Netflix Inc.
(
NFLX
) has entered into a multi-year licensing agreement with
Walt Disney Company
(
DIS
) for the exclusive right to stream the latter's content to its
U.S. subscribers. The financial terms of the deal were not
disclosed.
According to the terms, starting 2016, Netflix would be able
to stream movies from the Disney Studio and its associated
studios instantly after release. Moreover, Netflix would
gain access to Disney's direct-to-video releases starting
2013.
The current deal is a big positive for Netflix and has come at
a crucial time. The company lost streaming rights of Disney
movies as the Starz deal expired in February 2012. Back in
mid 2011, the license renewal talks between Netflix and Starz
Entertainment LLC fell through due to non agreement related to
financial matters. We believe that the deal would be
incrementally beneficial for the company in attracting new
subscribers as well as retaining the old ones.
We believe that the partnership agreements with Hollywood
studios and the overall improvement in content make its streaming
services distinguishable from other service providers such as HBO
and
Amazon
's (
AMZN
) Prime Instant Video. Apart from recent movies and
documentaries, Netflix is also boosting its original content
portfolio to entice new subscribers in the U.S. and International
markets. Backed by these factors, Netflix's subscriber base
increased from 25.3 million subscribers in the year-ago period to
31.8 million unique subscribers in the third quarter.
Moreover, with its own content delivery network, Open Connect,
Netflix's video library will be directly connected to Internet
service providers, ensuring smooth and fast data transfer that
would eventually enrich the customer experience.
However, the company continues to see cost escalation due to
higher license and renewal fees. Netflix needs to pay $5.0
billion for streaming content obligations, out of which $2.1
billion is to be paid within the next 12 months. Coming to the
current deal, industry experts expect Netflix to pay between $200
million and $350 million annually to Disney. Going forward, these
huge payment obligations would weigh on the stock.
We have a Neutral recommendation on Netflix over the long
term. Currently, Netflix has a Zacks Rank #3 (Hold).
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