Competition May Be Good for Netflix

Last Thursday, following the market’s close, Netflix (NASDAQ: NFLX) investors were dealt a tremendous blow.

Starz announced that it was cancelling further contract negotiations with Netflix. Now, come March 2012, Netflix streaming subscribers will no longer have access to content provided by Starz.

Starz cited a desire to protect the “premium” status of its brand.

Other factors may have been at play. Perhaps the company desired monetary terms beyond the scope of what Netflix was willing to give.

TheStreet cites a desire by Starz to see Netflix implement a tiered subscription model, where subscribers who wanted Starz content would have to pay more than the standard $8 per month.

The announcement sent shares of Netflix plummeting. On Friday, shares opened down nearly 10% and remained depressed throughout trading on Friday and early Tuesday.

Netflix responded to the move, stating that Starz content amounted to less than 10% of what its subscribers watched through its streaming service.

While that may be true, Starz decision to end its deal with Netflix may reveal an unfortunate possibility: perhaps the company’s business model is unsustainable.

The inability of Netflix to extend its deal may be an unfortunate sign of things to come for the company. As other deals come up for resigning, Netflix may be forced to increase prices further or change its plans in ways that the company itself does not want to, just to maintain its content library.

On Friday, Bloomberg reported that Dish Network (NASDAQ: DISH) is planning to unveil its own streaming service next month.

After acquiring Blockbuster’s assets back in April, the satellite provider may be attempting to cash in on the business Netflix has—until this point—had near monopoly control over.

Although Hulu may be said to provide some competition, in terms of streaming movie content, Netflix is virtually unchallenged.

The introduction of a competing service may be seen as a detriment to Netflix in the near-term. However, in the longer term it may benefit the company.

Netflix’s virtual monopoly may embolden its content providers to aggressively seek more favorable terms with Netflix. With competition, Netflix may be able to argue for less restrictive deals in the future.

Ultimately, as more consumers get access to broadband Internet connections, streaming services may be the future of digital content distribution. Netflix may come under short-term pressure from content providers and competitors entering the field, yet the growth of the sector may drive the company forward.

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