Analysts Discuss Starz's Decision to Pull Sony Films from Netflix Streaming Service

"Netflix will likely have to renew with Starz under much higher terms sooner than the first quarter 2012 contract expiration," says Stifel, Nicolaus expert Drew Crum said, while another analyst expect Sony to get a bigger cut of Netflix revenue from Starz.

NEW YORK - Wall Street analysts on Monday weighed in on the possible implications of Starz's decision to temporarily pull Sony movies from Netflix's streaming video service.

One shared expectation is that the disruption, news of which emerged on Friday, could accelerate talks about a renewal of the Starz-Netflix content deal, which expires early next year.

"Sony's actions could act as a catalyst for the Netflix renewal," Janney Montgomery Scott analyst Tony Wible said in a report.

"While the loss of Sony product on the service may in fact allow [Netflix] to seek a license fee reduction from Starz, as the product is not available, it is clear that in order to resume service, which is in Netflix's interest, Netflix will likely have to renew with Starz under much higher terms sooner than the first quarter 2012 contract expiration," Stifel, Nicolaus analyst Drew Crum said.

Netflix first mentioned the disappearance of the Sony movies in a blog post Friday. Sources explained that a Starz-Sony film output deal, which Crum said does not expire until 2016 films, included a cap on the number of Netflix subscribers that has been reached. Now the companies are negotiating how to proceed.

Crum estimated that the Sony-Starz deal's Netflix subscriber cap is in the 24 million range. Overall, he maintained his "hold," or "neutral," rating on Liberty Starz and an $80 fair value estimate.

Wible said the latest development could have major effects on both Netflix and Starz.

"This a significant blow to Netflix as Sony accounts for 12 percent of industry U.S. Box office and is one of its single largest source of major films,"  Wible said. "In essence, the quality of Netflix's film library has  materially eroded until a new deal between Starz and Sony is established. This dynamic will not immediately hurt Netflix's earnings, but could trigger an increase in churn if the films do not soon return."
The companies have signaled they are looking to resolve the issue as soon as possible.

The Sony studio is likely to benefit from getting more money for the return of its films - "or it could keep the digital rights for itself to distribute through [Web site] Crackle to help offset DVD cannibalization," Wible said.

So far, he had predicted that 15 percent of a Netflix deal renewal's revenue would flow to Starz's studio partners Disney and Sony. The contract issue "leaves us to believe that Sony will ask for a bigger contribution, which Starz will try to pass on to Netflix," Wible said. "Given the uncertainty around Sony, we are now conservatively assuming half of the Netflix renewal revenue will go to Starz's studios.

Wible also suggested that Netflix would not be willing to pay as much for a possible renewal of its content deal with Starz without Sony. "At the very least this move could require Starz to share a greater portion of its Netflix revenue with Sony," he said.

Overall, Wible reduced his fair value estimate for Starz by $10 to $95 per share.


Twitter: @georgszalai