still, there are plenty of problems that continue to prevent SVOD from taking off at this stage, says Greg DePrez, VP of SVOD, and John Beyler, SVP of technology operations. For one thing, the consumer interface is clunky, complicated and time-consuming. The company’s recent consumer research shows that viewers like the product but rarely use it more than once, claiming it’s too difficult to figure out. Many also think they will be charged each time they click on a movie; the navigator software isn’t clear enough to indicate otherwise. Starz Encore’s in-home customer testing conducted last summer found that people liked SVOD but had no reminders to use it. And when they tried to use it, they couldn’t easily navigate through the ordering process. Most, DePrez says, simply gave up. The guide manufacturers are working to eliminate some of the work associated with accessing SVOD product, but it’s a slow process, he says. Sie’s dream is seamless interaction between the guide’s linear list of programming and SVOD. Consumers would scroll down the regular guide, see a movie they like, click on it and watch it instantly if it’s an SVOD offering. “It’s a little like ABS brakes,” Sie says. “It’s very interactive, but the consumer doesn’t know it. There is a lot going on with the car to make sure the wheels are braking correctly. In the old days there were all kinds of things we had to do as drivers if we were skidding on the road; you had to pump your brakes several times and at different intervals. Today, you push the brake down once and that’s all. SVOD needs to be that way.” All this activity comes with a backdrop of some uncertainty for Starz Encore. Liberty executives have said that merging Starz Encore with a larger programming entity like Vivendi Universal Entertainment, which includes Universal Studios as well as USA Networks, would fit nicely with its long-term plans. Sie says such a pairing would give Starz Encore a leg up in some cases, but he quickly notes that being lumped into VUE is but one of many options available to the company. “We can see all kinds of combinations,” Sie says. “It could involve Vivendi. But we could also buy or own other services and they could be either pay or basic networks. We surpassed Showtime in 1999 in terms of cash flow and surpassed them in terms of subscribers in 2001, and that is just with Starz. Here is a company with a studio and a stable of networks to cross promote it. And it doesn’t seem to be doing them much good.” Sie notes that Starz Encore has already invested $150 million in Revolution Studios. “With only 55 people,” he says, “that studio is cranking out half of Sony’s distribution output. That has been a great investment for us.” However, further programming acquisitions won’t come cheap or be easy to find, says Myers Group president Jack Myers. There’s not much on the market that’s available, he says. And the product that could be snatched up will likely cost a bundle. Cablevision could sell AMC and MuchMusic, he says. But the music service doesn’t fit very well with what Starz Encore does, Myers says, and AMC is probably worth at least $2 billion. “It’s all up to Liberty to do something,” Sie says. “We’re a good currency…I feel good about what we’ve done with Starz Encore. We took nothing and built it into something special.” Looking at John Sie today, it’s hard to imagine him as a youthful hooligan who got into trouble everywhere he went. Then again, maybe it’s not, given the contrarian positions he’s taken on many issues in the cable business over the years. Sie was born April 12, 1936, in Nanking, China, into a diplomatic family. His father left home shortly after his birth to serve as Minister to the Holy See at the Vatican on behalf of China. It would be ten years before he saw his father again, and while that was wrenching, it might also have saved his life. When his father left for Rome, he and his mother and brother went to live with family in Shanghai. They coincidently left right before the Japanese massacred thousands of people in Nanking. Sie allows that he was a ruffian, not much of a student. He was even held back in the fourth grade. “I think I caused my mother some concern,” he says. “I wasn’t well disciplined.” He wasn’t a bad kid, but he did tend to get in some pickles. When the U.S. troops were airdropping rations to the prisoner-of-war camp nearby, for instance, he and his friends picked up strays. There were Communist guerrillas in the area that also had their eye on those stray packages, and they shot at Sie and his friends more than once to scare them away. Sie’s family would make a daring escape in 1949; they were among the last to get on a boat from Shanghai to Taiwan as Communist forces were about to storm the city. The family sailed for the U.S. the following year. “My experience of Americans was that they were always so nice,” he says. “They’d let us on their ships and give us tours, and they gave us ice cream. I was not worried about coming to America.” His family couldn’t afford to take care of him or his brother. They were sent off to a Catholic orphanage when he was 14. A glitch in translation resulted in Sie being enrolled two grades ahead of where he should have been, even though he didn’t speak any English. Each day at school, he copied notes from the board as they were written, returned home and used a Chinese/English dictionary to complete his lessons by converting them first into Chinese and then back to English. He began his first corporate career at RCA in 1957 working in microwave research. Sie started his first business, called MicroState Electronics, in 1960. The company, which was eventually sold to Raytheon, had all kinds of sensitive defense contracts, and Sie’s research, development and technology was used in several aerospace applications. But he was never able to see the final products because he was an illegal alien at the time. He eventually got a green card but didn’t become a U.S. citizen until 1984, when he went to work for Tele-Communications Inc. John Malone, who was president of Jerrold Electronics at the time, hired Sie as head of terminal products and services in 1972. His first job was to develop a two-way interactive product. Sie left the company in 1978 to join Showtime. It was difficult to get the MSOs to subscribe to Showtime since most had already cut deals with HBO. At the time, operators were choosing between one or the other. But that would change when Wometco Cable in Thibodaux, La., allowed HBO and Showtime to duke it out in its market — whoever got the most subscribers during a marketing and sales test, got the contract. The test showed that a significant number of customers actually wanted both, and the idea of multipay was born. Sie left Showtime in 1984 to join his old boss Malone again, who by this time was president of TCI. As SVP in charge of strategic issues including programming, government affairs, technology and revenue streams, Sie had his hands on just about everything. But when TCI’s deal to buy 50% of Showtime foundered in 1989, he saw an opportunity to create a discounted premium movie service. “I actually started it on a dare,” he says. “I wanted to do it and John said I’d never be able to get product, and I said, ‘If I can get three studios to give me enough product for three years, would you back it?’ and he said, ‘Sure.’ So that’s what I did.” Encore was born in 1991 with TCI’s blessing, backing and support. TCI launched Starz in 1994 but hired Encore to manage the property. Eventually, through a series of transactions, Encore ended up with complete ownership and control of the network. The company has splurged on high-priced product, but Sie says he would have it no other way. Yet, it’s been expensive. Starz Encore has committed more than $1 billion to secure movie product through 2014. Although cable and satellite are the company’s main revenue generators, Sie is always on the lookout for new ways to deliver his services. That’s why he cut a deal late last year with RealNetworks, which will offer movies to subscribers over the Internet beginning later this year.
— K.C. Neel Liberty Media’s equity interest in Starz Encore Group could change over the next few years, but don’t look for the company to sell its stake completely. “Starz is a key strategic holding for us,” says Liberty CEO Robert Bennett. “It’s a very successful business with good growth, and it’s well managed. It’s a core asset for us. It could give us a piece of a different entity and our interest could change, but any deal would be a strategic one that would add value to our holding.” Liberty has gone on record as saying it would like to merge Starz Encore with Vivendi Universal Entertainment’s stable of U.S. assets that include Universal Studios as well as USA Networks. But there are other options, Bennett says. “The real question for us is this: We’ve got a strong asset in Starz. How do we make it stronger and how will Liberty benefit?” Starz Encore could perhaps pick up Cablevision Systems’ American Movie Classics service, Bennett says. There are also possible advantageous partnerships that could arise if Liberty buys DirecTV, Bennett says. Liberty is seriously considering making a bid for the company either alone or with News Corp. To be sure, DirecTV is Starz Encore’s second-largest revenue generator and one of its biggest supporters. AT&T Broadband, now owned by Comcast, and DirecTV customers generated 27% and 22%, respectively, of Starz Encore’s revenue for the nine months ended Sept. 30, 2002. There are some uncertainties associated with owning Starz Encore today, but Bennett remains unfazed. For one thing, Starz Encore has some serious upcoming financial commitments as part of its push to obtain Hollywood studio product. The unpaid balance for those films will total $81 million in 2003; $27 million in 2004; and $18 million in 2005. The company also owes money for movies to which it doesn’t have access yet. Starz Encore will owe $345 million in 2003; $164 million in 2004; $101 million in 2005; $112 million in 2006; and $416 million thereafter, according to Liberty’s third-quarter financial results. Starz Encore is also obligated to pay fees for films that are released by certain producers through 2014. There’s no way to estimate how much those fees will be yet, Liberty says, but the company admits it could be significant. Bennett isn’t worried. Starz’s revenue can cover the costs, he says. There’s also the lawsuit between Starz Encore and Comcast Corp., which is contesting a 25-year affiliation deal Starz Encore signed with Tele-Communications Inc. in 1997. AT&T Broadband, which purchased TCI in 1998, tried to get out from under the contract, and Comcast, which purchased AT&T last year, has picked up the mantle. Liberty supports Starz chairman John Sie’s battle on high-definition TV. “John is a tremendous visionary when it comes to technology, programming and packaging,” Bennett says. “He’s done his homework on this, and he’s basing his views on facts. He’s done the math and we support him. He’s done this before. This is all part of being an industry leader. This doesn’t worry me at all.”
— K.C. Neel

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