You Don't Get 23 Million Friends Without Making a Few Enemies

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LibertyStarz (NAS: LSTZA) didn't just tell Netflix (NAS: NFLX) to talk to the hand. As always, there's more to the story than a simple rejection.

The premium cable outfit had a specific deal structure in mind. Netflix had another. When an unstoppable force meets an immovable object, things blow up. This is a microcosm of the larger movie industry today (more on that in a minute).

The man behind the curtain
According to The LosAngeles Times, Starz insisted on a premium pricing tier. The paper's sources say that Netflix was willing to pay more than $300 million a year for access to the Starz library, but Starz insisted on creating something like the movie package add-ons to your cable bill: If you want Starz streams in your Netflix service, you should pay a little bit extra for the privilege.

But that's just not how Netflix rolls. One fee covers every licensed stream, another fee gives you access to every available mail-out DVD (with a $2 monthly upcharge for Blu-ray discs), and that's that.

It's the Apple (NAS: AAPL) model of ultimate simplicity, applied to the field of movie rentals rather than smartphones or iPods. And the pricing plans recently got more complicated anyhow, what with the bifurcation of DVD and streaming plans.

The company might consider premium packages at some point in the distant future, but the last complication is still way too fresh. Don't hold your breath waiting for this pair to return to the deal-making table.

The road not taken
Personally, I would have loved to see exactly how a tiered pricing model would have worked out with full disclosure in Netflix's quarterly earnings reports. How large a portion of those 23 million subscribers would be willing to pay a little bit extra for access to Starz' Walt Disney (NYS: DIS) and Sony (NYS: SNE) pictures?

Then again, Starz might have been pushing for something closer to the premium price it commands through its cable partners. For example, Starz adds $10 to your monthly Comcast bill. Add that amount to an $8 streaming-only Netflix bill and you get a 125% price increase.

If that sticker shock is what Starz had in mind, I can't blame Netflix for turning its attentions elsewhere. And that could very well be the case; executives from Time Warner, which controls Starz rival HBO, suggest that Netflix would have to charge $20 a month for streaming alone "before the economics make sense."

Starz has exclusive rights for Disney's pay-per-view window (where Netflix streams also fall) until 2015 and its Sony agreement is sown up until 2016. Netflix must be hard at work behind the scenes to get a finger directly in those pies when the Starz deals expire; the fewer middlemen, the better for everyone involved. Well, except for the shunned middleman.

Ouch!
In a perfect world, consumers would have a simple one-stop shop that gives us access to shows and movies from every studio, all at a reasonable price with as little distribution fat in the process as possible. Netflix wants to be that focal point. Starz, HBO, Epix, and Showtime want their pounds of flesh for being part of the distribution chain.

Are Starz and HBO fighting to protect their premium brands, or are they dinosaurs staving off extinction? In the end, I believe that consumers will demand a complete, low-cost streaming solution at the expense of all that old gristle in the machinery. Netflix is well on its way to becoming that central library.

Apple and others could catch up at some point, but they're all late to the game. Building a true-blue Netflix killer might be easy in technical terms, but the promotion campaign required would be insanely expensive.

And that's why I see Netflix dragging Hollywood into the digital era -- one studio at a time, kicking and screaming. Netflix disrupts the traditional distribution system in much the same way as Sirius XM Radio disrupts FM radio networks and Universal Display's OLED technology disrupts LCD screens.

Foolish co-founder Dave Gardner loves to point out disruption before it happens. Stock Advisor subscribers have enjoyed Netflix returns as fat as 1,500% and a five-bagger Universal Display investment came to Rule Breakers readers under his watch. What's Dave's next stroke of market-crushing genius? Grab a free 30-day trial to Stock Advisor, Rule Breakers, or any Foolish newsletter you'd like to see his latest ideas for yourself.

At the time this article was published

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