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Analysts Mull Pending Starz, Netflix Split

2 Sep, 2011 By: Erik Gruenwedel

A day after Starz ends negotiations with Netflix, the streaming service’s stock continues to slide

The day after Starz Entertainment said it ended talks for a new license deal with Netflix, Wall Street remained perplexed, with some analysts contending the move is a negotiations ploy and others suggesting content owners will up efforts to monetize assets internally.

Indeed, the announcement came on the day Netflix implemented a 60% rate hike for subscribers that both stream and rent physical discs, including Blu-ray Disc.

Eric Wold, research director with Merriman Securities in San Francisco, said despite contention by Netflix that Starz represented just 8% of the content subscribers were streaming, the fact that Sony Pictures and Walt Disney Studios movies comprise a bulk of the movies offered and represented 26% of the 2010 box office cannot be ignored.

Indeed, about 1,000 of Netflix’s 22,000 streaming titles originate from Starz, according to Ralph Schackart, analyst with William Blair & Co. in Chicago.

Schackart said the Starz decision reflects the belief among content owners that license fees for repurposed programming can go higher.

“This event is evidence that content owners are asking for significantly higher prices from digital media distributors and the digital leverage studios have since first-sales doctrine does not exist for digital content,” Schackart wrote in a Sept. 2 note.

Unlike DVD movies, whereby the owner of the copy can resell or rent the product to a third party within certain parameters, digital files cannot be repurposed without the content owner’s consent. Wold said the news would increase investor concerns about Netflix’s access to quality content in the future as other options arise.

“We believe this brings up an interesting question as to whether there will be a trend for content owners to attempt to monetize the assets themselves versus relying on third-parties like Netflix,” Wold wrote in a note.

At the same time, the analyst said the scenario could free up funds for Netflix to pursue higher-profile TV programming or greenlight additional original content.

Richard Greenfield with BTIG Research in New York said in recent months Netflix CEO Reed Hastings had warmed up to the reality of paying a considerable premium on Starz content going forward.

Greenfield said Netflix will weather the recent stop of Sony movies due to existing IP cap limits — a scenario he said does not apply to Disney content. He said the film slate on Epix does not rival that of Sony/Disney, especially considering Paramount Pictures’ “Transformers” franchise is not included in the studio’s co-ownership of the pay-TV platform.

“It’s hard to imagine the loss of Disney/Pixar films will not be more problematic — especially given the recently launched ‘Just for Kids’ section on Netflix,” Greenfield wrote in a post.

He believes Starz and Netflix need each other, considering Netflix’s deep pockets and willingness to spend, and Starz’ portfolio, which would be detrimental to Netflix in the hands of burgeoning streaming competitors, such as Amazon Prime or Google.

“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,” Greenfield wrote.

Meanwhile, Netflix’s stock continued to decline, down more than 8% in mid-morning trading after closing down more than 8% Sept. 1 at $213.14 a share.



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