Pay channel output deals originated in the early 1980s. During this time Viacom’s Showtime was in a heavy competition with Time Inc.’s HBO over cable viewers. This was known as “The Pay TV Wars.” At the time, the public could not purchase movies. They could only rent them from a video store; DVDs were not even in the picture.

Cable subscriptions were driven by the studio movies on pay channels. Big money was paid to HBO, the dominate pay channel, by cable operators. HBO won this war by purchasing the studio’s entire library of movies for several years. This gave HBO the exclusive rights to the movies. This was hardly ever spoken of in the entertainment media. Jonathan Dolgen, Frank Biondi and Thomas McGrath were the top executives who brought these deals to the table. Pay TV channels would pay approximately $12 million per title.

Ghostbusters was such a big hit at the box office; HBO paid $30 million for this blockbuster. After this, the cap was $12.5 million per title with an average of $10 million until 2005. A studio would collect a whopping quarter billion dollars in the US for 25 movies in the output deal. This was pure profit for the studios. The six major studios were pulling in $1.1 billion off of pay TV by 2000.

DVDs, iTunes and digital downloads began to introduce alternatives to watching high quality movies at home to viewers in the 2000s. This really put a damper on the Pay-TV stations. In an effort to keep their audience, pay channels began to increase their investment in original programming with series such as The Sopranos, Sex and the City and The L Word.

This allowed the pay channels to be more selective about their purchases from the studio, and gave them a better window of bargaining because they were now able to fill up their 24-hour programming schedule with their original programs and their large inventory of movies. By 2009 they were paying half of what they were paying per title in 2005 and only purchasing half the amount of movies.

One of the first studios to feel the effects of this was New Line Cinema, a mini-studio started by Time Warner in 1996. Up until 2007, New Line Cinema was guaranteed $80 million for 12 movies in its output deal with HBO. HBO was also a Time Warner subsidiary. In 2008 Jeff Bewkes, the chairman of Time Warner found that the New Line Cinema movies were not needed by HBO and closed the deal. He felt the money would be of better use if he put it into Warner Brothers.

In 2008, Paramount experienced a similar situation in its output deal with Showtime. Showtime split from Viacom and became a part of CBS. Paramount and Showtime were both part of Viacom. Showtime ended up leaving Paramount with no output deal. Although these changes are taking place in the world of Pay-TV, there is nothing for Hollywood to fear with the advancements taking place in the digital industry.

Pay TV Revenues