MGM: A Changing Environment

Metro-Goldwyn-Mayer (MGM) Studios has produced some of the best known movies and content in the world. However, like other content providers, MGM has to adjust to a changing media environment, and the studio is trying to stay ahead of the curve in terms of generating revenues from its movies and content. Douglas Lee, executive vice president, digital media division, and Gary Marenzi, co-president of worldwide television operation at MGM Studios, discuss the challenges facing the organization as it looks to monetize its array of content.

VIA SATELLITE: What are the main growth drivers for the business through the economic slowdown and beyond?

Marenzi: It is always quality product. There is an economic downturn across the linear and on-demand world. People have to compete. If you spend the money to invest in a channel, in your brand, infrastructure and distribution platform, you need the best quality product, because if not, your competition is going to go out and get it. So what stimulates the market is product that is on brand and desirable by buyers out there. As major distributors and producers, it is our role to acquire or produce that type of product. Fortunately, we have had pretty good luck over the years with things like the James Bond series, Stargate, etc. We always seem to have some good movies and TV shows that draw audiences and keep us in the mix with all the buyers, no matter what the economy goes through

Lee: One of the things that I oversee at MGM is MGM HD, which is our HD movie service. We are in around 75 percent to 80 percent of the United States with that channel with operators like DirecTV, Dish, Comcast, Time Warner and the like. One thing we have noticed this year is that advertising is down compared to the past year. The good thing about MGM HD and cable channels in the United States is that they are dual-revenue stream. We have a revenue stream from the operators paying a licence fee. Our business plan is still very robust from that point of view, but advertising has really lagged. That has been the story for everybody, but we have been able to make our numbers.

VIA SATELLITE: What are the challenges for a major studio to stay relevant in this new media environment?

Marenzi: There are a lot of models out there to produce programming and make it relevant. So, instead of hitting 30 percent to 40 percent of households watching TV at any one time, you have got to be content with 5 percent or less in this fragmented world, but that is still enough to drive a model that makes sense and makes money for the company and get into the public consciousness. You have to work harder to get into the public consciousness, not just through advertising but through viral marketing, publicity and more. Even with fragmentation, the models are still doable, but you have to work very hard and perhaps cycle through a few more windows than you did before on the distribution side to make things work.

Lee: I think on the digital side, watching anywhere, anytime, some of that has a business model that has yet to be proved, and technology has also yet to be proven. You also have issues of authentication. It is still something that a lot of the operators are working on. From a broader point of view, from the perspective of a studio or a content owner like MGM, access to more viewers is what it is all about. So if we get our product to more people, that is a good thing for us.
 

VIA SATELLITE: How is MGM’s business model with TV channels evolving?

Marenzi: The buyers are targeting their spending more than ever to serve specific time periods. The cost of making and marketing movies has spiralled upwards. There are still business models for movies and TV shows that make sense. Every project that we have at MGM has a game plan around it, so we think about the costs of particular projects and assess the market for that project at the same time. In the old days, it was a case of if-you-build-it-they-will-come type of attitude, and spend a ton of money on it, and it will live forever. Now, you have to be focused on getting your money out very quickly, because if you spend a lot of money on an expensive show or an expensive movie and it does not hit within that first season, you could be stuck with a big loss. It drives us to situations where we have upfront partners with a lot of our projects to share costs. It is about being smarter in terms of doing business. We have been in the business a long time. A lot of people weren’t doing this 10 to 15 years ago, but they should have been doing it. Now, everybody has to do it to survive, so I welcome it.

Lee: From the MGM HD perspective, we make deals with cable operators and satellite providers for more rights. Before people would just take a linear feed. Now, people want [video-on-demand] rights. That can have an impact on other revenues from the studio. We have direct [video-on-demand] deals with some of these operators. People just want more rights. Customers have more ways to deploy our rights than ever before. We have to be careful and aware of all of the different avenues that people want to distribute our products. For example, we have to be very careful in terms of things like windowing. I think MGM is smarter in that than other studios.
 

VIA SATELLITE: Do you believe MGM is ahead of the game in adapting to this new environment?

Marenzi: I think we have been ahead of the game in terms of our competition, because we are one united division. If you look at some other studios you have multiple divisions who develop, produce or license digital media. We have one integrated unit that does channels, digital media licensing, whether it is free [video-on-demand], transactional [video-on-demand] or IPTV, [subscription video-on-demand], linear TV, etc. I think this has allowed us to be very quick and analyze the opportunities as one group and sitting at one table. At some of these other places they have multiple divisions that don’t even reside in the same place, so it can only prolong the deal process. 
 

VIA SATELLITE: What are your plans in terms of producing content in HD as well as 3-D HD?

Lee: HD has been a real growth area for us. About 25 percent of our [video-on-demand] libraries are now in HD. We have launched HD [video-on-demand] services in the United States and around the world. We are looking to do some other HD channels in the United States as well. That is a very important part of our growth strategy. This has given us a seat at the table domestically. Previously, we had never had a channel before, so HD was our way in. In terms of 3-D, that is something that manufacturers are taking a hard look at, and Hollywood is really firmly behind the growth of HD in cinema. But it is going to be a huge capital outlay on the part of theater owners and TV manufacturers for 3-D TV. I think it could be the way of the future, but it could be some time away.
 

VIA SATELLITE: What is your take on the advertising versus subscription models for pay-TV?

Marenzi: I like the subscription model. In terms of digital media, subscription works better than the advertising-supported model. That is not to say with continued fragmentation and continued rise of targeted [costs per thousand] on the Web for advertisers that they can’t have an inflection point. We both grew up in the pay-TV business when that was new media. We kind of like that subscription model.

Lee: There are multiple streams now. There is going to be subscription and online advertising. We have a lot of product up on Hulu, and we love the way that we are growing. As we go forward, there are going to be a number of different ways to skin the cat. We need to make sure that existing business models continue to thrive.
 

VIA SATELLITE: Can you give us one or two examples of new initiatives which you think have worked well?

Marenzi: In terms of something different, in Europe, we are seeing some 3G operators be very creative with their content strategies, and some are offering long-form content via mobile. In some places, they are putting their money where their mouth is. As the screens get bigger or more convenient or just better quality, that is going to be a growth area for us. Right now, that is just a fraction of our business, but we are seeing signs that there will be a big push in that area.

Lee: Hulu is relatively new. It is getting a lot of viewers. It is getting pretty entrenched as a platform and that will continue to evolve. We were an early contributor, [and] that is a pretty good example of a different platform.

VIA SATELLITE: Where do you hope to position MGM on this broadcasting landscape?

Marenzi: There is still a business out there for traditional TV with big brands and big platforms around the world. I think you will see more consolidation of niche channels and channel aggregators around the world so they can put up as much of a walled garden as they can, both in the linear and on-demand space, so brands will be more ubiquitous. I think you are going to see a lot more emphasis on branding on multiple platforms of content aggregators.

Lee: I think people would say broadcasting is in pretty poor shape because of the fragmentation going on. I think one of the things we do well is that out of a situation that others would find as dire, we find opportunities An example is called This TV, a network we own half of, which is a digital broadcast play network in the United States. We launched that earlier this year. It has been very successful for us so far. We have found a way to create some new business in the broadcast spectrum, so we are very bullish.