Starz Entertainment (NASDAQ:LSTZA) has ended its deal to provide movies to Netflix (NASDAQ:NFLX), cutting off one of the online video service’s most valuable sources of recently released movies. Netflix stock is down over 9% on the news.
The current agreement between the two expires in February 2012, and analysts say the cost of renewing the agreement could have been as much as $300 million. However, Starz (NASDAQ:LSTZA) concluded that they would still be losing money in the deal, as it would give consumers a reason to subscribe to Netflix instead of the premium movie channel.
Don’t Miss: Equity Research Analysis of the Starz-Netflix News.
“This decision is 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,” Starz said in a statement issued Thursday. Starz has exclusive pay-cable rights to movies from Walt Disney Studios (NYSE:DIS) and Sony Pictures (NYSE:SNE). In 2008, when Starz signed its current agreement with Netflix, only a small number of relatively young, technologically-savvy people watched video online, and the estimated $30 million a year Netflix would pay for Starz’s programming was seen as new revenue, as it would have little impact on its television business.
But with 25 million subscribers, Netflix has been putting a dent in the competition, including Starz, which has been fueling its competitor’s growth by providing the service with recently released hit movies like “Alice in Wonderland” and “The Karate Kid”. Netflix offers relatively few recently released movies through its streaming service, the rest coming from its agreement with premium movie channel Epix, which provides films from Paramount Pictures (NYSE:VIA), Lionsgate (NYSE:LGF) and Metro-Goldwyn-Mayer. HBO (NYSE:TWX), which has distribution rights for films produced by 20th Century Fox (NASDAQ:NWSA), Universal Pictures (NASDAQ:CMCSA), and Warner Bros. (NYSE:TWX) has refused to partner with Netflix.
The news comes just as Netflix begins implementation of its new pricing plan on all existing customers. While the streaming-video service will continue to cost $7.99, the DVD-delivery service will now cost $7.99 as its own separate package rather than as a $2 add-on.