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Summary:

Starz announced yesterday that it wouldn’t renew its streaming deal with Netflix, sending many Netflix investors heading for the exits. Netflix stock has been down 8-10 percent since the announcement went out. But what do Wall Street analysts think?

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Starz announced Thursday that it had reached an impasse in renewal talks for the digital streaming deal it has with Netflix, and that its content will disappear from the streaming service next March. That’s sent many investors heading for the exits, as Netflix stock has been down 8-10 percent since the announcement went out. But what do Wall Street analysts think?

On the whole, analysts acknowledged that the percentage of titles that Starz represents in the Netflix library is relatively small. However, the library includes new movie content from Sony and Disney, which could affect subscribers’ perception of the overall quality of the service. Furthermore, the non-renewal highlights the continued challenge that Netflix faces as it seeks to strike deals with potential partners: higher content costs.

But don’t take our word for it… Here are selected snippets from various Wall Street analyst reports:

Doug Anmuth, JP Morgan:

“Despite Starz content from Disney and Sony representing some of the highest quality film content on Netflix’s streaming service, we believe Netflix has seen little overall pushback from subscribers since Sony content was pulled from the service more than 2 months ago in the related, but separate dispute between Sony and Starz… Our current 2012 estimates factor in a ~$300M/yr Starz deal. In the event that Netflix cannot acquire a similar amount of content from alternative content providers, we could see a gross profit increase, though revenue and subscriber growth could be dampened by lower overall content appeal.”

Ingrid Chung, Goldman Sachs:

“We would view any weakness in Netflix as a buying opportunity for the following reasons: (1) Starz content accounted for a small and declining percentage of viewership (8% of US streaming hours currently going to 5%-6% in 1Q2012); (2) Netflix’s subscriber growth has not been negatively impacted by losing Sony content 2 months ago… (4) Netflix now has 6 months to find content to fill the potential void; and (5) We view the lowered valuation as very compelling compared to other fast growing, disruptive Internet companies and its addressable market.”

Scott Devitt, Morgan Stanley:

“We believe Netflix is now going through a new phase in which the company is 1) seeing rising content costs, 2) increasing spend on international expansion, 3) approaching law of large numbers in US, and 4) the effects of a price increase. While Netflix is showing financial discipline and it should be able to acquire other content with the money it would have paid to Starz, Netflix is also becoming more of a TV distributor than a movie distributor. Is this bad? We don’t know, but it is different. While Netflix stated that Starz accounted for 8% of streaming hours, we believe the number is closer to 15%, including Sony content.”

Brian Fitzgerald, UBS:

“The real impact… is very likely materially higher because Starz offers lots of new and original programming content that Netflix members like. Our analysis showed that 22 of the 100 currently most popular streaming titles on Netflix were from the Starz catalog. Given the still earlier state of its streaming library, we think the loss of this content will surely affect the quality of Netflix’s streaming service – potentially pushing NFLX deeper into the long tail and /or requiring them to bid for replacement content in a market with rising prices.”

Richard Greenfield, BTIG:

“The overall Netflix film void would be hard to fill – Epix’s content (Paramount, Lionsgate and MGM) is nowhere near as exciting as Sony/Disney (remember several of the biggest Paramount movies do not go to Epix, such as the Transformer franchise) and while Relativity is adding some good content, ‘fresh’ movies will certainly decrease on Netflix next year without a Starz renewal… To the extent Netflix is morphing into a TV rerun service, movies are becoming less and less important and this frees up capital to spend even more aggressively on TV content which is easier to license than movies and distinguishes it from traditional pay TV services such as HBO, Showtime and Starz.”

Photo courtesy of Flickr user echiner1.

  1. I have to say that Netflix’s online content quality has really declined in recent months. I think Scott Devitt for Morgan Stanley has it right. Seems like a lot more TV and crummy movies that you can get for free at the public library, with a few decent ones sprinkled in. I think there is a lot of opportunity for the movie studios to step up and provide good quality content online at a fair price – cutting out the middle-man, which is Netflix. Maybe Netflix could offer different subscriptions for different movie studios? Like cable provide HBO for a separate fee. Users like all-you-can-eat better though.

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  2. I think the concept of “Netflix” is great, however, their execution is wrong. They are continually reducing content to please producers and keep costs down, but now they are raising their prices 60%, seems like a poor business model.

    Meanwhile, redbox is popping up everywhere and many studios (i.e. comedy central, NBC, etc.) are allowing viewers to stream for free.

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  3. The question for Netflix is the sustainability of its business model, growth rate, margins, P/E and stock price. As streaming pioneer, it enjoyed tremendous first mover advantage in the form of low initial streaming contract rates, when streaming potential was not yet widely recognized. Now that it is, studios will not repeat their mistake. The great depression proved that low cost entertainment can thrive in a bad economy, and Netflix underscored the point by rising from $15 to $300 per share as it convinced people to cut the cable. NFLX has only 2 major content contracts, Starz and Epix. Epix deal is said to run through August 2015 while Starz deal ends March 1, 2012. There is still plenty of time for Hastings and Malone to reach a deal, though I suspect it to cost NFLX closer to $500 million. No way will it accede to Malone’s demand that it offer premium packages resembling cable channels. By the time the air clears, I expect Malone’s Liberty Media to own at least 10% of Netflix. It will take their combined mindshare, and maybe Carlos Slim as well to help Hollywood battle Bollywood for international eyeballs and stay one step ahead of the pirates.

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    1. No way Hastings gives a stake to John Malone — he’s so much smarter than that. To a certain extent I think this is a tempest in a teapot. Hollywood and Wall St will make a big deal out of how important a certain contract is to Netflix, because there’s this belief that content is king. Somehow no one noticed that the cable programmers survived — and thrived — for decades serving up reruns and long-tail, second-run content. Which is precisely what Netflix is doing today.

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  4. Perhaps I’m not a “typical” Netflix subscriber, but it seems to me that the analysts don’t understand the consumer profile that’s attracted to the subscription service.

    I don’t see the quality declining at all — I can still find lots of new Indie films, amazing foreign movies that I’ve not seen before, and documentaries and archive TV series that are readily available on Netflix Instant Viewing.

    Granted, if what you seek is primarily new mainstream Hollywood movies, then you’re likely not a good fit for the Netflix business model. Personally, I prefer this caliber of video content, and won’t miss the predictable big-budget Hollywood productions.

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    1. I agree with David. If you want more recent films, you have plenty of choices. But that’s not the reason for Hollywood’s ire with the ‘N’. IMHO, it has more to do with the number that you don’t here brandished about, OnDemand and online rental’s that are possibly declining. I have no proof of this so it’s more speculation based on a few things I’m seeing. Firstly, DirecTV has been trying to offer more carrots for ppl to get OnDemand movies. Buy one get one’s, and the like. Next, Video renting via Android Market, while on the surface a move to compete with iTunes, I see it as a grab to get more eyes paying to watch a movie for $3.99 for 24hrs(!!!$$$). It’s another sign that folks are voting with their wallets and the Netflix model is still a killer value.

      Ohh and BTW, on the 60% hike thing…that’s if you were on the bottom tier for single disc at a time. For those on higher tiers, the price hike was way smaller, more like 10%. We still reduced from 3disk to 2disk and kept streaming since we’d see no increase in our bill with that change. And we stream ALOT!

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      1. Sure, not everyone will see a 60% increase. But the majority of subscribers were either unlimited streaming or the $9.99 streaming plus one-disc out plan. So that’s the biggest portion of Netflix DVD users.

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    2. David, I definitely think that there’s a misunderstanding among wall st types and the tech press in what netflix’s value proposition is, and how subscribers use the service. I’ve read that 60% of Netflix views come from recommendations. Which means the majority of viewers are likely not watching the newest movies at all, but something that the didn’t know they wanted to watch when they logged on.

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  5. The last thing I’m interested is more TV series. I’m with Netflix for the movies and documentaries, especially foreign, independent, and unique stuff. Starz stuff is fun but I can get that elsewhere or on blu-ray.

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    1. Dennis, I think most people disagree with you, Netflix included. It’s a very data-driven organization, and I’m sure that if it’s betting on tv, that’s because that’s what it’s users are watching.

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      1. I want MORE tv! It’s actually a bit rare that Netflix is used for movies in my home, 9 times out of 10 we’re watching tv series.

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      2. I agree I may be in the minority. TV series usually bore me. That’s why the documentaries, foreign films, and independent films on Netflix interest me so much. Dedicating time to a recurring story is a very unusual thing for me now and reminds me of when I was a kid. I use Netflix and other Roku-accessible services to escape from the 95% of stuff cable has that doesn’t interest me. I’ll be very disappointed if Netflix just turns into one more tiered cable service.

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  6. Why would anyone with integrity care what whores from discredited Wall St. banks have to say? Goldman Sachs et al will sell you one position then bet against it for their own profit. If these individuals had integrity, they would work elsewhere.

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  7. I just went all streaming on my Netflix account, so I’m saving money…going from 4 DVDs in the past to pure streaming now. I just don’t have time to mail even a single disk. What allows me to do this is the increasing amount of material on streaming…just now I’ve been watching the entire “Twin Peaks” series and Lancaster-Douglas in “I Walk Alone”. In fact, people have been arguing the wrong thing about price. I would gladly pay Netflix $16 instead of $8 a month — if they put the whole catalog online!! (And it seems to be inevitable that they will). As far as Starz, they were a last ran cable channel, and now they have the nerve to “walk” on Netflix? Please…take stock of yourself…you’re not worth it, Starz.

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  8. I think that NF will pretty much be limited to movie ‘catalog’ and and non current season TV shows. Not sure if the customer is driving NF to more TV shows or because that is what NF is only being offered by the content owners. I do not see much happening in the ‘fresh’ movie department till the middle part of the decade. Not to sure about the timing (maybe someone with knowledge could expand) but this is the time period when those long term contracts with the movie studios by HBO, Starz, etc. come up for renewal. By mid decade NF should/could have 35-40 million subscribers. This well put NF in a very competitive position to bid for those ‘fresh’ movies. I think that HBO, Starz, etc. realize that movies are not going to be their bread and butter heading into the future.

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