Gazing at the Streaming Starz

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Few perhaps expected that the wisdom in the decision of Liberty Media chairman John Malone to spin off Starz (NASDAQ: STRZA) from Liberty would manifest this soon. Just about a month from this January’s spinoff, designed to create a smaller but more liquid and agile organization to explore real potential growth in video subscription programming and content distribution, Starz outbid Netflix (NASDAQ: NFLX) in renewing the former’s rights to show the movie productions of Sony Pictures Entertainment in pay-TV and similar media outlets. The current Starz-Sony contract is set to expire in 2016.

At the outset, the stock market welcomed the move of Malone, who is known to constantly restructure his media holdings. The shares of Starz gained over 8% in its first day of public trading on Jan. 14 after the spinoff. As to be expected, series A shares of the company rose 7.4% to $17.91 in the February 11 trading on news of its contract extension with Sony until 2021. According to sources knowledgeable about the deal, Starz will only pay a modest amount on top of the estimated $200 million on its current license for 25 to 40 Sony films annually.

Renewing the contract was critical for Starz, as Sony now looms as its single source for major studio films. In December last year, Starz failed to renew the contract rights it had with Walt Disney, which it has held since 1993, and which expire in 2015. It was Netflix, this time, which wrapped up the Disney deal.

Range and Appeal of Movie Offerings Favor Starz

It would still appear though that Starz may have the better end of the bargain, compared with the terms Netflix got on the Disney deal. Netflix will reportedly pay about $300 million annually for the Disney film rights. This amount is approximately $100 million more than what Starz pays Disney under their current contract. In terms of subscriber appeal, a contract with Sony would also appear to be the more potent in revenue possibilities, as its productions span all movie genres, while those of Disney’s are generally family-oriented.

Fighting for Wider Internet Reach

Such diversity in movie offerings will be critical, as the playing field in online video streaming service has grown to be a rich revenue source for companies like Starz and Netflix. This growing importance was demonstrated in the 2012 Netflix fourth quarter, wherein its 2 million Internet video-streaming subscribers in the U.S. during the period propelled the company to an unexpected profit.

Significantly, the new agreement between Starz and Sony lifts the limit on the number of subscribers to whom Starz can stream Sony productions online. It is estimated that the U.S. video streaming market has a potential of between 60 million and 90 million subscribers.

Face-to-face with Amazon Online

In tapping this huge potential revenue source, Starz and Netflix are ranged against a seasoned Internet market player: (NASDAQ: AMZN), whose Amazon Video On Demand is ranked by techies as one of the top five streaming media services.

The Amazon library flaunts of a selection of new and old movie hits and most current TV shows, past seasons of premium HBO or Showtime cable shows included. Rather than focus on subscription, Amazon offers flexibility with its affordable rentals and purchase prices. With an Amazon account, access of other company retail services online is also facilitated.

Will Starz Still Shine in the End?

With the Sony deal though, Starz is in a better position to further solidify its movie content distribution, be it via Internet-based resources. Its network has such platforms as STARZ@ Play, ENCORE@ Play, and MOVIEPLEX@ Play as conduits to the vast resource of movie entertainment offerings that it retained in Sony. The only caveat as far as the streaming video market is concerned is that user-subscribers can easily switch from one service provider to another. All it can take is a few mouse clicks, and the fortunes of the service providers can change.

ReniaBula has no position in any stocks mentioned. The Motley Fool recommends and Netflix. The Motley Fool owns shares of and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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