Why Netflix Subs Can’t Stream Sony Movies From Starz (For Now)

When you run out of talk minutes, you have to top off, change plans or stop using the cell phone. Turns out the same kind of system is at work with Starz, which literally has hit the limits on its ability to serve up movies from *Sony* Pictures on Netflix (NSDQ: NFLX) through its Starz Play service. The result: no Sony (NYSE: SNE) movies on instant Netflix for now and a public discussion over a deal point that usually would stay private.

Multiple sources tell paidContent that Starz has hit a subscriber cap for streamed subscription video on demand (SVOD) in its current Sony deal to stream first-run movies and, as a result, asked Netflix to take down the movies until it can be resolved. This doesn’t affect other Starz offerings that include Sony.

Pauline Fischer, VP of Content Acquisition for Netflix, notified subscribers via the corporate blog Friday morning, ascribing it to “a temporary contract issue between Sony and Starz.”

Starz’s public stance: “Sony movies have been temporarily taken down from the Starz Play service on Netflix. All parties are working diligently to resolve the issue and return the films to Netflix members.” No comment from Sony, which is referring queries to Starz.

The current Sony-Starz library deal dates back to 2008 and runs through 2014 but a separate theatrical output deal covers first-run movies released through 2016. That second deal has the clause that triggered this situation but it affects all Sony movies that were being steamed on Netflix through Starz Play.

Starz seems to have been caught off guard by Netflix’s rapid expansion. It’s not clear whether the issue is overall numbers with Netflix passing 23 million subscribers or the number of subs with access to streaming and Starz Play. It’s also not clear whether there is an escalation clause built in that Starz could use or if hitting the number triggered the need to renegotiate this point. (My understanding is negotiations were well under way.) Meanwhile, the Netflix-Starz deal expires early next year and Starz would like a more lucrative deal.

Ideally, this would have been taken care of behind the scenes and subscribers wouldn’t know it was an issue. This isn’t exactly a retrans pay dispute with public sentiment viewed as leverage. Instead, if you want to watch SALT, The Social Network or other first-run movies from Sony through Netflix, order the DVD.

Analyst’s view: BTIG’s Richard Greenfield, who initially raised concerns about the Sony-Starz trigger late last year, thought the matter was resolved until today. While Starz and Netflix are calling this a temporary issue, if what Greenfield suspects — that this will escalate Starz-Netflix negotiations — temporary could have a new definition unless Sony and Starz agree to an interim solution. From Greenfield’s post:

While it is possible that Sony and Starz simply work out their differences or that Netflix can offer Starz streaming to a subset of users (to reduce the streaming sub count) without a larger Starz/Netflix renegotiation, we believe a more likely scenario is that this impasse creates a catalyst to trigger an earlier renegotiation between Netflix and Starz (rather than wait until January 2012). We suspect Starz wants to have a sense of what its new Netflix deal looks like, before it renegotiates with Sony in terms of how much of the dollar upside goes to Sony vs. Starz.

Netflix’s Reed Hastings continues to talk about his willingness to pay-up to retain Starz content (click here for our 5/6 blog post). In turn, we continue to believe that a new multi-hundred million dollar annual arrangement between Starz and Netflix will be reached in the near-future (probably starting at $300-$350 mm annually and escalating), with Starz, Sony and Disney (NYSE: DIS) all benefiting from the increased value of digital rights, while Netflix retains access to high-profile feature films that it needs to continue to drive its sub growth.