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.
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.
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.
Then, Warner Bros. licenses it to basic cable channels, such as Fox Family and Turner, for 66 months. HBO then gets the movie back for another 12 months. Finally there is a three month black period.
So it will only be available for Netflix to license for streaming in 2020. But by this time, some of aging streamers may have outgrown “Harry Potter.” Or they may have seen it elsewhere, since during this 96-month gap, it will be available for rental at Redbox and video store on DVDs (which are far superior in sound and visual quality to streaming). And it will also be available on DVD from the mail-in service that Netflix has now separated from its streaming service and is trying to phase out before the rise in postage rates puts it out of business.
To be sure, Netflix’s streamers will have something to watch via Epix. Epix is the concoction of Paramount, which lost its output deal with Showtime. It will have movies from Paramount, Lionsgate and MGM three months after the pay-TV window opens.
They will also get titles from indie foreign filmmakers that do not have output deals. And they can watch a raft of TV series that Netflix licenses.
But this is a far cry from Netflix’s original concept of being the great aggregation of Hollywood movies, offering its subscribers virtually any movie they wanted to see as soon as it was released to the video store. Now it cannot offer the newer movies of five of the six major studios for streaming. It remains to be seen whether its subscribers will accept this eight-year gap.