As editor of a blog that recommends what to watch on Netflix, Taylor Nikolai is used to seeing movies come and go from the online streaming service. But even he was surprised last Friday when more than 250 films from Sony Pictures were suddenly no longer available.
"It's the first time I can remember a huge bulk of movies disappearing without advance warning," the Minnesota resident said.
Customers upset that their Netflix Instant queue unexpectedly lost some of its highest-profile titles, like "The Social Network," "Salt" and "Grown Ups," might be frustrated with Netflix and Sony. In reality, the catalyst is a pay cable network whose fate is tied to Netflix: Starz.
As part of its agreements to carry films from Sony and Walt Disney Studios on television, Starz, which is owned by Liberty Media Corp., also acquired the online rights to their movies. In 2008, Starz struck a four-year deal to distribute that content to Netflix that analysts estimate is worth $20 million to $30 million annually. According to IHS Screen Digest, the arrangement covers more than 1,000 movies a year.
The disappearance of Sony's movies resulted from a clause in the Starz agreement. According to people familiar with the matter who spoke on condition of anonymity because contract terms are confidential, it includes an undisclosed cap, which has recently been exceeded, on the number of people who can watch Sony movies online.
To return Sony's movies to Netflix, Starz needs to renegotiate the terms with the studio and is likely to seek higher payments from Netflix.
Starz saw the original Netflix deal as an easy way to spread its brand online and generate extra money. But Netflix has exploded in popularity over the last three years. It now has more than 23.6 million subscribers, many of whom watch movies online or on Internet-connected televisions. As a result Netflix has become a competitor to cable channels, putting Starz in the difficult position of charting its future while doing business with its fastest-growing rival.
"At the time, the Netflix deal seemed like a good proposition to make money in a medium that wasn't being used," Janney Capital Markets analyst Tony Wible said. Starz now is "cannibalizing its own revenue … and potentially trading a dollar for a nickel."
Starz and Netflix are discussing whether and on what terms to extend their overall content deal, which expires next winter. Analysts have estimated that a renewal would cost Netflix more than $200 million a year.
"Starz is in the bad place of standing in the middle of the studios and Netflix with a hand out saying 'pay us,'" said Arash Amel, HIS Screen Digest's digital media research director.
Resolving the issue appears crucial for Netflix because Starz is one of only two sources it has for movies less than 7 years old to stream online. The other is pay cable channel Epix, which offers movies from Paramount Pictures, Lionsgate and Metro-Goldwyn-Mayer.
By not renewing with Netflix, Starz could give people who want to watch see recently released Sony and Disney movies an incentive to subscribe to its cable channel, which is essentially the strategy that its larger rival HBO is pursuing.
If an accord is not reached, Netflix viewers will be left without access to Sony movies for the duration of their contract, which runs through 2016. Such a scenario is unlikely, however. People close to the talks have said they expect a resolution in the near future. In the meantime, Sony movies are still available on other online platforms for Starz subscribers.
Starz could face a similar situation with the Disney deal. A person with knowledge of that contract said once the number of Netflix subscribers streaming content online exceeds 20 million, which is expected to happen soon, Starz must pay Disney close to 20 cents a month for each additional subscriber.
Already there are signs that Starz is rethinking its cozy relationship with Netflix. The pay service this year started holding back its original programs such as the drama "Camelot" from Netflix for 90 days in a bid to make fans pay to watch it on TV.
Netflix executives, meanwhile, have made clear that in the future they intend to bid against pay cable networks for the rights to studio movies, aiming to cut Starz and HBO out of the equation.
Times staff writer Dawn Chmielewski contributed to this report.