Q3 2015 Starz Earnings Call
Oct 29, 2015 AM EDT
Thomson Reuters StreetEvents Event Transcript
E D I T E D V E R S I O N
STRZA - Starz
Q3 2015 Starz Earnings Call
Oct 29, 2015 / 09:00PM GMT
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Corporate Participants
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* Courtnee Ulrich
Starz - VP of IR
* Chris Albrecht
Starz - CEO
* Scott Macdonald
Starz - CFO
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Conference Call Participants
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* Ben Mogil
Stifel Nicolaus - Analyst
* Barton Crockett
FBR Capital Markets & Co. - Analyst
* Vasily Karasyov
CLSA - Analyst
* Ryan Fiftal
Morgan Stanley - Analyst
* Bryan Kraft
Deutsche Bank - Analyst
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Presentation
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Operator [1]
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Good day, everyone, and welcome to the Starz third quarter 2015 earnings conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Courtnee Ulrich, VP of Investor Relations. Please go ahead.
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Courtnee Ulrich, Starz - VP of IR [2]
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Thank you. Welcome to the Starz 2015 third-quarter earnings call. This call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including statements about new service offerings and original programming including anticipated episodes of original content programming, new distribution platforms, foreign programming, international distribution opportunities, the continuation of our stock repurchase plans, our anticipated performance and financial results, and other matters that are not historical facts.
These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These forward-looking statements speak only as of the date of this call and Starz expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Starz expectations with regard thereto or any change in events conditions or circumstances on which any such statement is based.
Please refer to the publicly filed documents of Starz including our most recent forms 10-K and 10-Q for additional information about Starz and about the risks and uncertainties related to Starz' business, which may affect the statements made in this presentation. During today's call we will discuss certain non-GAAP financial measures including adjusted OIBDA the required definition and reconciliation can be found at the end this PowerPoint, which you can find on our website.
Now I'd like to introduce Starz' CEO, Chris Albrecht.
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Chris Albrecht, Starz - CEO [3]
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Thank you, Courtnee, and welcome, everyone. We appreciate you joining us today for our third quarter 2015 earnings call and for your continued interest in Starz. With the today is Scott Macdonald, Starz Chief Financial Officer.
Starz's original programming is resonating with consumers creating significant opportunities for us to further develop our brand through traditional partners and new distribution platforms. We're confident these opportunities will continue to create shareholder value in the quarters and years to come. With regard to our investment and compelling original content by the end of 2015, we will have aired 76 new episodes of Starz' original series, close to reaching our goal of 80 to 90 episodes per year.
While original programming accounts for approximately 10% of total air-time on the Starz' schedule, more than two thirds of the top 100 airings in 2015 have been Starz original series. We believe that is a loud and clear indicator that our original programming strategy is successful with consumers.
On the subscriber front, we increased Starz' subscriptions by 1 million on a year-over-year basis. On a sequential basis STARZ' subscribers decreased 200,000 and ENCORE subscribers decreased 800,000. The sequential subscriber decreases are related to industry-wide issues that our distributors are facing including merger-related distractions and increases in basic package and premium services pricing. These issues impacted ENCORE in particular giving how widely penetrated our ENCORE channel and business are with certain distributors.
Make no mistake, Starz remains a very strong partner for MVPDs. We are by far the best premium services that our distributors sell by virtue of several metrics including some of the best margins, which lead to significant growth potential. Plus consumers consistently demonstrate a proven appetite for our content, which is delivering stellar ratings compared to other premium series.
Our business models to program for under-served audiences who have been generally overlooked in premium TV including African-Americans, women and a new focus on Latino viewers is clearly working. Since we embarked on our original programming strategy in 2010, Starz has added more than six million subscribers and stands as the second most subscribed flagship premium service in the United States.
Nevertheless, it has become clear to us the importance of Starz unlocking opportunity to distribute our content beyond the traditional cable bundle, tapping into the end demand we are seeing for our content while at the same time still cultivating our core business with MVPDs. In the coming weeks we plan to complete agreements with several new distribution partners.
Let's get into some of the highlights from the quarter. The second season of Power concluded and was the most highly watched season ever for a Starz original series with nearly seven million multi-platform viewers per episode. We also entered into a two-year exclusive overall agreement with Power Executive Producer Curtis, 50 Cent, Jackson. This summer the Starz comedy block was a great platform to launch the second season of Survivor's Remorse, as well as the first season of Blunt Talk from Executive Producer Seth McFarlane starring Patrick Stewart.
Survivor's Remorse has grown its audience by more than 25% from the first season and the growth in the African-American demographic has been more than 40%. According to meta-credit Survivor's remorse is the most critically acclaimed comedy on television. Both series will return to Starz next year.
The final 10 episodes from the third season of Da Vinci's Demons premiered on October 24 and this Saturday we will debut the eagerly awaited worldwide premiere of the Ash Vs Evil Dead series from Director Sam Raimi. Interest from fans and our international distribution partners for Ash Vs Evil Dead has been so strong, the series is going to launch on October 31 in more than 100 countries and territories, day and date with the US Starz premier. In total Ash Vs Evil Dead deals are expected to be in place for at least 150 countries and territories before year's end.
The limited series Flesh and Bone will wrap up the 2015 original slate with the weekly Sunday night premiere beginning on November 8. In addition to the traditional weekly linear airings, the entire series of Flesh and Bone will also be immediately available for our subscribers to binge watch on the Starz On Demand and STARZ PLAY platforms.
Looking ahead, in addition to the strong collection of Starz originals, we have a very solid theatrical slate from Sony. Our final Disney output title will be Star Wars The Force Awakens, which debuts theatrically in December 2015 and will have its premium TV premiere exclusively on Starz in the second half of 2016.
Turning to Starz distribution, we entered into two significant long-term content output agreements. The first with Swedish Company See More and the second an extension of our long-term partnership with Super Channel in Canada. Anchor Bay and Starz Digital recently released The Walking Dead season five on Blu-ray, DVD and select digital platforms and Fear of the Walking Dead is scheduled for a December release.
On the technology front, we continue to build out our STARZ PLAY platform recently adding TV support through Android, Roku and Samsung. And now I'll turn the call over to Scott.
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Scott Macdonald, Starz - CFO [4]
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Thanks, Chris. For the third quarter, Starz' consolidated revenue was $404.1 million, adjusted OIBDA was one of $114.7 million and operating income was $101.8 million. At Starz Networks, third-quarter revenue increased 1% to $329.3 million. This increase was primarily due to the increase of subscribers, offset by lower rates at certain distributors due to promotional acquisition campaign activity.
Adjusted OIBDA increased 3% to $113.1 million, primarily because of the increase in revenue and a decrease in advertising and marketing costs to the mix of shows in our original programming lineup. This increase in adjusted OIBDA was partially offset by an increase in programming costs related to the continued ramp-up of our original programming lineup. Starz Networks' cash paid for investments in films and television programs decreased $8.9 million during Q3 2015 to $48.6 million due to timing of original series in production.
At Starz Distribution, third-quarter revenue decreased $7.9 million to $65.6 million due to lower revenue for AMC Networks' The Walking Dead and no significant new Starz original series releases, partially offset by the distribution of films for The Weinstein Company. Adjusted OIBDA increased $1.2 million to $1.8 million due to the distribution of films for The Weinstein Company. Starz Distribution cash paid for investment in films and television programs decreased $26.6 million to $2.8 million primarily due to timing of payments for The Weinstein Company titles.
As we I have mentioned on our last couple of calls, and Chris just described, we have a robust lineup of Starz original series airing in the fourth quarter of 2015 with the debut of Ash Vs Evil Dead, the third and final season of Da Vinci's Demons and the limited series Flesh and Bone. This compares to The Missing and The Chair, two lower-cost series, from both programming costs and marketing costs perspectives that we aired in Q4 2014.
Furthermore, Flesh and Bone has higher costs associated with it compared to other limited series as we originally viewed the series to have multiple seasons. As a result of this increased original programming, in addition to carrying content from two first run output partners, Sony and Disney, we expect consolidated programming expense in the range of $195 million to $205 million for Q4 2015 and in the range of $650 million to $660 million for the year ended December 31, 2015.
As we approach our annual goal of 80 to 90 episodes of new original series, we will continue to utilize previously negotiated savings under our first run output agreements to fund a portion of the ramp up in Starz original programming. At the end of 2017, we will have fully amortized costs associated with the first window under our expiring Disney agreement and expect to be at our annual goal of 80 to 90 episodes of the new Starz original series.
As we've seen in the past, our quarterly results can vary dramatically based on a number of factors, including the number of Starz original series airing at a particular quarter, the individual production cost of each Starz original series, the level of advertising and marketing investment for each series and respective timing for such costs.
With respect to our share buyback program, from August 1, 2015 through October 31, 2015 we bought back 834,000 shares of our common stock for $31.9 million at an average price of $38.19. Since January 14, 2013 when our stock began trading, we have repurchased 24.4 million shares or 20.1% of our outstanding shares. We currently have $106.7 million remaining under our share repurchase authorization.
At September 30 we had $425 million drawn under our revolving credit facility with $575 million of borrowing capacity remaining. Our leverage stood at approximately 2.2 times adjusted OIBDA.
I would like to report two transactions that took place following quarter end. First, we acquired the 25% interest in Starz Media previously held by The Weinstein Company. This transaction does not impact the distribution agreement that we extended with The Weinstein Company last December through April 2020. Second, in October, we sold 100% of our wholly-owned subsidiary, Film Roman.
Finally, before turning the call back to Chris, as we mentioned last quarter one of our larger distributors adjusted its subscriber reporting that reduced our subscriber results for both STARZ and ENCORE. While this did not affect revenue, we have recast our historical subscriber count prior to 2Q 2015 to reflect this adjustment and allow for consistent year-over-year comparison of subscriber group. The effect from this adjustment is a immaterial for any historical quarter dating back further than those presented in this quarter's earnings release.
Now I'll turn the call back to Chris.
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Chris Albrecht, Starz - CEO [5]
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Thank you, Scott. Operator, we will can now open the call for questions. Thank you.
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Ben Mogil, Stifel.
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Ben Mogil, Stifel Nicolaus - Analyst [2]
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Hi. Good afternoon, and thank you for taking my call -- my question. So one for Scott and one for Chris. So, Chris, first for you, there's been a lot of chatter about just how much original TV programming is going on now, I think something like 400 scripted shows and, obviously, you are well aware of this. Obviously, you've got the benefit of not having to be on the live and same-day ratings treadmill, but when you look at the environment, how do you muddle through all the clutter? How do you get your shows out there?
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Chris Albrecht, Starz - CEO [3]
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Well, I think we do it in a few different ways. One is through targeting specific audiences. I think it gives us a much more effective way to market our shows to demographics that we are looking to become early viewers, early advocates for the show. I think by making some of these shows for groups that are particularly active in social media, we create an almost-supplemental marketing tool.
Certainly, the way that consumers are using the different technological aspects of our products, linear obviously, On Demand, STARZ PLAY, their own DVRs. What we're really seeing, and the business that we are really in, is aggregation of viewers over the run of each episode, over the run of each series and providing value to a lot of different subscriber demographic groups that make up the pay-TV subscriber landscape. So, in a way, our ability to kind of seek out different audiences gives us a nice way to differentiate ourselves from ad-supported networks, which are looking for the key 18-to-49 sweet spot that advertisers are looking for. We're in a different business than that. The creative advantages that STARZ has as a premium platform also allow us to attract people and put stuff up there that feels different than anything else that's on TV.
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Ben Mogil, Stifel Nicolaus - Analyst [4]
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And the decision to allow one series to be binged, when you look back when that happens, is your thought is that whatever takeaways will be that you may do that for more shows? I'm curious what kind of takeaways you're looking for in order to decide if the experiment was a good one or not.
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Chris Albrecht, Starz - CEO [5]
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Yes, so it is an experiment. I think it does highlight for the viewers some of the fun and flexibility that you can have with a premium channel. It's also a way for us to get more shows into the quarter without having to fight for linear schedule because, as I said, for us it's about the aggregate number of viewers, not about any particular time spot -- any particular premier spot.
So we're looking to see what we can learn from this, but it will be a strategy that evolves. And I certainly would expect that we will give it a couple more shots to continue to investigate what the benefits of it are. And I think there are benefits. I don't really see a downside to the strategy for us at all.
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Ben Mogil, Stifel Nicolaus - Analyst [6]
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That's great. Thanks, Chris. And then, Scott, just one or two for you quickly. The $195 million to $205 million guidance for programming costs, just to make sure I got it right, that would compare to the $159 million in the third quarter, is that correct?
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Scott Macdonald, Starz - CFO [7]
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Yes, that's correct.
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Ben Mogil, Stifel Nicolaus - Analyst [8]
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Okay. And then when, on the marketing side or the advertising side, which I think gets put into the SG&A number, should we assume a sequential uptick there again to support the increase in the original programming and the high-profile nature of them.
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Scott Macdonald, Starz - CFO [9]
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Yes, it will be just a slight uptick from what we had in the third quarter. So it really depends on the mix of shows, but it will be up slightly in the fourth quarter.
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Ben Mogil, Stifel Nicolaus - Analyst [10]
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So the bigger increase is on the programming side as opposed to the SG&A promotional side.
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Scott Macdonald, Starz - CFO [11]
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That's correct.
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Ben Mogil, Stifel Nicolaus - Analyst [12]
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Okay. That's great. Thank you very much.
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Chris Albrecht, Starz - CEO [13]
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Thank you.
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Operator [14]
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Barton Crockett, FBR Capital Markets.
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Barton Crockett, FBR Capital Markets & Co. - Analyst [15]
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Okay, thanks for taking the question. I was curious about your description of the environment causing the sequential decline in subscribers at ENCORE and STARZ. The environment has been changing for a period of time, I was wondering if you could be a little bit more specific about why we saw bigger impact in this quarter than we have in previous quarters. Is it some type of phenomena of skinny bundle? Because we would've thought maybe the premium channels would've been stabler than some of the basic channels that people went to a skinny bundle. So I was wondering if you could be more specific about what changed.
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Chris Albrecht, Starz - CEO [16]
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Sure. Well, I think we've all watched with interest and listened and read as the MVPDs have been reporting their results. And I think what we've seen, and what we've heard, is that certain MVPDs, certain sectors of the MVPD universe, have fared better than others. And I'll go back to my remarks about merger-related distractions, that we have had three mergers in the last couple of years -- one failed, one completed, and one pending -- and that pretty much involves every large MVPD.
So I think some of this has been building and it has culminated in some of our customers losing customers. We saw from some of the AT&T remarks that there was particular softness before the merger closed on the Direct platform. And then we also saw that September stabilized and they did well. Well, we haven't heard -- we haven't gotten a report from September yet. So we don't really know what those results are and we're happy to see that they reported a stabilizing of their subscriber base. But, basically, if our large customers are going to lose customers, then it is pretty hard for us to not lose customers. And we believe -- we've been told that this is not a Starz-specific issue and that this has affected the other premium channels as well.
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Barton Crockett, FBR Capital Markets & Co. - Analyst [17]
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Okay. So to follow up on the, I guess, DIRECTV commentary, and just to be clear with what I heard you say. Did you say you don't -- your sub count is not including DIRECTV subs at the end of September, it's something, basically, at the end of August or something earlier than that? Is that correct?
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Scott Macdonald, Starz - CFO [18]
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No, we make estimates for the subscriber counts based on historical trends and information that we know. But we -- they provide us payment reports anywhere from 45 to 60 days after a quarter. At that time, then, we would look at our estimates and true them up to what they actually report to us. And that's what Chris is referring to. We haven't seen the actual reports yet for the last couple of months.
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Chris Albrecht, Starz - CEO [19]
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Yes, and I would say also, Barton, that I think looking at what's happening in the MVPD landscape, we think it obviously becomes increasingly important for them to hold onto as many subscribers as they can, both basic and premium. And also, we look forward to seeing them innovate and -- whether it's skinny bundles, whether it's broadband delivery, whatever people are calling it, we certainly see that as creating a potential opportunity for the premiums and STARZ because we're such a high-margin product for them.
But also, I think, as I said in my remarks, we are now looking at what is clearly numerous opportunities for STARZ to be distributed in ways other than MVPDs while still continuing to solidify and hopefully grow our business with the MVPDs as they continue, or as they refocus, as these mergers are settled down. So, there's a lot of factors at work there that are influencing the direction that we see ourselves going in the coming months.
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Barton Crockett, FBR Capital Markets & Co. - Analyst [20]
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Okay. And then, you know I appreciate the responses, they've been very detailed, but if I could just follow up with this one point: did the subscriber declines -- were those correlated to revenues or were they deals that really did have no impact on revenues?
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Chris Albrecht, Starz - CEO [21]
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It was both. Honest -- yes, it was both and those were all baked into the results that we just presented.
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Barton Crockett, FBR Capital Markets & Co. - Analyst [22]
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Okay. All right, that's great. Thank you very much.
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Chris Albrecht, Starz - CEO [23]
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Thank you.
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Operator [24]
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Vasily Karasyov, CLSA.
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Vasily Karasyov, CLSA - Analyst [25]
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Thank you. Good afternoon. Can you please provide maybe more detail on the increase in programming costs in Q4? So it will be around $70 million year on year. Would you mind giving us an idea of the breakdown between film costs and original costs, and then what does it mean for your cost structure going forward? What percentage of this spike in Q4 is -- will reverse itself in 2016?
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Scott Macdonald, Starz - CFO [26]
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Well, Vasily, as we've been saying on our last couple of calls, we are in the midst of the ramp-up in our original programming at 76 hours this year, as Chris mentioned --
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Chris Albrecht, Starz - CEO [27]
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Episodes.
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Scott Macdonald, Starz - CFO [28]
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-- episodes, moving to the 80 to 90 episodes here over the next couple of years. And the third quarter -- or coming up here on the fourth quarter, we actually have three shows that are -- in aggregate, that are more expensive by far than what we aired last year when we only had two small series, The Chair and The Missing. So we're right in the midst of that ramp-up and, as you've seen, we've had lower costs with our output studios, both Sony and Disney, over, really, trending down here over the last several periods.
You know, we will have Disney. We'll get our last movie, as Chris mentioned, here at the end of the year, and the Star Wars movie by the end of 2017. That will be fully amortized through our -- first-run Disney movie, fully amortized through our P&L. At that point, will also be at the 80, 90 hours of original programming. So, in the next -- fourth quarter and into next year, we will continue the ramp-up in the original programming, utilizing the savings that we have seen from the output. But -- and then when you get to the end of 2017, we'll no longer have Disney amortizing through the P&L.
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Chris Albrecht, Starz - CEO [29]
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And, Vasily, the real outlier in Q4 is Flesh and Bone, which, as we've said before, was designed to be an ongoing series shot in the streets of New York City as a top-flight, premium, long-running series. And our decision to turn it into a limited series -- which, from a creative point of view, I think, and from a business point of view, was exactly the right decision -- has provided a very unique situation in the fourth quarter, with those eight episodes costing as much as they did, well in excess of what a normal, I would call, STARZ Original -- I mean, a STARZ limited series would cost.
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Vasily Karasyov, CLSA - Analyst [30]
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Okay. Well, one follow-up question then. If I put that assumption into the model, $200 million in programming costs, then my -- for the full year I will see margin compression. I did the margin compression for the networks of 400 basis points from 37.8 last year to 33.3. So, which one is more representative of the business model before the Disney savings kick in?
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Scott Macdonald, Starz - CFO [31]
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It would be the lower margin before the Disney savings kick in.
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Vasily Karasyov, CLSA - Analyst [32]
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Okay. Thank you very much.
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Chris Albrecht, Starz - CEO [33]
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Thank you.
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Operator [34]
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Ryan Fiftal, Morgan Stanley.
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Ryan Fiftal, Morgan Stanley - Analyst [35]
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Great, thank you. Chris, distributing outside the cable bundle, that would be a huge strategic shift for Starz. So, couple of questions there. I mean, first, what in your mind has changed in the ecosystem that makes this the right time versus maybe even a year ago. And then, second, how do dimension the risk of channel conflict of making that move? Especially in light of the backlash you saw last time around when you went to Netflix. Thank you.
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Chris Albrecht, Starz - CEO [36]
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You know, look, I think this is -- we're at the beginning of the evolution of this new distribution area. Historically, the pay-TV business has always been aided by new distributors coming into new technologies. So, first you had cable, then you had satellite, then you had telcos, and that provided growth. Now what we're seeing is digital distribution. The nice thing about the digital distribution arena is that it can be accessed through our current MVPD distributors who can decide to innovate, as we see some of them experimenting with.
We'd like to see those experiments accelerate and the innovation part of that accelerate because that, we think, is great is for Starz. But also there now is, I think, evidence that digital distribution can coexist with MVP distribution when appropriately priced. The problem with the Starz and Netflix deal was that it was just ill conceived from a cost perspective, and Netflix was paying far less than what our distributors were paying, and that's not fair to long-term partners. That's not going to happen in the new distribution landscape.
So, I think, we believe that the opportunities outweigh the challenges, especially since we continue to have strong relationships with the MVPDs. And we think that we can show all of them how they can make even more money off of Starz and off of more of a focus on Starz, and create high-margin, increased revenue for them that, I think, should be what everybody's looking for. So, I think, this is just more opportunity to do more things. And one shouldn't assume that the only path to take is the path that we've seen HBO and Showtime take. But we've decided that the time to move into that arena is now and, as I said, we're actively talking to several companies.
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Ryan Fiftal, Morgan Stanley - Analyst [37]
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Okay. And then, how have the conversations been going on the MVPD and the traditional distribution partners side in these terms? I think it was -- for the last couple of quarters, you were trying to go in the opposite direction and be the, quote-unquote, house brand and increase the value to the MVPDs by maintaining exclusivity, at least in that ecosystem. Is there -- do you feel like there's going to be acceptance of this move? Do you feel like there's a corollary where the perceived value of Starz goes down?
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Chris Albrecht, Starz - CEO [38]
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Look, I think the value to Starz is, as I said in my remarks, we are really high-margin product, one of their highest-margin products for sure. So, in a world of holding onto subs, which I think has been the challenge that's been thrown down to the MVPDs, and all that's been written about cannibalization or cord cutting or whatever people want to refer to, I think this is an opportunity to expand the universe, where the MVPDs should be trying to sell as many products to their video customers as they can, create new products over their broadband distribution -- to the extent that they have broadband distribution -- as well as, for us, the opportunity to work with new distribution partners, and not -- and see an expanding universe for customers for Starz -- and by customers I mean not just distribution partners, but actual subscribers through those distribution partners. So, it seems to us that this is an expanding and not a contracting strategy and phenomenon that's happening out there, when it comes to the premiums, Starz in particular.
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Ryan Fiftal, Morgan Stanley - Analyst [39]
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Okay. Thank you.
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Chris Albrecht, Starz - CEO [40]
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Thank you.
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Operator [41]
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Bryan Kraft, Deutsche Bank.
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Bryan Kraft, Deutsche Bank - Analyst [42]
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Hi, good afternoon. I had a couple questions. I guess, first, can you comment on the outlook for increased inclusion in consignment distributor promotions in the fourth quarter that could improve the subscriber trajectory? And, also, I noticed that Starz has found its way into its first skinny bundle -- in this case, with Time Warner Cable. Do you think this is the beginning of a trend where you'll find your way into more MVPD's skinny bundles? And then, I just had two follow-ups after that.
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Chris Albrecht, Starz - CEO [43]
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Well, I'll take the second part of your first question, which is, yes. We do think that this is an opportunity for us to be included in more things. And we certainly see these, as I said, experiments or test trials -- whatever you want to call them -- as moves in the right direction that we think it is important to accelerate and for the MVPDs to really get behind and commit to making them successful.
With regard to marketing campaigns, I think that seeing mergers being completed, we're now going to see integration between some of those platforms. And I think that could create opportunities for us to reengage in marketing campaigns because, although one merger is still pending, I really am being accurate when I say there are a lot of merger-related distractions and we've heard it from the MVPDs that they change their marketing campaigns, they pull back in certain marketing things. So as all this stuff settles down, I think we'll find our way into more mutually beneficial marketing opportunities with our MVPDs.
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Bryan Kraft, Deutsche Bank - Analyst [44]
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Okay. Thank you. And, can you comment on -- in the press release there was a comment that revenues suffered somewhat from lower rates at certain distributors from increased promotional activity. I just wasn't sure exactly what that meant and I was wondering if you could explain that.
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Scott Macdonald, Starz - CFO [45]
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Sure. So when you -- again, this is comparing the 2015 quarter to 2014, we had some promotional [campaign] activity at certain distributors. So, for example, these consignment distributors are able to earn a lower rate on incremental subscribers as they grow those subscribers. And that's what we saw when you compare Q3 2015 to Q3 2014, that there was some activity for a couple of the consignment distributors whereby they were earning the low rates as they grew their subscribers.
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Bryan Kraft, Deutsche Bank - Analyst [46]
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Okay. And, are they earning lower rates just on the incremental subscribers? Or does the rate come down on the whole base generally?
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Scott Macdonald, Starz - CFO [47]
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Think of it as a grid. At certain levels there's a lower incremental rate that you earn and it lowers the overall effective rate, but it doesn't -- at the lower tranches you're still paying the higher rates. And it's in place to do exactly what it did, spur additional growth for our services and primarily Starz, in this case. And you can see that in the 800,000 increase in Starz subscribers.
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Bryan Kraft, Deutsche Bank - Analyst [48]
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Okay, great. And the last thing I had is just a follow-up on programming costs. Just want to make sure -- so do I understand correctly that, off of the $650 million to $660 million in 2016, as the Disney contract rolls off beginning in 2017, that essentially all those Disney savings are going to then fall to the bottom line because you would've built up the original slate completely by the end of 2016?
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Scott Macdonald, Starz - CFO [49]
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I think it'll be 2016, 2017 when we'll have the original slate built up. And you're not going to see Disney fully out of the P&L until the end of 2017, at which point it will be out -- it will be fully amortized.
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Chris Albrecht, Starz - CEO [50]
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And I think, from a strategic point of view, we're going to look for that -- for those savings to be applied to where we can best create shareholder value. And that could be everything from the things that we currently employ. But if we see that there are real opportunities in the marketplace to grow Starz's top line through gaining new subscribers through other distribution platforms, then that'll be a strategy that will -- that we may decide to invest behind again. But we're going to look for the opportunities are, and if the best opportunity is to have as much of it as possible drop to the bottom line, then that certainly is available to us as well.
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Bryan Kraft, Deutsche Bank - Analyst [51]
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Okay, thanks very much.
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Chris Albrecht, Starz - CEO [52]
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Thank you. And thank you all for your continued interest in Starz. Thanks, operator.
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Operator [53]
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Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.
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Definitions
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