ATTORNEY / CLIENT PRIVILEGED

Confidential Draft

Starz / Netflix ConsiderationsFOR SONY INTERNAL USE ONLY

December 1, 2008

[DRAFT]

2

Executive Summary

• We have made progress toward an extension and a framework for Starz’ approach to internet SOD

• By delaying the XBOX launch to December 15, we delayed our need to file a TRO until December 12. Our goal is to close a deal beforehand

• The terms currently being discussed would:

– Extend the output deal through 2016 (currently expires in 2013)

– Adjust rate card while retaining bonus payments; generating $160-$225MM in annual revenue during the extension

– Introduce title caps; but maintain flexibility with regard to slate / title mix

– Provide additional benefits (extend VOD to 72 hours, decrease EST price floor)

– Address internet SOD, requiring premium pricing and branding with some financial upside opportunity for SPE

3

Overall Deal Parameters

Extension • 3 year extension • Extends beyond current deal, which expires 2013• Provides Sony security of Pay TV deal through 2016

Value • Annual value in 2014-2016 of $160MM - $225MM

• Above market• Specific annual fees depend on slate• $40MM bonus + 35% rate reduction translates to a roughly

30% decrease in all-in fees

Above Market Deal Terms

• 50 title cap• $40MM bonus• Overall rate card

• All studios have title caps; ours would be the highest and is distinct from a cap on absolute dollar fees

• We would receive the only bonus in the industry• Rate card would be above market, even after reductions

Other Benefits

• 72 hour PPV/VOD viewing• Reduce Pay 2 EST Floor to $3.50

• Increases value in pre-PayTV windows

SOD • Premium pricing / access• Premium branding• Modest incremental fees

• Structure is in the spirit of traditional Pay TV flat fee model; but provides clear definition for “Pay TV on the internet”

• Potential additional upside for Sony

Concessions • 50 title cap• 12.5% reduction in rate card

2012 -- 2013• Expand Pay 1 window

(market is 18 months)

• Cap on titles and near-term reduction are non-negotiable for Starz

• Pay 1 window is important to Starz but may be negotiable

Terms Comments

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Revenues for Extension – Fees Per Year (2014-2016) (1)(2)

$40 $40

$120

$184

$0

$50

$100

$150

$200

$250

Low Slate High Slate

Bonus Payment License Fees

$160

$224

Footnotes:

1) Does not include potential library deal or incremental digital profits.

2) Low slate assumes volumes in-line with last 3 years experience, high slate assumes volumes in-line with slate used in MRP

Annual Revenues in Extension

Comments

• Total dollar value depends on slate

• Low slate compares to a trailing 3 years average of $230MM

–$182.6MM fees

–$47.5MM bonus

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Starz will Remain a Premium Branded Service

• Starz is bundled with premium services from Cable MSO, Satellite and Telco providers

– Packages with Starz are priced on average roughly 40% above entry-level prices

– Starz brand is generally called-out as one of the main value drivers of the upgraded package

– Premium marketing approach has led to Starz reaching 17MM cable / satellite / fiber households

• The method for making Starz available digitally will be subject to a similar approach

– Packages that include Starz would be above entry-level broadband or subject to an a la carte charge

– Starz brand would be specifically called-out as one of the main value drivers of the upgraded package

– Starz would be made available in no more than 30MM broadband households to ensure premium positioning

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Pricing Starz as a Premium Service

AreaBasic

PackageEst. Current Basic Price

Least Expensive Package

with Starz

Est. Lowest Price with

Starz

Est. Minimum Add-on Cost for Bundles

w/Starz

Premium

Cable (Comcast)

“Enhanced Cable”

$38.98“On Demand

Silver”$55.95 $16.97 44%

Satellite (DirecTV)

“Family Package”

$29.99“Choice Extra”

$34.99 -- $57.99 (3) $5-$28 17%-93%

DSL (Verizon) (1)

“Starter Plan” 1 Mbps

$19.99“Power Plan”

3Mbps$29.99 $10 50%

Cable broadband(1) Confirming $33 Confirming $40 -$45 $7-$12 21%-36%

Websites (on top of broadband)

Lowest Cost 1Mbps

Broadband$19.99

DSL Plus $7.99 ALC

or bundle with $13.99 website

subscription

$27.98 -- $33.98

$7.99-$13.99 40%-70%

Footnotes:1) Structured as 1 tier above the 1MB.2) Average price paid by someone with access to Starz3) Note, $34.99 is for first 12 months only

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Subscribers included in Caps and Rate Card

Total Digital Subscriber Cap Subscribers Subject to Rate Card

Cable

Satellite

IPTV (Fios)

All other digital

delivery subscribers (including

DSL bundle) are subject

to 30MM Cap

Excluded Included

Excluded Included

Cable

Satellite

IPTV (Fios)

DSL

Open internet on a service that

feels like cable

All other digital

delivery (Amazon,

Blockbuster, Hulu)

subscribers are subject to a per-sub

rate card

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Digital Rate Card Proposal

• Starz Proposal:

– $2.0MM per year over the next 3

years for the Netflix deal

– Per sub fee on all “included” subs

– Incremental fees are structured as

follows:

– Cap of $14.6MM per year

Sample Potential Economics

Footnotes:

1) Netflix subs do not count towards rate card until after 3 year settlement.

Starz Digital Proposal Sony Protection

Sub Range (MM)Rate Card

Dollars (MM) Cume

0 10 0.33$ 3.3$ 3.3$

10 15 0.50$ 2.5$ 5.8$

15 20 0.75$ 3.8$ 9.6$

20 25 1.00$ 5.0$ 14.6$

CompanySubs (MM)

Profits ($ in MM)

Verizon (DSL) 7 $0.0

Netflix (1) 6 $2.0

Quest (DSL) 2 $0.0

Blockbuster 4 $1.3

At&T (DSL) 7 $0.0

TiVo 4 $1.3

Total 30 $4.6 (2.1% of $223.9)

[Confirm Subs]

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APPENDIX

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Potential Response

Item Approach Importance

“Shadow Economics”Revenue share model which is an approximation of the per sub fee rate card proposed by Starz

Low

Grow rate card/caps Expands cap limits Low

Include DSL subsExpand the sub definition to include DSL subs in the rate card calculation so that fees can be collected

Low

Increase Netflix valueRationale is to move likely digital fees closer to 5-10% of traditional license fee deal

Medium

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Timeline of Current and Proposed Windows

Theatrical Release

Theatrical Release

DVD / VOD Day & Date

DVD / VOD Day & Date

PPV / VOD Standard

PPV / VOD Standard

12 months from theaters (10 months)

Key:Existing (Requested)

8 months from VOD – lets us do early window (3½ months)

6 months from DVD (4½ months)

6 months from PPV (3½ months)

Home TheaterHome Theater

4 weeks 4 weeks

Pay 1Triggers

Pay 1 Window: 15

Mos. + 30d Black Period (18 months)

Pay 1 Window: 15

Mos. + 30d Black Period (18 months)

Early Window/

VOD

Early Window/

VOD

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Discussion Summary

• Progress: After solid work Sat, Sunday and Monday, we have made a lot of progress towards closing an extension and resolving how Starz will distribute SOD on the Internet

• Extension: Our new deal would go 3 more years -- through 2016 releases. This is a big win, given Paramount doesn't have a deal and HBO is unwilling to take us in (and, they think, legally unable to include us, for antitrust reasons, unless they get rid of another studio)

• Bonus/Fees: Our deal is now above market. We maintained our current bonus ($47.5m) through the existing term and a obtained a new bonus ($40m) for each year of the extension period. No other studio has a bonus. Although the pay market is declining and our ratecard will take a reduction, our compensation in the extension continues to be above market

• SOD - Internet:

– The key elements we needed and got were:

(a) Premium Pricing and (b) Distinctive Starz Branding.  This maintains the perception of "premium pay", protecting the network window (and also, to a lesser extent, DVD and digital) 

– Nice-to-haves we got were:

(a) a cap on the number Internet users (to maintain premium positioning) and

(b) financial participation in the Netflix deal and potential upside from Internet subscriber growth outside of Netflix

• Digital Wins:

– 72 hour VOD window

– Pricing flexibility for EST during Pay 2 (old floor was $6.95, new floor is $3.50)

– Requested (not agreed yet) carve outs for digital SOD during network window

• Volume: Ours is the last studio deal that was uncapped.  Starz agreed to the cap we proposed (50 total, including 25 Columbia titles, 15 SPC and 10 other "Acquisitions/rent-a-system").  Our volume has never approached these caps

• TRO/Litigation Position Preserved: We persuaded Starz to delay the XBox roll out until 12/15.  This means we keep the leverage of seeking a TRO until 12/12, when we'd have to file

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Internet Service Provider Monthly Rates

ISP Dial-UpLowest Tier 2nd Lowest Tier

Basic ISP $6.95Copper.net $9.95ISP.com $8.95Juno $6.95NetZero $9.95PeoplePC Online $10.95Toast.net $9.95Turbo USA $9.95Avg. all Dial-Up ISPs $9.20

AT&T N/ABasic DSL:

$14.99 (768 Kbps)Express DSL:

$25.00 (1.5 Mbps)

AT&T U-Verse N/A

Comcast N/ACurrent Cable Customer:

$19.99 (1.5 Mbps)

Performance with PowerBoost:

$33.00 (12 Mbps)

Time Warner N/ARoad Runner Lite: $25.00 (768 Kbps)

Road Runner Basic: $36.95 (3 Mbps)

Verizon N/AStarter Plan:

$19.99 (1 Mbps)Power Plan:

$29.99 (3 Mbps)

N/A

N/A

U200 Package: $20.00 (1.5 Mbps)

DSL/Cable Internet

N/AN/AN/A

N/A

N/A

N/A

N/A

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Consumer Cost Comparison

Subs (Mil) Avg NY LA Philly AustinPalm

Beach Portland Subs (Mil) Avg NY LA Philly AustinPalm

Beach Portland

Direct TV* 20.0 $42 -- -- -- -- -- -- NA -- -- -- -- -- -- --

Echostar* 13.8 $33 -- -- -- -- -- -- NA -- -- -- -- -- -- --

Comcast 24.5 $67 -- $69 $69 $63 $66 -- 14.3 $52 -- $43 $45 $60 -- $58

Time Warner/Road Runner Lite 13.3 $69 $68 $68 -- $71 -- -- 8.4 $25 -- $25 -- -- -- --

Verizon/Fios 1.0 $63 $63 $63 $63 -- -- $63 8.3 $20 -- $20 -- $20 -- --

AT&T**/U-Verse 0.8 $65 -- $65 -- -- -- -- 7.8 $20 $20 $20 $20 $20 $20 $20

** ISP Bundled with Telephone Line

Basic Cable + Starz ISP Broadband"Straight" Average Comparison $56.46 $29.13 $27.33

"Weighted" Average Comparison $54.00 $32.69 $21.31

Basic Cable + Starz (Monthly Rates) ISP Broadband (Monthly Rates)

* Satellite subscription fees based on "family" packages (45 channels) starting at $20; a package with the more customary 150+ channels starts at $53

Price Difference

Markets Markets