Can Viacom and Disney Deal a Painful Blow to Netflix?

Last year, Starz announced it would not renew its contract to stream movies via Netflix. This move came shortly after Sony(SNE) pulled its movies, which were part of the Starz deal, from the service in what Netflix discounted as a "temporary contract issue." Clearly, it ended up being more than a fleeting dispute. Starz appears to have told the real story in the above-referenced September 2011 press release:

This decision is a result of our strategy to protect the premium nature of our brand by preserving the appropriate pricing and packaging of our exclusive and highly valuable content. With our current studio rights and growing original programming presence, the network is in an excellent position to evaluate new opportunities and expand its overall business.

Translation: At $8 a month, there comes a point where Netflix dilutes the quality of our content. We're no longer interested in giving it away.

While I consider this a profound point in the Netflix drama, I thought Bloomberg reporters jumped the gun last year when they said:

"Who knew this was a problem ... what Netflix never warned people was that Sony could pull out of its deal with Starz ..."

Netflix "has known all along."

It's flat out wrong to state that "Netflix never warned people" about Sony. Maybe not specifically, but if you read the risks section of Netflix's annual report, you'll find the possibility of content getting pulled clearly and openly discussed.

A little due diligence is all that it takes.

With relation to companies like Viacom and Disney pulling kids' shows then, we do not know what the deal is. I would imagine they're free to do it. As I have argued over the last year or so, competition is not necessarily what makes Netflix vulnerable to failure; the fact that content owners operate from a serious position of strength is. That said, without seeing the contracts or being privy to their terms, it's difficult for anybody to know exactly how this could shake out if it's even on the table to begin with.

Potential Impact

This whole episode, whether it plays out or not, only underscores the fragility of Netflix's model. The company aggressively pursues original programming because Reed Hastings is not an idiot. He can read the writing on the wall.

Presently, he scratches the content providers' backs by pumping up their revenue figures with millions in licensing fees. The content providers, in return, allow Netflix to live to fight another day.