Starz (s LSTZA) announced Thursday that it had reached an impasse in renewal talks for the digital streaming deal it has with Netflix, (s NFLX) 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 (s SNE) and Disney, (s DIS) 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: (s JPM)
“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: (s GS)
“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: (s MS)
“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: (s 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.”