As I predicted in TheWrap, Netflix has hit a brick wall with its expiring contract with John Malone’s Starz: On Sept. 2, Starz announced it would not renew it.
Through the deal, Netflix had sub-licensed electronic transmission rights of Disney and Sony that Starz had itself licensed in its output deals for its pay-TV channel. This deal allowed Netflix to stream a large number of newer movies to its subscribers.
Netflix got these sub-rights for the bargain-basement price of $30 million per year, because in 2008 when Starz made the deal, streaming was a new technology of such little monetary value that it seemed like found money.
Also read: Streaming Breakdown! Starz Won't Renew Netflix Deal
But by 2011, Netflix’s huge success with streaming has made it all but impossible for Starz (and the movie studios from which it licensed movies) to renew that deal. By then it had become clear to all concerned that Netflix’s delivery of its movies over the Internet directly competed with Starz’s own pay channel as well as with the cable and telecom that were its cash cows.
For example, Netflix offered to its streamers anything on the Starz channel for $7.95 a month while Starz charged up to $14.95 a month.
The handwriting was on the wall for Netflix when Starz’s CEO Chris Albrecht announced that he intended to establish “pricing parity.” This went beyond the issue of money: Not only would Netflix have to pay Starz well over $300 million a year to renew these rights, but it would have to agree to change the way it charged subscribers for newer titles.
To achieve “parity,” they would have to pay more for these titles. If Netflix accepted tiered pricing, it would undermine it entire concept of uniform prices. Even if Netflix could afford to pay a ten-fold increase, it could not accept these terms.
So the deal came undone.
Also read: Netflix About to Hit a Brick Wall With the Studios
The crash now leaves a gaping hole in Netflix’s ability to deliver current movies through its streaming service. Every one of the five largest studios -- Warner Bros, Disney, Fox, Universal, and Sony -- has output deals with either HBO or Starz.
These deals lock up the electronic transmission rights for 8 years after they are released at video stores. This means that all the films these studios are now playing at theaters, and that account for more than 85 percent of the movie audience in America, will not be available to subscribers to the Netflix streaming service until the year 2020.
Consider, for example, “Harry Potter and the Deadly Hallows: Part 2.” It is, as are all the “Harry Potter” films, covered under Warner Bros.’ output deal with HBO. After its video release in the winter of 2011, HBO gets exclusive rights to the movie for its pay channels for 15 months.
