More bad news for Netflix: Starz ends renewal talks

Updated. After flying high over the past few years, Netflix (s NFLX) has had its share of troubles lately, including a user revolt after announcing a price increase for streaming and DVD customers. The latest piece of bad news is that cable network Starz will no longer negotiate to renew a licensing deal that gives Netflix users access to content from Disney (s DIS) and Sony Pictures (s SNE) at the same time as Starz cable subscribers.

In announcing that the network was ending its renewal discussions with Netflix, Starz CEO Chris Albrecht issued the following statement:

Starz Entertainment has ended contract renewal negotiations with Netflix. When the agreement expires on February 28, 2012, Starz will cease to distribute its content on the Netflix streaming platform. This decision is a result of our strategy to protect the premium nature of our brand by preserving the appropriate pricing and packaging of our exclusive and highly valuable content. With our current studio rights and growing original programming presence, the network is in an excellent position to evaluate new opportunities and expand its overall business.

The announcement comes about three years after Netflix launched its streaming service, which grew rapidly in part due to the new release titles that were available thanks to the Starz deal. The agreement gave Netflix streaming viewers the opportunity to watch new release titles like Wall-E at the same time they showed on cable.

Since it was announced, Starz has been criticized for selling its content too cheaply and enabling a new competitor to undercut the incumbent cable ecosystem on price. As a result, the Netflix deal has been a point of friction between Starz and other traditional distributors, as well as its studio partners. A clause in Starz’s contract with Sony Pictures resulted in the network having to remove its content from Netflix after it reached a limit to the number of IP subscribers that could access its content.

Nevertheless, Netflix has been working to keep Starz content online. After striking a five-year deal with Epix last year that was reportedly worth $900 million, Netflix was expected to pay upward of $300 million a year to make a new Starz deal happen. However, it appears that the two parties were too far away to make a deal happen, which will mean the removal of Disney and Sony content next spring.

With that content disappearing and general dissatisfaction with the recent price hike, Netflix will need to work hard to retain its existing customers and to win over new ones. Already Wall Street is punishing Netflix on the news: Its shares have been pummeled lately, falling about 30 percent after reaching a 52-week high of $304.79. The stock fell nearly 10 percent in after-hours trading on the Starz news, to about $211.

Update: Netflix has issued the following statement in response to the news:

Starz has been a great content partner since 2008 and we are thankful for their support.

While we regret their decision to let our agreement lapse next February, we are grateful for the early notice of their decision, which will give us time to license other content before Starz expires.

While Starz was a huge part of viewing on Netflix several years ago because it was some of the only mainstream content Netflix offered, over the years Netflix has spent more and more licensing great TV shows from all four broadcast networks and many cable networks, and we have licensed 1st run movies from Relativity, MGM, Paramount, Lionsgate and others. Because we’ve licensed so much other great content, Starz content is now down to about 8% of domestic Netflix subscribers’ viewing. As we add even more content in Q4, we expect Starz content to naturally drift down to 5–6% of domestic viewing in Q1. We are confident we can take the money we had earmarked for Starz renewal next year, and spend it with other content providers to maintain or even improve the Netflix experience.

We have tremendous respect for the Starz creative team, and we look forward to someday licensing some of their original or licensed content.

Photo courtesy of Flickr user Ross Catrow