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Starz's Tier-Ful Goodbye to Netflix

9/02/2011 10:18 AM

Misery loves company. Netflix already was facing a dismal-looking third quarter, with subscriber growth expected to slow dramatically because of its pricing changes (see Netflix Sees Sub Growth Doldrums Ahead).

Things got even cloudier for Netflix with the news that Starz plans to walk away from a $300-million-per-year distribution deal with the over-the-topper in early 2012 (see Starz To Pull Plug On Netflix Deal).

While Netflix insisted viewership of Starz material among subscribers is currently only 8%, investors sent its shares skidding down more than 10%. Netflix opened Friday morning at $208.44 per share, down from $233.27 Thursday’s closing price.

So why did Starz turn down a huge wad of cash? According to a source familiar with the negotiations, Starz wanted a deal with Netflix on par with those it has with traditional pay-TV affiliates — i.e., to have Netflix sell Starz on a separate premium tier. The LA Times also reported that Starz’s insistence on premium-tier placement was the deal breaker.

Netflix refused, so it looks like you can bid adieu to the Disney flicks on the service. (Sony’s movies were suspended from Netflix in June, after the number of Netflix streaming subscribers triggered a provision in the studio’s deal with Starz that would have greatly escalated Starz’s per-subscriber payments.)

Starz’s position is: Hey, if you offer us as part of a $7.99-per-month package, you’re devaluing our programming. It’s a marketing perception issue. Recall that Starz and Disney sued Dish Network after the DBS provider decided to give away Starz for a year (see Starz, Disney Sue Dish Over Year-Long Free Access To Starz Channels).

Not everyone thinks this is the end of the Starz-Netflix story, however.

Despite the posturing on both sides, “we find it hard to believe that both Netflix and Starz do not come back to the negotiating table and sign a deal over the next several months,” BTIG analyst Rich Greenfield wrote in a blog post. “With competition building, why does Netflix want to let someone else have access to Starz’s unique movie content and can anyone really pay Starz as much as Netflix is able to, even accounting for the share that will flow to Sony/Disney?”

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