Netflix: The Revolution Continues

This week Netflix ( NFLX ) announced that it has struck a $1 billion deal to provide more television shows and movies to its online streaming service. The deal is with Epix, a pay cable channel backed by three large studios: Viacom, Lions Gate Entertainment and MGM Studios.

(Never heard of Epix? That's because many major cable companies, including DirectTV and Comcast don't carry it.)

The deal, which begins on September 1, will cost Netflix about $200 million a year for five years. Epix will provide new releases like "Iron Man" to Netflix's streaming service that the company offers as part of packages that also include DVD mail deliveries.

Netflix will receive Epix new releases and older movies 90 days after they appear on its traditional TV channel and on-demand service, preserving the deals Epix does have with cable providers.

This deal is just the latest in a string of moves that clearly puts Netflix ahead of any competition in the movie rental business. The company's mail DVD service virtually wiped out Blockbuster and smaller movie stores and now its online streaming service provides a whole new way to watch movies in the comfort of your own home.

(Coinstar, with its Redbox DVD rental kiosks at the front of grocery stores, is trying to give Netflix a run for its money, but with this new deal to put even more top movies on its streaming service, I have little doubt that Netflix will emerge victorious.)

Netflix has been recommended by many of Cabot's publications over the years and it was featured in Cabot Stock of the Month in February. This is what Tim Lutts wrote then:

"Today's story is about revolutionary new ideas. They lead to great growth companies, and they lead to great growth investments. In Cabot's case, successful revolution-driven investments have included, Yahoo!, Google, Crox, XM Satellite Radio, Qualcomm, Taser, Home Depot, Intuitive Surgical and Green Mountain Coffee. Going forward, we expect many more, and we expect Netflix to be one of them.

"What's revolutionary about Netflix is its delivery methods. Back when everyone was accustomed to driving to the corner store to rent a video, Reed Hastings founded Netflix on the idea that using the U.S. Postal Service to deliver rented DVDs would be a superior business model. Critics scoffed, but Reed was right. Today, with more than 12.3 million subscribers, Netflix is the biggest company in the business. The old leader, Blockbuster is shrinking … and its stock sells for less than 40 cents.

"You may already know how Netflix works, but for the uninitiated, we'll explain. Netflix's simplest plan costs just $4.99 a month, and gets you the rental of two DVDs per month. The biggest plan costs $16.99 a month, and enables you to have three DVDs in your house at once, and to have them replaced as quickly as the postal service can ferry them back and forth … very quickly, in our experience. Theoretically, accounting for normal postal service, you could watch roughly 30 movies a month that way. With two adult tickets at our local Loews cinema costing $21, we call that an incredible bargain, not least because Netflix pays all postage costs.

"But Reed is always looking ahead, so now, in addition to those discs the postman brings, the unlimited Netflix subscription enables you to instantly watch any movie you choose online, from your computer or television, at any time. Theoretically, you could watch these instant movies every waking hour of every day, for a whole month, for that $16.99. Happily for Netflix, it costs a lot less to deliver movies this way!"

And this week, Netflix continued revolutionizing the movie rental business with its deal to stream movies from three large studios. Cabot Stock of the Month originally recommended NFLX at 65. The stock is now trading around 130 after soaring on news of this deal!

I'm a late Netflix convert, but since subscribing, I am completely hooked. I especially love the online streaming service and look forward to being able to watch even more terrific movies through it. This company is clearly into something big and should not be ignored.

Until next time,

Elyse Andrews

Editor of Cabot Wealth Advisory

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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