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2014, and we will keep focusing on innovative partnerships that are designed to capitalize on emerging opportunities, diversifying our content offerings and embracing cutting-edge technologies that add value to our product.
Lionsgate’s feature-film business distributes 15 to 18 titles a year, including franchise tentpoles like the upcoming Now You See Me 2. WS: How do creative partnerships play into Lionsgate’s television strategy? FELTHEIMER: We look at creative partnerships in all facets of our business. At the corporate level, we have multifaceted alliances with some of the biggest and best content companies in the world, including CBS, STUDIOCANAL, Televisa and New Regency—companies that combine a visionary approach to their businesses with tremendous underlying intellectual property. Within our channel business, we’ve partnered with CBS on Pop, a network that has created nearly 400 hours of original programming. Pop has grown its ratings for five straight quarters and continued to expand its distribution footprint following last year’s rebrand. Our EPIX channel with MGM and Viacom is the fastest-growing pay-TV network in the world. It increased its subscriber base by 54 percent last year as we continued to assemble a portfolio of digital platforms, MSOs and telcos that includes Amazon, Hulu, Play Station Vue, Time Warner Cable, AT&T, Charter, Verizon and Dish. This coalition reflects the changing composition of a television ecosystem that is transforming itself to deliver content to consumers whenever, wherever and however they want it. Now we’re putting together EPIX’s first slate of
original series, including our political comedy Graves starring Nick Nolte and Sela Ward, as the channel continues to expand its content offerings. Finally, building profitable models for our individual shows through innovative, multiple window financing deals with creative partners has always been part of our DNA. With Mad Men, we were the first studio to license the back end of one of our series to a digital platform. We’ve been a first mover in creating original content for online networks such as Hulu and Netflix, and we continue to explore innovative ways to bring SVOD partners into the business models of our shows as early as possible, as we’ve done with Amazon on The Royals. These partnerships have a few things in common: we like to be in business with companies whose strengths are complementary to ours, who can help us explore new markets and reach new audiences, and who are willing to join us in creating innovative and disruptive business models. When we’re able to check off all these boxes, everyone benefits. WS: The home-entertainment market has been challenging for many companies. What opportunities does Lionsgate see in that business? FELTHEIMER: As we’ve been predicting for years, the growth of VOD
and electronic sell-through [EST] continues to incrementally expand the home-entertainment business, both in terms of top line and margins. We’re well positioned to capitalize on the opportunities created by the proliferation of digital platforms, and we’re able to offer an increasingly broad array of choices to consumers. All the indicators of the business are strong. Home-entertainment spend increased to its highest level in five years in 2015. EST spend grew by nearly 20 percent and is now on par with transactional VOD spend, reflecting consumers’ embrace of digital ownership. SVOD spend from an increasing number of platforms has grown to more than $5 billion. Even catalog spend reversed its multiyear decline and increased by 2 percent last year. We expect these trends to continue, driven by record industry box office underlying this year’s slate of home-entertainment releases, the launch of 4K Ultra HD Blu-ray and more MVPDs [multichannel video programming distributors] rolling out their own EST stores. Within this environment, we will continue to be a first mover in exploring windowing and pricing strategies that are customized to our content. We were the first outside studio to partner with Comcast when they successfully entered the EST space in November
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WS: In terms of financial results, how was 2015? In what areas do you see the biggest potential for growth? FELTHEIMER: Our television group is achieving record results as we continue to scale and diversify our operations and build a roster of unscripted content alongside our premium scripted programming. We expect our television division to continue growing to annual revenues of more than $1 billion with contribution margins of 15 to 20 percent within the next two years. The depth and quality of our intellectual property is also driving our expansion into new businesses, such as location-based entertainment, video games and OTT channels, which will accelerate our company’s diversification, bring us closer to the consumer and generate significant incremental profits in the years to come. Though our two biggest franchises, The Hunger Games: Mockingjay Part 2 and Divergent: Insurgent, generated nearly $1 billion in combined global box office in 2015, our overall slate had an off year compared to the strength of previous years. However, we’re looking at a lineup for the next two years that is loaded with potential franchise tentpoles, star-driven event movies and targeted films that we expect will help us resume our financial growth trajectory and return us to our historical average of profitability on more than 70 percent of our releases. Even more significantly, I believe that our competitive advantages as a pure-play content company with no legacy constraints, our entrepreneurial culture and our strong balance sheet all position us to continue building one of the most vibrant content companies in the world, creating lasting value for our partners and shareholders.