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 Amazon.com (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.
