On Thursday, Starz Entertainment issued a press release stating that it, “has ended contract renewal negotiations with Netflix.” As a result, “When the agreement expires on February 28, 2012, Starz will cease to distribute its content on the Netflix streaming platform.”

The decision comes as a serious blow to Netflix’s streaming operations, which has offered Starz’s original programming and film catalogue of approximately 1,000 titles in its streaming package. Starz’s announcement coincided with Netflix’s controversial price hike on its streaming and mail distribution services. When the price hike was originally announced, many Netflix users complained that the catalogue of films for streaming was weak. The Starz Play catalogue was a major component of that catalogue and featured on Netflix’s website. “These choices,” it said, “include new releases from major Hollywood studios such as Walt Disney Pictures, Sony Pictures Entertainment, Overture Films, Revolution Studios, Miramax Films, Touchstone Pictures, Hollywood Pictures, Pixar, TriStar, Screen Gems, Sony Classics and Warren Miller Films.” As of February Netflix users will no longer have access to those films.

Netflix seems to have suspected that problems were brewing as early as 2010. In its Annual Shareholders Report it stated that, “If we are not successful in maintaining existing and creating new relationships, or if we encounter technological, content licensing or other impediments to our streaming content, our ability to grow our business could be adversely impacted.” Yesterday’s announcement indicates that it has not been successful in maintaining existing relationships and that it has encountered licensing impediments.

Worries that the business would be “adversely impacted” have already taken their toll on Netflix stock prices, which plummeted 8 percent in afterhours trading on Thursday. Nevertheless, some analysts believe that that the current crisis will encourage Netflix to make deals directly with studios such as Sony and Disney, instead of going through Starz as a middleman. In that case, the panic surrounding Starz’s announcement will have minimal impact on Netflix’s catalogue.

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