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Summary:

Starz has been a key component in the growth of Netflix’s streaming service over the past two years, but it has been woefully underpaid in that time. A new deal could bring Starz more than $250 million a year, according to BTIG analyst Richard Greenfield.

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Starz might be able to cash in big time by continuing to make its content available on Netflix, according to one analyst. In a research note issued Tuesday, BTIG Research analyst Richard Greenfield estimated the cable network could renegotiate its streaming deal to be worth north of $250 million a year, and the deal might get done sooner rather than later.

Starz has been a key part of Netflix’s streaming success since October 2008, when it signed up to stream titles from Disney and Warner Bros. The deal gives Netflix access to those titles in the pay TV window, or at the same time they’re viewable on the premium cable network.

The deal is pretty undervalued compared to what Starz gets from cable partners. Netflix’s streaming service has doubled since that deal was done, but Starz is estimated to be making only about $25 to $30 million a year from the deal, which boils down to less than 15 cents a subscriber. Compare that to the $2 a subscriber it gets from cable and satellite distributors, and you can see why Starz might be anxious to renegotiate.

Starz should expect a bigger deal, too, after seeing how much Netflix is shelling out for other content; its five-year deal with Epix is reported to be worth more than $900 million, or about $180 million a year. That deal gives Netflix subscribers access to streaming titles from Paramount, MGM and Lionsgate. Netflix has also been busy signing deals with independent studios like Relativity Media, Nu Image/Millennium Films and FilmDistrict for exclusive access to content in the pay TV window.

While Netflix has opened up its checkbook over the past year to diversify its streaming content, clearly the pressure is on for it to re-up with Starz, which, as Greenfield notes, accounts for 50 percent or more of the “freshest” movies in Netflix’s streaming service. As a result, it may seek to conclude negotiations well before the Starz deal is expected to lapse in the third quarter of 2011. Greenfield writes:

“We believe Netflix and Starz will need to renegotiate their distribution agreement far earlier than we had previously expected. While we believe the benefits to Starz from waiting to negotiate still exist (related to increasing competition), we sense Netflix’s rapid growth is creating a requirement for all parties to sit down and renegotiate sooner than later.

Getting a deal done sooner rather than later could also quell some uneasiness from Netflix investors; while there’s still reportedly a year left on the deal, the issue of locking down Starz content is a regular issue on Netflix investor calls. That said, Netflix CEO Reed Hastings remains confident that the renewal will get done because, as he said on the latest earnings call, “We have money to pay and they are in the business of collecting money.”

Image courtesy of Flickr user Scott Feldstein.

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  1. $180m to Epix / 17m subscribers/12months = $0.88/sub/month
    $250m to Starx / 17m subscribers/12months = $1.23/sub/month

    $2.11/month – 26% (2.11/7.99) of their streaming revenue to two content providers.

    While these are huge providers, it doesn’t leave much for the rest of the content providers in the library not to mention other corporate expenses such as SG&A, Marketing, and digital distribution.

    The Netflix model is supposed to scale nicely but I’m finding it hard to see the economies of scale when the costs can go up by 10x when it is time to negotiate content contracts.

    They may be awash with cash now but, with a significant amount of cash going towards content deals and downward pressure in subscription pricing, the numbers are diverging in the wrong way. The costs should be going down while the revenues go up, not the other way around.

  2. How much does Netflix have to pay in royalties for instant streaming movies?…

    Netflix pays hundreds of millions or billions of dollars for a blanket license to stream certain titles, so it does not pay royalties per se. Netflix has worked out a series of arrangements with various media companies for the rights to parts of their …

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