Analyzing the Disney Deal

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Realizing the importance of monetization from subscriptions and on-demand movies, Netflix (NASDAQ: NFLX) sealed a deal with Disney (NYSE: DIS) to acquire exclusive US TV rights for Disney movies. With the contract beginning in 2016, I see this as a long term move from Netflix with the shift of focus from a large pool of non-exclusive library titles to lesser and exclusive TV shows rights. Nevertheless, this deal has put up several questions in investors' mind like: Why 2016? Is the deal worth it? And what does it mean for Netflix's subscribers? In my post, I am trying to answer each of these questions.

Why Not 2013? Well, Disney is locked in a deal with Starz, which is expected to end in 2015, so there was actually no option left for Netflix. In 2008 Netflix gained Internet rights from Starz for Disney/Sony movies. This deal expired in February 2012, consequently leading Netflix to lose all these titles. To cover up the phase 2012-16, Netflix has already entered into a separate deal with Disney.  

Is the Deal Worth It? Though no financial terms of the deal have been disclosed, it is estimated that Netflix will pay $300 million per year to Disney. Simultaneously it will also add around 3.7 million streaming subscribers for Netflix every year (25 million at present). I find this deal worth the cost as it is will fix Netflix's current broken subscription model. Also, it should further strengthen Netflix current content portfolio, which seems to be positioned very well. 

What Does it Means for Netflix's Subscribers? The subscribers will be rewarded for their patience by the premium movie content acquired through this deal. The same would be added to the non-exclusive content and Netflix will run some of the biggest box office hits of the year which will also include the releases from Pixar and Marvel. Netflix's subscribers will also be enjoying the blockbuster Star Wars series, which Disney acquired from Lucasfilm for $4.5 billion. Though in 2016 Netflix has a lot in the bag to offer, the wait is a bit too long. To cover the gap both the companies entered into a separate deal where Netflix will be playing some of the Disney's films, which includes Alice in Wonderland, Dumbo and Pocahontas. Also the direct to video movies will be made available this year on Netflix. 

The Amazon Impact: Netflix already maintains a lead over Amazon.com (NASDAQ: AMZN) with its 30 million global users and 33% of the prime time web viewing based on Internet traffic. This deal will add further pressure to Amazon, as its prime users will have to pay an extra $8/month on top of their usual cable bill in order to get access to the Disney content. Moving to movies and television shows, though Amazon can't beat Netflix's wide selection, it is trying to battle it out by deploying some cheap and innovative strategies. The company recently announced its plans to produce pilot episodes for six new comedy series. These six pilots will be played on Amazon Instant video and, taking the customer feedback into account, the company will decide which series will be taken forward and will be continued for production. 

I find Netflix a clear winner in the online streaming video business. With this deal the company has bypassed famous channels like HBO, Showtime and Starz, and with its current success with the kids, the company will further try to monetize by providing special kids-friendly content. This is the biggest deal that has ever been made by Netflix, hinting that more content acquisitions efforts will be made in the coming time.


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own

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