Starz nixes deal with Netflix

Streaming service stock tumbles 8%

Starz Entertainment’s decision Thursday to walk away from renewal talks on a streaming deal with Netflix leaves questions as to what the next moves from both companies will be.

The original 2008 pact, which delivered more than 1,000 recently released movies to Netflix via the pay cabler’s output deals with Walt Disney Studios and Sony Pictures, was key to the emergence of the company as a dominant player in digital movie delivery.

“This decision is a result of our strategy to protect the premium nature of our brand by preserving the appropriate pricing and packaging of our exclusive and highly valuable content,” Starz said in a statement.

Netflix’s high-flying stock tumbled about 8% in after-hours trading Thursday. Hours after Starz announced the end of negotiations, Netflix CEO Reed Hastings minimized the impact of losing top-shelf titles from “Wall-E” to “The Social Network,” noting that they comprised only 8% of its subscribers’ digital viewing.

“We are confident we can take the money we had earmarked for Starz renewal next year, and spend it with other content providers to maintain or even improve the Netflix experience,” he said in a statement.

The prospect of a Netflix shopping spree has sent salivary glands at content companies’ everywhere into overdrive, though it remains to be seen what the Los Gatos, Calif. company is in the market for: films to compensate for the loss of Disney and Sony titles or a doubling down on TV titles.

As for Starz, the question is what it will do next with the streaming rights to its films, which could either be folded into TV Everywhere efforts or maybe even sold to a Netflix rival.

“Starz is in a very different environment now than it was when it made the deal in 2008,” said Deana Myers, a pay-TV analyst with SNL Kagan. “The MSOs are very eager to build out their own digital platforms.”

The loss of the Starz deal comes at a crucial juncture for Netflix, which on the very same day coincidentally implemented a controversial move to raise by 60% the price for subscribers who want to both rent movies by mail and streaming — a decision that could leave it newly vulnerable.

For the past year, the companies had been negotiating a renewal, which likely would have cost exponentially more than the $20 million-$30 million Netflix paid for its initial four-year deal. That pact had been seen as a steal, singlehandedly responsible for putting Netflix on the map online when it had little else to offer.

While the dissolution of the deal wasn’t entirely surprising, both Starz and Netflix execs have spoken optimistically in past months about reaching a new deal.

Starz was said to be seeking at least $200 million per year to renew the deal, a sum that Netflix CEO Reed Hastings acknowledged as reasonable. Back in May, Hastings told Charlie Rose in an interview, “We’ll try to renew with them, and, of course, that renewal if it happens will be for a lot more money.”

The current agreement expires on Feb. 28, 2012.

Sony movies had already disappeared from Netflix in June, when the studio pulled its film titles off the service due to a clause in Sony’s contract with Starz that put a cap on how much its content could be viewed online.

Liberty Media Corp.-owned Starz had already begun to take a more protective stance with Netflix in March, imposing a 90-day delay on its programming made available through the cabler’s Starz Play service. The move came just days after Showtime made a similar move, an acknowledgement of how Netflix has increasingly been perceived as a competitor to pay-TV networks.

Earlier this year, Netflix announced it was getting into the original programming business by ordering 26 episodes of “House of Cards,” an adaptation of the BBC drama set for late 2012. Media Rights Capital will produce the series, which will star Kevin Spacey and be executive produced by “The Social Network” director David Fincher.

The foray into original content has been interpreted as a hedge against the increasing selectivity among content companies regarding what movies and TV shows it will license to Netflix and other digital players. No major TV brand currently licenses Netflix streaming rights to current programming, for instance.

The collapse of deal talks could also raise the prospect that Starz is prepared to steer the movies to a Netflix rival ready to outbid. Competing subscription VOD services including Amazon may have been willing to pay a premium to land the kind of content that would make them more competitive.

The absence of the Starz deal leaves Netflix’s pact last year with Epix, which delivered streaming rights to Paramount, MGM and Lionsgate titles, as its most valuable partner on the film side of its business. That deal is estimated to have cost Netflix nearly $1 billion over five years.

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