With Starz Announcement, Netflix Takes A Hit

The premium cable network Starz announced that it would not renew its streaming contract with Netflix Thursday. The news came on the same day that Netflix's controversial new price hike kicked in — and the company's stock took a beating. Melissa Block talks to Ben Fritz, who has been covering the story for the Los Angeles Times.

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MELISSA BLOCK, host: The home video giant Netflix had a bad day yesterday. The premium cable network Starz announced that it would not renew its streaming contract with the company, and that means the already thin library of top-tier recent movies that Netflix can stream just got a lot thinner. The news came on the same day that Netflix's controversial new price hike kicked in, and the company's stock took a beating. Ben Fritz has been covering the story for Los Angeles Times. He joins me now. Welcome to the program.

BEN FRITZ: Thank you for having me.

BLOCK: And let's talk specifically about just what Netflix is losing here. Most people would know Starz as a cable TV network, and it has pay cable rights for movies from two very big movie studios, Disney and Sony. How badly does Netflix need this content?

FRITZ: Well, one of Netflix's appeal is that they have some recent movies. And in order to get recent movies, they have to work with these pay-cable channels. And by losing Starz, they lose popular movies from Sony and Disney like "Alice in Wonderland" and "The Karate Kid." And this is a pretty big blow to Netflix because it means the content they offer will be more and more just really old stuff than people can't really think of Netflix as a replacement for their local DVD store or a Redbox or cable.

BLOCK: If they want to stream.

FRITZ: If they want to stream newer content, then Netflix is just not going to be a good offering anymore.

BLOCK: Ben, you've been reporting that Netflix offered to pay Starz $300 million to renew this contract. That's about 10 times what they pay under their current agreement. Starz said no. Why? Why did they say no?

FRITZ: Because Starz realized that that $30 million deal they made in 2008 was very bad for them. Because streaming content has become so popular that there's no reason to subscribe to cable anymore. Why would you pay 15 bucks to your cable provider to get Starz if you can get the same content through Netflix for $8? So Starz, they're just not interested and essentially undermining their television business by working with Netflix. And it turns out even $300 million is just not enough because Starz believed it would essentially destroy the rest of their business.

BLOCK: Well, it's interesting because if they're losing pay-cable subscribers, you would think they would take a deal like this. Three hundred million dollars is $300 million.

FRITZ: But they're essentially making themselves irrelevant in the long run. Because if you think about it, if most of their money comes from Netflix, then in the few years, Starz has to go back to Sony and Disney to renew their deals. And Sony and Disney might say why am I even working with you? I can make my own deal with Netflix. And then essentially, Starz doesn't really have a reason to exist anymore in a few years.

BLOCK: Now, Netflix has, what, 25 million subscribers?

FRITZ: Yes.

BLOCK: And they're charged a monthly fee. They don't charge per film. Is that the issue here - movie studios worried they're not getting their money's worth? What would make them happy?

FRITZ: What make them happy is if the pricing model of Netflix more resembled what they're used to getting in other businesses like cable television. So what Starz wanted Netflix to do was essentially charge more money to consumers, the same way that you have to subscribe to cable and then spend another $15 to get Starz. They wanted Netflix subscribers to have to spend additional money in order to get the Starz content. It's another example of, you know, Hollywood has these established business models would provide them billions of dollars. And they want to see those business models continuing - keep getting money the way they're used to getting it.

BLOCK: And if we think about how movies get to viewers, OK, they start in theaters, go to DVD, video on demand and then to cable and then to streaming. Do you think that whole chain starts to change anytime soon?

FRITZ: I think the movie studios that produce the content would like that change stay the way it is, because they make money at each step along the way. And that's how they get enough to support these big budget movies, you know, and that's the economic model of Hollywood. So they want it to stay that way. But consumers and visual media companies would obviously prefer to only have to pay once and have access to everything. So it's an interesting kind of battle. Will the distributors who reach consumers win? Or will the people who produce the content win? That's the big question in Hollywood for the next decade, I think.

BLOCK: Ben Fritz covers the entertainment industry for the Los Angeles Times. Ben, thanks so much.

FRITZ: Thank you, Melissa.

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