Chief Executive Officer, Lionsgate Studios Corp.
4A's Transformation 2014 - March 17 - Keynote Interview: Jon Feltheimer and Michael Kassan
Agencies as Content Creators at 4A's Transformation 2014. Visit http://goo.gl/kuKZSO for more info.
About Jon Feltheimer
Jon Feltheimer, CEO of Lionsgate, has emphasized the enduring value of the company's content library, describing it as having "incredible value" that increases over time. During a 2020 earnings call, he noted that the COVID-19 pandemic demonstrated the existence of an at-home audience for movies and suggested that distribution models could change, while reaffirming the company's commitment to theatrical exhibition. He also stated that the company was "pretty well positioned for this new world" and was continuing to explore potential transactions that would leverage the library and unlock value. Feltheimer has long advocated for a disciplined, entrepreneurial approach to the media business. In earlier remarks, he described the industry as "vibrant and ripe with opportunity" and argued that new digital windows, such as the Netflix deal, carry "tremendous value" for content creators. He has stressed the importance of keeping overhead low—noting Lionsgate's overhead was less than nine percent of revenue—and of mitigating risk through cost discipline rather than relying solely on financial partners. Feltheimer has also said that the key to success is allowing talented people to make decisions and learn from mistakes, stating that "the magic comes from entrepreneurial people who really can take ideas that other people haven't thought of."
Transcript (18 segments)
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Interviewer0:15
So John, I'd love to start with Mad Men. It's a, all kidding aside, it's a great place to start with this audience. Aside from being one of the most compelling shows, probably in this generation of television, I think it's arguable that Mad Men was the show that kind of launched binge viewing. Did you know when you greenlit that show, with foresight, did you know that it had the possibility of game-changing not only television but viewing habits?
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Jon Feltheimer0:44
Yeah, we had tremendous foresight with Mad Men. We actually read the script and we passed. So we did get a second chance. What we saw in Mad Men was something that we felt, being a disruptive kind of a company, was a bit of a challenge. It was a period piece, expensive, for a cable network that typically you wouldn't think could aggregate a big enough audience to make the economics work. That challenge made us want to take a shot at it. We put together a financial model with a lot of moving pieces. We had a great partner in AMC. Speaking of branding and branded integration, interestingly, to this day AMC tells me they're losing money on the show. Hollywood accounting. They don't talk about the brand value, which is incredible, nor about the CPM increases they probably have had across the board with all their programming for five or six years. But we put together something we thought would be iconic, something special. It kind of worked out pretty well.
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Interviewer2:09
So John, I want to take you back even before that, when you were running Sony Pictures Television back in the 90s. You did a groundbreaking deal. Some of the people may be in the room today. I think Erwin Gottlieb was the agency lead at MediaVest, and Daryl Simm was the Procter & Gamble client. With you at Sony TV and Carrie McCluggage at Paramount, you did what was probably a groundbreaking deal with Procter & Gamble, one of the early times a brand stepped up at that level in branded content and integration. Can you talk about that? It was really at the forefront of brands getting involved in content creation, save soap operas. I'm talking about, as I say, Carries was what 'Northern Exposure' was that right? I know you're talking about, but Sony was the primary player.
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Jon Feltheimer3:02
Interestingly enough, Irwin is still our agency at Mindshare, our agency of record. And Daryl Simm has moved from P&G to Omnicom, and he's on our board, which is great. The interesting thing about the P&G deal was that they came in as a co-financing partner on all our development, most of our production pilots, and series deficits. There was also an element to handle distribution of their soaps internationally, which they weren't doing well. We had 'Days of Our Lives' and 'Young and the Restless', we thought we could help. But other than having their logo at the end of every episode, there was never any ad efficiency or other piece of the deal. They thought being close to the content and the studio would create opportunities. There was a reverse brand integration: they passed on 'Dawson's Creek'. They had an opt-out for content, and they didn't want their brand associated with it. It turned out to be a good return on investment for them because they had 'King of Queens' that worked well in syndication, but would have been better if they had picked that show. I always heard that 'Dawson's Creek' was too edgy for Procter at that time. I walked in here and there was a condom ad running, and I thought not really that racy, but back then it was considered too edgy for family TV.
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Interviewer5:20
So John, let me talk about what you've done that's so remarkable in building Lionsgate with a great team: Michael Burns, Kevin Beggs, and others. In a world where WhatsApp sold for $19 billion with no revenue, you've built a company with a market cap over $4 billion based on a brick-by-brick approach: television, theatrical, at a time when people thought it couldn't be done because so many mini-majors failed. The graveyard is full of companies that had one big movie and thought they could make movies, and they didn't. Yet you've done it. You understand franchise better than anybody. You had it with 'Saw', Tyler Perry, you acquired Summit with 'Twilight', you have 'Hunger Games'. That vision to understand the value of a franchise is important to this audience. 'Hunger Games' is a brand just as much as any brand they represent. How do you manage that? How do you get lucky a lot?
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Jon Feltheimer6:39
We didn't build the company that way. I remember when Michael and I would talk about our stock price at $1.70 or $1.80, and it's now around $31-32. He'd say, 'All we need is one thing: a hit.' I thought that's genius, but we didn't build the company assuming we would have hits. The business plan was to buy three or four companies with library for evergreen income, create disruptive, edgy TV and films. We had a unique marketing campaign for an edgy show. A movie was made for $1.1 million. 'Hunger Games' was made for a bit more. We never counted on hits. The great thing about our company is the optionality. You're Disney, a movie that doesn't work might write down $100 million. We have a steady company with evergreen cash flow and diversification: 28 shows, now up to 34 shows on about 24-25 networks including over-the-top. But there's nothing like a hit to drive stock price and profitability. You better not count on them, but when you get them, you better maximize them. Three 'Hunger Games' books will be four movies. Three 'Divergent' books. So you have to maximize and drive these franchises.
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Interviewer8:44
So John, when you mention over-the-top, another important issue as we look at how consumers will enjoy content, not only binge viewing ushered in by 'Mad Men', but how we receive and consume it. 'Orange Is the New Black', a big hit on Netflix. You did something else theatrically: the movie 'Margin Call' and 'Arbitrage', releasing them day-and-date. For those in the audience, you could get the movie on demand or in theaters at the same time. How did the experiment work? Other than probably the National Association of Theatre Owners not being your best friend for a bit. Was the experience fulfilling?
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Jon Feltheimer9:35
I don't like the NRA, no gun laws, a good gun law? Well exactly, yeah, no, no, change of windows is good for the exhibitors. We four-walled the theaters. The only big chain we could work with a bit was AMC. We found out that about 80% of the people who saw it on VOD and EST were aware it was in theaters, and 80% of the people who saw it in theaters weren't aware it was available on demand. The joke was, I was in Tampa with my wife, she wanted to see 'Margin Call', I looked it up and said there's one theater 15 miles away. She said can they send us a copy from your office? So I called the office and our guy said, 'You idiot, you can watch it right now on demand.' What it speaks to is that there was a site called Popcorn Time, done by Pirate Bay, with amazing navigation and crystal clear piracy. It was scary. The guy running it took it down and said this proves to you thieves at the studios that you should give people the content at the price they want. There's something horrible about that, but also something right: we have to give the consumer a great value proposition, content when they want it, where they want it. We have to be flexible and smart. Doing things like 'Margin Call' and 'Arbitrage', pushing different windows and variable pricing. We love being first to do that. It energizes our management team.
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Interviewer12:25
As you make content decisions, let me take it back to 'Mad Men' and 'Orange Is the New Black'. 'Mad Men' was released weekly, while 'Orange Is the New Black' on Netflix was released all at once for binge watching. Does that change the way you make content creation decisions? Would 'Orange Is the New Black' look the same if it were released on HBO weekly? Would that change your decision?
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Jon Feltheimer13:04
The business decision starts with looking at the overall value of the series. Until we know better, we want to do a better deal upfront for something that airs 13 episodes at a time. How does that affect our back end and syndication? We were fortunate with 'Mad Men' that serialized programming, which had lost value in syndication, suddenly found value with services like Netflix that valued it. So we got syndication numbers I couldn't count on. When I build a model, I have to look at what the return will be and how our partners need to work with us to make the value proposition better on a present value basis.
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Interviewer14:10
So John, you're a unique combination of someone running a studio with a background in television, and based on the numbers, theatrical revenue with 'Hunger Games' is probably larger. But you have a perspective of a marketer as much as any studio executive I've ever met. So when you're creating content that the consumer will enjoy when, where, and how they want, how does the marketer play in that? I didn't watch 'Orange Is the New Black' with any commercial interruption because it was on Netflix. The link between content and marketing messages is the bedrock of this industry. How would you advise the folks in this audience, clients and agency partners, on how the over-the-top world impacts a marketer? Because you're a marketer too, spending hundreds of millions marketing your movies.
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Jon Feltheimer15:31
That's a good question. I would like to say advertisers should spend way more money getting close to the content. But we all have to push the edges and try new things. Premium content cuts through the clutter more than ordinary content. If I'm a marketer, I want to be involved with premium content and be focused on the audience I really want to count on. Part of our plan is not to compete with huge conglomerates for four-quadrant movies and TV shows. We aim at audiences we know: 'Divergent', 'Hunger Games' – we know exactly who the core audience is. So we know where to market and spend our money. We're extensive in digital advertising, at least 25% now. Obama in 2008 spent 5% of his budget on digital; in 2012 it was 25% of a larger budget. That's a four-year period. We're doing the same. It's not just digital spread all over; it's maximizing the digital spend. We're doing interesting things with Facebook, first to test their new premium video ads, and with YouTube's mobile masthead for 'Divergent'. It's about understanding who your audience is and how to spend your money.
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Interviewer17:44
So you speak about digital media. I didn't mention it in the introduction, but I think Lionsgate is probably the second largest shareholder in Defy Media, which was Alloy and Break Media coming together, one of the biggest players in digital video online, geared to specific demographics: Break for college humor, Alloy for teen girls. The combined revenue makes them one of the biggest. Is that a place you see content moving as rapidly as people hope, and the democratization of content creation?
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Jon Feltheimer18:38
I think overall, online over-the-top channels, apps, whatever you want to call it, is absolutely where the future is. If you narrow your focus and look at a fragmented audience, it's a way to reach the audiences we want, customize content, and monetize more effectively. We also have a fitness app, probably number one or two on YouTube, and we're starting to monetize those apps. I absolutely think that's the future. We're too late to build a significant linear channel bouquet, but that's where the future lies for us and others.
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Interviewer19:23
Yeah, when the premium channels were launched on YouTube three years ago, people said that was cable 20 years ago. How do you think that's working out in terms of turning into cable? That was the idea. People looked at YouTube as a way to launch channels, but it's hard to know the metrics. Awareness TV is a good example – they're doing well, but it's hard to know exactly how it's being monetized and the value of that consumer.
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Jon Feltheimer19:44
What the value of that consumer is, the stickiness of that site. But I think there's no question we just made a deal with Freddie Wong, a significant online player. We have to all be trying these things. I believe within the next five to seven years, this can be some very valuable brands built online.
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Interviewer20:20
Well John, I appreciate you taking the time today and sharing your insights. Congratulations on the great success, and thanks for joining.
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Jon Feltheimer20:28
Thank you.