Peter Kafka

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Starz Says It Won’t Renew Giant Netflix Deal

Satellite TV channel Starz says it won’t renew its distribution deal with Netflix when it expires next February.

If the company follows through on that statement, it will mean Netflix won’t be able to provide digital access to movies from Sony and Disney — a scenario Reed Hastings and company have been trying to avoid for years.

Here’s the statement from Starz:

Starz Entertainment has ended contract renewal negotiations with Netflix. When the agreement expires on February 28, 2012, Starz will cease to distribute its content on the Netflix streaming platform. 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. With our current studio rights and growing original programming presence, the network is in an excellent position to evaluate new opportunities and expand its overall business.

UPDATE: Here’s a comment from Netflix, which is acting as if Starz’ decision is final:

Starz has been a great content partner since 2008 and we are thankful for their support.

While we regret their decision to let our agreement lapse next February, we are grateful for the early notice of their decision, which will give us time to license other content before Starz expires.

While Starz was a huge part of viewing on Netflix several years ago because it was some of the only mainstream content Netflix offered, over the years Netflix has spent more and more licensing great TV shows from all four broadcast networks and many cable networks, and we have licensed 1st run movies from Relativity, MGM, Paramount, Lionsgate and others. Because we’ve licensed so much other great content, Starz content is now down to about 8% of domestic Netflix subscribers’ viewing. As we add even more content in Q4, we expect Starz content to naturally drift down to 5-6% of domestic viewing in Q1. We are confident we can take the money we had earmarked for Starz renewal next year, and spend it with other content providers to maintain or even improve the Netflix experience.

We have tremendous respect for the Starz creative team, and we look forward to someday licensing some of their original or licensed content.

Netflix shares dropped nine percent in after-market trading after Starz put out its press release.

Netflix has been preparing to live without programming from Disney and Sony by broadening its library, particularly via deals that have brought it TV shows from the likes of CBS and other networks. The company has also announced a move into original programming, via an expensive mini-series starring Kevin Spacey.

The company has already been living without Sony movies since June, when they were pulled off the streaming video service because its subscriber growth had tripped off a contract violation. At the time, Netflix described the Sony absence as “temporary.”

The fact that Netflix had access to Sony and Disney’s digital library at all has often rankled Hollywood, since the company paid a pittance for them back in 2008 — something like $30 million a year. Netflix has signaled that it would be willing to pay much more than that now — at the D9 conference in June, Reed Hastings said that it “wouldn’t be shocking” if he paid $200 million a year or more to renew the deal.

The Starz/Sony/Disney deal also symbolizes big media’s conflicted feelings about Netflix. On the one hand, Hollywood and TV executives worry that Netflix is training its 25 million subscribers to expect all the video they want, at very little cost, piped directly into their house.

On the other hand, they’ve been very happy to cash the significant checks that Hastings has been handing them for access to their stuff. Hastings has clearly been betting that short-term cash would trump long-term business model worries. “The whole relationship thing is over-stated,” he said at the All Things Digital conference. “If you have a big checkbook, you can do business.”

If Starz does end up staying away from Netflix, it will be interesting to see who ends up with its digital rights. Satellite TV provider Dish Network has talked openly about creating a video subscription that could rival the one Netflix has built, and Amazon is building up its library of digital video, which it is giving away free to some users.

Meanwhile, Google — which has struggled to land much premium content for its YouTube site — has recently started signaling that it might pay big money to get some: The company is one of several bidders interested in Hulu, the video site joint venture co-owned by Disney, News Corp. and Comcast. (News Corp. also owns this Web site).

And of course there’s yet another scenario, where Starz just hangs on to its rights for itself, and tries to boost the value of its own service via a digital extension.

Here’s Hastings onstage at D9 a few months ago, discussing his deals with Starz and the rest of the big media companies. And here’s Hastings’s D9 entire interview, in video form and via notes I took during his presentation.

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