Online Extra: Q&A With Robert Clasen

Starz Encore takes viewers to the movies and beyond.

By Shirley Brady

In the following interview, Robert Clasen, president and COO, Starz Encore Group, chats with CableWorld's Shirley Brady at length about increased competition, the promise of both video on demand and Internet protocol delivery of movies and the need to work with affiliates to sell the products that the younger demographic actually wants.

CW: You celebrated your first year with Starz in July. What have been the highlights, other than getting promoted to president and COO in May?

Robert Clasen: Three important things have happened in the year that I've been at Starz.

First is we've reconnected with our major affiliates. We have had this year with our top four affiliates [Comcast, Time Warner Cable, DirecTV, Cox] national campaigns for the first time in years through a combination of the right story and some changes in some of our deals.

The second thing is that we have been in a position to have tremendous content. Not just our library, but our studio partners in the last two years have really been able to push some tremendous content through the food chain to us, and we've been able to market around that content.

Third, we've been able to connect with the end user, the consumer, through our Encore products which are sold by the cable operators typically much differently and reach a much broader array, so there are many more Encore customers out there. There's also Starz and our messaging, and especially Starz On Demand, where we've been able to, with Comcast and Charter and a number of our affiliates, get significant distribution. So when you're got new initiatives with your affiliates and you've got good content, then some unique stories and attributes to the consumer, it all makes a big difference.

We've been working with Comcast on the rollout of our Encore On Demand product. Over 80% of their digital customers have Encore and over the next year they'll be in a position to get Encore On Demand. I think their operating management is very excited about the high quality of movies that we'll be able to deliver to such a broad array of their customers.

CW: Why did premium cable programmers, and Starz in particular, see an increase in subscribers in the second quarter of this year?

Clasen: The big news is that our two largest affiliates are contributing to our growth. So with Comcast we're having a very good year, we're just coming off our second national campaign with them and those campaigns and the acceptance of those campaigns--97% of the Comcast network is participating, which is great. DirecTV is our other great affiliate, and we also had national campaigns with Time Warner this year, our third-largest affiliate. We've also this year done a lot with Cox. Most of what we do with them is customized to Phoenix, Las Vegas, Hampton Roads and so on--they're not running the large umbrella national pieces the way that some of our other affiliates have been. So we do very targeted messaging to those particular marketplaces.

CW: How has the premium business changed since you started out?

Clasen: In 1977, maybe it was 1976, I was in a cement block building in Zenia, Ohio, that had been devastated by a tornado a couple of years before. I was at Continental and we had launched a pay television service. HBO had just announced, but the Earth stations were so expensive that we couldn't afford one. So we went and leased some movies. And we opened against Roots, which was the worst programming thing we could have done. But we went ahead and launched with Barbra Streisand in Funny Girl. The next day there were literally hundreds of phone calls to our office, "I can't believe I saw that movie on television without commercials." It's no different today than it was in 1977. People can watch Finding Nemo, uncut, brilliant picture quality, all-digital. Movies on pay TV is a great product.

CW: But today your competition includes DVDs, other platforms...

Clasen: Yes. The cable business today is so much more competitive both from a programming access standpoint and from the standpoint of competing with all of cable's other array of products, and it's not just the satellite and cable industry but also competition from the telecom industry. The level of competition is much, much higher than it was in '77, even 10 years ago. So into that milieu, for Starz, we're bringing our library and our studio output product--because we know when Finding Nemo and Lost in Translation gets to our service, we know how it's going to do because if it does well at the box office and it does well in DVD, it's going to be great for us. We can delve into our library and program as we will in January, when we launch 17 James Bond films on demand, which will be the first time they will all be together on a premium service. And now with [Starz] on Demand, that will be just incredible. We're doing some fun things to promote it. We're putting together a little collage so you can see in 15 minutes clips of all the Bond girls, all the gadgets.

CW: You should call it BOD--Bond On Demand.

Clasen: I like that. Mind if we use it?

CW: It's all yours. Talk about the importance of Starz On Demand offering DVD-like extra features to compete with DVD.

Clasen: It's critical especially in on demand, where viewers get drawn to shorter-form content such as a 20-minute "making of" The Lord of the Rings. That whets people's appetite to watch the movie. Even if they only have time at that moment for the featurette, they'll come back and watch the feature at their convenience. There's a lot of [subscribers] going in, we're finding, and taking quick looks within on demand. In fact, viewers sometimes go in and take a look just at their favorite part of the movie and watch only that scene.

CW: How is Starz On Demand doing in homes with DVR?

Clasen: DVR is turning out to be a nice complement to on demand. It's kind of the Hawthorne Effect. Once you've got more things to try of the same ilk, whether you're doing it from the DVR or the head-end, you get more accustomed and you do it more and all of a sudden it catches on, so I think it's all additive.

CW: What consumers may not realize--yet--is all the copying restrictions with copy-once, copy-never and so forth, so they can't copy on demand titles willy nilly to their DVRs. Or if they do, that content may be there for a limited window. Is Starz helping to educate them?

Clasen: There's going to be a lot of consumer education that the cable industry is going to have to do, and the consumer electronics industry, because they're going to bringing products to market. And it's in that mix that, frankly, things have never worked that well because the consumer electronics industry creates certain expectations with the consumer. Early adopting products can create expectations that sometimes can't be fulfilled. The industry right now is trying to work through plug-and-play resolution with consumer electronics and studios, and it's going to be tough.

We're a digital product, so we're only available, at a reasonable price point, to about 40% of the market. So part of what fuels our growth from year to year is moving that to 42%, 46%, 48% and so on, and as that happens to buy Starz goes to a much smaller increment. That's why we certainly see ourselves as the youthful member of the premium category with growth in front of us, so as the industry moves digital going forward, it may only be an $8 or $10 increment to buy us.

We're not even typically sold until $65, so we're lucky to get any growth, but we've had phenomenal growth. The only year we didn't grow was during the lawsuit with Comcast. And 2004 is the best year we've had in three or four years, and the second quarter of this year was the best that the category had in many, many years. All of the packaging is set by the affiliates. We're a wholesaler. And because we're not available in analog the way that HBO and Showtime are, you can't buy us until you get through basic, CPST, digital basic, digital tier and then all of a sudden there we might be. So we have growth in front of us, as the industry rolls out digital.

IP for all of the affiliates is where they'll be headed, so we have to be out there early to market with IP. You get a few arrows in your back, but they're worth it because that's where everybody's going. We've future-proofed ourselves by securing those rights, and in doing that we can see continued steady growth in our core business and a chance that by 2006, I would expect, all of our affiliates--if they have the proper infrastructure and DRM--should be delivering Starz IP products in their networks.

CW: What other areas are driving your growth?

Clasen: Let's back up for a moment. Now that we're a full Nielsen [-rated] participant, we see how strong Starz is, how strong Encore is, how strong the Westerns Channel is, and we've really had a chance to look specifically at our individual demographics. We skew more to women, we skew more to kids, and of course overall we still skew male, as movie services tend to do. So what we're looking to do is, as perhaps others are, something more to do with the 18-to-34 demographic. And we're looking for ways to create the use of our product that will allow us to have a broader appeal to that particular demographic, which is the one that people worry has left the television market. But we've got thousands of movies and putting them together in the right way, we might be able to do something there.

CW: Was that the logic behind launching the movie-downloading service for broadband in partnership with RealNetworks -- to better reach that young audience?

Clasen: It is absolutely clear to us that this is a different demographic, and we've already started to have more customized on-demand product because of that demo. We have instant feedback. Our affiliates on the cable and satellite side are great, but the level of detailed information that comes back in terms of video-on-demand usage and so on, they're still struggling to get it together. On the Internet we know in a snap so we're able to make more changes in the content to be more responsive to what the consumers want to take a look at. With that younger demographic, we think as we have changed things in our video package that can appeal to that demographic, that we can be marketing them back and forth in that regard. So it starts giving us a new look for a new demographic on the Internet. So when it comes to broadband, we certainly feel like we're pioneers. We have the opportunity, with the support of our studio partners, to talk to our affiliates about they might use this product in their own mix. I don't pretend to know exactly what the cable industry and satellite industry expects to do, but it's reasonably clear that over time there will be some migration to Internet protocol, and so we'll probably be the most experienced of the programmers as we learn the best ways to market and also have an opportunity to see how the product plays on these new platforms as they are developed.

CW: Yet you launched Starz! Ticket with RealNetworks back in June without any cable operators participating. Are any interested now?

Clasen: To be frank about it, I think the announcement came in such a way that they are either thinking about what to do, or wondering what it means. We had talked to all of the cable affiliates beforehand and our position is pretty much the same. We know everybody is going to go IP in maybe five or ten years, but being out there sooner rather than later, we've kind of put a stake in the ground. And the way we think it would benefit most of us best is to be in a position--just as we did on the TV piece--to partner with our cable affiliates. Frankly none of them yet would have the infrastructure to deliver the product themselves. You need websites dedicated to this, and servers, and digital rights management that's blessed by our studio partners. I think some of them will be ready to do that in the next 12 to 18 months. Conversely, we do think from our most recent discussions that we'll have cable operators affiliating with this first of our Internet products, Starz! Ticket, over the next 90 to 120 days.

CW: So there are more Internet products to come from Starz?

Clasen: I think so. The Internet lends itself to a variety of products because you are direct to the consumer. We view ourselves at this point as an aggregator of movies, and whether it's movies that are broad and we discover that our categorization helps them understand our library better, or whether we need customization. I always joke that I think on Cowboys.com [not a Starz site] we should be delivering 10 Westerns a month, and there are ways that we can go about doing that. That's quite different from having a broad-based movie service, like Starz is. Also, with our cable affiliates need to understand more about closed networks and open networks. Chairman Powell just talked about this, the era of Internet video is here and yet it's undefined, so we're going to be out there taking notes and figuring out what the definitions are.

CW: Are cable operators ready for where Starz thinks broadband is headed?

Clasen: They're not. Comcast has announced several content aggregation deals and is asking folks to go to their website and buy content--they have a suite of games for $14.95 a month. So we would expect that movies would be the same driver on the Internet that they are on the television.

CW: So your plan is not simply mimicking your themed channels on the Internet, but creating more specialized suites of movies?

Clasen: That's right, and it's certainly unclear how things are going to be packaged on the Internet. You look at some sites, and you can get ESPN highlights and a movie and songs, and maybe that's a mix that would work, no one is really quite sure or even what the pricing mechanism should be, who gets what percentage and so on. So we're looking to work through this with our affiliates. We're out there with an Internet product, and we would certainly hope that three years from now, all of our affiliates would have Internet products that would carry Starz content.

CW: What's the studio perspective as Starz redefines its business?

Clasen: There's no question that the studios own the rights to these films, and that the studios, in the case of the Internet, want to ensure for themselves that the DRM system works. As in every new platform, the studios would love to reinvent the windows, and they're trying to do that. We have the benefit, on our side, of five to seven year deals with all of our studios but one, and then library deals for Internet rights. On a subscription model, almost anybody could go to a studio and negotiate the rights to do pay per view in that PPV window, as Movielink does, for example. But for our movies in a subscription model, we have a pretty long road to develop this product. The studios are seeing what Movielink and Netflix and others are trying to do or alleging that they will do--that was two weeks in a row that Netflix and TiVo had press stories about them that nobody would confirm, although at least their stock has moved. All of this heightens awareness. The studios are certainly keen, and we're going to capitalize on our Internet rights because we have to. That's why we're first and that's why we're going to continue to look for products that we can develop and, very importantly, products that we can develop with our affiliates.

CW: Starz offers different benefits to cable and satellite. For instance, you offer EchoStar customers an auto-provisioning virtual channel that's very successful. Is that something your cable affiliates are interested in and can you offer it to them?

Clasen: The cable industry and the satellite industry, because they're moving to digital, should be in a position--if they ever agree on the middleware to go in the set-top boxes and have the right hardware and software at the head-end--to let customers buy products, just as though they were online, including in the cable world because they're two-way plants. So we're working with some cable affiliates on that. We had a big debate on the panel I was on at the CTAM Summit in July, where the cable industry has known for four, five, six years that all these products were coming and still have, frankly, a terrible user interface at the television. Comcast at least has stepped up and done a joint venture with Gemstar, but that could be years before they have something usable. The idea of having a sophisticated user interface and auto-provisioning system at the television is probably something the cable industry should have done years ago but didn't. On the Internet it happens all the time, and it's easy. You're online and you order it with one click or you don't order it. Cable needs to bring that technology to the television.

CW: CTAM has been working with cable operators to come up with some common parameters for on-screen user interfaces, as has CableLabs.

Clasen: That's all well and good, but our cable affiliates are strong independent thinkers and are moving forward individually developing their own solutions. So we still have to work with each of them individually. The window to have had a kind of industry standard has passed for an on-air user interface and selection process. It's going to be cable operator to cable operator at this point.

CW: I assume another area of growth for Starz would be on the telcos' side, both for video and broadband delivery of your programming.

Clasen: There's no question that the telcos recognize that they need to have a competing video product. The telcos have been talking about this for 20 years. We do see, as a programmer, that they're much more active in their relationships with EchoStar and DirecTV, for example. They're looking at developing their own video delivery system, which is likely to be an IP system, and we're hearing a lot of talk about IP set-top boxes. That's probably the right thing for them to do. Whether they have the management to move quickly enough to capitalize on them has always been the challenge. Maybe this time they do. But certainly historically, if we could just have another research report and get that right, then we'll do it. The cable guy is more the other way: Let's get it out there now and we'll learn by trial and error, and I hope that the RBOCs move in that direction because they have an opportunity to move quickly with IP set-top boxes.

CW: What opportunities do you feel the cable industry is missing?

Clasen: I have two generalizations that I make. The first is that the cable industry needs product managers. It has not developed the way that consumer goods have, where you research products and you bring products to market and you package and position them. Products just kind of show up and typically get thrown to the engineers to see if they work, as opposed to saying what are the next three products that my consumers want and what in that mass of hundreds of ideas and developing technologies and content can I really use? In my view, having been on the operator side, having been on the technology side and having been on the content side, cable could use some really good product managers to help them decide what the next great product is.

Secondarily, the follow-on to that is that all products aren't additive. Some products are a la carte, some products need to be sold quite differently and not just say, "well we've gone from 150 channels to 170 channels, and we've added these three new things into your package." Package selling is wonderful, but I think they're missing opportunities to sell products a la carte. Because the consumer now, especially as they use the Internet world, is more accustomed to buying things a la carte. I'm not specifically talking about breaking 150-channel packages, I'm talking about the other kinds of services that are coming down the pipe that cable could be putting on.

CW: OK, let's talk about a product like cable telephony. What can Starz be doing to help operators drive that business?

Clasen: We were the first operator with Cox to ever do a pay television/high-speed Internet cross-promotion. We did that a year and a half ago. And we believe with our IP product that there going to be all kinds of ways to cross-promote what happens at the video and what happens at the cable modem and what happens with content. We'd expect to be out there doing. The more the operators have experience with voice over IP, then the more comfortable they may be with our kinds of products on their networks. So it all works together.

CW: What about wireless?

Clasen: I think everybody needs a wireless solution. There's no question that there's going to be people sitting in Starbucks looking at Starz movies pretty quickly.

CW: So in the future we'll have "Starzbucks"?

Clasen: (chuckles) Look at my son, who's 16. He has iPod technology loaded on his PC. It's wireless so he walks around and listens to content, orders content, trials content and he can be doing it from any location. There's no doubt that wireless is going to be very important to all of our futures because that's what this new demographic is accustomed to. They're playing games on their phones, they can watch short-form films on there.

CW: How will you apply what Starz learns on the Internet to your core businesses with your cable affiliates?

Clasen: We have to. We were talking about this in a meeting just yesterday, that we don't know what we don't know about what's going on at college campuses and in high schools, but this younger generation... Again, I look at my own home. I came home from work and said, "I hear Comcast has just added on demand here in Denver, we should go try it," and my son said, "Dad, I've been watching it for two weeks." As in, "you know, get a life." He can take my cellular phone and change the rings and messages and I have no idea what he's done or how he's done it. It's almost as though he's grown up this way. So yes, we as a company expect to learn a lot about where our business is going by being online. Of course we have to remember our core business. Starz has a positioning--all movies, movies for the whole family--and messaging that we deliver that's important to us and our affiliates, and I think we can capitalize on that have new products that appeal to these new demographics. Like those young kids.

CW: Is Starz On Demand attracting that young demo?

Clasen: You bet. We went, just with Comcast alone, from no SOD customers to basically their whole network in a six-month period, and our numbers with Comcast have been phenomenal. SOD had to play a role in this. Our view is that year in and year out, movies is a pretty well understood category. It's a comfortable destination for viewers, and with six different movie destinations in Starz and seven or eight in Encore, those are reliable places that viewers can go and select a Western or a family movie or a blockbuster hit. We are not a general entertainment service the way Showtime and HBO have evolved. There are benefits to what they're doing, but we're going to stick to our knitting.

CW: Yet you've got some original programming: WAM, a channel geared at youths; a few documentaries on the Westerns Channel; and The Directors series on Encore.

Clasen: WAM aside, yes, we do several documentaries a year but mostly dealing with producers, directors, such as we did with Sisters in Cinema recently. It has to be movie-related and all about movies.

CW: Given your interest in reaching the younger demo, any plans to tweak WAM?

Clasen: It's funny you ask. The one thing we're investigating--and just only investigating at this point because it's a challenge--is you've got literally tens of thousands of young filmmakers out there. The challenge is that they usually infringe upon everybody's rights with music and the like. But we're certainly asking ourselves--because of the demographic and the growing number of youth film festivals and college kids making films and short-form films being all over the Internet--can we do something with all that? That can be an exciting new genre of content for WAM. So yes, we're looking at ways to bring that demographic's passion for filmmaking to WAM.

CW: Operators are starting to dip their toes into HD VOD. Any upside there for Starz?

Clasen: Absolutely, but it's not a product you'd roll out at 8 or 9% hi-def penetration. And again, when the cable industry is ready for that product, we'll have that product for them. But they need to make that decision when they think they're ready. Are they going to retail it at a set price or blend it into a package? And at the end of the day, who interfaces with the consumer? The issue on the Internet is a little different because there it's storage. We need some improvement in encryption and compression before the average person wants to load up their PC with most of one movie, because the hi-def file is so large. The set-top box has to be encrypted because that's the security that lets it happen, whereas on the Internet encryption can be an issue but the real issue is do you have a password and an acceptable subscriber name to log on and see your content?

CW: The younger, Web-savvy demo you're pursuing is also savvy at swapping user names and passwords. Is Starz! Ticket protected against that?

Clasen: Yes. There are a number of limits to it: You've got to be using a registered computer, there are only so many that a subscriber can register; and when you've given away your password and your user name, you've also given away access to your credit card. We were sitting with one of the studio chiefs this week and pointing that out, and he said "yeah, I think I get it." Consumers get the message, too: When they log on, the first thing we get is their credit card, because there are other products they can buy through the platform.

CW: Last question. You're going to CES?

Clasen: We will have a massive presence because we are inundated with calls from technology providers who want to showcase IP technology using a product like Starz. Intel recently had a developers' conference in San Francisco, introducing new products allowing the consumer to move video from the PC to the TV set wirelessly, and they used Starz! Ticket as the demo product. So we will be in seven or eight booths at CES with providers who want to showcase our products, and we'll have some meetings and hopefully participate in some panels to get our own sense of what's going on. CES has already replaced the Western Show. You've got the IP guys, the DBS guys and the cable guys attending, all of our affiliates. We can't afford not to go.