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.

Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.

Pay TV
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.

Video Streaming
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.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Investing

    Three Companies That Will Benefit From Online Gaming

    Certain companies stand to benefit from the increasing popularity of the online gambling industry in the U.S., as well as its expanding legalization.
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!