Starz / Netflix Considerations
FOR SONY INTERNAL USE ONLY
November 2008
ATTORNEY / CLIENT PRIVILEGED
Confidential Draft
Access Rules
1a. Separate User Payment to Opt-in for all Services besides Netflix
• Starz Play would require a separate brand, payment, and user action to add on.
• Advantages
– In conjunction with deemed prices (on next page), increases likelihood of an end-user charge and
downstream perception of “premium” service
• Disadvantages
– Separate payment can be “gamed” with $0.01 add-on charges
1b. Separate User Action to Opt-in for Netflix
• Starz Play on Netflix will not require a separate charge. But access to Starz Play will require separate
branding and affirmative user action to add-on. In other words, Netflix users do not automatically
receive Starz Play unless they proactively opt-in
• Advantages
– In conjunction with requiring Netflix to bundle on a higher tier, further narrows the universe of
Netflix users with access to the Starz Play service
• Disadvantages
– May not be necessary to ask for at highest tiers.
1
Access Rules
2a. Premium Pricing Protection for Services other than Netflix
• Deemed Price - For a Service Including Pay 1, Pay 2 and Library
A la carte or $4.99 tier
$ 9.99
$8.99 tier
$ 8.99
$13.99 tier
$ 7.99
$16.99 tier
$ 6.99
>$16.99 tier
$ 5.99
• Deemed Price - For a Pay 2/Library Only
A la carte or $4.99 tier
$
$8.99 tier
$
$13.99 tier
$
$16.99 tier
$
>$16.99 tier
$
5.99
4.99
3.99
2.99
1.99
• Advantages:
– Starz Play may be bundled, but the pricing floor increases as the base tier gets cheaper
• Disadvantages:
– Deal Risk for Starz: Starz may have trouble controlling price to consumer, which is set by Starz
partners. Starz would have to pass through its obligations to Sony set out above
2
Access Rules
2b. Premium Pricing Protection for Netflix
• Starz Play may only be bundled with the $16.99 or higher tier
• Advantages
– Simple solution for ensuring offering is viewed as premium without requiring Netflix to “retrofit” an
add-on charge into their model
• Disadvantages
– Limits Netflix ability to offer more broadly on an a la carte basis or as an add-on to lower tiers
– Need to discuss mechanism for enforcing this
3
Deemed Price / Revenue Share Model
Sony receives the greater of a Deemed Price Calculation and
Sony’s Share of 60% of any Flat Fee Starz receives
Sony’s Share Definition
1. Sony Title Share -- Number of Sony Titles in the Offering / Total Titles in the Offering, OR
2. Sony Usage Share -- Number of Sony Movies Viewed on Starz Play / Total Movies Viewed (may be more
volatile on upside and downside)
Subscriber Definition
•
For Netflix – Anyone that has gained access to Starz Play by:
1. Subscribing to the Netflix $16.99 tier or higher
2. AND, Proactively opting-in to gain access
•
For those other than Netflix – Anyone that has gained access to Starz Play by:
1. Paying for access to the service
Deemed Price Calculation
•
For Netflix:
– Sony Share X 60% X $4.99 X Subscribers X Starz Share
– Starz Share is assumed to be 60% X $4.99
•
For those other than Netflix
– Sony Share X 60% X Deemed Price (See 2a.) X Subscribers X Starz Share
– Starz Share is assumed to be 60% X (the greater of deemed price or actual price)
* The 60% share could be reduced, eg, to 50% for a full service and 40% for a Pay 2/Library only service
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Other Considerations
As a working team, we should discuss the potential need to forgo the
Deemed Price Calculation and work with a straight revenue share
Advantages
Reduced deal risk for Starz because (a) Sony isn't paid based on actions such as usage
and opt-ins beyond Starz' control and (b) Starz has flexibility to price based on where
market is in a given year (i.e., lower in early years, higher in out years)
Sony Upside: Sony would rely on Starz' self interest to cut the best deals possible.
Disadvantages
Starz may cut a bad deal
Deal risk for Starz: if Disney/others insist on a different apportionment mechanism, then
Starz could come out underwater
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FINANCIAL EXAMPLES
6
Netflix Example
CALCULATION OF SUBSCRIBERS
Total Netflix Subscribers
Netflix Subscribers at $16.99 (or higher) tier
$16.99 subs that opt-in for Starz Play
8.7 MM
5.5
0.5
DEEMED PRICE CALCULATION
Starz Play Subscribers
Deemed Price
Starz Share
Percent to Content Providers
0.5
$4.99
60%
60%
Monthly Fee to Content Providers
Annual Fee to Content Providers
$1.0 MM
$11.8 MM
Sony Share (assumed)
Annual Fee to Sony
REVENUE SHARE CALCULATION
Annual Flat Fee Received by Starz
Percent to Content Providers
Annual Fees to Content Providers
Sony Share (assumed)
Annual Fee to Sony
63%
10%
50%
$5.9
$20.0 MM
60%
$12.0
50%
$6.0
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Theoretical Service
SUBSCRIBER BASE AND DEEMED PRICE CALCULATION
Tier
No base subscription (a la carte)
$8.99
$13.99
$16.99
Deemed Monthly Revenue
Starz Share
Percent to Content Providers
Monthly Fee to Content Providers
Annual Fee to Content Providers
Sony Share (assumed)
Annual Fee to Sony
REVENUE SHARE CALCULATION
Annual Flat Fee Received by Starz
Percent to Content Providers
Annual Fees to Content Providers
Sony Share (assumed)
Annual Fee to Sony
Total Subs
(MM)
5
None
None
2
Opt-in to
Starz
5%
N/A
N/A
5%
Starz
Subs
0.25
Deemed
Price
$9.99
0.1
$6.99
Deemed
Revenue
(MM)
$2.5
$0.7
$3.2
60%
60%
$1.2 MM
$13.8 MM
50%
$6.9 MM
$20.0 MM
60%
$12.0 MM
50%
$6.0 MM
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