In a blow to the fast-growing online video company, Netflix users will soon lose access to new movies from two of Hollywood's biggest studios.
Premium cable network Starz Entertainment said Thursday that it will end a distribution agreement that provided Netflix's streaming Internet service with movies from Walt Disney Studios and Sony Pictures that have included "Tangled," Alice in Wonderland," and "The Karate Kid."
The surprising news sent Netflix stock plunging 9% in after-hours trading Thursday.
Starz's decision is the latest sign that Netflix's relations with Hollywood are turning frosty as content companies reevaluate whether the big checks they received from the online video company are worth the effect on their traditional television and DVD businesses. Consumers are increasingly migrating to digital platforms and away from more costly cable TV subscriptions.
Netflix offered Starz more than $300 million a year to renew the deal after it expires in February, a more than tenfold increase from current terms, according to people familiar with negotiations not authorized to speak publicly.
But representatives for the cable network owned by John Malone's Liberty Media were insistent that Netflix create a new "tier" for subscribers who wanted its movies at a higher price than the $7.99 it currently charges for online video. That would have put Netflix more in line with the pricing of cable and satellite companies, a step the video company apparently wasn't willing to take.
"Starz could have taken a check from Netflix, but there would have been pushback from cable and satellite operators and its studio partners," said analyst Tony Wible of Janney Montgomery Scott.
For Netflix, the news couldn't have come at a worse time. The company Thursday implemented a previously announced price increase that eliminates hybrid plans and charges a minimum of $8 a month to receive DVDs through the mail and $8 a month for online video.
"It's disastrous for Netflix," Wible said. "Netflix's momentum was that it added content, which drew subscribers, so it could pay for more content. Now it's losing content."
Netflix spokesman Steve Swasey said he didn't believe the move would have a big impact.
"Because we've licensed so much other great content, Starz's content is now down to about 8% of domestic Netflix subscribers' viewing," he said in a statement. "We are confident we can take the money we had earmarked for Starz's renewal next year and spend it with other content providers to maintain or even improve the Netflix experience."
Starz, which controls pay-cable rights to movies from Disney and Sony, and produces original series including "Camelot," signed its current agreement with Netflix in 2008.
At that time, online video was watched by only a small number of tech-savvy young people, and the estimated $30 million per year the cable network received was seen as new revenue that would have little effect on its traditional television business.
But Netflix now has 25 million subscribers, most of whom watch video online through a variety of devices, including Internet-connected TVs, tablets and smartphones. By providing recently released hit movies from Disney and Sony such as "Alice in Wonderland" and "The Karate Kid," Starz has helped to fuel that growth.
The only other recently released movies Netflix gets for its streaming service come from Paramount Pictures, Lionsgate and Metro-Goldwyn-Mayer via cable channel Epix. HBO, which has offerings from 20th Century Fox, Universal Pictures and Warner Bros., has declined to partner with Netflix.
Starz typically costs about $15 a month for cable and satellite television subscribers, while Netflix streaming costs only $8 a month and doesn't require a pay television subscription.
Many of the large cable and satellite companies have endured subscriber losses recently, a trend analysts attribute in part to consumers "cutting the cord." Research firm SNL Kagan has said that 4% of TV households — 4.5 million homes — will drop their current pay television provider this year, a figure that will grow to 10% by 2015.
"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," Starz said in a statement Thursday.
Protecting its ability to draw TV subscribers was critical to Starz in its effort to compete with its better-known rivals HBO and Showtime. However, it still could sign an agreement with Netflix's primary competitor in subscription online video: Amazon.com.
The move comes two months after Sony movies were pulled from Netflix because of a provision in the studio's deal with Starz. But people close to the matter said at the time that they expected Sony films to return to Netflix soon. With Starz choosing not to renew with Netflix, that is now a moot point.
While Netflix stock fell 9% in after-hours trading Thursday, while Liberty Media stock was flat.