Yesterday Starz and Netflix issued dueling press releases/statements about the end of their affiliation relationship. The story was first, and most comprehensively, reported in the Los Angeles Times's Company Town blog.
Some are confused about how Starz could walk away from a reported $300 million annual rights fee, up from $30 million annually in its 3-year deal which expires in February 2012.
According to the LA Times story, the dealbreaker was the Starz wanted Netflix to charge extra for subscribers to have access to the Starz content. This extra price tier content more closely tracks the cable model where Starz is an add-on to basic. Also, It is not an unusual clause in studio "output agreements" that channels that air movies sold in the "premium window" (which is after theatrical and VOD, but before broadcast and basic cable) cannot be carried on the basic tier. The theory is that broader exposure will diminish their value for later windows. However, clearly Starz's movies had been part of Netflix's "basic" offering all along. That position however might no longer have been sustainable as the service grew.
Starz probably had some issues with cable operators about its presence on the Netflix platform. Cable operators are never enthusiastic about additional competition. Time Warner Cable said that it would not carry Epix, a competing pay service, after Epix did a deal with Netflix. While I do not know of any cable operator that has dropped Starz because of its availability on Netflix, it would not be surprising if they did not market Starz as heavily as HBO or Showtime. Since premium channels often sell for $10-15 or more via cable, Netflix's $7.99 streaming offer became a less expensive way to get the content. Unlike HBO or Showtime, that have high profile original programs that become watercooler discussion items, Starz's originals do not have the same profile. In fact, Starz withholds its originals for 90 days from Netflix, playing this card in an attempt to mollify the cable guys. It is unclear how much value that card holds, however.
One of the oddest decisions in the Netflix-Starz relationship is that all of the content was branded as Starz. Since Netflix subscribers search movies by genre and title first, labeling movies as "Starz Play" was always odd. It is hard to see how it supported sampling, you could only sample it if you were already buying a service that included it! Having Netflix have the Starz brand on the movies I believe undermines the value of the service to cable operators. So why does Starz do it? It may be a requirement of their studio deals. Starz has the right to show the movies on its Starz channels and can provide VOD access to customers who get the channels. Starz probably does not have the right to sublicense them or include them in a differently-branded environment. This is probably why you can watch only one of the seventeen Starz channels live via the Netflix website; the movies are acquired for the channels, Starz can only sell them to distributors in a package.
Netflix has done a great job establishing its own brand. Netflix is the programmer, aggregating stuff from lots of sources. While some have compared Netflix to Comcast or another MVPD, it isn't, as my former colleague Bruce Leichtman noted. It is a programmer. It acquires individual programs, not packaged, branded channels. Cable operators do this rarely places ("Free Movies on Demand"). A cable operator who drops a popular channel loses the content and the brand; there is no easy substitute for Nickelodeon, MTV or ESPN (and the dropped channel will be carried by competing multichannel distributors). Netflix losing Starz is more like MTV canceling a show -- that happens all the time, it is rarely news. Programs always change within a brand. (The only brands that rarely survive such a change are regional sports networks that lose their primary pro or college games, like Detroit's ProAm Sports System. Netflix does not appear to be one of those.)
What happens? A cynic would note that Starz issued the press release and Netflix did not and wonder if this is a negotiating ploy by Starz, six months before the expiration of the agreement. There is plenty of time for the parties to reach an agreement, particularly if the extra cost tier issue is not truly a deal breaker. Starz's press release is certainly a way to put pressure on Netflix. If Starz really intends to walk away, it could have done so quietly at the expiration of the deal.