On the same day that Netflix's controversial new pricing model became reality, the company also lost its contract with Starz -- which means some of Netflix's best and newest content will disappear come February 28, 2012. It's a mostly lose-lose situation, but Starz's departure could mean big cable companies' return to prominence, and the dilution of low-cost streaming video.
How Netflix Tried and Failed to Keep Starz Happy
Netflix's relationship with Starz has deteriorated since the two joined forces three years ago for a reported $30 million. Before the deal fell apart completely, the most painful jolt was when Sony content (for which Starz owns the licensing rights) disappeared from Netflix. Then Starz instituted a 90-day waiting period for its premium content. Now, Starz is just done.
Netflix flung a lot of money at Starz to keep them happy; it paid as much as $300 million -- 10 times the original contract price -- according to the The LA Times. But according to the Times' unnamed sources, Starz wanted to implement a tiered pricing structure, so Netflix subscribers who wanted first-run programming would have to pay more than the base $8 per month plan.
Netflix's answer was no, and Starz, in a statement, said that it would shut Netflix out on February 28, 2012 to "protect the premium nature of [its] brand" and "evaluate new opportunities and expand its overall business" -- meaning that Starz will start shopping around for another partner in streaming media.
Why this Could be Starz's Biggest Mistake
Not only is Starz giving up $300 million a year, it doesn't appear the company has a solid backup plan yet. Ryan Lawler at GigaOM reminds us that Netflix never had an exclusive contract with Starz, meaning Starz could have been bidding its streaming rights to Google or Amazon the whole time. But that doesn't appear to have happened.
Plus, if Starz was dead-set on tiered pricing models, and Netflix -- the most popular streaming video provider on the market -- refused, what makes Starz think that Netflix's competitors will want to start charging extra? They'll want to lower prices to keep fighting Netflix's control over streaming media, and Starz's demand to raise them could spoil future contract negotiations.
How Bad is Netflix's Loss of Starz's Stuff?
Without a doubt, Netflix is losing a lot of premium content, like Toy Story 3, Let Me In, Casino and, um, Jason X. But the loss isn't so bad. The LA Times also quotes Netflix spokesperson Steve Swasey saying Starz viewing is down to 8 percent and expected to "naturally drift" down to 5 or 6 percent in the beginning of next year, before the partnership ends.
Netflix has also pumped serious money -- an estimated $1 billion in 2011 alone -- into providers like Paramount, Lionsgate, and Miramax. Analysts predict that Netflix's streaming content licensing costs will rise to almost $2 billion in 2012.
So maybe Netflix has lost some cred, given the fact that its price hike and Starz's peace-out happened on the very same day, but with 25 million customers, it's certainly not the company's demise.
Is this Big Cable's Big Comeback?
Now that Netflix has lost some of its best content, you may regret cutting the cable cord or ditching the DVDs from your Netflix subscription. This is a win for big cable. The appeal of premium channels like HBO, which has its own streaming platform with HBO Go, has now broadened.
What's worse is that Starz's departure could signal a dramatic change in pricing structures -- those tiered pricing models are ominous. Also, the price of premium content could generally escalate, forcing other online video providers like Hulu to erase big names from its contracts as well.
But here's the question that'll determine whether the end of Netflix's relationship with Starz actually matters or not: will these shifts make you go back to cable, or purchase bigger cable packages? Because who knows -- if Starz fails to find another lucrative venue for its wares and returns to Netflix later on, at a lower price, this kerfuffle could be nothing more than a blip.