Posted by: Matthew Molinari | February 29, 2012

Netflix Loses a Star Supplier

February 28th wasn’t the last day of the month this year but it was the last day that Netflix subscribers could watch Starz movies. The contract between the two companies expired yesterday after negotiations for a contract extension fell through several months ago. Netflix now claims that less than 2% of the movies viewed on their site belonged to Starz. Really? That’s odd because a few months ago they claimed it was more like 8%.

The problems facing Netlflix are serious and most definitely present a threat to the company’s future. According to CNN, Netflix’s licensing costs will jump from $180 million in 2010 to $1.98 billion in 2012. That is a staggering increase in costs especially with the subscriptions dipping for the first time ever. With customers leaving, those who are staying unhappy and skyrocketing costs, Netflix is at a crossroads.

The business model was so successful at first because they were able to get suppliers to agree to contracts for movies at a relatively low price. When Netflix first started, the market was dominated by the likes of Blockbuster and other brick and mortar stores so movie studios were taken a little off guard. What we are seeing now is the suppliers realizing what a powerful market the videos by mail industry has become. Starz believed that their product was worth a lot more than what they had initially signed for back in 2008 (supposedly $30 million compared to the $300 million they were asking now) and I am guessing that other movie studios are going to follow their example when their contracts expire.

So what choice does Netflix have? None really. They have an extremely narrow supply chain and the limited suppliers have all the control. If Netflix wants to stream their content, they are going to have to pay up eventually. Perhaps Netflix can absorb loosing Starz movies but what about when HBO leaves? How many could they lose before their product becomes obsolete?

In the end, Netlflix must realize that their suppliers are really in control and they aren’t dealing with a widely available product. If your typical supplier raises prices you may be able to renegotiate with them or with a competitor but if Netflix wants to stream Toy Story 3 there is only one place to get it.

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Responses

  1. […] recently wrong a blog about Netlix doing this exact same thing. So, while it seems so simple, even companies as big as Netflix can completely […]

  2. […] https://matthewmolinari.wordpress.com/2012/02/29/netflix-loses-a-star-supplier/ […]


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