Looks Like Netflix Subscribers Have to Watch Men in Black Elsewhere

Just because Netflix (NASDAQ:NFLX) has begun producing its own content as means to offset the rising costs of licensing agreements, does not mean that Starz’s (NASDAQ:STRZA) deal with Sony (NYSE:SNE) will not be a blow.

On Monday, Sony Pictures gave the pay-television network Starz the exclusive rights to its movies — which range from Men in Black to Ghostbusters to Resident Evil. Now, Netflix has no hope of making a similar deal with the Japanese company.

In September 2011, Starz ended contract renewal discussion with Netflix because the companies could not agree on pricing or packing, and its programming was removed from Netflix in March of 2012. In a statement, Starz Chief Executive Officer Chris Albrecht said the decision was a “result of our strategy to protect the premium nature of our brand.” Netflix originally paid $30 million back in October of 2008 for the rights, which many analysts called a steal. By the time the deal came up for renegotiation, Netflix’s offer of $200 million was just not enough, so Starz pulled its 2500 movies, including films from Sony…
Stifel Nicholas analysts told Reuters that the agreement was priced at an estimated $300 million per year, similar to how much Netflix paid for movies from The Walt Disney Company (NYSE:DIS).

In a 2010 Annual Shareholder Report, the company showed signs of content problems. Netflix wrote that “[i]f we are not successful in maintaining existing and creating new relationships, or if we encounter technological, content licensing or other impediments to our streaming content, our ability to grow our business could be adversely impacted.”

Content continues to be a problem. While Netflix posted stunning fourth-quarter results that showed a gain two million new subscribers to its video streaming business and pushed its stock up significantly, the company’s future is far from assured; one quarter’s results is not enough to build a bull case. Whether those new subscribers will stay with Netflix, given the content acquisition battle taking place between the video subscriber and its rivals, will only be determined in the coming months. Although the company has secured deals with Disney and Time Warner (NYSE:TWX) in the past quarter, Netflix’s “library of streaming content simply isn’t as all-encompassing as its DVD rental library once was,” reported the Financial Times, “meaning that it is more vulnerable to actual or potential competitors.” Even with this limited selection, analysts are worried about the company’s costly acquisition bill…

To boost its content and lower that bill, Netflix has turned to producing its original programming, beginning with its new series “House of Cards,” which cost $100 million to make two,13-episode seasons. Since many critics have given the show a positive review and more than one quarter of viewers on one network watched all episodes in the first weekend it was available to stream, it seems this strategy was a good business decision. But the cost is high. Netflix does not run any advertisements, nor does it benefit from a relationship with a large parent company as HBO does with Time Warner. Instead, the company makes all its money from the $7.99 subscription fees, and Chief Executive Officer Reed Hastings plans to make five original shows per year.

However, the financials back up this strategy; if the $100 million Netflix spent on “House of Cards approximates its budget for each show, the company will have to sign up 2.6 million more subscribers than it would ordinarily, reported The Atlantic Wire. That number of addition represents less than 10 percent of its current customer base of 33.3 million, and such gains are possible; last year the company experienced a 13 percent streaming viewer growth in the United States.

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