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ATTORNEY / CLIENT PRIVILEGED Confidential Draft

[DRAFT]. Starz / Netflix Considerations FOR SONY INTERNAL USE ONLY December 1, 2008. ATTORNEY / CLIENT PRIVILEGED Confidential Draft. Executive Summary. We have made progress toward an extension and a framework for Starz’ approach to internet SOD

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ATTORNEY / CLIENT PRIVILEGED Confidential Draft

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  1. [DRAFT] Starz / Netflix Considerations FOR SONY INTERNAL USE ONLY December 1, 2008 ATTORNEY / CLIENT PRIVILEGED Confidential 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 ATTORNEY / CLIENT PRIVILEGED -- CONFIDENTIAL

  3. Overall Deal Parameters Mention moving the home theater window and reducing the price for it? Comments Terms ATTORNEY / CLIENT PRIVILEGED -- CONFIDENTIAL

  4. Revenues for Extension – Fees Per Year (2014-2016) (1)(2) Annual Revenues in Extension $224 $160 • Comments • Total dollar value depends on slate • Low slate compares to a trailing 3 years average of $230MM • $182.6MM fees • $47.5MM bonus • Footnotes: • Does not include potential library deal or incremental digital profits. • Low slate assumes volumes in-line with last 3 years experience, high slate assumes volumes in-line with slate used in MRP ATTORNEY / CLIENT PRIVILEGED -- CONFIDENTIAL

  5. Starz will Remain a Premium Branded Service [Confirm whether Fios requires 40% premium for Starz] • Starz is bundled with premium services from Cable MSO, Satellite and Telco providers • Packages with Starz are priced 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 • To ensure Starz Play remains a premium offering, Starz would accept a limit of 30MM subscribers securing access through non-Cable/Satellite/Telco partners (i.e., no more than 30MM subs from services like Netflix, Amazon, Blockbuster) Should we further clarify; this could mean 70MM subs get access through broadband Providers; 30MM through sites like Netflix; for an absolute total of 100MM broadband subs ATTORNEY / CLIENT PRIVILEGED -- CONFIDENTIAL

  6. Pricing Starz as a Premium Service • Footnotes: • Structured as 1 tier above the 1MB. • Average price paid by someone with access to Starz • Note, $34.99 is for first 12 months only ATTORNEY / CLIENT PRIVILEGED -- CONFIDENTIAL

  7. Subscribers Subject to Rate Card Total Digital Subscriber Cap Subscribers included in Caps and Rate Card Excluded Included Excluded Included All other digital delivery (Amazon, Blockbuster, Hulu) subscribers are subject to a per-sub rate card Cable Satellite IPTV (Fios) DSL Open internet on a service that feels like cable All other digital delivery subscribers (including DSL bundle) are subject to 30MM Cap Cable Satellite IPTV (Fios) Confim – is Satellite in this cap? ATTORNEY / CLIENT PRIVILEGED -- CONFIDENTIAL

  8. Digital Rate Card Proposal Sample Potential Economics • 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 [Confirm Subs] • Footnotes: • Netflix subs do not count towards rate card until after 3 year settlement. ATTORNEY / CLIENT PRIVILEGED -- CONFIDENTIAL

  9. APPENDIX ATTORNEY / CLIENT PRIVILEGED -- CONFIDENTIAL

  10. Potential Response ATTORNEY / CLIENT PRIVILEGED -- CONFIDENTIAL

  11. Pay 1Triggers Key: Existing (Requested) Timeline of Current and Proposed Windows Theatrical Release Early Window/VOD DVD / VOD Day & Date PPV / VOD Standard Pay 1 Window: 15 Mos. + 30d Black Period (18 months) Home Theater 4 weeks 4 weeks 12 months from theaters (10 months) 8 months from VOD – lets us do early window (3½ months) 6 months from DVD (4½ months) 6 months from PPV (3½ months) ATTORNEY / CLIENT PRIVILEGED -- CONFIDENTIAL

  12. 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 ATTORNEY / CLIENT PRIVILEGED -- CONFIDENTIAL

  13. Internet Service Provider Monthly Rates ATTORNEY / CLIENT PRIVILEGED -- CONFIDENTIAL

  14. Consumer Cost Comparison ATTORNEY / CLIENT PRIVILEGED -- CONFIDENTIAL

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