Netflix, Starz to break up: One crazy ride ahead to Feb. 28

Netflix, Starz to break up: One crazy ride ahead to Feb. 28

Summary: Netflix has a bevy of hurdles to navigate now the Starz partnership is on the rocks.

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Contract renewal talks between Netflix and Starz have broken down and the streaming movie and television company is facing a stunning amount of uncertainty in the next few months. How Netflix navigates the next five months will either rattle its standing as the Web's darling streaming content service or cement it as an elite Hollywood player.

Starz said Thursday in a statement:

"Starz Entertainment has ended contract renewal negotiations with Netflix. When the agreement expires on February 28, 2012, Starz will cease to distribute its content on the Netflix streaming platform. 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. With our current studio rights and growing original programming presence, the network is in an excellent position to evaluate new opportunities and expand its overall business."

The timing of the Starz announcement seems to be set for maximum impact. After all, Netflix customers have to decide whether to get the company's streaming movie service, DVD delivery or both. If consumers make no pick, many consumers will see their bills jump to $15.98 for streaming and one DVD out a month from $9.99. Analysts largely expected Netflix's churn rates to jump.

Also see: Netflix suffers major setback with loss of Starz content

With the Starz deal in flux it's now clear that Netflix's churn rates are going to be closely watched through February. Here's a look at the moving parts that factor into Netflix's immediate future.

The Starz loss hurts, but is not fatal. Piper Jaffray analyst Michael Olson said that the Netflix loss of Starz hurts, but it's not as damaging as it appears.

While this will be interpreted as a negative by many investors, we believe the termination of this agreement will have one of two outcomes, either of which could prove to be neutral-to-positive for the company: 1) Netflix will spend the $250m-$300m/yr (est) that it would have spent on the Starz deal on other content in order to retain and attract subscribers, or 2) the company will be unable to spend the funds set aside for Starz and will exceed the consensus CY12 EPS number that includes a significant increase in expense from Starz. The loss of the Starz content is a negative for the Netflix streaming library, but given it was only 8% of Netflix subscriber viewing (and going lower), the Starz library is far less important than it was 24 months ago.

Netflix loses negotiating leverage with content providers. Olson's assessment is on target to a degree. However, the loss of Starz has created a situation where Netflix is up against a hard Feb. 28 deadline. Why would a content provider sign any deal with Netflix before Feb. 1? Netflix will have to negotiate other content deals to replace Starz. Movie and TV studios are likely to make Netflix sweat a bit. The closer to Feb. 28 Netflix gets the more likely it's going to pay higher licensing prices. As CNET News' Greg Sandoval noted, it's possible that Starz even comes back for the right price.

The end of Starz is symbolic. The Netflix acquisition of the Starz library put Netflix's streaming service on the map back in 2008. The return on investment for the Netflix-Starz deal, valued at roughly $30 million a year---was off the charts. In fact, Starz accounted for half of the top 50 streaming movie titles for Netflix in 2009 and 2010. The Starz deal was an end run around studios. Now Netflix is expected to pay up with a series of individual deals. Uncertainty reigns. Netflix is likely to go through periods of streaming content flux. Why? No studio is going to sign a long-term deal because digital media is evolving too quickly. Disney chief Bob Iger recently said long-term digital media deals just don't make sense these days. Iger's comments are notable given that Netflix needs a Disney movie deal to offset the titles---Toy Story 3 for instance---it will lose when Starz goes away. Here's Netflix's 10-day chart, which includes a drop after the Starz news broke.

Churn rates under the microscope. A Feb. 28 deadline for replacement content deals may give consumers pause. First, Netflix dramatically changes its pricing in a bet that consumers will complain at first but ultimately stick around. And now many popular titles on the Netflix streaming service, which was light on the latest releases anyway, are in question. At the very least, consumers need to think through other options. Netflix can't lose Disney and Sony Pictures content---both delivered via Starz---and not take a hit. "Given that prices on DVD plans were recently hiked (DVD is especially useful for new film releases), we see upside risk to churn and new customer adds, as a streaming only offering may not meet subscribers needs for newer film content," said Jefferies analyst Youssef Squali. Netflix has some discipline. The fact that Netflix didn't pay up to meet whatever Starz wanted heartened analysts a bit. Netflix has shown it will exercise some restraint in its content deals. The big question is how much restraint Netflix will show as it reaches the Feb. 28 Starz cut-off.

Amazon will pounce. Barclays analyst Anthony DiClemente said it's likely Starz will sell it's library to the highest bidder. That highest bidder is likely to be Amazon. DiClemente argues that Netflix will be fine and has time to land more content deals. However, Amazon could license the Starz library and make a lot of noise about it. DiClemente wrote:

The bears are likely to argue that: 1) Netflix may not have the necessary cash-flow to effectively build out its content offering; 2) this may signal a shift in sentiment away from Netflix by the Studios; and 3) this raises the possibility that Starz may offer its ~1,000 streaming titles to a competitor, like Amazon.

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63 comments
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  • RE: Netflix, Starz to break up: One crazy ride ahead to Feb. 28

    I still see Netflix as a great value and have made no plans to cancel my current two out + streaming plan. Will be interesting to see how this all shakes out in the coming months. I don't care what the Studios think, fact of the matter is they charge too much for their content. I don't mind an actor getting millions for their work but tens of millions is not justifiable. Maybe Hollowood should send some acting jobs to China and India.
    NPGMBR
    • Actors and actresses are national treasures

      @NPGMBR They deserve their millions and then some!
      otaddy
      • RE: Netflix, Starz to break up: One crazy ride ahead to Feb. 28

        @otaddy Actors and Actresses make too much money. They are people just like the rest of us and we put too much faith into their abilities. They are mostly greedy alcoholics and drug addicts. No one show make tens of millions of dollars to read from a script. They are there by luck not talent, I could do what they do given the number of cuts it takes to complete a scene.
        drsmith330
    • Message has been deleted.

      basvideoizle
    • RE: Netflix, Starz to break up: One crazy ride ahead to Feb. 28

      @NPGMBR This is great news... Netflix has become arrogant and greedy. Two price hikes in less than a year is completely unacceptable. I dropped my streaming service and kept my 2 DVD plan. It's really ridiculous if you ask me... I had a 3 DVD plan for $16.99 but then Netflix increased the plan to $19.99 a month so I dropped down to 2 DVD plan & unlimited streaming for $14.99, now that Netflix has increased rates again I dropped streaming and just have 2 DVD plan for $11.99 a month. In essence Netflix is now collecting $5 less a month from me then they were a year ago. How is that smart business?

      I really wanted to drop Netflix altogether and go with Blockbuster, but the boneheads at BB missed a rare opportunity to pickup unhappy Netflix customers cause their 2 DVD plan is $14.99 a month. They should have dropped their 2 DVD plan to the same price as Netflix ($11.99) then promote the 28 day advantage, in-store exchanges, and games. That would have lead to a lot more people dropping Netflix and switching back to BB, including me!
      Masari.Jones
    • RE: Netflix, Starz to break up: One crazy ride ahead to Feb. 28

      @NPGMBR Frankly, I find Starz fairly cheesy. Here's to hoping Netflix will spend the money wisely on better quality streaming offerings and higher rates of new movies. I also plan to hold on to both mail and streamed offerings. After all NF gave us all streaming for FREE at the beginning. It has been the best free trial offering I've ever received!
      gsjaeger@...
    • Message has been deleted.

      jonfleck
  • RE: Netflix, Starz to break up: One crazy ride ahead to Feb. 28

    We dumped the disks and do the cheap streaming only deal with Netflix. We use Red Box sometimes. We now go to more movies, too. Now that we have fewer new titles available in the house, we have sort of rediscovered the theater. As good as a less than state of the art home theater can be, the big room at the AMC blows it away. There is always going to be someone providing content, and I am pretty sure Netflix will figure out a way to continue to be competitive...
    notme403@...
    • RE: Netflix, Starz to break up: One crazy ride ahead to Feb. 28

      @notme403@... either your local AMC is extraordinarily good or you haven't seen a less than state of the art home theatre in action.
      Al_nyc
    • RE: Netflix, Starz to break up: One crazy ride ahead to Feb. 28

      @notme403@... I completely agree with the first part of your statement. I too have dumped the disc service and have kept the streaming option since we use it all of the time on the Xbox, Wii and my Android phone. However, my home theater system more than blows away any "go to the movies" experience. Plus, I refuse to pay $10 per person in my family to watch commercials - it's just not going to happen. We haven't gone to a big theater chain in years, but we do support our local drive-in movie theater.
      j28n
      • RE: Netflix, Starz to break up: One crazy ride ahead to Feb. 28

        @j28n 10 bucks per person, that's cheap. Here in Canada we pay from 15-20 per person. I stopped going to movie theatres about 10 years ago as I have never seen a Hollywood movie worth what they were asking at the ticket booth. As for Netflix I think all we can get is streaming and I am quite happy with it. I've watched a lot of foreign films I never would have seen otherwise. As for Block Buster, I see they just went belly up here in Canada. Witness the end of the video stores.
        carlson1@...
    • RE: Netflix, Starz to break up: One crazy ride ahead to Feb. 28

      @notme403@... I still see the bulk of my movies at the theatres but all those flicks I see because they didn't get great reviews or disappeared before I had a chance to see them; I catch on Netflix.
      NPGMBR
  • Might not be fatal,but its not good

    Netflix has some real issues but so does streaming in the months to come. None of the streaming services are a "jack of all trades". They have weakness in all of them. Even Apple TV has issues with content. Netflix real problem is raising rates without adding a decent amount of new services. If your going to push subscribers towards streaming then you can't just do it by raising prices. You have to make them want the streaming service more. So far with Starz problems and sporadic Network being off-line in regional areas at times. Its not looking good for Netflix.
    jscott418-22447200638980614791982928182376
    • RE: Netflix, Starz to break up: One crazy ride ahead to Feb. 28

      @jscott418

      We have NetFlix and prefer the online service, but periodically experience dropped service right in the middle of a program. You have no idea where the problem originates (my wireless network? The ISP? The rest of the Internet? Netflix itself?), so it is very frustrating. If Netflix is the likely culprit, they need to address the problem, or it doesn't bode well for their business model.
      Biotechguy
      • dropped service: many variables

        @Biotechguy,
        I've had drops in the middle of playback. I've also had many titles that were skipping or on permanent fast-forward, or would slowly degrade to be un-watchable. The culprits usually turned out to be the client. In my case, an S3 Tivo that needed a re-boot. Watching on a laptop or another Tivo showed that the content was OK...just not working with that older/glitchy player. Netflix customer service told me whether it had other complaints for that title, and in a couple of cases said they would report the case to engineers to examine the title for problems.

        In no way can Netflix take responsibility for your playback device, your ISP, or your networking hardware or wireless service. They are content providers, and from my experience, have done a great job compared to any TV, cable, or satellite service I've had in the past.

        Most of the playback problems I've had were my own tech issues. Damaged DVDs are replaced the next day.
        alegh
      • RE: Netflix, Starz to break up: One crazy ride ahead to Feb. 28

        @Biotechguy - Wow never had the problem myself and my ISP is Comcast. I don't give Comcast a lot of credit but I've never had Netflix just drop. I'll get the occasional buffer but thats about it.
        NPGMBR
  • RE: Netflix, Starz to break up: One crazy ride ahead to Feb. 28

    If memory serves part of the rationale for the rate hike was to deliver more content, not less, and Starz is a major source of Netflix's valuable content (stuff that people actually want to see). I would suggest Netflix's day in the sun has come and gone, being now viewed as more of a competitor.

    With so many hurdles ahead, I would rate the company as a sell.
    lampson@...
    • RE: Netflix, Starz to break up: One crazy ride ahead to Feb. 28

      @lampson@... You nailed it! It is not so much what the content was that Starz was providing, but the fact that Netflix is LOSING content while raising prices. An action which was specifically stated was being done to get MORE content, that is the story here.
      jefferyshall
      • RE: Netflix, Starz to break up: One crazy ride ahead to Feb. 28

        @jefferyshall , actually the price is going down.... They have not lost content on DVD's just streaming, so for someone like me who pays 7.99 now the price just dropped, and I don't watch stars movies anyway...
        digaprints
  • RE: Netflix, Starz to break up: One crazy ride ahead to Feb. 28

    Who cares, they did not carry ANY STARZ HD so big whoop!
    dortmunder@...