Netflix Loses Contract With Starz; Stock Drops 9 Percent

Sep 2, 2011

Just as it had raised prices on its internet streaming customers, Netflix has lost a contract with one of its big content providers. The AP reports that Starz Entertainment, better known as a premium cable channel, announced it was walking away from a contract with Netflix that allowed it to stream Starz TV shows and movies over the internet.

The AP adds:

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 talks fell apart after the two sides disagreed over the value of the Starz content and how it should be sold to Netflix subscribers, according to people familiar with the negotiations. The people asked not to be identified because they weren't authorized to speak publicly.

In early trading, stock in Netflix was down up to 9.7 percent on the news. The loss is huge, says The Los Angeles Times, calling Starz Netflix's "most valuable source for movies." The Times reports the deal fell apart Thursday, after Starz demanded that Netflix customers pay more, if they wanted access to Starz content.

The thinking from Starz is that if customers can get their content through Netflix, they'll "cut the cord" on traditional cable service.

The Hollywood Reporter spoke to market analysts, who were split on what this means for Netflix's long-term prospects:

We believe the loss of Starz content could be disastrous for Netflix and has the potential to start the downward spiral, said Janney Montgomery Scott analyst Tony Wible expressed concern about Netflix's outlook. "A loss of subs could leave Netflix struggling to pay the over $2.4 billion in off balance sheet content obligations, especially when one considers that it is losing money on an adjusted free cash flow basis."

arclays Capital analyst Anthony DiClemente is more bullish on the company. "We believe Netflix has a clear indication of what content is worth and the fact that it is willing to let Starz Play expire suggests to us the company is staying disciplined," he wrote in a report. "Netflix now has six months to redeploy its Starz...budget for incremental content and based on our discussions with studios, we do not believe that will be an issue." He maintained his "overweight" rating on Netflix's stock and his $285 target price.

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