Netflix is Not Seeing Starz

Bombshell: Starz has ended talks with Netflix about renewing a licensing agreement for movie content on the streaming video service. The current agreement — which expires on February 28, 2012 — reportedly is estimated to be worth about $30 million, and Netflix CEO Reed Hastings had stated that he expected the renewal to cost around $200 million a year. The huge jump reflects both the mammoth success of the Netflix streaming service and the pile of money that Netflix has generated with its all-you-can-eat subscription model.

So why did Starz walk away from the cash? According to a company statement, it was “a result of our strategy to protect the premium nature of our brand by preserving the appropriate pricing and packaging of our exclusive and highly valuable content.” In other words, they don’t want to upset their main customers — the subscription television services — and they think that perhaps they can do better with some other online streaming deal.

This is enormous news for Netflix. The streaming service currently has a huge movie catalog, though it’s a bit like the old story about the two old ladies on the cruise ship. At dinner one night, one says “The food on this cruise isn’t very good, is it?” To which her friend replies, “No, but they do serve such nice large portions.” Netflix has been serving large portions of average quality films, and a large percentage of those come from Starz. At a time when Netflix is wooing Hollywood studios and other content producers to help it improve the quality of its content catalog, the loss of the Starz titles could be a major blow.

The bigger issue is that this news demonstrates just how fragile this new ecosystem of Internet streaming video is. The distribution channels of Netflix, Hulu, Vudu, Amazon Instant Video, and others are not firmly rooted in the video entertainment establishment yet, unlike cable and satellite services. They continue to balance on the knife edge, fighting content producers’ resistance with piles of money. But none have a certain future; even the sale of Hulu — which was created by the networks and content producers — is shrouded in uncertainty because it is unclear whether or not it will still have access to the content that it now provides.

I believe that online streaming is close to being the proverbial unstoppable force, though no single service controls that force. As a result, I believe that online streaming will continue to grow and that fortunes will be made in the process, but there are no guarantees at this point that any individual service will survive longer than a couple more years. Will Netflix recover from the loss of Starz content and become one of the survivors? It’s too soon to tell.