Streaming Wild West: Netflix Loses Starz, Competition Heats Up

by Anthony John Agnello | September 2, 2011 11:52 am

It couldn’t have happened at a worse time. On the same day that the company instituted new subscription pricing to its streaming video service, Netflix (NASDAQ:NFLX[1]) lost its contract with Starz. The Liberty Media-owned (NASDAQ:LSTZA[2]) premium movie channel has been one of Netflix’s most vital partners during the past three years as it has transformed from a by-mail DVD rental company into the face of digital movie and television distribution.

It was through its partnership with Starz that Netflix gained access to big-name movies from Sony (NYSE:SNE[3]), Disney (NYSE:DIS[4]) and others within the “HBO Window” — a period of time after a film’s home release when digital outlets are barred from distributing movies playing on premium cable channels.

It was Starz that reportedly walked out of new contract negotiations with Netflix. The company released a statement Thursday saying that once its current contract runs out Feb. 28, it will pull its content from Netflix to “protect the premium nature of our brand by preserving the appropriate pricing and packaging of our exclusive and highly valuable content.”

Netflix in turn commented to All Things Digital that it isn’t worried too much about the loss since Starz programming represents just 8% of what U.S. Netflix subscribers watch[5]. It cited partnerships with film distributors like Lions Gate (NYSE:LGF[6]) and Viacom‘s (NYSE:VIA[7]) Paramount Pictures as picking up the slack and boasted that it will take the money it had set aside from Starz’s licensing fees and use it to secure contracts with other content providers.

While Netflix doesn’t seem perturbed, its shareholders were clearly shaken by the announcement. The stock was down almost 10% by mid-morning Friday. Is there really that much cause for alarm?

Investors looking to capitalize on the streaming video boom need to brace themselves for turbulence over the next two years. Netflix’s power in the space still is largely uncontested, but new competitors are popping up all the time.

Amazon (NASDAQ:AMZN[8]) slowly is building up a strong library of streaming titles for its Amazon Prime premium subscription service[9]. What started as a stable of 5,000 titles in January grew to 9,000 by August thanks to new deals with CBS (NYSE:CBS[10]) and Comcast‘s (NASDAQ:CMCSA[11]) NBC Universal. Apple (NASDAQ:AAPL[12]) is said to be working fast to transform iTunes into a streaming video business[13] as well. Cable providers like Time Warner (NYSE:TWX[14]) are aggressively expanding into streaming video[15]. Not only did the company release apps for Apple’s iPhone and iPad that offer access to certain cable channels, it expanded the HBO Go service to mobile devices as well. (HBO Go is a streaming-only subscription to HBO that can be accessed on Internet-connected devices.)

That’s just a handful of the players that are all vying for rights to the most profitable content. On the one hand, this means content partners like Starz are seeing the value of their goods increase in the digital space rather than dwindling because of piracy. Viacom is a solid example of how lucrative digital licensing can be[16], and it’s no wonder Starz is holding out for more from Netflix. On the other hand, the space still is very much in its Wild West phase, with the overall value of streaming services changing quickly. Netflix’s new subscription model is just the first of many upheavals coming to the entire space during the next 12 months as streaming businesses and content providers iron out just how they’re going to make the most money.

In the meantime, though, investors shouldn’t worry too much about Netflix. The company has had dust-ups with its content partners before. Just a few months ago it appeared that contract renegotiations with CBS (NYSE:CBS[10]) had broken down completely, but by the summer, the two companies came to an agreement that not only reinstated a good deal of Showtime programming to Netflix, but it expanded its library in international markets. Netflix might lose Starz, but plenty of other networks and movie studios want access to an audience that’s 25 million strong.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello[17] and become a fan of InvestorPlace on Facebook[18].

Endnotes:
  1. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  2. LSTZA: http://studio-5.financialcontent.com/investplace/quote?Symbol=LSTZA
  3. SNE: http://studio-5.financialcontent.com/investplace/quote?Symbol=SNE
  4. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS
  5. just 8% of what U.S. Netflix subscribers watch: http://allthingsd.com/20110901/starz-says-it-wont-renew-giant-netflix-deal/
  6. LGF: http://studio-5.financialcontent.com/investplace/quote?Symbol=LGF
  7. VIA: http://studio-5.financialcontent.com/investplace/quote?Symbol=VIA
  8. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  9. Amazon Prime premium subscription service: http://investorplace.com/2011/01/amazon-prime-streaming-video-nflx-netflix-nws/
  10. CBS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CBS
  11. CMCSA: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMCSA
  12. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  13. iTunes into a streaming video business: http://investorplace.com/2011/08/apple-rumors-streaming-video/
  14. TWX: http://studio-5.financialcontent.com/investplace/quote?Symbol=TWX
  15. are aggressively expanding into streaming video: http://investorplace.com/2011/04/time-warner-embracing-streaming-future/
  16. Viacom is a solid example of how lucrative digital licensing can be: http://investorplace.com/2011/08/viacom-profit-digital-television/
  17. @ajohnagnello: http://twitter.com/#%21/ajohnagnello
  18. InvestorPlace on Facebook: http://www.facebook.com/pages/InvestorPlace/178906405484848

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