Bloomberg News

Netflix Falls as Streaming Talks With Malone’s Starz End

September 01, 2011

(Updates with analyst comment in third paragraph.)

Sept. 1 (Bloomberg) -- Starz LLC, the premium cable channel controlled by billionaire John Malone’s Liberty Media Corp., ended contract renewal talks with Netflix Inc. after failing to reach terms for films online. Netflix fell.

Starz made the decision to “protect the premium nature of our brand by preserving the appropriate pricing and packaging of our exclusive and highly valuable content,” according to a statement today.

If the deal lapses as scheduled on Feb. 28, Netflix will completely lose online access to films from Sony Pictures and Walt Disney Co. Without Starz, the mail-order and online movie service may lose up to 15 percent of its 25 million subscribers, said Michael Pachter, an analyst with Wedbush Securities in Los Angeles. That would be in addition to any defections resulting from a price hike that took effect today.

“It’s a negotiating ploy, but an effective one since Netflix simply cannot allow Starz to leave,” Pachter said in an interview. “On the other hand, Starz needs to cut this deal” to boost revenue.

Netflix had gained online access to newer films from Sony and Disney through a streaming agreement with Englewood, Colorado-based Starz, operator of the namesake and Encore cable channels. Sony has already pulled its movies, after Starz reached a cap in online viewing in June.

Netflix fell $20.02, or 8.6 percent, to $213.25 in extended trading after the announcement. The shares retreated $1.74 to $233.27 at 4:29 p.m. in regular Nasdaq Stock Market trading.

Liberty Media’s Starz tracking stock declined $1.54 to $67.33 on the Nasdaq and was unchanged in extended trading.

Netflix Options

“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,” Steve Swasey, a spokesman for the Los Gatos, California-based company, said in an e-mailed statement.

Theano Apostolou, a spokesman for Starz, declined to comment beyond the statement.

The Starz announcement coincided with today’s effective date for a new Netflix pricing arrangement that increases the combined cost for its mail-order DVD and streaming service by 60 percent.

Movies from Starz have become less important since Netflix has licensed other films and TV shows for online viewing, Swasey said. Starz makes up about 8 percent of domestic Netflix subscribers’ viewing, a share that is expected to decline to 5 percent to 6 percent in the first quarter, he said.

$300 Million

“While we regret their decision to let our agreement lapse next February, we are grateful for the early notice of their decision, which will give us time to license other content before Starz expires,” Swasey said in the statement.

Netflix Chief Executive Officer Reed Hastings said in June it “wouldn’t be shocking” to pay $300 million a year, or 10 times more, to renew the Starz rights.

Most of the major studios have contracts with cable networks that give them exclusive access to movies. Netflix must wait for those contracts to end or negotiate with networks that, like Starz, have online rights.

In June, Sony informed Starz it had reached a cap on the number of movies that can be streamed online, ending its contract and leaving Netflix customers without access to newer films from that studio.

--Editors: Rob Golum, Anthony Palazzo

To contact the reporter on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net


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