Science/Technology

Talks on Starz deal unravel, Netflix stock plunges

Thursday, September 01, 2011
Netflix

Netflix's negotiations to keep a key piece of its Internet video library have collapsed, dealing a major blow to the largest U.S. video subscription service as it raises the prices for most of its 25 million customers. The setback triggered a 9 percent drop in Netflix Inc.'s stock price late Thursday.

Starz Entertainment delivered the bad news in a terse statement announcing that it won't renew a contract that allows Netflix to show a lineup of recently released movies and TV shows over high-speed Internet connections.

That means Starz content will be removed from Netflix's streaming service starting in March. Starz' library includes movies from Walt Disney Co.'s assorted studios and, until recently, Sony Corp.

The content from Starz' cable TV channel played an instrumental role in increasing usage of Netflix's Internet service and contributed to Netflix's ability to add nearly 17 million subscribers since the deal was signed in October 2008.

Netflix had been expected to work out a new contract with Starz, although at a much higher price than the estimated $30 million a year that it had been paying under the current contract. Netflix CEO Reed Hastings acknowledged earlier this year that he wouldn't be surprised if the company paid as much as $250 million a year to retain the Starz rights when the current contract expires in February.

But those hopes were dashed, if not blown up completely, with Thursday's bombshell dropped by Starz CEO Chris Albrecht. He said Starz had decided against a renewal "to protect the premium nature of our brand by preserving the appropriate pricing and packaging of our exclusive and highly valuable content." He also indicated that Starz, part of Liberty Media Corp., believes it could get more money for its content through other outlets.

Netflix said it would spend the $250 million that Hastings had earmarked for the Starz renewal to buy audience-pleasing content from other distributors. Hasting has left no doubt that he intends to invest heavily in Netflix's Internet video library because he wants more subscribers to use that option. That would allow Netflix to cut postage and other costs to mail DVD rentals to its customers.

The rising cost for Internet streaming rights is one of the reasons that Netflix has raised its prices by as much as 60 percent, triggering a backlash among many subscribers. The higher rates for packages combining streaming with DVD rentals began kicking in Thursday for Netflix's existing subscribers. The changes don't affect customers who subscribe to a streaming-only plan, which costs $8 per month.

Starz's decision to end the talks with Netflix underscores the escalating tensions with pay-TV services that view Netflix's popularity as a competitive threat. Time Warner Inc.'s HBO has consistently refused to license its shows for Netflix streaming, and Showtime recently has declined to make some of its top series, including "Dexter" and "Californication" available to the service.

The falling out with Starz added to the worries of Netflix investors already fretting about the higher prices driving away subscribers. Netflix's stock plunged $19.47 to $213.80 in extended trading Thursday, after the announcement by Starz.

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