New Content Restrictions from Starz and Showtime Unlikely to Hurt Netflix Much

                    New Content Restrictions from Starz and Showtime Unlikely to Hurt Netflix Much

Recent moves by Starz and Showtime to restrict the content they are providing to Netflix represent maneuvering to gain advantage in upcoming contract negotiations, rather than a life-and-death battle over subscribers that some believe it is.

Showtime announced that it will remove some of its original programming from Netflix’s streaming library starting this fall. Under the new arrangement, Netflix will keep the streaming rights to shows that have already ended their first run on the pay-TV network, such as “The Tudors” and “Sleeper Cell.” However, the rental company will no longer be able to stream older seasons of Showtime’s running original series, such as “Dexter” and “Californication.”

Starz, one of Netflix’s longest and most important content partners, is changing its policy as well. Starting on April 1, Starz will institute a 90-day delay before Netflix subscribers can stream the latest episode of newly debuted original series such as “Camelot,” which premieres April 1. This change will not affect new episodes of existing series, such as “Spartacus.”

According to conventional wisdom, the Showtime and Starz policy changes were prompted by the networks’ fears of losing traditional subscribers because of the availability of their content through Netflix. The moves also have been attributed to the video rental company’srecent foray into original programming, which presumably has cemented its status as a direct competitor. The networks, accordingly, aim to accomplish the dual goal of protecting their traditional TV subscriptions from cannibalization while slowing down Netflix’s momentum by depriving its streaming service of timely high-quality content.

Indeed, Netflix’s subscriber base has been rapidly outgrowing those of premium networks like Showtime and Starz. Netflix’s subscribers rose by 30.6 percent in 2009 and accelerated to a 59 percent expansion in 2010, compared to single-digit growth or decline for the premium networks, as presented in the attached figure.

However, IHS Screen Digest doesn’t believe the changes in the policies represent a fundamental battle over subscribers for two reasons.

First, there is no indication that greater engagement with Netflix degrades the traditional TV subscription business for premium networks.In fact, Netflix serves not only as an additional revenue stream but also as a powerful promotional tool for those networks that choose to engage and use the relationship to their advantage.

Second, the moves by Showtime and Starz are unlikely to have lasting impact on the health of the online service’s content library.Showtime, for one, can only withdraw old seasons of the series it produced. The popular show “Weeds,” which currently runs on the premium network, is produced by Lionsgate, which owns the streaming rights to older seasons. It is ultimately Lionsgate’s decision whether to make those seasons available to Netflix’s viewers or not, and this decision will depend in large part on Netflix’s offer and the amount of push-back from Showtime, being the first-run licensee of the series.

In light of these factors, rather than casting the current differences between Netflix and the two premium networks as a death match, IHS Screen Digest views the back-and-forth as an old fashioned carriage fight, not unlike the common disputes between networks and subscription-TV operators over affiliate fees. Starz, for example, is flexing its muscles in the renewal negotiations with Netflix to bring the expiring sublicensing deal more in line with the one obtained by the premium network Epix late last year, which not only came at a higher price tag but also grants the network a 90-day exclusive window for new releases. Showtime likely is pushing for such a deal instead of the simple content licensing agreement it currently has. Netflix, for its part, appears to be pushing back against these demands. Empowered by its impressive subscriber growth over the past year and the strength of its brand and multi-screen presence, Netflix is increasingly comfortable with a more aggressive posture in dealing with network owners.

For more information on this topic, see the new report entitled: Netflix and the Premiums: The Search for a Sustainable Business Model.