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
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.
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
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