Why Netflix Might Be on Your Side

NEW YORK (MainStreet) — Movie channel Starz announced Thursday that it will pull its content from Netflix’s streaming film library at the end of February as a result of a breakdown in contract renewal negotiations. Starz was the service’s provider of Sony and Disney movies, and the company will have to strike separate deals if it wants to keep those movies in its library.

The announcement couldn’t have come at a worse time for Netflix – Thursday, you may recall, was also the day the service’s new pricing regime went into effect for existing subscribers. Netflix previously offered a $10-per-month plan that included unlimited Internet streaming and DVDs by mail. But in July the company did away with that plan, replacing it with a DVD-only plan and a streaming-only plan, each costing $8 a month. In other words, subscribers who wanted to keep getting unlimited streaming as well as DVDs by mail would have to pay $16 a month, a 60% price hike.

The decision prompted many subscribers to head for the exits, enticed by some of the competitors that have cropped up since Netflix (Stock Quote: NFLX) started offering its subscription model in 1999. For those on the fence about ditching the service, the announcement of lost content may be difficult to recover from.

We can’t begrudge anyone who feels Netflix is no longer the great deal it used to be, but the loss of Starz and the circumstances surrounding the split, serve as a stark reminder of the tough realities that prompted Netflix to raise its prices in the first place.

Under the current, soon-to-expire agreement with Starz, Netflix paid $30 million per year for the right to stream the movie channel’s content. Negotiations to renew that contract reportedly broke down even after Netflix offered a $300 million-a-year deal. Starz reportedly insisted that Netflix introduce a tiered subscription service so subscribers who wanted to see Starz movies and TV shows (including Sony and Disney films) would have to pay more than $8 a month. Evidently Netflix refused to hike subscription prices more than it already had.

Netflix has seen tremendous growth since its launch, attracting more than 25 million subscribers in the U.S. and Canada. But the breakdown of the Starz deal is a reminder that success comes at a cost, in the form of increased competition and soaring licensing fees demanded by studios.

“Netflix is under enormous pressures from the content owners to write bigger and bigger checks,” analyst Arash Amel told The Associated Press in July when Netflix raised its prices.

Despite those pressures, Netflix has until this summer kept its subscription prices virtually unchanged even as its library swelled enormously from the 1,000 streaming videos and 2,600 DVDs it initially offered. The result is that even with the price increase, Netflix subscribers are still getting more movie bang for their buck than they used to. And if the reports surrounding the Starz deal are true, the company was willing to pay a king’s ransom to keep the library well-stocked without raising prices further on subscribers.

We aren’t asking you to feel bad for Netflix, which is still doing just fine. But before you slam it for raising prices, consider how much content it’s still able to deliver on the cheap despite an increasingly hostile business climate.

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