Deeper Dive—Comcast, Starz probably can work it out

Starz is home to popular original series including "Power" and "Outlander." (Starz)

When a report surfaced last week suggesting that Comcast would drop Starz by the end of the year, it was enough to crater parent company Lionsgate’s stock.

The Information cited people familiar with the situation who said that Comcast was considering removing Starz and Starz Encore from its primary video service bundle. Given what Comcast did to Cinemax, it’s not out of the realm of possibility that the cable giant would dump another premium network not named HBO or Showtime.

It’s unclear why Comcast might ditch Starz. Alan Wolk, co-founder and lead analyst at TV[R]EV, said it’s likely not a competition concern and that it could simply be that Comcast did the math and found that the money it needed to spend to keep Starz on board versus the amount of subscribers isn’t worth it.

But there’s still four months left to negotiate and a good chance Comcast and Starz will settle their differences. SunTrust Robinson Humphrey analyst Matthew Thornton told Variety that he thinks Comcast and Starz will reach an agreement but will need to see eye to eye on some pricing concessions.

If no new deal can be struck, it could cost Starz a lot of subscribers. Thornton estimated being dropped by Comcast would lead to Starz losing 8 million to 9 million subscribers, a significant portion of the 26.5 million the network had at the end of the first quarter. But, it might not be that bad for Starz, he said. If the company can attract approximately one third of those subscribers to its direct-to-consumer service, which carries a much healthier ARPU of $6.62 per user than the $2 Starz gets from Comcast, it can make up for lost revenue.

There are other signs that point toward a deal between Comcast and Starz getting done. At the end of last month, Starz set a new carriage agreement with AT&T (the only pay TV distributor with more subscribers than Comcast) for DirecTV, U-verse and AT&T TV.

Starz and Lionsgate are also still the subject of ongoing M&A rumors. According to Variety, ViacomCBS isn’t actively pursuing a deal for Starz now. But that doesn’t mean it won’t in the future. National Amusements’ Shari Redstone, who is the controlling shareholder of both CBS and Viacom, has reportedly already held discussions about future acquisition targets.

Lionsgate and Starz could be targeted by other companies looking for more content and distribution scale to compete with giant conglomerates like Disney and WarnerMedia. Thorton said that Lionsgate is likely under pressure from shareholders to create more value, meaning that the company is likely a motivated seller. If that’s the case, then Starz has a lot of incentive to not lose one third of its subscribers by not reaching a deal with Comcast.

It’s still possible that Comcast and Starz won’t be able to continue working together, but it just seems like Starz has too much riding on it to let a potential deal fall through the cracks.