Netflix Shares Fall Following Collapse Of Starz Contract Talks

(Himank Sharma and Doris Frankel) - Netflix Inc shares lost 11 percent of their value on Friday following the collapse of its content distribution talks with pay-TV operator Starz Entertainment, underscoring investor concerns that it may lose its edge in the online rental market.

Starz, controlled by John Malone's Liberty Media, ended talks to renew a deal that expires on February 28, 2012. After that date, Starz will stop providing its content, which includes exclusive rights to first-run Sony Corp and Walt Disney Co movies, for streaming on Netflix.

Netflix had earlier said Starz movies -- which includes latest releases from Sony and Disney -- and shows account for just 8 percent of U.S. subscribers' viewing, but some analysts said lack of new content may lead to higher attrition.

Netflix has long enjoyed a near-monopoly in the online streaming space but the recent entry of new players Amazon.com Inc and Google Inc's Youtube could potentially lead to subscribers switching to alternative services.

"We believe our longer-term concerns continue to play out. Rising content costs and increasing competition from incumbent and new players alike remain our top concerns," UBS analyst Brian Fitzgerald said.

SHORT SELLERS' PICK

Gareth Feighery, a founder of Philadelphia-based options education firm MarketTamer.com, said the inability to renew the Starz contract could just be the trigger for short sellers.

"The failure to strike a deal with Starz might be just the fundamental event the short sellers have been waiting to pounce upon."

The failure in contract negotiations could push the stock price lower, Feighery said.

Netflix shares have a short interest of 15.5 percent as of August, implying that more than 1 in 6 Netflix share is shorted. Blue-chip technology stocks like Google and Apple have short interest positions much below 2 percent.

Netflix is one of the heaviest shorted blue-chip technology stock, owing to high valuations. Content owners and short-sellers have questioned how the company can charge customers so little and yet continue to grow.

Near midday, option traders exchanged about 78,000 contracts in Netflix, consisting of 34,000 calls and 44,000 puts, according to option analytics firm Trade Alert.

The bulk of the action was in the short-term options expiring at the end of Friday's session. Netflix typically trades on average 59,000 contracts per day.

Ryan Detrick, senior technical analyst at options research firm Schaeffer's Investment Research in Cincinnati, Ohio, said Netflix shares attract a lot of activity based on news related to the company.

"There is not a huge sway of sentiment one way or the other, but the options action appear to be bets on near-term volatility in the stock."

"Some early bird traders appear to be selling weekly puts expiring today to harvest premium on the opinion that the shares will not pullback much further by the end of Friday. The most actively traded are the $205 and $210 strike puts as of 11:15 a.m. EDT," Interactive Brokers Group options analyst Caitlin Duffy said.

ALTERNATE DEALS

However, some analysts were unfazed by the development and were positive on Netflix's prospects to secure alternative deals.

Jefferies' Youssef Squali said while Starz will continue to hold the rights to Sony and Disney titles, Netflix could independently strike a deal with the production studios for streaming content.

Stifel Nicolaus analyst George Askew, who has a "hold" rating on the company's stock, said the loss of contract could help Netflix in the long term, as it could deploy the estimated $300 million fee for future, replacement content.

Netflix was offering to pay somewhere in the $200 - $300 million range annually for rights to stream Starz content.

Shares of the company fell to a two-week low of $207.62 on Nasdaq, wiping out $1.35 billion of investor wealth. They trade at a 12-month forward price-to-earnings multiple of 37.5, according to Starmine data. Competitors Dish Networks, Time Warner Inc and Best Buy trade at multiples of 8.4, 10.4 and 6.9, respectively.

(Reporting by Himank Sharma in Bangalore and Doris Frankel in Chicago; Editing by Gopakumar Warrier, Maju Samuel and Sriraj Kalluvila)

Copyright 2011 Thomson Reuters. Click for Restrictions.

Comments

[loki]

11:54 PM on 09/05/2011

well if they are losing content, then shouldn't they be dropping prices back down to reasonable and affordable?

[JoeWolfe]

10:28 PM on 09/05/2011

Notice they mentioned the "short sellers" swooping in! I really hate to see this as short selling is creating such mayhem in stock market, including some very unethical behavior and people losing more than their entire original investment - don't try it guys, it will get you in trouble! Here's an article I wrote about shorting selling:

http://how-to-make-money-with-penny-stocks.blogspot.com/2011/07/how-to-make-money-shorting-penny-stocks.html

Joe

[Mooky454]

12:50 AM on 09/05/2011

Ya, I'm sure it also has nothing to do with Disney owning a big ol chunk of Hulu. Big corperations have been playing this game for a long time. it's to bad we dont have enforcible monoply laws in this country anymore, with out them we get horrible products, service, and support all at premium prices. Yay free market..

[edejan]

10:54 PM on 09/05/2011

Agree. Faved.

[MarkInEugene]

04:15 PM on 09/03/2011

Netflix streaming was the hope and alternative to the crushing expense of Comcast Cable. But the program material was never very good. The movies are old, often poorly rated, often in standard definition, rarely in HD. I just recently dropped my Netflix because I ran out of things to watch basically that were interesting and worthwhile.

Now that they are loosing Starz material, there's not much left worth streaming.

[escapement]

09:00 PM on 09/02/2011

First they jack our rates and then the next day they get their content library slashed.... They better reconsider that rate hike.

[NerdybyNature]

04:55 PM on 09/02/2011

I don't feel sorry at all for these greedy schmucks. They never have a movie I really want to see, or if they do I have to have it mailed to me. Then to add insult to injury, they have the nerve to hike up their prices in one of the worse recessions I have seen in my lifetime . Their stocks are dropping "cry me a river".

[picaman]

10:08 PM on 09/02/2011

Same complaints here, I'm about to drop them and just do red box from now on.

[SonicUltimate]

03:53 PM on 09/02/2011

In what market does a comapny think price hikes with higher competition accompanyied by loss of product to customers means anything but lower investor confidence? If Netflix is suprised by this reaction they really are digging their own grave.

[loki]

11:57 PM on 09/05/2011

in the American market, where we have been conditioned to accept a royal screwing and think we are getting the best in the world.

[frank day]

02:54 PM on 09/02/2011

I hope Amazon strikes a deal with Starz to add those movies

to their Streaming Service which is free with my Amazon Prime account.

[TruEngineHearing]

02:30 PM on 09/02/2011

If you feel a little tingle in your shorts, that's Sony and Disney and others scanning your wallet to see how much money you've got left. They want it, and to get it they're ready to show you any picture of Bambi you wanna see; including clothing optional.

Hooray for Hollywood... it coulda' been Holywood, but with all that greed! - no chance.

[sillylittleme]

02:20 PM on 09/02/2011

Who cares? I am tired of the stock market dictating everything. I love Netflix and will continue to subscribe and enjoy my selections.

[edejan]

10:53 PM on 09/05/2011

I agree with you. Fanned. I just hope these big players don't shut down netflix. We were just thinking of dumping our cable because of the expense and going to Netflix/Hulu.