Starz Bids Adieu to Netflix

Come March 2012 Netflix Inc. (NFLX) customers will not be able to watch their favorite Walt Disney Co. (DIS) and Sony Corp. (SNE) movies, as license renewal talks between Netflix and Starz Entertainment LLC have fallen through.

The present deal with Starz that allows Netflix to stream online movies from Walt Disney and the Sony library will expire on February next year. The deal with Starz is important to Netflix as it provided Netflix with new titles to be streamed on its site. Currently, Netflix pays approximately $30.0 million worth of license fees for the deal every year, which was signed in 2008 and expires in 2012.

Netflix was in talks with Starz to renew the deal for an estimated $200 million to $300 million annually. Netflix was shelling out this hefty amount for the deal as content from Starz’s cable TV channel was instrumental to increasing usage of Netflix’s Internet service and helped to add nearly 17 million subscribers since the deal was signed in October 2008.

Analysts are now saying that Netflix, after this debacle, is likely to lose some of its subscriber base in the near term. However, with decent time in its hand before the expiry of the deal, Netflix is likely to look for alternative content providers with the amount that it had set aside for the renewal of Starz deal. Moreover, making up for the loss of Walt Disney and Sony looks like an uphill task.

In this context, the intensifying competition in the online streaming market from large players such as Inc. (AMZN), Apple Inc. (AAPL) and Google Inc. (GOOG) is significant because it will further push up the license fee and also make subscriber acquisition more difficult.

However, Netflix has partnerships with big production houses like Paramount Pictures and Twentieth Century Fox, to name a few. In order to expand its video library, which already has 20,000 titles. Netflix has been entering into partnerships with big Hollywood production houses.

Recently, Netflix signed a multi-year agreement with Miramax films, thereby enabling its U.S. members to watch critically acclaimed and popular titles like “Pulp Fiction”, “Good Will Hunting” and “The English Patient”. Through this agreement, Netflix will gain the rights to Miramax’s film library, which boasts 700 titles.

More recently, Netflix has started a new Internet video streaming service for children aged 12 and under. “Just For Kids,” as the section is named, appears on the Netflix website and has about 1000 movies and TV shows in its library.

Netflix’s other growth plans include overseas expansion, which along with higher license and renewal fees and technology investments could result in some cost escalation. This would pressurize margins, unless the average monthly revenue per paid subscriber increases.

Additionally, Movie Gallery Inc. and Red Box, the kiosk company owned by Coinstar Inc. (CSTR), are also increasing competition for Netflix.

Thus, we have a Neutral recommendation on Netflix’s shares in the long term.

We currently have a Zacks #3 Rank for Netflix Inc., which translates into a Hold rating in the short term.

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