Netflix is in dire straits if it can’t right its ship soon. Yesterday, prices jumped up 60% to $7.99 for DVD rental and $7.99 for streaming (formerly $9.99 when combined), severely displeasing many subscribers into canceling, as I did. On top of that, Starz also announced that contract negotiations on the renewal of rights to stream their content have so far failed.

Bong! Bong! Bong!

Michael Pachter of Wedbush Securities stated:

We estimate that Starz has received $30 million annually under its current deal, which allows Netflix to stream unlimited Starz content to its more than 25 million customers.

They also believe that Starz is putting on the pressure to see if Netflix cracks and gives up more money as they probably want more than Netflix wants to pay (perhaps 10x more). However, if they lose Starz, which is a lot of Disney and Sony film content on the site, they could be in serious trouble. To get a grasp of the situation, Starz has exclusive rights to Disney and Sony films from one year after DVD sales begin, to up to seven years for some films. Therefore, they hold the keys to the kingdom if Netflix wants to maintain that content they’re so proud of.

You might recall that in a recent interview Netflix said they’re not all that concerned about new releases. So if they don’t get new releases, and they lose Starz, then what content is really left? It would be a massive blow to them I think and really diminish the quality as well as quantity of their library.

Timing is Key

Starz’s announcement was most likely to apply some pressure to Netflix and loosen their purse strings. Dropping that news on the same day the prices go up might have been a well-timed ploy on their part to scare Netflix users into canceling their subscriptions and thereby slapping Netflix with another round of cancellations.

Wedbush Securities currently rates Netflix at underperform and their 12-month price target for the company is $110 while the current price of the stock is down 8% since the announcement, it was $233.27 when Wedbush put out their report, it’s now around $212.84 at time of writing.

That’s certainly motivation for Netflix to call up Starz and begin a new round of negotiations I imagine. If no deal is reached, Netflix’s ability to stream that content ends February 28th next year.

Wedbush believes that Netflix is trying to limit their costs since they are allegedly the only bidder for the rights, they’ve got a large audience (which peaked at maybe 24 million subscribers) and they have been paying massive amounts for content. But see, that was what was getting them the content. They were willing to pay. Now, they’re not so willing to pay and it could cost them.

Plus, they’re not really the only deal in town anymore. YouTube is streaming film to both the US and Canada, other sites like FlickMe, Cinema Now, VUDU and more are firing up. Amazon is streaming video, and Hollywood Suite is ready to pop open the Canadian market as well. Just when Netflix was expanding, they suddenly are facing some stiff competition from some major players and larger hands reaching into the honeypot. The question is, will they figure things out in time to survive?

Read the whole Wedbush Securities report.