Why Did Starz Turn Down Disney?

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In a press release announcing its Walt Disney (NYSE:DIS) deal, Netflix (NASDAQ:NFLX) executives represented the content licensing agreement as a major accomplishment for the company. “It’s a bold leap forward for Internet television and we are incredibly pleased and proud this iconic family brand is teaming with Netflix to make it happen,” said Chief Content Officer Ted Sarandos.

Adding Disney’s new films to its catalog will help Netflix solve its content problems. After the company’s deal with Starz ended earlier this year, television reruns have accounted for more than 60 percent of the content streamed by customers, and users have complained about the lack of new releases.

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However, the deal has a major downside: its cost. While Netflix declined to give any financial details regarding the terms of the agreement, the L.A. Times reported that it could run as much as $300 million per year. Janney Montgomery Scott analyst Tony Wible wrote in a report seen by NBC that the firm would “not be surprised if (Netflix) would need to raise capital.”

Liberty Media’s (NASDAQ:LMCA) premium cable channel Starz decided on Tuesday not to renew its exclusive licensing agreement with Disney, partly because of the prohibitive price. As The Wall Street Journal said on Wednesday, Starz will be looking for a potential buyer as soon as Liberty Media spins off the company in early January. Sources told the publication that “Some buyers wouldn’t want to take over a company that’s burdened with giant cost increases.” Disney’s new terms could have resulted in annual fees of $300 million, $100 million more than under Starz’s previous deal.

For Starz, which will be solely dependent on original programming and content from a deal with Sony (NYSE:SNE) once its Disney contract expires, securing a potential buyer is of utmost importance. Its networks have struggled to compete with Time Warner’s (NYSE:TWX) HBO and CBS’s (NYSE:CBS) Showtime in recent years.

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