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Movie Rights Expire -- Is That Bad for Netflix?

http://www.fool.com/investing/general/2011/01/05/movie-rights-expire-is-that-bad-for-netflix.aspx

Anders Bylund
January 5, 2011

A curious reader recently emailed me to ask about Netflix (Nasdaq: NFLX  ) and its content library. He's a happy Netflix user, but was turned off when he found out that titles in his streaming queue didn't necessarily stick around forever. "Is the apparently ephemeral nature of instant viewing rights risky to Netflix given its stated desire to go all-streaming in the future?" was his final query.

Like walking in water
The fleeting form of those streaming licenses makes a ton of sense in today's entertainment industry. You don't expect HBO to have the rights for any movie it didn't produce in-house forever and ever, for example.

Movie theaters can only hang on to Avatar and the next Twilight installment for a few weeks before passing the baton to the DVD and premium cable windows. And so it goes; no studio wants to sign permanent licenses for anything. That's just not the way it works.

This is why some pundits want Netflix to buy Starz off Liberty Media (Nasdaq: LSTZA  ) right now. Netflix currently pays a minuscule $30 million a year for the right to stream movies from Sony (NYSE: SNE  ) Pictures and Walt Disney (Nasdaq: DIS  ) . That license could become a costly $300 million a year when it's renegotiated -- maybe even more. Why not simply buy the cable channel, thus securing fixed-cost access to those studios forevermore?

Alas, it wouldn't really work. Netflix would be buying a middleman operation, which itself has to work out long-term rights to that content with its backing studios. Starz' contracts with Sony, Disney, and a handful of smaller studios expire between 2012 and 2016. Moreover, Starz pays license fees to the studios for these rights. It wouldn't make any economic sense for Netflix to shoulder those payments in return for ... four years or less of guaranteed fees.

Roadblocks ahead
In a perfectly digitized world, Netflix would operate like a library where every title is always resting on the shelf. Once a title entered the vault, it would never leave. Consumers would certainly love this, and the company would surely make permanence a major selling point in its marketing.

But we're not there yet, and we may never get there at all. The established system of time-limited content licenses is deeply embedded in Hollywood, and it's a large component of how the studios expect to do business. Moving from celluloid to bits and bytes doesn't change that expectation; it only stretches out the addressable market on a global scale.

A change is gonna come
Digital video is still a pretty new phenomenon in the movie industry. That ridiculously affordable Starz agreement shows how Netflix took everyone by surprise when its streaming operations exploded over the past couple of years. The billion-dollar Epix deal is more in line with the current climate, and future deals will surely be even more expensive. Everyone is setting new standards as they go along.

So we Netflix users are stuck with disappearing titles until someone figures out how to make eternal licenses palatable to an industry that hates the very idea. Netflix doesn't do late fees, but I suppose this expir