September 2, 2011
Netflix To Lose Starz Content In 2012
Starz Entertainment said it will remove all of its movies and television shows from Netflix Inc.´s streaming service early next year after key negotiations fell apart, which will deal a major blow to the largest US video subscription service as it raises subscription prices.The move will deprive Netflix´s 25 million-plus customers of online streaming of new releases from two major Hollywood studios. The setback triggered a 9 percent drop in Netflix´s stock price.
Starz delivered the bad news on Thursday in a brief statement announcing it would not renew a contract with Netflix. The talks fell apart after the two sides disagreed over the value of the Starz content and how it should be sold to Netflix subscribers, according to people familiar with the talks, who wished to remain anonymous.
It was the contract between Starz and Netflix, signed in October 2008, that catapulted the subscription service to add nearly 17 million new subscribers. Content from Starz´ played a key role in increasing usage of Netflix´s streaming service.
Netflix´s growth probably would not have been what it is without the boost from Starz content, said Janney Montgomery Scott analyst Tony Wible.
“What created (Netflix's success in streaming) is frankly, initially getting Starz, getting that content, which got you more subscribers, which allowed you to buy more content,” Wible told the Associated Press (AP). “The virtuous cycle that has made Netflix what it is could work against it. If you lose content, you lose subscribers; ... it could be a downward spiral from here.”
Starz, controlled by John Malone´s Liberty Media, said the contract would expire on February 28 of next year. After that date, Starz will stop providing content, which includes exclusive rights to Sony Corp and Walt Disney Co movies, to Netflix.
Netflix had offered to pay Starz between $200 million and $300 million annually for rights to stream Starz content, said sources familiar with the negotiations, adding that Starz declined that offer.
Netflix CEO Reed Hastings said in June it “wouldn´t be shocking” to pay up to $200 million for streaming rights.
The original streaming rights are believed to have been agreed for around $30 million a year for four years, according to the source.
Starz, in its statement, called the decision to end talks with Netflix “a result of our strategy to protect the premium nature of our brand by preserving the appropriate pricing and packaging” of its content.
Brett Harriss, an analyst with Gabelli & Co., said the talk´s breakdown was a surprise because investors were sure a deal would be reached. “Netflix just effectively raised prices by 60 percent, and a big chunk of their content walked away,” he told Reuters.
With the end of talks with Netflix, it could be possible to see Starz look for another streaming provider, such as Amazon or YouTube.
Starz CEO Chris Albrecht said the company is in an “excellent position” to make more money from other sources besides Netflix.
The contract renewal talks broke down when Netflix refused to meet demands that could have driven the licensing rights up to $300 million or more annually. A major sticking point in the deal was that Starz wanted viewership of its content limited to people paying at least $16 per month for DVD rentals plus Internet streaming, according to sources.
Netflix tried to downplay the loss of Starz content.
Steve Swasey, a spokesman for Netflix, told Reuters that the company was “confident we could take the money and spend it on other content providers to maintain or even improve the Netflix experience.”
Netflix said Starz content accounts for only 8 percent of US subscribers´ viewing, and the company had projected that to fall to 6 percent by the first quarter of 2012, right when the deal ends.
The rising costs of Internet streaming rights are one of the main reasons that Netflix raised its prices for people who also want to rent DVDs through the mail and stream video. The price hike doesn´t affect people who remain only on the streaming-only plan.
Michael Corty, an analyst with Morningstar, believes Netflix can still salvage the deal with Starz, given there is six months left before the contract expires. But to do that, Netflix will likely have to pay even more than it intended because Starz appears to have more negotiating leverage.
Although Albrecht´s statement made it sound clear that there was little chance of a new deal, Netflix left the door open.
“We have tremendous respect for the Starz creative team, and we look forward to someday licensing some of their original or licensed content,” Netflix said in a statement.
Netflix's stock plunged $19.97 to $213.30 in extended trading Thursday, after the announcement by Starz.
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