Can Netflix Afford Hollywood?

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The widening world of Netflix (Nasdaq: NFLX  ) streaming got a bit narrower last week, when Sony (NYSE: SNE  ) pulled several of its flicks from Netflix's web-based distribution deal with Liberty Media's (Nasdaq: LSTZA  ) Starz.

Cynics will argue that Sony is doing you a favor by pulling Grown Ups and Salt, but The Social Network, too? Oh, you Fincher pincher.

The original four-year deal, struck in 2008, set bandwidth caps on Sony releases, according to The Los Angeles Times. Sony didn't have an obligation to continue making its films available, so it pulled titles representing roughly a quarter of the 1,000-flick Starz catalog available through Netflix.

Even Netflix admits that it got a great deal the first time around with Starz. Analysts estimate that Netflix is paying Starz $20 million to $30 million a year for access to its attractive digital library. A new deal needs to be negotiated later this year to keep the flicks coming in 2012 and beyond.

"We will clearly pay more," Netflix CEO Reed Hastings said two months ago in a Business Insider interview. "There are more people streaming, so we can afford to pay more." But how much more? That's the multimillion-dollar question.

Jefferies & Co.'s Youssef Squali -- who has a "hold" rating on Netflix -- feels that Netflix may now have to pay as much as $300 million annually to keep the Starz deal going with Sony in tow. He previously modeled $200 million to keep Starz streaming; under his new calculation, Netflix would take a $0.40-a-share hit to earnings after taxes.

Netflix doesn't need Starz. In fact, kissing off Starz entirely come 2012 could serve the company's best interests. Sure, many of Netflix's 23 million subscribers may not be happy with what I'm suggesting, but Netflix can't let the studios bully it.

If Netflix agrees to overpay for Starz, what kind of precedent will that set for future renewals? Netflix needs to show that it doesn't depend on any single piece of content.

Of course Netflix can pay. However, no one else can pay anything close to what Netflix can pay. That gives Netflix the leverage here. Without Netflix, Starz will have to strike much smaller deals with (Nasdaq: AMZN  ) or Coinstar's (Nasdaq: CSTR  ) Redbox -- assuming Redbox even bellies up to the digital bar.

As a Netflix customer and avid viewer since its initial streaming rollout in 2007, I can assure you that digital content comes and goes. Through it all, overall Netflix subscriber growth continues to climb with every passing quarter.

Netflix doesn't need Sony. Netflix doesn't need Starz. More importantly, it doesn't need to shell out $300 million for a deal that will set a bad example of fiscal irresponsibility.

Does Netflix need to renew its deal with Starz next year? Share your thoughts in the comment box below.

Motley Fool newsletter services have recommended buying shares of and Netflix. Motley Fool newsletter services have recommended buying puts in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Read/Post Comments (10) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 28, 2011, at 1:18 PM, jb757 wrote:

    I believe the $300 million annual grew from a $200 million figure tossed around in a casual Hastings interview. Subsequent reports on this interview turned the $200 million figure not only into a real estimate, but added "a year" to the amount then injected the fear routine "but I wouldn't be surprised if Netflix will pay $300 to $350 million a year for Starz content." People get paid for this trash reporting. The best bet is that Netflix will do a multi-year $200 million deal to get this content, a substantial increase, but nothing stockholders will be concerned about.

  • Report this Comment On June 28, 2011, at 1:21 PM, stockwoodie wrote:

    Screw Starz and Sony... that's what I say. As a happy Netflix subscriber, I can live without them.

  • Report this Comment On June 28, 2011, at 2:17 PM, PlayingwithOPM wrote:

    Personally, I don't watch the Starz content anyway. Their movies tend to be lower quality and I turn them off and pick a new movie as soon as I a see the Starz banner.

  • Report this Comment On June 28, 2011, at 2:32 PM, cbuffool wrote:

    This is a question where Netflix's power of knowledge SHOULD lead them to the right answer. They know exactly how much their viewers use Starz movies, and can determine the value of the Starz offerings pretty accurately (realizing that without Starz, their viewers have plenty of other options). I'd be curious to know how much of that information they share with Starz.

    Off the cuff, $200M seems high, especially as an annual figure. With 20M users, that's $10 each. Would I pay $10/yr for the number of Starz movies I stream each year, which is probably less than 5? I don't think so, and that's not even allowing for the markup that Netflix deserves.

  • Report this Comment On June 28, 2011, at 6:51 PM, CMFStan8331 wrote:

    As others have stated, Starz movies do not tend to be the cream of the crop. I'm sure some folks watch a lot of them, but it happens very rarely for me. it's worth keeping that content at a reasonable price - maybe $200M for a 2 or 3 year deal - but it would be a serious mistake to pay $300M for a one year agreement on middling content. I don't expect Netflix management to do anything along those lines.

  • Report this Comment On June 28, 2011, at 8:30 PM, colddish wrote:

    Netflix is now one of the Big Dogs. And it's symbiotic relationship with Facebook is going to make it a Huge Dog. Many of these companies will need Netflix more than Netflix needs them.

  • Report this Comment On June 28, 2011, at 10:03 PM, nijawash wrote:

    I enjoy my netfilx on my tv I purchase a tv to have netfilx on it and i love it. As for starz picture quality it not good with hd it is not clear. I'm not upset because sony or starz removed there movies. As for next year sony or starz i will not miss you. Keep doing what you are doing netfilx.

  • Report this Comment On June 28, 2011, at 11:55 PM, TMFBoiseKen wrote:

    Just wanted to say the CBufFool nailed it -- netflix knows what it needs to do. They know what we watch and how we watch it.

    If everybody is content streaming "Swamp People" then they will payup to the History Channel. If we consume bad Stars Movies, then they had best write the "big check" to Stars.

    I trust Reed Hastings to make a smart deal that will benefit longterm shareholders.

    As for me, I'm up over 1500% on my first nflx purchase at $17.35/share. Just keep pulling the right strings Mr. H.

  • Report this Comment On June 29, 2011, at 1:53 PM, Driskells wrote:

    Obviously, Netflix need content to retain and establish net new accounts. The question is how much is the value of that content.

    Personally, I don't understand the big deal for the Starz or Sony content. They are not the only game in town.

  • Report this Comment On June 30, 2011, at 3:43 AM, azman90 wrote:

    You're being pretty short-sighted if you think Amazon can't compete with Netflix on a contract-level agreement.

    As a Netflix subscriber (and also short since $140) I do agree with most of the comments about the indy-type films being better views than Starz content; however, I can get the indy stuff elsewhere, most of the Stars -- especially Sony content is the high priced stuff that's harder to find elsewhere (ie Amazon, Hulu).

    With HBO playing hardball, if Starz (+ Sony and Disney) are lost- Netflix instant viewing will lose it's value at $8/month.

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