Netflix's deal with Starz isn't kaput, the real negotiations are just beginning

editor's corner

Jim O'Neil

Last week, Starz announced it was walking away from a $300 million a year offer from Netflix (Nasdaq: NFLX) for content, saying it was doing so as "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."

But as anyone who has bought a house, a car or a company knows, saying "no" to a deal rarely is the end of that deal; it's just negotiations.

Remember, the deal between the two companies doesn't expire until February, and that's plenty of time to go back in and hammer out a new pact.

Take a look at the statement Netflix released last week and tell me you haven't used a similar strategy in negotiations:

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

That's like saying to someone whose house you just toured, "Thanks for letting us look at this beautiful home..."

"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.

"There are a dozen more homes out there in the market, and their prices are a little more competitive than yours..."

"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 first 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 the fourth quarter, we expect Starz content to naturally drift down to 5-6 percent of domestic viewing in the first quarter. 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."

"Just down the block, the Smiths', who also have a swimming pool and are willing to work with us on some improvements we'd like to see, are really motivated to sell."

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

"Again, really nice place you have here; let us know if you are willing to come down a couple of thousand. We really like your place."

Will Richmond, at VideoNuze, has a great look at the back story of the deal, pointing out that the $300 million a year could have a sizable impact on Starz's revenue, but it makes up less than a quarter of what Starz earned from other customers last year.

And, as Netflix's subscriber base continues to grow, escalation clauses from Starz's content provider partners could end up costing it more money, cutting into profits. And, Richmond points out, Netflix's $8 monthly subscription fee also was a sticking point, as many thought it would be months ago, especially since Starz CEO Chris Albrecht said the company was "seeking agreements that specifically price and package our content in ways on par with that of our traditional distributors."

And, of course, Netflix CEO Reed Hastings said the service could "live without" Starz if it had to, but he implied he didn't believe that would happen:

"They have content, we have money," Hastings said. "Unless we're idiots we ought to be able to find some way to make it work over the next couple years."

Truer words have never been spoken, and obviously they're not idiots.

Can any content provider really turn away from a $300 million deal today? CBS and Comcast (Nasdaq: CMCSA) both said in their second quarter earnings calls in August that deals with Netflix made them a lot of money.

As CBS' chief financial officer, Joe Ianniello said at the time:

"The Netflix International (deal) is gravy. We want to put gravy, we want to put some cream, we want to put cherries on the top of all that stuff, so stay tuned for more of that."

Will Starz make a deal? Will Netflix? Who doesn't want more gravy?--Jim

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