08/11/2012 08:55 am ET

FX Has The Movies And The Money, Thanks To Bold Acquisition Campaign

NEW YORK -- Want to watch "Avatar" or "The Avengers," the two highest-grossing movies so far in the 21st century, on TV? How about "The Social Network," "Ted," "Snow White and the Huntsman," "The Amazing Spider-Man" or any of the "Twilight" or "Transformer" movies?

Unless you subscribe to a premium movie channel like HBO or Showtime, you have only one option: FX.

Over the past decade, the basic cable network, founded in 1994 by Rupert Murdoch's News Corp., has pursued an ambitious strategy of movie acquisitions, effectively cornering the market for the TV broadcast of blockbuster movies. FX bought the rights to a dozen of the 20 top-grossing movies of 2009, 10 of the top 20 of 2010, 12 of the top 20 of 2011 and 11 of the top 20 so far in 2012.

Film is by far the biggest programming category on FX, occupying 57 percent of the channel's broadcasting time, according to a recent report by IHS Screen Digest.

The network spends hundreds of millions of dollars a year acquiring movies -- "Avatar" alone is said to have cost from $25 million to $30 million to acquire. That means the strategy is a pricy gamble. But so far, it seems to have paid off. Since FX started down the movie-focused path, it's become one of the most profitable channels on TV.

"It's working. The consumers are responding. That allows them to negotiate substantially higher carriage fees from cable providers. And at the same time, they're selling ads at much higher rates," analyst Tom Adams of IHS told The Huffington Post. "In the past few years, they've doubled programming costs, but they've tripled revenue."

Chuck Saftler, who as executive vice president of FX has been the chief architect of the strategy, told The Huffington Post that he was originally drawn to film because other networks were reducing movie acquisitions.

"The Turner networks started to define their brands as drama and comedy, and started going after TV acquisitions very aggressively," Saftler explained. "And they started to abandon their movie strategy. The broadcast networks also abandoned their movie strategies for the most part as they took on more reality shows for programming. Rather than running an off-theatrical movie, they started owning their properties."

Saftler said his rivals assumed that movies broadcast on TV competed directly with DVDs and with movie-watching services like Netflix -- a logical enough supposition, given that the content is identical. FX competitors figured that TV movies could never compete with media that offered superior quality and range of options, without commercials. So cable networks cut spending on acquiring movies in favor of buying syndication rights for shows from the broadcast networks and developing their own original content.

But Saftler had a hunch that his rivals misunderstood how audiences respond to movies on TV. He agreed that someone in the mood to watch a specific movie is always going to opt for a DVD or Netflix. But there's another class of viewer that stumbles across movies as they're flipping through the channels. And he suspected that many of these casual viewers would be likely to watch the movie they landed on straight through to the end -- no matter when they happened to start watching.

"When we come across a movie that we really have liked, we might dive in, thinking we'll watch a scene -- and the next thing we know, we're at the rolling end credits," Safter said. "That's the strategy that we deployed. We call it the 'flypaper strategy,' because people join these movies at every minute of their play. Right up through the last minutes of the movie, you have people joining."

FX slowly started implementing its 'flypaper strategy' in 2002. The movie showings attracted large audiences and cost less, on a per-hour basis, than the syndicated shows that FX had focused on before, so they quickly started boosting the network's profitability. That gave Saftler more cash to spend on film rights. FX's movie strategy kept snowballing until it reached today's dominant position.

Erik Brannon, the principal author of the Screen Digest report, told The Huffington Post that FX's success has attracted notice from USA and TNT, prompting bidding wars for many hit movies.

"The genre is heating back up," Brannon said.

Saftler said he's confident that FX will be able to maintain its place atop the heap.

"TNT and USA have tied up a lot of their financial resources in acquiring syndicated drama and comedy shows," Saftler said. "If you're talking about 200 episodes at $2 million an episode, for something like "The Mentalist," that's $400 million. That, I think, is going to prevent them from mounting that strategy in a near-term aggressive manner."

That means that the only TV players who have a more prominent stake in the movie business than FX are the premium movie channels. They air movies about six months after they appear in theaters. Movies don't come to free TV channels, including FX, until at least three years after their theatrical debut.

The reason for this delay is that free channels usually buy rights to individual movies -- while premium channels sign huge, decade-long contracts with studios granting them the rights to every movie released. Such deals are among the studios' most dependable sources of revenue. And for now, FX has no reason to challenge the status quo.

"I don't believe that the ratings would be significantly higher if we could get the film a year and a half earlier. We're doing very well with our ratings -- so I'm not sure that the incremental boost we'd get from having them first would be worth the price," Saftler said.

But Adams said that revenue and profit are growing far faster at basic cable channels than at premiums, which could eventually prompt FX to spend the small fortune it would take to break into the premium channels' first-run window.

"The amount of money spent by basic and premium cable right now are so far apart that it's hard to imagine a basic cable channel bidding against a premium," Adams said. "But the trends are there. In the distant future, somebody could make that bold move."