Netflix (Nasdaq:NFLX) announced at precisely 1:45 p.m. on December 4 that it had signed a multi-year licensing agreement with Disney (NYSE:DIS) that gives it exclusive access to Disney's first-run movies starting in 2016. Beating Pay TV to the punch, the markets reacted favorably, instantly sending its stock up $4 and another $7 throughout the afternoon. This is a game changer for Netflix. Will it be enough to stem the tide and keep its stock price moving ever higher towards triple digits? I think so.
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Michael Granberry, a reporter for the Dallas Morning News, wrote a September article about first-run theatrical releases opening the same day as pay-per-view. Specifically, he was referring to Richard Gere's movie "Arbitrage," which DirecTV (Nasdaq:DTV) was offering to its customers for $7.99 on the same night it opened in movie theaters. Called "day and date release," the first example of its use was in 2005 when Mark Cuban's movie company Magnolia Pictures released Stephen Soderbergh's film "Bubble." Granberry wonders whether this sort of thing will become commonplace even for blockbusters.
I mention this because what happens with regard to same-day theatrical and at-home movie releases will greatly affect the future benefits of the deal Netflix announced. Disney's current agreement with Starz, Liberty Media's (Nasdaq:LMCA) pay-TV channel, expires at the end of 2015. Starz issued a statement suggesting that it ended the contract with Disney in order to redeploy the funds used for Disney films to create its own content for distributors and subscribers. Barclays Capital analyst Anthony DiClemente estimates that Starz is paying $250 million annually for the right to show Disney first-run films seven to nine months after their release in movie theaters. It apparently costs as much as $39 million to make 13 episodes of "Mad Men." Therefore, Starz is giving up that right in order to be able to make as many as six original series, none of which are guaranteed to be successful. It seems to me that Starz isn't necessarily opposed to the $250 million it's paying yearly but rather what Disney wanted on renewal. Whatever the truth, Netflix chief content officer Ted Sarandos calls it "... a leap forward for Internet television." I'd have to agree.
Billionaire Carl Icahn revealed in November that he'd bought a 10% stake in Netflix. Icahn believes the video streaming service should be sold to a strategic buyer like Amazon (Nasdaq:AMZN) or Verizon (NYSE:VZ). The vulture investor figures it would be easier and cheaper for either company to buy Netflix and its 25 million subscribers than it would building a business from the ground up. While this might be true, the Disney deal changes how people see and view Netflix. No longer is it just the home of dusty old classics like "Ghostbusters" and "Ghostbusters II," but it will also replace cable and video on demand as the first pay window for all future "Star Wars" releases. Investing approximately $100 million in original programming as well as securing past episodes of TV shows like "Mad Men" and "Breaking Bad," it's slowly building a reasonably priced streaming service offering a variety of timely and not-so-timely content to its audience. As more studios come to realize that the timelines set years ago as to who gets to play what and when are arbitrary and not in the best interest of its end-user customer, Netflix will become just as powerful as the cable companies. Eventually this could lead to a network, say CBS (NYSE:CBS), granting Netflix commercial-free access to a select group of its programs in return for a hefty fee. I'd gladly pay $8 per month for brand new, new, not-so-new and downright stale TV content. I'm willing to bet others will too.
The Bottom Line
As part of the Disney deal, the studio will provide Netflix with direct-to-video content beginning in 2013 as well as access to Disney's catalog of films including "Alice In Wonderland." If Netflix continues to demonstrate that it's committed to providing fresh content on a consistent basis, I believe it will move the subscriber base in the United S well above the 30-million mark in short order, and begin to potentially pose a challenge to premium pay TV leader HBO. This deal with Disney just upped the ante. Netflix is back in the game.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.