Netflix Inc shares lost 11 percent of their value on Friday following the collapse of its content distribution talks with pay-TV operator Starz Entertainment, underscoring investor concerns that it may lose its edge in the online rental market.
Starz, controlled by John Malone's Liberty Media, ended talks to renew a deal that expires on February 28, 2012. After that date, Starz will stop providing its content, which includes exclusive rights to first-run Sony Corp and Walt Disney Co movies, for streaming on Netflix.
Netflix had earlier said Starz movies -- which includes latest releases from Sony and Disney -- and shows account for just 8 percent of U.S. subscribers' viewing, but some analysts said lack of new content may lead to higher attrition.
Netflix has long enjoyed a near-monopoly in the online streaming space but the recent entry of new players Amazon.com Inc and Google Inc's Youtube could potentially lead to subscribers switching to alternative services.
We believe our longer-term concerns continue to play out. Rising content costs and increasing competition from incumbent and new players alike remain our top concerns, UBS analyst Brian Fitzgerald said.
SHORT SELLERS' PICK
Gareth Feighery, a founder of Philadelphia-based options education firm MarketTamer.com, said the inability to renew the Starz contract could just be the trigger for short sellers.
The failure to strike a deal with Starz might be just the fundamental event the short sellers have been waiting to pounce upon.
The failure in contract negotiations could push the stock price lower, Feighery said.
Netflix shares have a short interest of 15.5 percent as of August, implying that more than 1 in 6 Netflix share is shorted. Blue-chip technology stocks like Google and Apple have short interest positions much below 2 percent.
Netflix is one of the heaviest shorted blue-chip technology stock, owing to high valuations. Content owners and short-sellers have questioned how the company can charge customers so little and yet continue to grow.
Near midday, option traders exchanged about 78,000 contracts in Netflix, consisting of 34,000 calls and 44,000 puts, according to option analytics firm Trade Alert.
The bulk of the action was in the short-term options expiring at the end of Friday's session. Netflix typically trades on average 59,000 contracts per day.
Ryan Detrick, senior technical analyst at options research firm Schaeffer's Investment Research in Cincinnati, Ohio, said Netflix shares attract a lot of activity based on news related to the company.
There is not a huge sway of sentiment one way or the other, but the options action appear to be bets on near-term volatility in the stock.
Some early bird traders appear to be selling weekly puts expiring today to harvest premium on the opinion that the shares will not pullback much further by the end of Friday. The most actively traded are the $205 and $210 strike puts as of 11:15 a.m. EDT, Interactive Brokers Group options analyst Caitlin Duffy said.
However, some analysts were unfazed by the development and were positive on Netflix's prospects to secure alternative deals.
Jefferies' Youssef Squali said while Starz will continue to hold the rights to Sony and Disney titles, Netflix could independently strike a deal with the production studios for streaming content.
Stifel Nicolaus analyst George Askew, who has a hold rating on the company's stock, said the loss of contract could help Netflix in the long term, as it could deploy the estimated $300 million fee for future, replacement content.
Netflix was offering to pay somewhere in the $200 - $300 million range annually for rights to stream Starz content.
Shares of the company fell to a two-week low of $207.62 on Nasdaq, wiping out $1.35 billion of investor wealth. They trade at a 12-month forward price-to-earnings multiple of 37.5, according to Starmine data. Competitors Dish Networks, Time Warner Inc and Best Buy trade at multiples of 8.4, 10.4 and 6.9, respectively.
(Reporting by Himank Sharma in Bangalore and Doris Frankel in Chicago; Editing by Gopakumar Warrier, Maju Samuel and Sriraj Kalluvila)