Netflix's Vanished Sony Films Are An Ominous Sign
NEW YORK (CNNMoney) -- In the not so distant past, Netflix was known mainly for its red envelopes. The DVD-rental-by-mail service was the company's core, and streaming video was a side perk for subscribers.
Fast forward to 2011, and online movies and TV couldn't be hotter. Google, Amazon, Hulu and others have jumped into the fray -- putting studios in the power position. They want to be paid more for the content they're providing.
That spells trouble for Netflix's streaming content costs.
"Netflix has another year or two on most of these contracts, and then the game completely changes," says Michael Pachter, analyst at Wedbush Securities.
Pachter predicts Netflix's streaming content licensing costs will rise from $180 million in 2010 to a whopping $1.98 billion in 2012.
When streaming video was new, Netflix was able to secure contracts with the likes of Warner Bros. Studios and MTV to license big TV and film catalogues for about $5 million to $10 million per year. This time around, Pachter says, those costs could increase more than tenfold.
"The content owners realize they can't give Netflix all the leverage," he says. "Netflix had the power when they were the only bidder. But you don't have as much leverage when you suddenly have competition."
Netflix subscribers got a taste of the studios' new hardball approach last month, when hundreds of Sony (SNE) movies -- including high-profile titles like "The Social Network" and "Salt" -- abruptly vanished from Netflix's "watch now" catalog.
In a blog post, Netflix pinned the blame on a "temporary contract issue" between Sony and Starz, a pay cable network that licenses Sony's movie catalog. Back in 2008, Netflix struck a four-year deal with Starz that gave it streaming access to Starz' offerings.
But Starz' deal with Sony included a cap on the number of subscribers who can watch Sony movies online, a source told the LA Times. Once Netflix' audience exceeded the cap, the contract was null. Starz' catalog of Disney movies available for online streaming is on the verge of triggering a similar contractual cap, the newspaper reported. >>>CLICK HERE TO READ MORE
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