Starz has announced that it will not renew its contract with Netflix to provide streaming content from its Starz and Encore brands. Netflix shares were down 7% on news of the cancellation. Updated with statement from Netflix.

Starz Entertainment said that it has ended contract renewal negotiations with Netflix and when their current contract is up in February of 2012, it will cease to distribute its content on the Netflix platfrom.

Starz says that it is doing this to ‘protect the premium nature’ of its brand by preserving the pricing and packaging of its content. In other words, Starz wanted more money and didn’t want to devalue its brand in the eyes of other potential straming services like Hulu.

Honestly, there are several factors that could be contribuing to this move from Starz, but it is likely that money is at the heart of the problem. It is very possible that the studios that provide content to Starz wanted more money for the content that they were delivering to Netflix. In turn, Starz would have had to bring that figure to Netflix, a number which CEO Reed Hastings has said could be in the $200 million range.

This could also be a pressure tactic by studios that want to broker deals directly with Netflix, but couldn’t because of their partnerships with Starz.

Starz says that it is in an ‘excellent position’ to evaluate new opportunities and expand its business.

In all honestly the Starz content represents a huge back catalog of movies that air on its cable networks, which specialize in those familiar movies and shows that you wouldn’t necesarily go out and buy, but “wouldn’t mind watching if they came on the TV while I was sitting there, I guess.”

Netflix has recently lost content from other providers and yet has seen its growth continue. In June, Sony pulled its content from Netflix over contract violations related to their movies getting watched too many times.

This catalog, while it may not be the most exciting, represents a huge chunk of the Netflix catalog and will result in, at least the perception of a lot less choices in recognizeable titles. But no matter how large the catalog offered by Starz, it represents a fraction of the overall catalog that Netflix has gathered. Starz, in turn, is a third tier runner-up to HBO and other rising stars like AMC.

Starz has had a mild hit in the medium-budget original content category recently with Spartacus: Blood and Sand. Back in March, Starz put a 90-day delay on original content like Spartacus appearing on Netflix. Starz also delivers content from CBS and Disney to Netflix, so the breakdown of these talks potentially means no more Disney movies on Netflix, although the company has separate deals in place for ABC television content.

The loss of Starz will be felt by Netflix users for sure, but the price of losing the Netflix connection might end up being felt much more deeply for Starz.

Update: Netflix has issued a statement about Starz to All things D.

Starz has been a great content partner since 2008 and we are thankful for their support.

While we regret their decision to let our agreement lapse next February, we are grateful for the early notice of their decision, which will give us time to license other content before Starz expires.

While Starz was a huge part of viewing on Netflix several years ago because it was some of the only mainstream content Netflix offered, over the years Netflix has spent more and more licensing great TV shows from all four broadcast networks and many cable networks, and we have licensed 1st run movies from Relativity, MGM, Paramount, Lionsgate and others. Because we’ve licensed so much other great content, Starz content is now down to about 8% of domestic Netflix subscribers’ viewing. As we add even more content in Q4, we expect Starz content to naturally drift down to 5-6% of domestic viewing in Q1. We are confident we can take the money we had earmarked for Starz renewal next year, and spend it with other content providers to maintain or even improve the Netflix experience.

We have tremendous respect for the Starz creative team, and we look forward to someday licensing some of their original or licensed content.