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Netflix's Great Expectations Going South

As its negotiations with Starz demonstrate, content owners hold the upper hand.

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Starz issued a press release on Sept. 1 that disclosed it is ending discussions with  Netflix (NFLX) about renewing the streaming content deal for  Disney (DIS) and  Sony (SNE) movies. The current deal does not end until February 2012, so we think the network is wisely flexing its negotiating muscle. Starz hit Netflix with the public announcement on the first day that Netflix's price increase (which was announced in July) took effect.

We believe Starz has the leverage in this negotiation, and this dispute is an example of why we don't assign an economic moat to Netflix. Content owners hold the upper hand, as evidenced by the ability to sign shorter licensing deals that allow them to consistently reprice content. Among the headwinds facing Netflix: heightened competition from new entrants, lack of access to high-quality television content, and higher future costs for movie content.

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Michael Corty does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.