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Netflix dilemma: higher prices, less content

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Here is the latest predicament for Netflix: It raised prices this week, but lost a huge chunk of its best movies.

That move is spooking investors to sell-off shares of the once high-flying Silicon Valley Web giant and making some customers wonder whether they should hang on to their Netflix subscription, which has served as a cheaper alternative to cable television.

Shares of Netflix fell nearly 9 percent to $213 on Friday. Its stock is 28 percent off its high reached in the middle of July.

On Thursday, Netflix’s 60-percent price hike for DVD and streaming-video customers took affect.

Later that day, Netflix and media supplier Starz announced they weren’t able to renew their contract — killing about 8 percent of the content Netflix streams over the Web.

The companies said that Starz movies such as “Toy Story 3,” “Tangled” and “Chicago” would be pulled from Netflix’s streaming service on Feb. 28. One analyst estimated that 22 of Netflix’s 100 most popular streaming videos come from Starz. Customers would still be able to get those films on DVDs.

The collapse of the deal is an alarming development for Netflix, which is closely watched because it is viewed by many in Hollywood and Washington as the future of how entertainment will be delivered to consumers. Studios worry about losing the lucrative DVD business because Netflix brings content directly to peoples’ homes, while big cable and Internet companies are trying to mimic the company’s service model.

Federal regulators, meanwhile, are grappling with how to keep up as so many industries converge.

The talks with Starz fell apart even though Netflix was willing to pay $300 million for another four years of Starz content, more than 10 times the original contract, according to people familiar with the negotiations.

But Starz asked for more. It wanted its shows to be bundled as a separate channel that would cost consumers more than the flat $16 fee they already pay for Netflix’s DVDs and streaming service, said the sources, who spoke on condition of anonymity because the talks were private.

“Starz wanted their content to be premium and Netflix is a low, flat-priced monthly service,” said one of the sources.

Starz was feeling pressure from Hollywood studios such as Disney and Sony Entertainment, who don’t like their movies going to Netflix for cheaper than what they are able to charge in DVD sales and in fees to cable partners, according to Barclays analyst James Ratcliffe in a research note Friday.

He said cable and satellite distributors and Hollywood studios “are unlikely to mourn the end of the relationship.”

The two sides originally negotiated the contract in 2008 on terms that were cheap for Netflix when few saw its potential.

Since then, Netflix has skyrocketed in popularity, gaining 25 million subscribers, more than the biggest cable company, Comcast.

Both sides played down the collapse of the deal.

“This decision is a result of our strategy to protect the premium nature of our brand,” Starz chief executive Chris Albrecht said. Starz’s stock dropped 1.7 percent to close at $66.18.

Netflix said Starz was becoming less important as its content library grew from deals to carry movies and shows from other providers. In the past year it began running shows such as “Jersey Shore” from Viacom and “Mad Men” from AMC as well as movies from Lionsgate and MGM Studios. Last March, it struck a deal to exclusively run Kevin Spacey’s television series “House of Cards.”

On Thursday, Netflix chief executive Reed Hastings said in a statement: “We are confident we can take the money we had earmarked for the Starz renewal next year, and spend it with other content providers to maintain or even improve the Netflix experience.”

But the approach by Starz could embolden other Netflix partners to increase their demands, said UBS analyst Brian Fitzgerald, who called the loss “significant.” Netflix is also facing tough competition from online competitors such as Amazon and Apple.

Ryan Thompson was one of the many angry customers who flooded Netflix’s Web site with complaints about the 60-percent price hikes.

He joined the Facebook page Cancel Netflix, which has more than 4,000 members. Even though he didn’t like the billing changes, he kept the streaming service of $7.99 a month because his children watch so many Disney shows.

Now the Tampa Bay resident said he sees no reason to stick with Netflix at all. “It was the straw that broke the camel’s back,” he said.

© The Washington Post Company