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Netflix's rough weekend: Sign of things to come through October

Netflix has had a rough few days with a Web site outage and a contract dispute that led it to pull Sony movies from its streaming service. These two issues independently aren't a big deal, but they do highlight how Netflix is under more scrutiny as it grows.

Netflix has had a rough few days with a Web site outage and a contract dispute that led it to pull Sony movies from its streaming service. These two issues independently aren't a big deal, but they do highlight how Netflix is under more scrutiny as it grows.

On Friday, Netflix noted in a blog that it had to pull Sony movies through its Starz streaming service. Starz reportedly can't stream Sony films beyond a certain subscriber mark. Netflix's big coup as a young company was landing Starz as a partner because the move bolstered its streaming library. Starz will be a primary focus going forward since Netflix will have to renegotiate the contract.

Netflix CEO Reed Hastings recently said that a $200 million price tag for a new Starz deal wouldn't be surprising. Wedbush Securities analyst Michael Pachter said Starz may seek more than that sum and the New York Post reported that the cable network wants $350 million. Pachter estimates that Netflix currently pays $30 million a year.

Why make a fuss over Sony disappearing from Netflix? It's a sign of things to come. Netflix has become a massive distribution channel. In many respects, Netflix is a cable network. Cable networks sometimes pull content over disputes. With the Netflix-Starz deal expiring in October there will likely be some threats ahead that could damage the $7.99 a month streaming content service.

Pachter said in a recent research note:

We believe that the Starz deal is the most high-profile of the five deals that provide Netflix with new movie streaming content. If Netflix were to lose Starz, the quality of its streaming content would suffer, and a loss of this content would potentially cause existing Netflix customers to defect. At the same time, several Netflix competitors are beginning to offer unlimited viewing for a monthly subscription fee, such as Hulu Plus (which costs $7.99/month, and focuses on new TV shows, but also has some catalog movies) or Amazon (which is free for Amazon Prime customers and focuses on catalog items). We fully expect a subscription offering from Amazon later this year.

The second half of Netflix's weekend revolved around a Web outage that affected a few users. Netflix's outage got some play on TechCrunch and the company's Twitter feed tells the tale.

The upshot: Netflix is now in Google territory. If Google's site hiccups the world notices. If Gmail burps it's a lead Techmeme story. Welcome to the land of intense scrutiny Netflix. Things are likely to get worse right through that October Starz contract expiration.