* Shares drop 8.6 pct to $213.11 after Starz deal collapse
* Short interest over 15 pct in August
* Many analysts still bullish
(Rewrites with analyst and investor comments; updates shares)
By Lisa Richwine and Himank Sharma
LOS ANGELES/BANGALORE, Sept 2 High-flying
Netflix Inc (NFLX.O) saw its shares fall 8.6 percent on Friday
after failing to secure a chunk of movie content for the online
service it touts as the future of its popular video rental
The collapse of talks, announced Thursday, with cable
channel operator Starz Entertainment underscored investor
concerns that Netflix may lose its edge in online rentals.
Under the leadership of well-regarded Chief Executive Reed
Hastings, Netflix shares have tripled since January 2010. But
the rocketing price and recent stumbles, including a July
decision to raise some prices, have drawn short sellers betting
the momentum cannot continue.
Hastings decided to raise prices for subscribers who still
want DVDs-by-mail, a move seen as emphasizing higher-margin
streaming plans. The price hike angered so many customers that
the company warned it would see a pause in its normally
explosive subscriber growth.
Wedbush analyst Michael Pachter, who has rated Netflix
"underperform" for more than a year, said the failure to make a
deal with Starz was evidence of higher content costs the
company must grapple with as providers recognize their
"Starz is the perfect example. Content owners have to play
hardball with Netflix," said Pachter, who has a $110 price
target on Netflix shares.
Starz, controlled by John Malone's Liberty Media LSTZA.O
LINTA.O, ended talks with Netflix to renew a streaming deal.
After February, Starz will stop providing its content, which
includes exclusive rights to first-run Sony Corp (6758.T) and
Walt Disney Co (DIS.N) movies, for streaming on Netflix.
Netflix said Starz movies and shows account for just 8
percent of U.S. subscribers' viewing, but some analysts said
lack of new content may lead to higher customer attrition.
Netflix has long enjoyed a near-monopoly in the online
streaming space but the recent entry of Amazon.com Inc (AMZN.O)
and Google Inc's (GOOG.O) YouTube could potentially lead to
subscribers switching to alternative services.
The field could get even more crowded. Dish Networks
(DISH.O), which won Blockbuster Inc in a bankruptcy auction for
$320 million, is expected to expand its business beyond
satellite TV and eventually into online video streaming.
"Rising content costs and increasing competition from
incumbent and new players alike remain our top concerns," UBS
analyst Brian Fitzgerald said of Netflix.
SHORT SELLERS' PICK
Yoni Jacobs. portfolio manager for Chart Prophet Capital,
said he previously shorted Netflix in the face of growing
competition in the online market and a "weak" streaming
library. Jacobs covered his short position when Netflix shares
hit $200 but remains negative on the company's outlook.
"Their library is even weaker now" after the breakdown with
Starz, Jacobs said.
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
Netflix is one of the heaviest shorted blue-chip technology
stocks. Its shares have a short interest of 15.5 percent as of
August, implying that more than 1 in 6 Netflix shares is
shorted. Blue-chip technology stocks like Google and Apple
(AAPL.O) have short interest positions below 2 percent.
Content owners and short-sellers have questioned how
Netflix can charge customers so little. [ID:nN1E76C0AM]
For Starmine data on Netflix: r.reuters.com/jat53s
Netflix was offering to pay somewhere in the $200 million
to $300 million range annually for rights to stream Starz
content, a source familiar with the negotiations said.
Some analysts remain positive on Netflix's prospects to
secure alternative deals.
Stifel Nicolaus analyst George Askew, who has a "hold"
rating on the company's stock, said the loss of the Starz
contract could help Netflix in the long term, as it could use
the money for replacement content.
Netflix shares closed Friday on Nasdaq down $20.16 at
(Reporting by Himank Sharma and Lisa Richwine; Editing by
Gopakumar Warrier, Maju Samuel and Tim Dobbyn)