Netflix Declines After Starz Walks Away From Streaming Deal

Netflix Inc. (NFLX), the online and DVD rental service, fell the most in four months after John Malone’s Starz LLC cable network ended contract renewal talks in a standoff over pricing.

Netflix slid $20.16, or 8.6 percent, to $213.11 at 4 p.m. New York time on the Nasdaq Stock Market after Starz, part of Liberty Media Corp., said yesterday it halted talks to renew an online viewing deal. Liberty Media’s Starz tracking stock fell $1.15, or 1.7 percent, to $66.18.

Starz had sought an additional levy on Netflix users for its films and TV shows, and premium placement similar to deals with cable and satellite services, according to a person briefed on the talks who wouldn’t speak publicly.

Dish Network Corp. (DISH), the second largest U.S. satellite-TV provider, will introduce a Blockbuster streaming-movie service to compete with Netflix next month, according to a person with direct knowledge of the plans. The offering is expected to include movies from Starz, said the person.

Netflix would be without online access to films from Sony Pictures and Walt Disney Co. (DIS) if the Starz contract was to lapse as scheduled on Feb. 28. The mail-order and online movie service may lose as much as 15 percent of its 25 million subscribers without Starz, said Michael Pachter, an analyst with Wedbush Securities in Los Angeles. Those would be in addition to defections from a price increase that took effect yesterday.

“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.

Renewal Negotiations

As Netflix enters negotiations later this year to renew other content deals, it will face demands for concessions that give rights-holders a bigger cut of its revenue and more prominence as partners, Pachter said.

The Los Gatos, California-based company’s costs to acquire content in 2012 will rise to more than $2 billion from about $800 million this year, Pachter projected.

Starz Chief Executive Officer Chris Albrecht told analysts on Aug. 9 that the pay-TV provider intended to position itself as a premium provider of content.

“It’s very hard to draw analogies between what’s happened on Netflix with Starz and what’s happening with more traditional distributors, but we do think that going forward in any scenario we need to maintain the premium nature of our products,” Albrecht said.

Sony, Disney Films

Netflix had gained online access to newer films from Sony Corp. (6758) and Disney through its 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.

“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 Netflix spokesman, said in an e-mail. He declined to comment on the specifics of the negotiations.

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

The Starz announcement coincided with yesterday’s effective date for new Netflix prices that boost the combined cost of its mail-order 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 Netflix’s online viewing in the U.S., after the loss of Sony films, a share that is expected to decline to 5 percent to 6 percent in the first quarter, he said.

Time Before Expiration

“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 signed contracts that give cable networks exclusive access to movies. Netflix must wait for those contracts to end or negotiate with the networks that, like Starz, have additional online rights.

To contact the reporters on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net; Ronald Grover in Los Angeles at rgrover5@bloomberg.net

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

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