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Why CBS Wants to Buy Starz From Lions Gate

The media landscape has gone through a series of seismic shifts in recent years as acquisitions have left a handful of powerful giants, and disruption has created a few entirely new ones. But the Tiffany network, CBS (NYSE: CBS) (NYSE: CBS-A), has been fairly quiet until this week, when it made a surprising bid to buy the Starz premium networks from Lions Gate Entertainment (NYSE: LGF-A) (NYSE: LGF-B).

In this segment of the MarketFoolery podcast, host Chris Hill and senior analyst Dan Kline consider the obvious questions: What is CBS thinking? What will they do with Starz? And where does this slightly buffed-up CBS fit into the new media universe?

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on May 20, 201

Chris Hill: Let's move on to the entertainment industry. I suppose this ties in. CBS has made an offer to buy Starz from Lions Gate Entertainment. I was saying right before we started taping, I had to take a moment and think about, what does Starz bring to the table as a network other than movies that other people have made? The only thing I could come up with was American Gods --

Dan Kline: And Power.

Hill: Yeah, the original series. What do you think of this deal? When I first saw this, what went through my head was, "Oh, the land grab continues. We're all moving to streaming." And by "we," I'm referring to the broadcast networks. "We're all moving to streaming, we're all looking to get as much original content as we can get our hands on. And if we have to pay maybe a little bit more for not as well-known content, we're going to do that."

Kline: This is kind of like asking someone to the prom an hour before the prom. All the good dates are gone. This almost goes back to Disney buys Pixar, then Disney buys Star Wars, then Disney buys Marvel; then Comcast goes, "Uh oh," and buys DreamWorks. We were comparing this, talking, saying that Starz is kind of the RC Cola, then we downgraded it to the Polar Soda of premium content channels. But this really is, in my opinion, a desperation move. You're going to pair this, if you're CBS, with its very weak two-show, or maybe three-show now that they've launched Twilight Zone, CBS streaming service. Maybe they're going to pair that with some of the Viacom properties if they ever properly merge. They're sort of controlled by the same people, and they talk about merging, but it hasn't quite happened. So you're streaming package is going to be a couple of old people shows on CBS Interactive, Starz, which has young streaming shows, but I don't know anybody who's intentionally buying Starz to watch American Gods, and then, what? Reruns of The Real World? Maybe Comedy Central is an asset that will drive some subscriptions? But it feels like, if I'm going to pay for a package -- Disney is clearly building toward a Hulu, Disney+, ESPN+ package -- that's going to be more attractive. And then Comcast is going to be more attractive. And then, probably Sony, now that they're working with Microsoft, is going to be able to put something together. And then maybe Apple. And then this. It really seems to me like buying a very low-level asset for a lot of money.

Hill: I'm going to put, in your rank ordering, this above Apple, just because we don't know what's coming with Apple yet. They had the event earlier this year with Oprah Winfrey and Steven Spielberg. I get all that. At least with CBS, you have some known quantities. I think the best version of this scenario for CBS is, if this goes through, then three years from now, they have enough data -- I would argue, actually, even sooner. Maybe a year and a half, two years from now, they have enough data from their streaming app to know what to invest in. The one thing you can say about the Starz original content, at least in terms of the dramas, is you're not seeing those types of dramas on CBS. It really is a different category of drama. It's edgier. I would argue in some ways it's more creative.

Kline: It's the 1985 HBO model, where there's going to be gratuitous nudity for absolutely no reason in every episode.

Hill: It's possible! But, just from a creative standpoint, it's less predictable. A show like American Gods is far less predictable than a formulaic... I know they don't own Law & Order, but that's the one that pops to mind. A procedural, where I know how it's going to play out. NCIS, I guess that's a CBS property.

Kline: I feel like this only makes sense if they're going to continue acquiring. But there's not much left out there. You start to get into buying one-offs and buying shows. If this is part of a roll-up strategy, and they need the subscriber base, and they come to you and they say, "Hey, do you have Starz? We're giving you CBS." The Disney pricing looks pretty attractive. I'm a Hulu Live subscriber. If they throw me Disney+ -- which I'm going to get anyway, it's going to have Star Wars shows -- and ESPN+ and it's only an extra $7.99 or $9.99, I'm probably going to do that. CBS's streaming service is very inexpensive. It's $4.99 a month. If all of a sudden, for $9.99 a month, I can get Starz, too, maybe. I mean, I had Starz when I used to have Sling TV when it was a small add-on price, and there was always some movie you wanted to watch. But it does seem to me like this is like, "Oh, God, we don't have a date for the prom. Let's buy something." I'd like to hope that maybe there's a bigger strategy to it.

Hill: Well, presumably, the people at CBS who are in charge of this initiative are watching how the pricing strategies of everyone else are playing out, and they're not going to have a self-inflicted wound where they say, "Let's charge $10 right out of the gate." No. Go low, get people in, addicted to your system, and then incrementally bump up over time.

Kline: They've been smart, because largely, you are buying their service because you want to watch The Good Fight or the Star Trek show. And maybe to a lesser extent, The Twilight Zone, but that hasn't been all that well reviewed. And in some markets, you can get NFL access. Depends where you live and how the deal works. So by keeping that point low, it is low enough that if I can just get it to watch like eight football games a year, I might do that. They do seem to know what they're doing. But I question... merging with Viacom is almost certainly part of their eventual strategy. But the Viacom portfolio seems especially weak. We're at a low point for the MTV channels. So, yeah, this feels like you're cobbling together a lot of distressed assets, which doesn't necessarily give you one good asset.

Hill: I'm curious to see what the final price tag is, though.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Walt Disney. Daniel B. Kline owns shares of Apple and Microsoft. The Motley Fool owns shares of and recommends Apple, Lions Gate Entertainment Class A, Lions Gate Entertainment Class B, Microsoft, and Walt Disney. The Motley Fool is short shares of CBS and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.